The Federal Government has made few friends in the insurance world via its attempts to ease premium affordability concerns in North Queensland.
Many players were opposed to plans to introduce a government-run domestic policy aggregator site, but it is the plan to encourage greater use of unauthorised foreign insurers (UFIs) that has drawn the most vitriol. Much concern over the use of UFIs, however, ignores the size of the role they already play in the market. Used adeptly, UFIs can be just another tool in a broker’s arsenal.
That the Federal Government is pushing UFIs as a possible balm for unaffordable premiums in North Queensland is due, of course, to the fact they can sometimes offer cheaper rates, thanks to the fact they do not have to comply with Australia’s relatively stringent regulatory regime.
UFIs vs Lloyd’s
The capital reserves and compliance requirements APRA places on insurers registered in Australia have been tightened substantially since the collapse of HIH in 2001, which the final report by the Royal Commission in 2003 blamed on mismanagement, among other things. The primary reason for HIH’s downfall was seen as under-provisioning, and a lack of proper pricing on policies in the past, leading to a strain on income.
In league with this, APRA has warned the public on numerous occasions about the perils of doing business with UFIs, particularly in the aftermath of overseas insurer collapses.
“Consumers need to be aware that unauthorised foreign insurers are not prudentially regulated in Australia,” a typical warning reads. “They are subject only to the regulation and controls applicable in the country in which they are licensed or registered.
I would compare this strategy with buying a car without airbags because it’s cheaper.
“When dealing with an unauthorised foreign insurer, consumers need to satisfy themselves that the entity they are dealing with has sufficient financial strength not only to pay claims today, but also into the future. This is particularly relevant when considering the purchase of ‘long tail’ insurance products, such as public liability or professional indemnity classes, where any claim may not be settled for years to come.”
Concerns over the risks UFIs pose notwithstanding, there are scores of brokers currently placing business with UFIs.
Last financial year, they together placed more than $1.3 billion in premiums overseas, or 7% of all business written by brokers, according to APRA’s most recent collection of statistics. This is because UFIs can prove vital for difficult-to-place cover.
There are currently three categories of instances in which brokers can place cover with UFIs, although Finance Minister Mathias Cormann has flagged a “clarification” of the relevant legislation to make it clear that where Australian insurers price a risk at relatively high levels, brokers can place the risk with a UFI if a substantially lower price is offered.
Currently, it is possible for brokers to arrange cover with a UFI where:
- The policy is for a high-value insured (HVI),
- The policy is an atypical risk, or
- The risk cannot reasonably be placed in Australia (also known as the custom exemption).
According to the Insurance Amendments Regulations 2011, a HVI is a policyholder whose annual revenue or assets is at least $200 million, or if they employ at least 500 people. Atypical risks are highly specific and include insurance against hazardous properties, war, terrorism and healthcare related research, among others.
What is an atypical risk?
Contracts for risks that cannot reasonably be placed in Australia are dependent on the broker to show, on reasonable grounds, that no Australian insurer will insure against the risk; that the terms, including price, are less favourable to the insured in Australia; or that other circumstances render the Australian insurer less favourable.
Mark Radford, Principal Solicitor at Radford Lawyers, says that when it comes to getting the process started there is no prescribed documentation and nothing to restrict how brokers should document the basis on which they form the view an exemption applies.
“Obviously brokers have to be able to prove to the regulator that the view taken is either accurate or reasonable, so the amount of information you put in should be enough to reasonably support your view if checked,” he says.
“For example, if a broker wants to prove that a price is substantially better with a UFI than Australian insurers, they would need to obtain quotes from local insurers so they can justify they were substantially better.”
Dean Carrigan, Partner at insurance law specialist Clyde & Co, says it’s imperative that brokers ensure from the outset that one of the exemptions applies.
“They have to do their due diligence because if they go ahead and arrange cover with a UFI and they really shouldn’t be, they are effectively contravening Chapter 7 (985b) of the Corporations Act which is a strict liability offence,” he says.
There is also a UFI requirement in NIBA’s Code of Practice (number five under ‘service standards’) designed to mitigate against this client risk – (unless agreed otherwise) “where the insurance is to be provided by a foreign general insurer that is not authorised under or subject to the provisions of the Insurance Act 1973, we will; inform you of the general risks we believe are involved in transacting insurance with such an insurer; and answer your questions”.
Radford says that it’s imperative that brokers prove that a relevant exemption applies or risk breaching the relevant legislation and possibly also a broker’s duty of care to their client.
“If it’s an atypical cover type exemption, ensure the policy sits within the relevant type specified in the regulations,” he advises.
“For HVIs, it would be prudent to have the client confirm in writing to the broker that they meet the specific client requirements and provide details so it can be confirmed, and when it comes to the ‘law of a foreign country’ exemption, brokers should have the insured obtain legal advice to confirm this requirement applied or obtain such legal advice themselves.”
The main involvement of brokers is likely to be where the broker has to certify in writing that the risk insured cannot reasonably be placed with an Australian insurer.
“Brokers will need to document the basis on which they form the view that the relevant criteria under this regulation are met, so that if they’re ever queried on the basis for their view they are able to justify it,” Radford explains.
NIBA CEO Dallas Booth says brokers would never arrange cover on price only.
“Insurance brokers will only recommend insurance companies – local or foreign – that they have complete confidence in, in relation to the terms and conditions they offer, the prices they charge, and their willingness and ability to pay claims promptly,” he says.
“It is a professional indemnity exposure to brokers if they just arrange cover through the cheapest insurance company from overseas.”
Booth says it is standard procedure for brokers who are placing cover overseas to advise their clients of the risks and seek informed consent to proceed.
“This is what brokers do as a matter of course.”