Clarifying the clarification

Clarifying the clarification | Insurance Business

Clarifying the clarification
Since October, debate has raged over Finance Minister Senator Mathias Cormann’s announcement of a set of initiatives aimed at addressing the problem of insurance affordability in North Queensland. According to the Australian Government Actuary’s report into home and contents insurance pricing, North Queensland premium rates increased by approximately 80% from 2005/6 to 2012/13. In stark contrast, the increase in Sydney and Melbourne over the same period was about 12%.

While the proposal encompassed a number of components, it was one particular measure that sparked the attention of industry professionals. That measure was an intention to boost competition by clarifying that licensed brokers can sell policies from unauthorised foreign insurers (UFIs) where those insurers offer consumers a better price.

Soon after Cormann’s announcement, the Insurance Council of Australia (ICA) made its concerns clear, releasing a statement saying that it was urgently seeking more details of the plans.

“Existing licensed insurers operate under some of the tightest regulations of any industry sector, yet … UFIs may not be held to the same legal, prudential and capital requirements, nor the same consumer laws and remedies,” said the ICA’s acting CEO, Karl Sullivan, in the statement.

Sullivan added: “The ICA believes all market participants selling retail insurance products must abide by the same set of laws and capital requirements, and exceptions should not be made that would diminish consumer rights and create further uncertainty.”

Common concerns voiced during the discussion that has followed include questions about the burden on brokers when exploring insurance through UFIs and providing advice on their use, and the lack of any geographical limitation on the plan.

So what are the issues brokers should be aware of, which are part and parcel of placing risk with UFIs?

And at the same time, how likely are the risks to materialise? Has the noise around the UFI issue possibly been premature?

The legal view
Peter Bennett, partner at law firm Holman Webb, talked to Insurance Business about UFIs. He said the main issue associated with placing risk with UFIs was insolvency. He said, “The burden for brokers is that the policyholders will look to the broker for compensation if a claim is not met because of the inability of the unauthorised foreign insurer to pay, possibly shifting the [insured’s] loss to the broker’s professional indemnity insurer.   

“Brokers will need to undertake their own enquiries into the financial position of the unauthorised foreign insurer and could be liable to the insureds if those enquiries failed to identify the potential for the insurer to be unable to meet claims.”

He said that, along with the risk of insolvent insurers, there was also a risk that brokers, rather than an insurer, would be sued by disgruntled policyholders. He added that any litigation against the insurer might need to be brought in an overseas jurisdiction, given the insurer might not have any local connection.

Bennett said brokers who found themselves in the position of having to advise a client who was interested in seeking a policy from a UFI needed to ensure they had adequate professional indemnity cover.

Allaying fears
While there are risks associated with placing business with UFIs, does the government’s October announcement mean it is now time to be contemplating those risks?

Dallas Booth, CEO of NIBA, says he doesn’t share the major issues or concerns that people have had over the government’s proposal. In mid-February, the Australian Insurance Law Association held an event in Brisbane, ‘Opening the doors to UFIs’, at which Booth spoke.

As to the main message he wanted to deliver to brokers at the event, he says, “I wanted to make sure that people understood what the government actually announced, which was to clarify the operation of unauthorised foreign insurers and the role of brokers, and the provisions that apply in relation to the potential for obtaining substantially better terms from a foreign insurer, compared to what might be available in the market.

“As soon as the announcement started to be reported, I think all sorts of people assumed all sorts of things and possibly jumped to conclusions that might have been a bit premature,” Booth says.

“My feeling was that some of the comments were not as well informed as they might have been, and I got the impression also that quite a few people didn’t really appear to understand what the current laws and regulations for UFIs are and how it works.”

According to data from APRA, businesses in Australia placed $1.331bn of risk with UFIs in the 2013/14 financial year. So while regulatory changes are part of the proposal, there currently already exists a framework for entities in Australia to place risk with UFIs.

Peter Bennett says what is proposed is “a change in the businesses which an unauthorised foreign insurer can write business for.  

“At the moment, this [is] limited to atypical risks, high-value insureds and other risks that cannot reasonably be placed in Australia. The category [will] now [be] widened to include where the risk is priced at relatively high levels by Australian insurers ...”

Booth says he has been involved in some general discussions with Treasury about the proposal. “We’re liaising on a regular basis, but I’m just keen to see what the draft is when it’s released. I know that Treasury has to go through a process of preparing draft materials, and then clearly you have to get ministerial approval for the release of that … They’re doing the right thing and going through proper process. And we look forward to the release of the draft in the near future.”

As to what he expects of the government proposal, he says, “[The minister] said [the proposal was] to clarify the operation of these provisions. That’s what I’m expecting will happen. Now what that actually means in practice, I just have to wait and see … [I’m] just looking forward to seeing the actual wording of the proposals that the government wants to put in place.”

Booth says that as soon as NIBA receives the draft regulations it will be advising its members. Those draft regulations are expected to be released by early March, and Booth says his understanding is that the proposed changes are likely to be in place by the end of March.

Another unknown in the UFI discussion is precisely how attractive a marketplace Australia will be to UFIs, as far as personal lines and domestic insurance are concerned. Booth says that, at the moment, the average premium for a policy placed by an entity in Australia with a UFI is approximately $130,000.

How keen will UFIs be to offer car and home insurance to individuals? And just how well placed will these organisations be to do so, when it comes to the level of service they can offer?

“The local market has a massive advantage in terms of being on the ground, being able to support, assess and respond to claims,” says Booth. “The Australian insurance industry does a phenomenal job when it comes to natural disasters.

“We’ve seen what’s happened with the Brisbane storm last year and the extent to which the industry has responded. The insurance industry in Australia does a phenomenal job and that gives them a massive advantage just in terms of the practical effects of getting claims assessed and paid when damage occurs.”

What remains now is for all stakeholders to wait until the draft regulations are released, when it will become clear precisely what the government’s proposal entails.