Insurance and reinsurance in Australia: overview
A Q&A guide to insurance and reinsurance law in Australia.
The Q&A gives a high level overview of the market trends and regulatory framework in the insurance and reinsurance market; the definitions for a contract of insurance and a contract of reinsurance; the regulation of insurance and reinsurance contracts; the forms of corporate organisation an insurer can take; and the regulation of insurers and reinsurers, including regulation of the transfer of risk. It also covers: operating restrictions for insurance and reinsurance entities; reinsurance monitoring and disclosure requirements; content requirements for policies and implied terms; insurance and reinsurance claims; remedies; insolvency of insurance and reinsurance providers; taxation; dispute resolution; and proposals for reform. Finally, it provides websites and brief details for the main insurance/reinsurance trade organisations in Australia.
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This Q&A is part of the global guide to insurance and reinsurance. For a full list of jurisdictional Q&As visit www.practicallaw.com/insurance-guide.
Market trends and regulatory framework
The insurance market in Australia can be broadly divided into the following segments:
General insurers and reinsurers authorised and regulated by the Australian Prudential Regulation Authority (APRA). In this segment are also Lloyds' underwriters.
Life insurers and reinsurers authorised and regulated by APRA.
Private health insurers providing private health insurance cover.
Insurance intermediaries (insurance brokers, agents and financial product advisers), generally regulated by the Australian Securities and Investments Commission (ASIC).
General insurers. There are 115 insurers authorised by APRA to conduct general insurance business (APRA Quarterly General Insurance Performance Statistics March 2015 (issued 28 May 2015)), of which 18 entities are in run-off and 12 are reinsurers. For the year ending 31 March 2015, net earned premium of AUD31.8 billion was generated, of which direct insurers wrote AUD30.3 billion, with the balance written by reinsurers. Over this period, there has been a significant increase in net incurred claims of AUD22 billion, due in part to the significant number of natural disasters, storm events, hailstorms and bushfires in Australia during the first quarter of 2015. Industry performance statistics are published by APRA on a quarterly basis.
The general insurance market continues to consolidate with a steady decline in the number of licensed insurers and reinsurers and an increasing concentration in the personal lines and commercial lines markets. However, there continues to be healthy competition evident amongst the insurers (for example, in the personal lines markets challenger brands are successfully securing market share).
Life insurers. There are 28 registered life insurers, of which seven are reinsurers (as at 30 June 2014). For the year ending 31 March 2015, total revenue was AUD55.8 billion, with life insurers experiencing net profit of AUD2.6 billion (up 29.7%) since last year. Over the past two to three years, life insurers (and, in particular, reinsurers) have experienced significant losses in the life risk market. These losses have arisen primarily due to significantly more claims being made against covers providing for Total and Permanent Disability (TPD) and Income Protection (IP). These losses were initially experienced in the group or wholesale life segments of the market (that is, the wholesale life insurance made available through superannuation funds and employer funded schemes to individuals). However, adverse claims experiences are also being observed in the direct or retail segments of the life market.
Insurers responded initially by increasing premium rates and changing benefit designs. Some reinsurers even announced their temporary withdrawal from the TPD and IP market.
The life insurance industry is also relatively concentrated, with the largest five life insurers accounting for up to 80% of the industry in gross assets.
Private health insurance. As at 1 July 2015, APRA will assume prudential supervision of the private health insurance sector.
General and life reinsurers authorised in Australia are also regulated by APRA. For the most part, these are either local branches or subsidiary companies of international reinsurers.
Australia has a federal system of government made up of the Commonwealth government on the one hand and the state and territory governments on the other. The Commonwealth government derives its law making power from the Australian Constitution, and is empowered to regulate insurance (other than state insurance) under section 51(xiv) of the Australian Constitution. Therefore, most legislation regulating insurance business in Australia is Commonwealth based (Cth) unless the insurance business is state insurance and regulated exclusively by state law. The insurance industry is generally regulated by reference to the type of insurance business so that general insurers, life insurers and private health insurers are all separately licensed or authorised.
The following legislation applies to insurance and reinsurance:
Insurance Act 1973 (Cth) and Insurance Regulations 2002 provide the framework for the authorisation and prudential regulation of general insurance business (including general reinsurance).
Life Insurance Act 1995 (Cth) and Life Insurance Regulations 1995 provide the framework for the registration and prudential regulation of life insurance and life reinsurance business.
Insurance Contracts Act 1984 (Cth) and Insurance Contracts Regulations 1995 regulate certain contracts (and proposed contracts) of insurance by modifying and supplementing the common law. The Insurance Contracts Act is designed to provide consumer protection by modifying the law so that a fair balance is struck between insurers, insureds and other members of the public.
Marine Insurance Act 1909 (Cth) regulates the provision of marine insurance.
Corporations Act 2001 (Cth) and Corporations Regulations 2001 regulate companies in Australia as well as financial services and markets. Chapter 7 of the Corporations Act contains licensing, disclosure and conduct requirements for the provision of financial services (which includes general and life insurance products and services but not reinsurance).
Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) also contains significant consumer protections and prohibits misleading and deceptive conduct and unconscionable conduct on the part of financial service providers.
Insurance Acquisitions and Takeovers Act 1991 (Cth) regulates changes in the control of authorised general insurers or registered life insurers, through a mandated approval process. Similarly, the Financial Sector (Shareholdings) Act 1998 (Cth) and Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth) regulate the shareholding of financial services entities such as banks and insurance companies.
Health Insurance Act 1973 (Cth) establishes Medicare, which provides a basic medical insurance safety net for public medical care in Australia. The Private Health Insurance Act 2007 (Cth) regulates the conduct of private health insurance businesses and provides for the registration and prudential management of private health insurers in Australia.
There are also two relevant self-regulatory codes of practice:
General Insurance Code of Practice applies to general insurers and provides standards of conduct in relation to many aspects of their relationship with customers. A new Code came into effect on 1 July 2014, with all Code participants requiring to be compliant by 1 July 2015.
Insurance Brokers' Code of Practice applies to insurance and associated services provided by insurance brokers who are members of the National Insurance Brokers Association (NIBA).
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of general insurers and life insurers (including reinsurance companies) as well as banks, credit unions, building societies, friendly societies and most of the superannuation industry. As a prudential regulator it is responsible for administering the relevant governing Acts (such as the Insurance Act and Life Insurance Act), and establishing and enforcing prudential standards that must be met by these regulated entities.
The Commonwealth Treasurer oversees the operation of the Insurance Acquisitions and Takeovers Act and the Financial Sector (Shareholdings) Act in respect of the change in ownership and control of general and life insurers in Australia. As a matter of practice, these approval powers are often delegated to and performed by APRA.
The Australian Securities & Investments Commission (ASIC) is the financial services market conduct regulator. As such, it has responsibility for the administration of the Insurance Contracts Act, as well as consumer protection functions under the Life Insurance Act and the ASIC Act. As the financial services regulator, it oversees the licensing disclosure and conduct of financial services licensees, including general insurers, life insurers and insurance intermediaries (such as brokers and financial advisers).
The Commonwealth Government's Department of Health is responsible for the oversight of the public healthcare system (Medicare). APRA assumes the responsibilities of the Private Health Insurance Administration Council (PHIAC) on 1 July 2015 in monitoring and regulating the private health insurance industry from that date.
Regulation of insurance and reinsurance contracts
There is no comprehensive definition of a contract of insurance under Australian law. It is necessary to have regard to whether a contract contains certain elements that would indicate that it is a contract of insurance as distinct from some other type of contractual promise (such as an indemnity, guarantee or bond).
At common law, the criteria for a contract of insurance are primarily:
Payment of consideration (for example, a premium) to secure a benefit.
Payment of the benefit is contingent upon the occurrence of a future event.
The future event is uncertain (that is, the event may or may not occur).
The party seeking to secure the benefit has an insurable interest in the subject matter of the insurance, so that if the event were to take place, it would adversely affect the interests of that party.
However, these criteria can be evident in other types of contracts as well as insurance. Consequently, over time additional criteria have been developed. For example, the requirement that a contract results in a transfer of risk from one party to the other is widely considered to be a key indicator that the party involved intended the contract to be a contract of insurance. The Insurance Contracts Act 1984 (Cth) also modifies the common law requirements with respect to insurable interest such that it is not an essential element for an insurance contract.
Section 9 of the Life Insurance Act defines the concept of a "life policy" for the purposes of the prudential regulation and registration of life companies that operate a life insurance business. An expanded definition of a contract of life insurance and insurance products is provided in Chapter 7 of the Corporations Act for the purposes of that Act.
By contrast, a contract of reinsurance is a contract of insurance between a primary insurer and reinsurer and is primarily governed by common law in Australia. For example, the Insurance Contracts Act specifically excludes reinsurance from its remit, as does the Corporations Act, by excluding it from the definition of a financial product.
The Insurance Contracts Act 1984 (Cth) (Insurance Contracts Act) and Insurance Contracts Regulations 1995 and the Corporations Act 2001 (Cth) and Corporations Regulations 2001 provide the primary regulatory framework for most insurance contracts in the Australian jurisdiction. However, the following types of contracts entered into (or proposed to be entered into) are exempt from the Insurance Contracts Act:
Private health insurance or insurance entered into by a private health insurer.
Insurance entered into by a friendly society.
Insurance entered into by the Export Finance and Insurance Corporation (other than short term contracts).
Contracts to which the Marine Insurance Act 1909 (Cth) applies.
Workers' compensation or compulsory third party (CPT) motor insurance (CTP covers death or injury arising from the use of a motor vehicle).
State or Northern Territory insurance.
These same contracts excluded from the Insurance Contracts Act are also generally exempted under the Corporations Act by being excluded from the definition of a financial product and/or financial services under that Act.
The Marine Insurance Act regulates contracts of marine insurance, defined to be a contract of indemnity in respect of losses incidental to marine adventure. Generally, this Act will apply to insurance covering maritime perils other than in respect of marine pleasure craft (which are covered by the Insurance Contracts Act).
Each state and territory in Australia legislates for workers' compensation and CTP. As noted above, these types of insurance contracts are exempt from the Insurance Contracts Act.
In the life insurance sector, the Superannuation Industry (Supervision) Act 1993 and Superannuation Industry Supervision Regulations 1994 also have some impact on and regulate the insurance that can be made available to members of regulated superannuation funds.
Only body corporates or Lloyd's underwriters can be authorised by APRA to write general insurance business in Australia. As a matter of practice, most general insurers operating in the market are either locally incorporated companies (public or proprietary) or a registered Australian branch of an overseas insurer. Lloyd's underwriters are permitted to write general insurance business in Australia provided that they meet certain security trust arrangements as stipulated under the Insurance Act 1973 (Cth).
There are a number of permissible types or forms that a body corporate can take under Australian law:
Proprietary companies limited by shares.
Public companies limited by guarantee (such as mutuals) or by shares.
Publicly traded companies on the Australian Stock Exchange (ASX).
Where a general insurer or life insurer is a wholly-owned subsidiary of another legal entity incorporated in Australia, that holding company will be the "non-operating holding company" (NOHC) for APRA purposes. APRA will require the NOHC to be registered along with the subsidiary that is the operating insurance company so as to ensure that APRA has some supervisory oversight in respect of the NOHC, although the NOHC does not itself carry on insurance business.
The Life Insurance Act 1995 (Cth) provides that a company can apply to APRA to be registered to write life business in Australia. A company is defined under that Act as either:
A company incorporated under the Corporations Act.
A body corporate incorporated under, or continued in existence under, a law of a state or territory.
An eligible foreign life insurance company.
Life insurers operating in the Australian market are generally locally incorporated companies. There is limited eligibility for foreign life companies to register branches to write life business in Australia. Currently the Life Insurance Regulations 1995 only permit companies authorised to write life business in the United States of America, Japan, New Zealand or Korea to register a branch in Australia and apply for authorisation to write business in Australia. Otherwise, most foreign insurers incorporate a local subsidiary company to be authorised to write life business in Australia.
Regulation of insurers and reinsurers
The form of regulation will vary according to the type of insurance business undertaken by an insurer or reinsurer:
General insurers and reinsurers are both required to be authorised under the Insurance Act 1973 (Cth) and subject to prudential supervision by APRA. A foreign insurer who seeks to write insurance business via a local agent or broker in Australia will be taken to be carrying on insurance business in Australia and will also need to be authorised.
Life insurers and reinsurers are regulated under the Life Insurance Act 1995 (Cth) and are subject to the prudential supervision of APRA.
There are exceptions to this under the Insurance Act 1973 (Cth) and Insurance Regulations 2002. First, the Insurance Regulations prescribe certain bodies corporate and certain types of insurance business that are exempt from regulation by APRA and under the Insurance Act. These include:
State based insurance entities.
The Export Finance and Insurance Corporation.
Insurance business of a kind related to workers' compensation.
Second, the Insurance Regulations exempt certain types of insurance business written by unauthorised foreign insurers in Australia. These exemptions relate to insurance that is issued to high-valued insureds (as defined), for atypical risks (defined), where the business cannot be reasonably placed in Australia, or where the insurance contract is required by foreign laws. Otherwise, foreign insurers are required to be authorised to write insurance business in Australia if they do not satisfy these exceptions.
There are additional exceptions for reinsurers. The fact that a foreign reinsurer provides reinsurance to an Australian insurer via an intermediary or broker will not constitute carrying on insurance business in Australia under the Insurance Act and the reinsurer will not need to be authorised by APRA.
General insurers and life insurers are also subject to ASIC supervision by reason of the Insurance Contracts Act 1984 (Cth).
Chapter 7 of the Corporations Act 2001 (Cth) regulates the conduct and licensing of insurance providers and insurance intermediaries if they provide prescribed insurances in Australia. This regulation is administered by ASIC. However, it does not apply to contracts of reinsurance.
There is no specific restriction on general insurers carrying on non-insurance business under the Insurance Act 1973 (Cth). However, the Life Insurance Act 1995 (Cth) prohibits a life company from intentionally carrying on any insurance business other than life insurance business.
As a matter of practice, these restrictions do not preclude a corporate group from having both life insurance and general insurance businesses, as well as other non-insurance businesses, as long as each of these businesses are performed by separate legal entities within the group.
Insurance and reinsurance companies authorised in Australia are required to comply with the APRA prudential requirements in relation to risk transfer. Typically, risk transfer takes two forms:
A business transfer to another APRA regulated insurer.
APRA requires that general insurers have a reinsurance management framework to provide reasonable assurance that its reinsurance arrangements are being prudently and soundly managed, having regard to factors such as the size, business classes and complexity of the insurer's operations and its risk appetite. (APRA's Prudential Standard GPS 230 (Reinsurance Management) for general insurers (GPS 230)). Reinsurers are subject to these same requirements, although the reference to reinsurance arrangements will mean retrocession arrangements in that context.
As a minimum, the reinsurance management framework must include a reinsurance management strategy (ReMS) that describes the key elements, policies, procedures and controls for the reinsurance management of the insurer. If an insurer updates its ReMS, it must provide APRA with the updated ReMS within ten business days of board approval of that update.
In addition, the insurer must submit to APRA on an annual (or six-monthly) basis a Reinsurance Statement that details the insurer's reinsurance arrangements as required by GPS 230. The insurer is required to achieve legally binding reinsurance arrangements and must at a minimum comply with the "two-month rule" and the "six-month rule" in GPS 230. The "two-month rule" requires that within two months, the insurer either:
Has a placing slip pertaining to the reinsurance arrangements that has been signed and stamped by all participating reinsurers, and contains the slip wording or full treaty wording which has been signed and stamped by participating reinsurers with no outstanding terms or conditions to be agreed.
Has the placing slip which has been signed and stamped by all participating reinsurers, with no outstanding terms or conditions to be agreed.
Does not have a placing slip but has a cover note(s) issued by the participating reinsurer(s) or from an appointed reinsurance broker.
The "six month rule" requires that within six months, the insurer either:
Has complied with the two-month rule and has a signed and stamped placing slip and agreed slip wording.
Has a full treaty contract wording that has been signed and stamped by all contracting parties.
The insurer must also submit an annual reinsurance declaration to APRA that the insurer has reinsurance arrangements in place that are in accordance with its Reinsurance Statement, and that the reinsurance arrangements in the current and previous Reinsurance Statements provided to APRA are legally binding.
An insurer must submit to APRA details of all proposed "Limited Risk Transfer Arrangements" for approval prior to entering into these arrangements. APRA will generally consider a Limited Risk Transfer Arrangement not to be a reinsurance arrangement where there is no significant transfer of insurance risk from the insurer to another insurer or reinsurer. Conversely, where APRA considers that a Limited Risk Transfer Arrangement does involve a genuine transfer of insurance risk, it will treat it as a reinsurance arrangement. The treatment of such arrangements will have an impact on how the insurer is able to satisfy the minimum capital requirements.
APRA prudential guidance on reinsurance management envisages that most insurers will have a target of ceding no more than 60% of their total written premium in any 12-month period. For an insurance group captive, the envisaged target is ceding no more than 90% of its total written premium in any 12-month period.
Life insurers are required to give APRA a reinsurance report relating to the financial year of the company within three months after each financial year end setting out the specified particulars of each reinsurance contract or group of reinsurance contracts in force (APRA Prudential Standard LPS 230 (Reinsurance Management) for life insurers). Certain types of reinsurance agreements will also require APRA's prior approval before being entered into. These are reinsurance contracts that provide for the transfer of a financial benefit from reinsurer to insurer or vice versa, that do not relate to the payment of claims, reinsurance commission or group life profit share, or experience payments or profit share arrangements on particular conditions.
General and life insurers regulated by APRA can voluntarily transfer or amalgamate their insurance business to another insurer regulated by APRA, providing that in either case, the transfer is under a scheme confirmed by the Federal Court (section 17B, Insurance Act 1973 (Cth), or Part 9, Life Insurance Act 1995 (Cth)). Life insurers also have the option of seeking approval from APRA to transfer their insurance business to another life insurer under the Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth).
Authorisation or licensing
General insurers and reinsurers. In summary, any person wishing to undertake general insurance business in Australia must obtain an authorisation or be registered with APRA to do so. The definition of insurance business is broadly defined under the Insurance Act 1973 (Cth) and all companies conducting business either directly or through the actions of an intermediary (such as an agent or broker) must be authorised by APRA (unless specifically exempted), regardless of whether the person or company holds an insurance authorisation in another jurisdiction.
Insurers and reinsurers are authorised to carry on business in Australia under the Insurance Act 1973 (Cth). Lloyd's underwriters are also authorised to carry on insurance business in Australia subject to section 93 of the Insurance Act 1973 (Cth). The authorisation can include conditions on an insurer's authorisations relating to prudential requirements.
Applicants should consult APRA's "Guidelines on Authorisation of General Insurers" (http://www.apra.gov.au/GI/Documents/GI-authorisation-guidelines-December-2007_1.pdf) for further information about the authorisation process. These guidelines will assist in understanding the:
Documentation that the applicant must supply.
Minimum APRA criteria for authorisation.
The overall authorisation process can take between three and 12 months, depending on the nature and complexity of the proposed business. As the Guidelines explain, APRA's approach to the authorisation process is consultative and involves preliminary consultation with APRA and submission of a draft application. Supporting information required for an application to conduct insurance business will vary depending on whether the applicant is a locally incorporated general insurer or a branch operation of a foreign insurer. The timeframe for the authorisation process depends on the proposal and the extent to which the applicant's proposed operations can be based on an existing, well-established and sound business model.
APRA will provide authorisation or refuse the application under section 12 of the Insurance Act 1973 (Cth). This section provides a non-exhaustive list of criteria upon which APRA can refuse any application. Applicants must comply with the prudential requirements outlined in the Insurance Act 1973 (Cth). APRA can, at any time, impose conditions on the authorisation that relate to prudential matters.
Non-operating holding companies (NOHCs) of general insurers are expected to apply for a NOHC authority from APRA under section 18 of the Insurance Act 1973 (Cth). The process for authorisation is similar to that for a general insurer and APRA has also published a guideline ("Guidelines on the Authorisation of Non-Operating Holding Companies of General Insurers" (December 2007)).
Life insurers and reinsurers. Companies wishing to carry on a life insurance business in Australia must be registered under the Life Insurance Act 1995 (Cth)). Applications for registration must be made to APRA in accordance with the Life Insurance Act 1995 (Cth)). For further information about the application process, applicants should consult APRA's guidelines on "Registration of Life Companies" (http://www.apra.gov.au/lifs/PrudentialFramework/Documents/Guidelines-on-registration-of-life-companies-21.pdf). Like general insurers, APRA expects that NOHCs of life insurance companies also seek registration under the Life Insurance Act 1995 (Cth). APRA has published a guideline ("Guidelines on Authorisation of Non-Operating Holding Companies of Life Companies").
APRA can refuse an application for registration on the basis that one of the grounds listed under section 21 of the Life Insurance Act 1995 (Cth)). APRA can, at any time, impose conditions on the registration of a company in accordance with section 22 of the Life Insurance Act 1995 (Cth)).
Subject to an insurer's business and distribution arrangements, an insurer may also be required to be licensed to provide financial services under the Corporations Act 2001 (Cth).
Chapter 7 of the Corporations Act 2001 (Cth) requires that any person who provides a "financial service" must either:
Be an Australian financial service licensee (AFSL), with authorisations to provide the financial services offered.
Be an authorised representative of such an AFSL.
Otherwise be exempt from having to hold an Australian financial services licence (licence).
ASIC regulates the licensing of financial service providers. A person or entity requiring a licence must apply to ASIC. ASIC provides regulatory guides to assist with the application process (http://asic.gov.au/for-finance-professionals/afs-licensees/applying-for-and-managing-an-afs-licence/afs-licensing-kit/). In granting a licence, ASIC must be satisfied that the applicant's proposed "responsible managers" have the appropriate experience in relation to the authorisations sought and that the proposed "responsible managers" are of good fame and character.
ASIC will assess the application, and if ASIC decides to issue the applicant with a licence, the AFSL conditions will outline the:
Financial services the licensee is authorised to provide, (for example, providing advice, dealing).
Specific types of financial products for which those financial services are authorised (for example, general insurance or life insurance products).
A financial service is broadly defined under the Corporations Act 2001 (Cth) and includes the provision of "financial product advice" or "dealing in a financial product". As such, an insurance intermediary such as a broker, distributor or financial adviser will be required to hold a licence if they provide these financial services, unless they act as authorised representatives of another AFSL, or otherwise satisfy one of the licensing exemptions under the Corporations Act 2001 (Cth).
The concept of "dealing in a financial product" includes issuing or arranging for the issue of insurance contracts. These are typical activities undertaken by a broker, intermediary or insurance agent. A person who provides financial product advice about insurance is also required to be licensed. Financial product advice is defined and can be general financial advice or personal financial advice.
Ordinarily general and life insurers will require financial services licences in Australia, although there are some exceptions to this requirement depending on the way in which the insurers elect to distribute their products in the market and to whom. The type of licence conditions required by an insurer will depend on the types of activities it undertakes. For example, most general insurers in Australia sell retail insurance via a no-advice or general advice only model. The use of brokers and agents is much more common in the area of commercial lines and business insurance, where a broker will typically advise clients on the type and level of insurance required. Depending on the nature of the advice given, the broker or insurance intermediary will require product advice authorisations for its own AFSL, or may have an arrangement whereby it is providing advice under the auspices of another entity's financial services licence.
Life risk insurance is generally sold in three ways:
Directly to the insured via a general advice or no-advice model.
Through intermediaries, such as financial advisers or planners who may provide personal financial advice to the insured.
Via group insurance arrangements entered into with employers (for the benefit of their staff) or superannuation funds (for the benefit of their fund members).
Reinsurance is specifically excluded from the definition of financial product and so a reinsurer or broker is not required to hold a licence to issue or arrange reinsurance.
Other providers of insurance/reinsurance-related activities
Claims managers and adjusters who handle and settle claims and potential claims in relation to insurance products are not considered to be providing a financial service by reason of that activity and are therefore not required to hold a licence under the Corporations Act 2001 (Cth).
An insurer carrying on a general insurance business in Australia must be authorised by APRA, unless they undertake insurance contracts that have been declared not to be insurance business for the purposes of the Insurance Act 1973 (Cth) (section 3A).
The Insurance Act 1973 (Cth) also provides limited exceptions for certain types of insurance that cannot be appropriately placed with Australian authorised insurers, to be provided by an unauthorised foreign insurer. These exemptions apply where the contract of insurance falls within the following categories:
Insurance contracts for a "high value insured", that is (based on averaging the previous three financial years):
annual operating revenue of AUD200 million;
gross assets of AUD200 million; or
at least 500 employees in Australia.
Insurance contracts for atypical risks (such as nuclear, biological risk and war).
Insurance contracts for other risks that cannot be reasonably placed in Australia due to:
no Australian insurer to insure the risk;
the terms (including price) which any Australian insurer would insure against the risk are substantially less favourable to the insured than the terms on which the unauthorised insurer would insure the risk; or
other circumstances that would lead to substantially less favourable insurance for the insured.
Contracts of insurance that are required by the law of a foreign country to be issued by an insurer, or kind of insurer, authorised or permitted under the laws of that country to issue that kind of contract.
A foreign reinsurer carrying on reinsurance business through an intermediary in Australia is not required to be authorised in Australia.
An insurance intermediary who provides financial services may be exempt from the requirement to hold a licence either:
Where acting as an authorised representative of an AFSL because they will have the benefit of the AFSL's licence.
Where acting as a distributor of general insurance and consumer credit insurance products on behalf of an AFSL.
Where regulated by APRA and the service is one for which APRA has regulatory or supervisory responsibilities and the service is provided only to wholesale clients.
Where advising in relation to, or dealing in, a medical indemnity insurance product.
A distributor of general insurance and consumer credit insurance products is not permitted to provide financial product advice about the insurance products it distributes but may "deal" in the products. For example, a distributor may arrange for the issue of the insurance policy to an individual on behalf of the insurer, provided that they don't also make recommendations about the product intended to influence the individual.
Other providers of insurance/reinsurance-related activities
Restrictions on ownership or control
Due to the Financial Sector (Shareholdings) Act 1998 (Cth) (FSSA), an individual shareholder or group of associated shareholders in an insurer are limited to holding 15% of an insurer's voting shares (a higher percentage can be held subject to approval by the Treasurer on national interest grounds).
APRA requires that the substantial shareholders of the applicant (the person or entity applying for shares in the insurer) be well-established and financially sound entities or individuals of standing and substance.
Similarly, under The Foreign Acquisitions and Takeovers Act 1975 (Cth), foreign investment into significant entities (such as insurers in Australia) are subject to an approval process by the Treasurer that operates independently of the FSSA.
APRA has a "fit and proper" requirement for directors and senior managers of insurers (Prudential Standard CPS 520 "Fit and Proper"). ASIC also imposes a "fit and proper" test on the proposed "responsible managers" applying for a licence in addition to other qualification requirements.
Insurance intermediaries, such as brokers or financial advisers that require a licence must meet the "fit and proper" person requirements, in addition to other relevant ASIC licence qualification requirements.
Where an insurance intermediary is appointed as an authorised representative of an AFSL, the AFSL is required to notify ASIC of this fact. AFSLs are responsible for the conduct of their representatives and so, as a matter of market practice, will impose various contractual limitations and requirements on the ownership or control of a corporate authorised representative.
Other providers of insurance/reinsurance-related activities
As noted in Question 11, the Treasurer's approval is required for a person or group of associates wishing to hold more than 15% of the voting shares in a financial sector company. A financial sector company includes:
An authorised deposit-taking institution (or its holding company).
An authorised insurance company (or its holding company).
The Foreign Acquisitions and Takeovers Act 1975 (Cth) also governs foreign investment and operates independently of the FSSA. A substantial investment by a foreign national in a financial service sector company such as an insurer will typically require Treasurer approval. The FSSA requirements are detailed and should be considered by reference to particular circumstances and parties.
Any change in control of an AFSL must be notified to ASIC within ten business of the change. ASIC also has the power to impose a "key person" condition on an AFSL requiring the licensee to notify ASIC if the key person leaves the business.
There is no restriction on ownership of insurance intermediaries, save for those that would apply to all companies under the Corporations Act 2001 (Cth) due to the AFSL regime or, in the case of foreign investment, the FSSA.
Other providers of insurance/reinsurance-related activities
Ongoing requirements for the authorised or licensed entity
General insurers and life insurers are subject to extensive APRA prudential and reporting requirements. These requirements are contained in the legislation and APRA prudential standards that cover things such as:
An insurer's capital adequacy.
Audit and actuarial requirements.
Fit and proper requirements for key management and board.
Life insurers, general insurers and reinsurers are required to have adequate levels and quality of capital commensurate with the scale, complexity and nature of the insurance business, and to report on their Internal Capital Adequacy Assessment Process (ICAAP) to APRA on an annual basis at a minimum. These requirements are detailed in:
APRA Prudential Standard GPS 110 for general insurers and reinsurers.
LPS 110 for life insurers and reinsurers.
Life insurers are expected to ensure that they have sufficient capital held by the company as a whole, and in respect of each statutory fund, commensurate with the business. Both general and life insurers are required to ensure that their capital holdings exceed the prescribed capital requirements calculated in accordance with APRA requirements.
A general insurer is required to hold assets in Australia that meet the relevant requirements of the Insurance Act 1973 (Cth) and Prudential Standard GPS 120 and any repatriation of capital from an Australian branch operation to a home office requires APRA's prior approval.
Insurers are also required to consult with and obtain APRA's approval before planned reductions of capital (such as share buy backs or redemptions of certain equity capital).
APRA has been consulting industry since March 2010 on its proposals for the prudential supervision of conglomerate groups of regulated institutions (level 3 groups). For example, this would apply to a corporate group comprising of more than one regulated entity, such as a general insurer, bank and life insurer as well as other businesses. APRA has been concerned about the management of contagion risks within conglomerates, intra group transactions and the treatment of regulatory capital. In August 2014, APRA announced that it would await the outcome of the Financial Services Inquiry and government response before progressing these proposals, as that Inquiry was looking actively at the financial services regulatory regime.
Insurance intermediaries are not required to be prudentially regulated by APRA but are regulated by ASIC under the financial services laws, unless otherwise exempt. Those AFSLs are required to comply with the general obligations of licensees as prescribed by the Corporations Act 2001 (Cth) and ASIC Regulatory Guides. Such licensees may also be subject to additional conditions imposed on their particular licence by ASIC.
These general licence obligations include ensuring:
Financial services are provided efficiently, honestly and fairly.
Representatives are adequately trained and competent.
Compliance with financial services law.
The licensee has adequate resources (including financial, technological, and human resources) to provide the services that are covered by the licence.
An AFSL must also satisfy financial obligations to ensure they have sufficient financial resources to conduct the business. Additional financial resource obligations apply where a licensee holds client money, is a responsible entity or acts as trustee. ASIC requirements are set out in ASIC Regulatory Guide RG166.
Other providers of insurance/reinsurance-related activities
If providers of such activities are also AFSLs, they will be required to meet the above mentioned conditions and requirements.
Penalties for non-compliance with legal and regulatory requirements
APRA as prudential regulator and ASIC as market regulator both have powers under the relevant Acts to investigate, remove and disqualify key persons, seek injunctive relief, direct recapitalisation and apply to the Federal Court for penalties to be awarded against a regulated entity found guilty of offences under the legislation. Therefore the regulators have a range of measures available to them to manage breaches and non-compliance.
Carrying on an insurance business without APRA authorisation under the Insurance Act 1973 (Cth) is a strict liability offence and attracts a penalty of 60 units per offence. It is also a continuing offence, so that each day a person continues in breach after receiving APRA's notice will result in multiple offences. A penalty unit under the section 4AA of the Crimes Act 1914 (Cth) is AUD170 unless otherwise stated. Different penalty rates apply under the Life Insurance Act 1995 (Cth). For example, a contravention of the prohibition of mixed insurance business under section 234 of the Life Insurance Act attracts 300 penalty units.
ASIC as market regulator has a range of powers and remedies available to it for breaches by licensees and corporations. It has the power to order stop notices in relation to product disclosure statements. ASIC has the power to cancel or suspend, as well as impose conditions on, licences.
Both regulators have the power to impose enforceable undertakings on regulated institutions and individuals in relation to breaches of the law. Directors and officers of such regulated entities can also face personal liability for breaches of their duties.
A regulatory breach by an insurer under the Insurance Act 1973 (Cth) or the Life Insurance Act 1995 (Cth) does not affect the legal validity of a contract of insurance and so such contracts will generally remain enforceable. Depending on the nature of the breach of financial services laws by a regulated entity, ASIC does have the power to seek orders that a relevant contract issued by the regulated entity not be enforced against a client.
Insurance intermediaries that are AFSLs and who breach the terms of their licence and/or the financial services laws may be subject to a range of regulatory responses by ASIC depending on the severity of the breach. The Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) provide for a range of offences for which ASIC has the power to seek penalties.
Other providers of insurance/reinsurance-related activities
Restrictions on persons to whom services can be marketed or sold
Reinsurance monitoring and disclosure requirements
There are no statutory obligations as a matter of Australian law that impose positive obligations on reinsurers to monitor or direct claims, settlements or underwriting by cedants. As noted above, however, APRA imposes a significantly robust prudential regulatory regime on authorised Australian insurers and reinsurers, and so it will be incumbent on a reinsurer to be able to demonstrate that it has an adequate risk management strategy and capital management plan, and a thorough understanding of its risk profile and claims liabilities.
The extent to which a reinsurer may monitor claims management, seek to approve settlements and underwriting by cedants will be governed by the terms of the relevant reinsurance treaty or agreement between the parties. The type of reinsurance treaty will also determine the type and extent of the monitoring and authority limits for underwriting and claims management. As a matter of practice, reinsurers can contractually reserve rights to monitor and intervene in claims where relevant.
Reinsurance contracts are specifically excluded from the Insurance Contracts Act 1984 (Cth), which:
Regulates the duty of disclosure between an insurer and insured.
Codifies the duty of utmost good faith between parties to a contract of insurance.
Provides for other matters relating to contracts of insurance.
Nonetheless, the common law duties of utmost good faith and disclosure between parties to an insurance contract are generally considered to apply to contracts of reinsurance. The question in a reinsurance context is the extent of the duty of disclosure that applies. Depending on the nature of the reinsurance contract, it is not unusual (particularly in quota share and excess of loss type treaties) for the reinsurer to be entitled to disclosure of no greater scope of information than the information the cedant can require from the insured.
Insurance and reinsurance policies
Content requirements and commonly found clauses
Form and content requirements
The Insurance Contracts Act 1984 (Cth) provides a statutory framework that imposes certain duties and obligations on the parties to a contract of insurance. It prescribes the scope of the duty of disclosure, and limits the rights of an insurer to deny a claim and cancel an insurance policy in certain circumstances. The Insurance Contracts Act therefore modifies the common law in this respect.
The Insurance Contracts Act also provides for standard or prescribed insurance cover for particular contracts of insurance. These cover requirements generally apply only to retail or personal lines insurance business and not commercial lines or insurance typically provided to commercial and wholesale clients. The prescribed insurance contracts under the Insurance Contracts Act are for the following risks:
Sickness and accident.
Where an insurer provides insurance cover for any of these risks that differ from the standard terms of the prescribed contract, the insurer is required to bring the differing terms to the attention of the insured. The Insurance Contracts Act also imposes an obligation on insurers of home buildings and home contents insurance to provide a Key Facts Sheet to an insured who applies for such insurance. The one-page sheet is designed to provide basic information about the coverage and exclusions applicable to the policy.
Where a contract is not a prescribed contract but includes terms that are unusual, the insurer must inform the insured of the unusual policy terms before the insured enters into the contract (section 37, Insurance Contracts Act 1984 (Cth)). A failure to do so may result in the insurer being unable to rely on the unusual policy term.
The financial services laws under the Corporations Act 2001 (Cth) also impose disclosure and form and content requirements on the policy documents for insurance policies that are sold to retail clients. In general, the prescribed insurance contracts noted above will be the types of insurance contracts to which these product disclosure requirements also apply. An insurer is required to provide a product disclosure statement that includes, in a clear, concise and effective manner:
Prescribed information about the insurer.
The insurance terms and conditions.
Key risks of the product.
Other important information.
Commonly found clauses
The only prescribed insurance terms are those mentioned in respect of standard insurance covers for prescribed contracts of insurance.
Nonetheless, there are commonly found clauses and a market practice has developed in Australia over time in relation to particular business lines and types of insurance. In general, many wordings reflect the practices and custom of the UK and US markets, subject to the specific operation of the Insurance Contracts Act 1984 (Cth).
We see both facultative and treaty insurance (in all its forms) used in the Australian market. In general, terms are very similar to those seen in the UK market given the similarity of the law relating to reinsurance across these jurisdictions.
Commonly found clauses
Reinsurance contracts usually incorporate the terms of the original insurance contract. Additional terms typically found in reinsurance treaties arranged for the Australian market include:
"Follow the fortunes" or "follow the settlements" clause. This clause intends to bind the reinsurer to settlements arranged by the insurer in good faith where the settlement comes within a risk covered by the reinsurance contract which either reflect or modify the common law to a greater or lesser degree.
Claims co-operation clause. This type of clause typically takes precedence over a "follow the settlements" clause in the event of any inconsistency and requires that the reinsured co-operate with the reinsurer in relation to any settlement of a claim and not settle a claim without the reinsurer's approval.
"Claims control clauses" in which the reinsurer retains a right to investigate and handle claims made on the reinsured. This usually applies to particular types of claims and coverage.
Where a policy of insurance is subject to the Insurance Contracts Act 1984 (Cth), there are a number of terms and conditions that are implied as a matter of law to the contract, which either reflect or modify the common law to a greater or lesser degree.
Most significantly, a duty of utmost good faith is implied, requiring that each party to a contract of insurance act towards the other party, in respect of any matter arising under or in relation to the contract of insurance, with the utmost good faith. In addition to available common law sanctions for breach of contract, where an insurer fails to comply with this duty of utmost good faith in the handling or settlement of a claim, the failure and breach of the Insurance Contracts Act is deemed to be a breach of the financial services laws. Such a breach will entitle ASIC to use its powers under the Corporations Act 2001 (Cth) with respect to AFSLs, including the ability to impose conditions on licences, seek penalties and undertake other enforcement action available to it.
This duty of utmost good faith also exists under common law and will therefore still be relevant to those contracts of insurance that are not subject to the Insurance Contracts Act.
As with all contracts, contractual terms can also be implied by a court to give business efficacy to contracts of insurance.
The general law (statute and common law) contains a number of consumer protections in relation to contracts of insurance. There is Australian consumer protection and fair trading legislation enacted at both federal and state government levels. The most significant of these is the Australian Consumer Law under the Competition and Consumer Act 2010 (Cth).
Similar consumer protection legislation in respect of financial services is also found in the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). However, the Insurance Contracts Act 1984 (Cth) provides that a contract of insurance that is subject to the Insurance Contracts Act is not capable of being made the subject of relief under any other legislation, and so the unfair contract terms that are implied in other financial services contracts under the ASIC Act are not applicable to contracts of insurance.
Nonetheless, there remain a number of consumer protections that exist under general law that apply to protect insureds under contracts of insurance. These include:
An insurer cannot rely on a provision in a contract of insurance that is unusual and not typically found in similar contracts of insurance unless the insurer has clearly informed the insured in writing of the effect of the provision before the contract was entered into.
Any provision in a contract of insurance that permits an insurer to unilaterally vary the contract to the prejudice of a person other than the insurer is void.
An insurer is not permitted to "contract out" of the provisions of the Insurance Contracts Act to the extent that it would have the effect of excluding or restricting the operation of the Act to the detriment of a person other than the insurer.
The circumstances in which an insurer is able to cancel or avoid a contract of insurance are limited to those prescribed in the Insurance Contracts Act.
Section 54 of the Insurance Contracts Act 1984 (Cth) can also operate to prevent an insurer from relying on a contractual breach by an insured or an exclusion in the insurance policy to the extent that the relevant act or omission by the insured has not caused or contributed to loss claimed by the insured under the policy.
A contract of insurance can also be subject to the disclosure requirements of the Corporations Act 2001 (Cth), in which case an insurer is required to satisfy additional obligations for product disclosure statements that contain the details, key terms and conditions and risks associated with the insurance contract. A person who issues a product disclosure statement must ensure that the document is clear, concise and effective in order to aid a consumer's understanding of the insurance contract that they are purchasing.
Standard policies or terms
Aside from the prescribed insurance contracts under the Insurance Contracts Act 1984 (Cth) (see Question 18), standard form wording produced by trade associations or relevant authorities are not usual practice in Australia.
The National Insurance Brokers Association (NIBA) has been involved in the development of some standard policy wording in the past (for example, Industrial Special Risks insurance Mark IV and Mark V). However, these policy wordings have not been revised by the association for at least four years and NIBA does not currently consider it to be part of its mandate to produce such policy wording.
Insurance and reinsurance policy claims
Establishing an insurance claim
Whether a claim under an insurance policy is triggered depends upon the terms of the particular policy. An essential distinction is whether the contract of insurance is a "claims made" policy or an "occurrence" policy.
Under a "claims made" policy, the claim is enlivened upon the insured's first notification of it by the claimant. Section 40(3) of the Insurance Contracts Act 1984 (Cth) extends this cover to claims which may be made after the relevant policy has expired if those claims arise from circumstances which the insured has informed the insurer of in writing as circumstances which may give rise to a future claim.
In contrast, under an "occurrence" policy the fundamental element required to establish a claim is an event causing loss to the insured, which is covered by the terms of the policy. A claim is not triggered where the event that caused the loss, or the loss itself, is excluded by the policy.
The trigger adopted by a policy will often be contingent upon the nature of the cover provided.
Third party insurance claims
The contractual doctrine of privity historically acted as a bar to third parties claiming directly against insurers. This position has been altered by section 48 of the Insurance Contracts Act 1984 (Cth).
Section 48 enables third parties, where identified as a beneficiary within the policy, to claim against the insurer as if they were a party to the contract. The section also allows the insurer to raise any defences against the third party that it would otherwise have against the insured. Qualifying third parties under this provision need not be identified as a beneficiary by name (section 20, Insurance Contracts Act 1984 (Cth)).
After some uncertainty in the case law as to whether the insurer's duty of utmost good faith extended to the third party under section 48, the Insurance Contracts Amendment Act 2013 resolved the question in the affirmative. The amendment clarifying the extension of the duty of utmost good faith to third parties applies only after the contract is entered into (section 13(4), Insurance Contracts Act 1984 (Cth)).
Therefore, section 48 is operative where the contract expressly states that the insurance policy covers persons who are not the insured. Common examples of this include motor vehicle insurance and home and contents insurance. The former can cover a person who drives the insured's car with consent, while the latter can benefit other people residing in the insured's house.
Some insurance policies even use the term "insured" to refer interchangeably to both the contracting party and a third party who is intended to benefit from the cover. In such instances, it is important to construe the document with regard to whether the insured, a third party, or both, are the subject of the term.
By way of specific protection, section 51 of the Insurance Contracts Act 1984 (Cth) provides that where a third party is entitled to recover against an insurer, and the insured has died or cannot be found after reasonable enquiry, the third party is able to make that claim directly.
Another instance where third parties can claim directly against the insurer is where a policy is assigned to that third party. Contracts for life insurance policies are one such class where assignment is common. Section 48A of the Insurance Contracts Act 1984 (Cth) provides for a third party beneficiary to claim directly against an insurer under that form of policy arrangement.
Finally, third party claimants have been considered in the event of a company's deregistration under the Corporations Act 2001 (Cth). Section 601AG of the Act states that upon the deregistration of a company, a third party may be able to recover from the insurer of that company an amount that would have been payable to the company under the insurance contract.
Although individual contracts of insurance can specify a time limit within which a claim must be made by the insured, there is no general statutory time limit for making a claim under an insurance policy.
Particular types of insurance may require the insured to notify their insurer of a claim within a certain time. For example, Compulsory Third Party claims must be made within 90 days of the accident under section 85 of the Road Transport (Third-Party Insurance) Act 2008.
Section 9 of the Insurance Contracts Act 1984 (Cth) specifically excludes its application to reinsurances. Other legislative instruments remain silent on whether they apply to reinsurance. The area is therefore primarily governed by common law.
New South Wales (NSW), Australian Capital Territory (ACT) and Northern Territory (NT) legislation creates a charge on a liability under an insurance policy in respect of the insured's liability to a third party. These legislative provisions were originally based on the Third Parties (Rights Against Insurers) Act 1930 (UK). The UK Act specifically excluded reinsurance from its ambit, resolving the question in that jurisdiction, but the reinsurance exclusion was not imported to the local legislation. The effect of this disparity is that these provisions have been interpreted as applying to reinsurance.
The charge effectively enables the third party to enforce the reinsurance contract against the reinsurer. Specific provision for this is made through section 562A of the Corporations Act 2001 (Cth), where proceeds of reinsurance can be applied directly to the insolvent insurer's contracts with third parties in certain circumstances.
Remedies available for the breach of an insurance policy contract are contingent upon which party has performed the breach, and the nature of that breach.
Insurer's remedies against insured
In respect of an insurer's claim against the insured, the most common remedies include:
A declaration of the insurer's right to refuse to pay the indemnity.
A declaration of the insurer's right to repudiate the contract.
Recovery of an unpaid premium or indemnity that was wrongly provided.
An insurer is unable to cancel a contract of general insurance except for the provisions outlined by section 60 of the Insurance Contracts Act 1984 (Cth). These involve:
A breach of the duty of utmost good faith.
A breach of the duty of disclosure.
A breach of a provision of the contract (for example, non-payment of premium).
A fraudulent claim under the contract.
An act or omission of the insured which is required to be notified to the insurer (and is not) or the occurrence of which gives rise to a right to refuse to pay a claim.
A general insurer wishing to cancel a policy of insurance must follow the procedure outlined in section 59 of the Insurance Contracts Act 1984 (Cth) which provides for the giving of written notice. Where a general insurer is in liquidation, it can cancel a contract of insurance at any time (section 61, Insurance Contracts Act 1984 (Cth)).
The remedies available to a life insurer to vary, cancel or avoid a policy are similarly limited by the Insurance Contracts Act 1984 (Cth) to particular circumstances in which an insured or policy owner breaches a duty of disclosure or makes a misrepresentation, misstates age or makes a fraudulent claim.
A life insurer is limited in its rights to cancel a life insurance contract by sections 59A and 63 of the Insurance Contracts Act 1984 (Cth) so that it can do so only in circumstances of non-payment of premium, having given the required notice as prescribed by section 210 of the Life Insurance Act 1995 (Cth) or where a fraudulent claim has been made under the contract.
Insured's remedies against insurer
In respect of an insured's claim against the insurer, the remedy is invariably either the specific enforcement of the indemnities, or damages for the breach of promise to provide them.
An insured can also rely on section 54 of the Insurance Contracts Act 1984 (Cth) in circumstances where an insurer may refuse to pay a claim because the insured or third party has done (or omitted to do) some act after the contract had been entered into. If the act or omission cannot be reasonably regarded as capable of causing, or contributing to, a loss for which the insurance policy provided cover, the insurer cannot refuse to pay the claim. The insurer may nevertheless be able to reduce its liability to pay the claim by an amount that represents the extent to which the insurer's interests have been prejudiced as a result of the act or omission.
Failure to pay a claim promptly
Section 57 of the Insurance Contracts Act 1984 (Cth) provides for interest penalties to be applied to any claim that the insurer fails to pay within a reasonable time. Interest at the rate prescribed by regulation may be incurred and in certain circumstances, the insurer's outstanding payment can become the subject of compound interest.
Punitive damage claims
In principle, there is no bar to the insurability of punitive damages. As a general approach, however, policies usually exclude cover for punitive damages.
Particularly in liability-based policies, the obligation is expressed as covering "damages" and the definition of damages is interpreted broadly. It has been found to include punitive or exemplary damages (Cotogno v Lamb (No 3) (1886) 5 NSWLR 559).
Insolvency of insurance and reinsurance providers
APRA has a wider range of powers available to it to make orders and directions in the case of a distressed or insolvent general or life insurer. It can make orders and directions including that a distressed insurer recapitalise, transfer its policy portfolio to another insurer, or it can apply to have a judicial manager appointed to the insurer. These powers and the operation of Part VB of the Insurance Act 1973 (Cth) and Part 8 of the Life Insurance Act 1995 (Cth) (as relevant) operate in addition to Chapter 6 of the Corporations Act 2001 (Cth) that deals with other methods for the external administration of companies generally.
In the event that a general insurer becomes insolvent and is to be wound up, a Financial Claims Scheme can also be established under the Insurance Act 1973 (Cth) which covers all policyholders or others who have valid claims against the affected insurer up to AUD5,000. For any claims of AUD5,000 or over, the policyholder or claimant must meet certain eligibility criteria under the Financial Claims Scheme. If they are eligible, the amount paid will be the full amount that the policyholder or claimant would have been entitled to under the insurance policy. If they are not eligible, they will need to apply to the liquidator and rank with other unsecured creditors in the liquidation of the insurer.
The Financial Claims Scheme also applies to certain third parties who are able to claim against a general insurer under a policy issued to another party by that insurer. If the insurance claim is valid and under AUD5,000, APRA will pay the amount that the policyholder or claimant would have been able to claim from the failed insurer. The Financial Claims Scheme does not apply to any unexpired insurance premium paid to the insurer before its failure. Policyholders may be entitled to claim some or all of their unexpired premiums in the winding-up of the general insurer. APRA is responsible for administering Financial Claims Schemes.
Financial Claims Schemes do not apply to policies issued by life insurance companies.
There is no legal prohibition on excess coverage insurance policies providing for "drop down" cover in the event of the insolvency of the primary layer insurer. Therefore, whether such cover is available will depend on the terms and conditions of the policy.
In the absence of such cover, the insured will bear the loss up to the attachment point of the excess layer unless the insured is otherwise able to make a claim under the primary cover through a Financial Claims Scheme, where a declaration has been made that Division 3 of Part VC of the Insurance Act 1973 (Cth) applies to the insolvent insurer.
Taxation of insurance and reinsurance providers
In Australia, the application of tax laws to insurers, reinsurers and other persons involved in insurance transactions is complex and technical. Those laws, and the interpretation of those laws adopted by the domestic revenue authorities, can change. Insurers, reinsurers and other persons involved in insurance transactions operating in Australia should seek tax advice in relation to their proposed activities.
Insurance and reinsurance dispute resolution
In the event of a dispute, the insured bears the onus of proof that, on the balance of probabilities, the contract was valid and covered the event of loss. Where an insurer seeks to prove an exclusion or breach, the burden of proof shifts to the insurer.
The primary forum to deal with insurance and reinsurance disputes in Australia has been the court system, although such disputes are increasingly resolved through alternative means.
In 2008 the merger of three constituent dispute resolution bodies (the Banking and Financial Services Ombudsman, the Financial Industry Complaints Service, and the Insurance Ombudsman Service) formed the Financial Ombudsmen Service (FOS), which has jurisdiction to resolve insurance disputes. Determinations made by the FOS are binding on the insurer, although not on the insured, whose rights are reserved in the event of their dissatisfaction with the outcome.
Many insurance contracts also contain arbitration clauses (see Question 34).
Section 43 of the Insurance Contracts Act 1984 (Cth) renders any clause attempting to enforce an arbitration clause void. Under the Act parties cannot be compelled to arbitrate their dispute.
However, where the insured and insurer agree that the dispute will be resolved through arbitration after the dispute has arisen, that agreement will be enforceable under section 43(2) of the Insurance Contracts Act 1984 (Cth).
The Insurance Contracts Act 1973 (Cth) expressly does not apply to reinsurance contracts, and therefore arbitration clauses in reinsurance contracts are not unenforceable under section 43 of the Insurance Contracts Act 1984 (Cth).
At common law the parties can agree (either expressly or by implication) that a particular jurisdiction applies to the contract of insurance. The tendency of Australian courts has been to determine that choice of jurisdiction clauses operate on an exclusive basis (FAI General Insurance Company v Ocean Marine Mutual Protection & Indemnity Association (1997) 41 NSWLR 117).
This is restricted by the Insurance Contracts Act 1984 (Cth) where it applies, as parties cannot contract out of the Insurance Contracts Act 1984 (Cth). Such clauses will be further limited by the broad definition given to the "conduct of insurance business" under the Insurance Act 1973. To this extent, clauses which attempt to apply alternative laws and/or enforce alternative litigation forums will be significantly limited. To avoid issues that may arise, general insurance contracts commonly note Australia as the relevant law and jurisdiction.
Because reinsurance is often an international contract, choices of forum and law clauses have traditionally carried particular importance. Recent APRA reforms applying to all insurers operating in Australia have altered the enforceability of choice of law clauses in respect of reinsurance contracts.
GPS 230 Reinsurance Management requires that for any reinsurance contract entered into by an insurer on or after 31 December 2008, the insurer must ensure that the reinsurance contract provides that both:
The governing law of the reinsurance contract is Australian law.
Any disputes that fall to be determined by a court are to be heard in an Australian court.
Category E insurers, or "sole parent captives", are excluded from this requirement.
Financial System Inquiry
In 2013, the Commonwealth Government announced a review of the Australian financial system. This became known as the Financial System Inquiry (FSI) and the final report of the FSI was released in December 2014. The FSI was charged with examining how the financial system could be positioned to best support Australia's evolving needs and support Australia's economic growth. The FSI looked at issues in the general insurance and life insurance sectors. It made recommendations to the Government that, if adopted, will result in reform impacting on the general insurance and life insurance sectors. For example, recommendations include strengthening financial product issuer and distribution accountability and to enhance ASIC's powers to intervene in relation to financial products where there is a risk of significant consumer detriment. Recommendations also include measures to facilitate innovative disclosure and improving the way fees and risks are communicated to consumers.
The FSI also made recommendations about better aligning the interests of financial firms and consumers and ensuring remuneration structures in life insurance do not adversely impact on the quality of financial advice given. In relation to general insurance, the FSI made recommendations for guidance (such as tools and calculators) and disclosure to be improved, especially in relation to home insurance. The Government is yet to release its response to the FSI and so it is not clear as to the extent to which these recommendations will be implemented.
Trowbridge Report 2015
In October 2014, ASIC released a Review of Retail Life Insurance which highlighted significant issues in the selling of life insurance. ASIC urged the industry to develop industry-wide solutions for the misaligned incentives ASIC found were influencing the quality of life insurance advice. The Association of Financial Advisers (AFA) and Financial Services Council (FSC) established a Life Insurance and Advice Working Group (LIAWG) in response. It appointed John Trowbridge to be the independent chair with the objective of making recommendations on how the life insurance and advice industries can respond to these issues identified by ASIC so as to ensure Australians are adequately insured and receive best practice financial advice.
The chair issued his final report in March 2015 (Trowbridge Report 2015), making recommendations for a level commission payment structure of no more than 20%, supplemented by an initial advice payment payable by the life insurer to the adviser to compensate the adviser for the upfront work required to establish the policy. The report also identified a number of other measures to supplement the new proposed remuneration structure along with a three-year transition plan to move the new arrangements. The life industry is presently considering the recommendations of the report and working with the Commonwealth Government and ASIC to identify an agreed reform programme.
Main insurance/reinsurance trade organisations
Insurance Council of Australia (ICA)
Main activities. ICA represents the interests of the Australian general insurance industry. It represents members' interests in both domestic and international issues and represents the general insurance sector to government and the community.
Australia Insurance Law Association (AILA)
Main activities. AILA is a national non-profit organisation formed to provide a forum for the promotion, review, development and debate of insurance law through seminars, workshops and conferences.
Australian and New Zealand Institute of Insurance and Finance (ANZIIF)
Main activities. ANZIIF is a professional association and education provider for the insurance and financial services industry in the Asia Pacific region.
Australasian Life Underwriting and Claims Association (ALUCA)
Main activities. ALUCA is a professional association established to advance the knowledge and professionalism of insurance professionals working on claims and underwriting in life risk and disability insurance.
National Insurance Brokers Association (NIBA)
Main activities. NIBA is the national trade organisation for licensed life and general insurance brokers in Australia. NIBA is the national voice of insurance brokers and an advocate for insurance consumers.
Description. Copies of Australian commonwealth legislation can be found at ComLaw which is provided and maintained by the Australian government. ComLaw website.
Australian Prudential Regulation Authority (APRA)
Description. APRA is the prudential regulator of the general insurance and life insurance sectors. It maintains a website that provides information about the prudential framework, register of authorised insurers and other relevant information about its activities publications and consultation packages.
Australian Securities & Investments Commission (ASIC)
Description. ASIC is the corporate and financial services regulator. It maintains a website with registers, regulatory resources and information relevant to financial services.
Louise Cantrill, Partner
Henry Davis York
Professional qualifications. Admitted as a solicitor New South Wales (1993); High Court of Australia (1993); Bachelor of Laws, University of New South Wales.
Non-professional qualifications. Bachelor of Economics, University of Sydney (1985).
Areas of practice. General insurance and reinsurance; transactional insurance advice; corporate risk and insurance advice; insurance and liability litigation.
- Advised insurer on managing multi-million dollar class action alleging breach of continuous disclosure obligations against international construction company.
- Advised an Australian based international construction and retail company on the annual renewal of its multi-million dollar international insurance programme, including construction, property, public liability and industrial special risks.
- Acting for one of the largest self-insured government agencies, NSW Health, in Supreme, District and the Coroner's Court matters involving a broad range of medical and allied health professionals, and hospital departments.
- Defended directors of a not for profit organisation against an employment practices claim alleging workplace bullying and sexual misconduct.
- Defending a professional negligence claim in multi-million dollar Supreme Court proceedings against an insurance broker for alleged failure to obtain appropriate professional indemnity insurance for a building certifier.
- Law Society of NSW Medico-Legal Liaison Committee.
- Australian Insurance Law Association (AILA).
- Commercial Law Association of Australia Ltd.
- Medico Legal Society of NSW.
- NSW Reinsurance Discussion Group.
- NSW Claims Discussion Group.
- Australian and New Zealand Institute of Insurance and Finance (ANZIIF).
- Woman Lawyers' Association.
- Financial Services Accountants Association.
Claire Machin, Special Counsel
Henry Davis York
Professional qualifications. Admitted as a solicitor and barrister, Tasmania (1993); admitted as a solicitor, New South Wales (1995); High Court of Australia (1995); Bachelor of Laws, University of Tasmania (1993); Masters of Laws, University of Sydney (2000).
Non-professional qualifications. Bachelor of Arts, University of Natal, South Africa.
Areas of practice. General insurance and reinsurance; life insurance and reinsurance; private health insurance; superannuation; financial services; corporate insurance advisory and regulatory risk.
- Acted on the world's first syndicated bank guarantee facility placed exclusively with the insurance markets in relation to Woolworth's workers compensation arrangements.
- Advised the Insurance Council of Australia on corporate governance changes to support the General Insurance Code of Practice 2014.
- Advised client on privatisation of South Australian CTP Insurance market.
- Financial Services Council (Member of Life Regulatory Affairs Working Group).
- Australian and New Zealand Institute of Insurance and Finance (ANZIIF).
- Australian Life Underwriting and Claims Association (ALUCA).
- Association of Superannuation Funds of Australia (ASFA) (Member of Insurance Standing Advisory Panel).
- Australian Insurance Law Association (AILA).