Brokers and insurers are experiencing one of the longest hard insurance market cycles in history. In a hard market, brokers will need to explore alternatives beyond the local insurance market. Often they will look to overseas insurance markets to meet local capacity constraints and rising premiums.
APRA recently published its statistics for the use of overseas insurers, and the use of unauthorised foreign insurers by brokers is on the rise, representing $2.2m of premiums invoiced by brokers in the last 12 months.
What are the regulatory requirements that apply to insurance intermediaries who are placing insurance with an overseas insurer? We examine how brokers can manage their compliance obligations.
What’s a UFI?
Insurers that aren’t authorised or supervised by the Australian Prudential Regulation Authority (APRA) are not authorised to conduct insurance business in Australia. Lloyd’s of London has special treatment as it is permitted to underwrite insurance business in Australia.
An unregulated overseas insurer is referred to as an unauthorised foreign insurer (UFI) or direct offshore foreign insurer (DOFI). These insurers are ‘unauthorised’ because they don’t hold a licence issued by APRA and do not meet the prudential and other conditions for carrying on an insurance business under the Insurance Act 1973 (Cth).
Before dealing with a UFI, it’s important to understand the Australian laws which allow a broker and its client to access an overseas insurance market. Generally, there are restrictions for brokers in placing business with a UFI. But, in some cases, brokers who have an Australian financial services licence can do so if certain circumstances apply and specific disclosures are made to the insured.
What are the restrictions?
Brokers can’t recommend and arrange insurance policies that are underwritten by UFIs unless one of four UFI exemptions applies. The four exemptions are available to:
- High-value clients;
- Insurance for atypical (or unusual) risks;
- Insurance required by foreign law; and
- Risks that cannot be reasonably placed in the Australian market.
High-value clients: High-value clients are exempt because they tend to be sophisticated insurance buyers and, in many cases, they may require insurance that is sourced from a UFI where there is limited appetite in the local insurance market to insure them or the insured forms part of a global group which purchases its insurance using a global insurance program.
To qualify as a high-value insured, at least one policyholder needs to meet one of the following criteria:
- Operating revenue of $200 million or more in Australia;
- Gross assets worth at least $200 million in Australia; or
- At least 500 employees in Australia.
These thresholds are calculated by averaging the relevant revenue, assets or employees at the end of the previous three financial years (or if operating for fewer than three years, the average for all financial years).
Atypical risks: Unique or unusual risks may need to be insured by accessing a specialist insurance product from the overseas insurance market and this is often needed for those atypical risks which may not be commonly available from Australian-regulated insurers.
A broker can place insurance with a UFI where the policy covers the following types of atypical risk: nuclear risks, war, terrorism, satellite or space, biological risks, medical clinical trials, aviation liability (excluding liability for loss of cargo), protection and indemnity for ships (other than pleasurecraft), or equine insurance (excluding equestrian packages).
If a policy covers both an atypical risk and another risk (unless that risk is ‘incidental’ to the cover provided for an atypical risk), the exemption only applies to the atypical risk and not to other risks covered by the policy. However, it may be possible to access another UFI exemption for the incidental cover.
Insurance required by foreign law: If the law of a foreign country requires that certain insurance for risks must be purchased from an insurer that is authorised or permitted by the laws of that country to issue that kind of insurance, the broker can place insurance with the UFI. For example, an Australian architect may be working on a project in the UAE and, as a condition of their professional services contract, they may be required to hold certain types of insurance with a locally-authorised UAE insurer.
Risk that cannot reasonably be placed in the Australian market: This exemption can be accessed by a broker and their client if an assessment is made by the broker to demonstrate that the risk can’t be placed in the local market. The broker needs to be satisfied that:
- No Australian-regulated insurer will insure the risk;
- The policies offered by an Australian-regulated insurer are or would be substantially less favourable for the client when compared to the policy terms offered by a UFI; or
- There are other circumstances that mean any policies offered by an Australian-regulated insurer are substantially less favourable for the client (for example, a global insurance policy that covers Australian risks might be more affordable for the insured or offer other advantages to the insured due to similar coverage provided to other insureds in a corporate group, continuity of cover or more expansive coverage than what would be available locally).
What are the disclosure requirements?
When placing insurance with a UFI, brokers should make certain disclosures as to the risks associated with placing insurance with a UFI. For retail clients, this may mean that a Product Disclosure Statement must be prepared, even though the UFI is located outside Australia and is not subject to Australian laws.
Where the UFI exemption requires the broker to make a written assessment of whether the risk can be reasonably placed with an Australian-regulated insurer, the broker will need to demonstrate that enquiries with the local market have been exhausted or will need to record their assessment of whether the UFI policy is more favourable to the client and record the reasons why.
There can be some conditions imposed by a broker’s professional indemnity insurer in terms of whether they will cover claims involving advice given in relation to the use of UFIs and brokers should check whether they have coverage and the relevant conditions carefully before advising any clients, particularly retail clients.
Requirements for a broker assessment
The broker should thoroughly but exhaustively investigate and assess whether Australian-regulated insurers are willing to or able to offer cover to the client. This will involve gathering records of the broker’s engagement with local insurers, including which insurers have been approached to quote and supply terms, whether they have agreed to do so or declined and whether quotes and policy terms provided by them are ‘substantially less favourable’ to the client when compared with an alternative UFI policy.
Following the assessment, the broker must certify that they are reasonably satisfied that the risk cannot reasonably be placed in Australia. This certification must be provided to ASIC or the insured if requested.
A broker certification can only be given by a broker that holds an Australian financial services licence (within the meaning given by the Corporations Act 2001 (Cth), which excludes authorised representatives of licensees) and who is permitted under section 923B of that Act to assume or use the expression ‘insurance broker’ or ‘general insurance broker’ in relation to the person’s business or services.
UFI notice for clients
Most brokers will include a UFI notice when they place business with UFI with the advice they provide to the client. This is a statement that explains that the insurer is not authorised under the Insurance Act 1973 (Cth) to conduct insurance business in Australia, is not subject to the provisions of the Insurance Act, and is not a declared general insurer under Part VC of the Insurance Act. It is also essential to explain that if the UFI becomes insolvent, the client is not protected by the financial claims scheme under the Insurance Act.
A UFI notice must always be given to retail clients (usually within the Product Disclosure Statement prepared by the insurer) and to wholesale clients when giving personal advice on personal accident and sickness insurance or consumer credit insurance which is placed with a UFI.