Partners David Amentas and Avryl Lattin are pleased to contribute the Australian chapter to The Legal 500: 2nd Edition Insurance & Reinsurance Comparative Guide. The below overview addresses topics such as contract regulation, licensing, penalties, policyholder protection, alternative dispute resolution and insight into the future of the insurance market over the next five years. To download a PDF of the chapter or to view the complete global guide, please see links at the bottom of the page.
1. How is the writing of insurance contracts regulated in Australia?
Insurance contracts in Australia are regulated by various Commonwealth Acts which deal with both the activity of insurers and reinsurers and the writing of the contracts. The activity of insurers is regulated by (i) the Insurance Act 1973 (Cth) (IA) for general insurers, (ii) the Life Insurance Act 1995 (Cth) (LIA) for life insurers, and (iii) the Private Health Insurance (Prudential Supervision) Act 2015 (Cth) for private health insurers. The writing of insurance contracts is separately regulated by (i) the Insurance Contracts Act 1984 (Cth) (ICA) which regulates contracts of general insurance and life insurance, (ii) the Marine Insurance Act 1909 (Cth) which regulates contracts of marine insurance and (iii) the Private Health Insurance Act 2007 (Cth) which regulates contracts of health insurance.
2. Are types of insurers regulated differently (i.e. life companies, reinsurers)?
Yes, different types of insurers are regulated differently. The regulation of general insurers is shared between two regulatory entities: the Australian Securities and Investments Commission (ASIC) and the Australian Prudential and Regulatory Authority (APRA). ASIC has responsibility for issuing financial services providers (including insurers) with an Australian Financial Services Licence (AFSL) under the Corporations Act 2001 (Cth) (Corporations Act). An AFSL permits insurers to provide financial services to Australian clients, which includes the issuing of insurance policies and providing financial product advice for insurance policies.
The definition of general insurers in the IA brings within its confines any insurer carrying on an insurance business including a business of reinsurance, but does not extend to life insurance, accident insurance and pecuniary loss insurance.
APRA is responsible for the administration of the IA. This includes both the publication of legally binding prudential standards for general insurers and the authorisation for an insurer to conduct general insurance business.
A separate regulatory regime applies under the LIA to insurers carrying on a life insurance business. APRA also regulates life insurers and there is a separate authorisation regime that applies under the LIA. Insurers who are authorised under the LIA are prohibited from conducting any non-life insurance business.
This separate regulatory approach between general and life insurers extends to reinsurers. Reinsurers must obtain separate authorisations to underwrite reinsurance for general or life insurance policies.
3. Are insurance brokers and other types of market intermediary subject to regulation?
Insurance brokers and intermediaries do not fall within the regulation of the IA nor the LIA in Australia. While this means they do not need to obtain an authorisation or registration to conduct an insurance business, they are still a provider of financial services as they advise on insurance products. This means they are subject to Chapter 7 of the Corporations Act, and in most cases are required to obtain an AFSL from ASIC.
An exception to this general requirement is where an intermediary solely conducts reinsurance activities. As reinsurance is excluded from the definition of “financial products” in the Corporations Act, these intermediaries are exempted from the requirement to obtain an AFSL in respect of provision of financial services for reinsurance.
4. Is authorisation or a licence required and if so, how long does it take on average to obtain such permission?
All insurers in Australia must obtain both an authorisation from APRA and an AFSL from ASIC in order to conduct insurance business.
On average, it takes ASIC four weeks to grant an AFSL, while APRA can require between three and 12 months to finalise an insurance authorisation. Applications must be accompanied by a fee of AUD 1,588 for ASIC and AUD 80,000 for APRA.
For intermediaries that require an AFSL from ASIC, the same timeframe and fees apply.
5. Are there restrictions over who owns or controls insurers (including restrictions on foreign ownership)?
The Financial Sector (Shareholdings) Act 1998 (Cth) restricts persons from holding more than a 15% stake in an insurer. The Insurance Acquisitions and Takeovers Act 1991 (Cth) (IATA) implements a similar 15% cap on the acquisition of an insurer's total asset value. Any holding above these limits must be approved by the Commonwealth Treasurer who will assess the application on the basis of whether it is in the national interest. Approval is also required under the IATA where there is an agreement with an Australian insurer that proposes to allow the acquiring entity to have the power to control the directorate of the insurer.
The application should demonstrate the financial security of the proposed shareholders and their commitment to long term investment and capital in the insurer. Requirements on capital must also be satisfied. The IATA Decision-Making Principles IDM 1/1992 provides further guidance on the national interest test, which includes whether the proposal could adversely affect the stability and strength of the insurance industry and financial system, the interests of policy holders and compliance with Australia's Foreign Investment Policy.
6. Is it possible to insure risks without a licence or authorisation? (i.e. on a non-admitted basis)?
All insurers are required to be authorised to carry on business in Australia. This prohibition applies to both insurers and reinsurers. The IA extends this prohibition to any non-admitted insurer which engages an Australian broker or agent to sell policies. In those circumstances a deeming provision will apply which will treat the non-admitted insurer as being taken to carry on an Australian insurance business, requiring APRA authorisation. Only Lloyd's underwriters are permitted to insure risks without obtaining an APRA authorisation, as they are covered by a specific exemption.
There are also some specific exemptions which apply to specific risks. For example, there is an exemption where the policyholder is a high value insured with annual revenue over AUD 200 million or where the insured risk is an atypical risk. An exemption also applies where a broker certifies that the risk cannot reasonably be placed in Australia and where insurance is required by the laws of a foreign country. A foreign insurer will not require APRA authorisation if an Australian customer has approached it directly.
7. What penalty is available for those who operate without appropriate permission?
The IA imposes a fine of 60 penalty units for any entity that operates a general insurance business without APRA authorisation. As at 31 March 2018, 60 penalty units equates to AUD 12,600.
8. How rigorous is the supervisory and enforcement environment?
When investigating breaches of the governing Acts, both APRA and ASIC have wide investigative powers to require all relevant information or persons with information to be produced or examined. The supervisory and enforcement approach of the regulators is dependent on the nature and severity of the contravention committed.
Unless significant contraventions have occurred, the focus for ASIC is on corrective and compensatory enforcement. The majority of contraventions are resolved through the issuing of infringement notices, recovering losses on behalf of entities, corrective disclosure orders and entering enforceable undertakings. Where the contravention is more serious, ASIC may seek criminal or civil penalties on the entities and individuals involved, extending to disqualifying individuals from providing financial services or managing a company.
With the overlap in the supervisory and enforcement responsibilities for APRA and ASIC, both regulators have a cooperation framework to guide their joint enforcement functions.
9. How is the solvency of insurers (and reinsurers where relevant) supervised?
The solvency of general insurers and reinsurers is supervised by APRA, which publishes legally binding prudential standards regulating the solvency of these entities. Prudential Standards GPS 110 to 118 and LPS 110 to 118 establish the minimum capital requirements for general and life insurers and reinsurers respectively.
To ensure continuous supervision, the prudential standards further require each entity to complete an annual Internal Capital Adequacy Assessment Process. This involves entities providing to APRA an annual report outlining the finding of a stress test of potential risk exposures and capital resources. Prudential Standard CPS 220 further requires general and life insurers and reinsurers to implement a forward looking scenario analysis as part of their risk management frameworks.
10. What are the minimum capital requirements?
APRA's Prudential Standard GPS 110 establishes that the minimum capital requirements for both general insurers and reinsurers is AUD 5 million, while LPS 110 states that the minimum capital requirements for both life insurers and reinsurers is AUD 10 million. However, the exact minimum capital varies between each entity. The individual requirements are based upon calculation of the Prescribed Capital Amount (PCA) for each insurer and reinsurer, which takes into account a number of different risk factors such as asset risk, asset concentration risk, insurance risk, insurance concentration risk and operational risk. The Prudential Capital Requirement establishes the PCA plus supervisory adjustments imposed by APRA and are measured on either APRA's standard method or an internal method approved by APRA. Each insurer and reinsurer must have capital in excess of the requirement and this will be dependent on the volume, mix and nature of each business.
11. Is there a policyholder protection scheme?
Where a general insurer is under judicial management and is believed to be insolvent, the Minister may declare a Financial Claims Scheme over the general insurer. This entitles eligible policyholders with claims connected to certain policies to be paid before they otherwise would during the winding up of the general insurer. The scheme does not apply to life insurers or private health insurers. Any policyholders of state based compulsory insurance lines are governed by separate schemes created under state legislation.
The scheme offers continuous cover to policyholders for 28 days after the scheme is declared and permits claims to be made within 12 months. The scheme only covers general insurance contracts and does not extend to policyholders with an operative revenue or gross assets above AUD 200 million or with more than 500 employees. Where claims are below AUD 5,000, policyholders are only entitled to be paid an amount equal to what the insurer's liability would have been. Where policyholders are over that threshold, they will only be paid if APRA is also satisfied that the policyholder meets any conditions in the Insurance Regulations 2002 (Cth).
The scheme is managed by the Commonwealth and funded through a levy on the financial sector.
12. How are groups supervised, if at all?
Insurance groups in Australia include any insurer with controlled entities and those insurers which are the subsidiary of an authorised non-operating holding company (NOHC). APRA supervises insurance groups by granting them authorisation to conduct a business of insurance similar to the authorisation process required for individual insurers. APRA has the ability to control the insurance group and to exercise enforcement powers over individual insurers. Where APRA does not have oversight over the subsidiaries of an insurer or NOHC, it can exercise oversight by directing the parent entity to take specified actions.
13. Do senior managers have to meet fit and proper requirements and/or be approved?
APRA's Prudential Standard CPS 520 requires that a responsible person of a general or life insurer (which includes directors, senior managers and employees who perform activities for a subsidiary that may materially affect the insurer's financial standing) must satisfy a "fit and proper" person test. This test requires responsible persons to possess the competence, character, diligence and judgment necessary for them to perform their duties. The test also requires the person not to be the subject of a disqualification order and not have a conflict which would create a material risk of failing to perform their duties. For foreign insurers operating a branch in Australia, these requirements only apply to those managers who are ordinarily resident in Australia. The insurer must maintain a "fit and proper" person policy which outlines the process used by the insurer to assess whether a responsible person satisfies the test.
14. Are there restrictions on outsourcing parts of the business?
APRA's Prudential Standard CPS 321 regulates the outsourcing of any material business activities for general and life insurers. The standard does not impose any express restrictions on outsourcing but does require all insurers and reinsurers to notify APRA within 20 business days of the execution of an outsourcing agreement. This notification must be accompanied by a summary of the key risks and mitigation strategies involved. The insurer or reinsurer must also provide information sufficient to demonstrate to APRA that the entity has a business case for the outsourcing, has engaged in a selection process for the project and has established procedures to monitor the performance of the agreement.
15. How are sales of insurance supervised or controlled?
The sale and advertisement of general and life insurance is regulated by the Corporations Act. The Corporations Act prescribes that any advertisement of an insurance policy must clearly specify the issuer and seller of the product, and the location of the product disclosure statement (PDS) must also be provided. The Corporations Act further requires any advertisement to include a statement that the buyer should consider the PDS in deciding whether to purchase the insurance. General and life insurers must provide ASIC with a copy of the first issue of the PDS for an insurance product offered to retail consumers. At the point of sale, retail customers must also be provided with a copy of the PDS (unless an exception under the Corporations Act applies). The PDS must set out prescribed content such as the fees payable, risks and benefits involved and the significant characteristics of the insurance product.
16. Are consumer policies subject to restrictions? If so, briefly describe the range of protections offered to consumer policyholders.
The Corporations Act and the ICA provide a range of protections for consumer policyholders. All PDS documents must be drafted in a clear, concise and effective manner that is easy for a consumer to understand. All consumer insurance policies are also subject to a 14 day cooling off period. Where a policyholder has purchased renewable cover, the insurer is required to advise the policyholder 14 days prior to its expiration whether the insurer is prepared to renew or extend the policy.
The ICA also provides a number of protections for policyholders, including notifications that must be made to insureds as to their duty of disclosure and the potential exclusion of the insurer's liability in certain circumstances.
The General Insurance Code of Practice (the Code) provides further protections to consumer policyholders where claims are made. Insurers which have subscribed to the Code are required to comply with strict time limits in managing claims.
17. Are the courts adept at handling complex commercial claims?
The Australian courts have well-developed case management processes for handling complex commercial claims in an efficient and expeditious manner, including those arising from insurance and reinsurance disputes in Australia.
In 2016, the Federal Court of Australia established an Insurance List within the commercial and corporations national practice area for short matters which concern policy interpretation or questions of law regarding the operation of insurance legislation.
18. Is alternative dispute resolution well established in the jurisdiction?
There is currently no comprehensive or uniform legislative framework for the operation of alternative dispute resolution (ADR) in Australia, although ADR processes are well established in the various Australian jurisdictions. Many different laws govern the operation of ADR in the different Australian jurisdictions and the laws generally require parties to litigation take 'genuine' or 'reasonable' steps to resolve disputes.
For example, the Civil Dispute Resolution Act 2011 (Cth) applies to proceedings in the Federal Court of Australia and requires an applicant to file a genuine steps statement at the time of filing the application.
Section 43 of the ICA renders any clause attempting to enforce an arbitration clause void, and under this legislation, 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 ICA.
Additionally almost all Courts will order mediation before a matter can proceed to trial.
19. What are the primary challenges to new market entrants?
The requirement for dual authorisations (as both an AFSL holder and a general or life insurer) to carry on insurance business in Australia is one of the key challenges for new market entrants looking to establish operations as an insurance company in the Australian market. New market entrants generally need to use a significant amount of resources due to the onerous requirements which they must demonstrate to both regulators that they satisfy, as outlined below.
Applicants for a general or life insurance authorisation from APRA must demonstrate that they can comply with the prudential requirements outlined in APRA's Prudential Standards including extensive requirements as to capital adequacy, risk management and internal control systems and governance from the start of their authorisation. In order to apply for an AFSL with ASIC, applicants must provide core proof documents including a business description, proofs for each responsible manager and organisational competence, along with financial statements and proofs for financial resources.
20. To what extent is the market being challenged by digital innovation?
Currently, there are a number of digital platforms looking for opportunities to expand their service offering, including into the Australian insurance market. At the moment, this is largely a positive for the insurance industry as it is creating new opportunities for distribution. However, if these players seek authorisation as insurers and issue their own products, this is likely to create even more competition in an already very competitive market.
One significant issue that has emerged with consolidation in the industry is the challenge of integrating legacy systems. The cost of replacing or integrating existing systems and technology is substantial. Those insurers that are able to adapt their systems, and make use of technology and insurtech to deliver insurance services in a more cost effective and consumer-friendly manner, will gain market share and potentially be attractive targets for acquisition.
21. Over the next five years what type of business do you see taking a market lead?
The types of businesses which are likely to take a market lead across the insurance and reinsurance sector are those which are able to respond and adapt their business models and processes to changing consumer demands and the pressures from emerging regulatory challenges.
While businesses linked to the resources and construction sectors are expected to remain strong in Australia, it is likely that businesses related to information technology/cyber will gradually overtake those sectors over the next five years.
The rapid pace of technological changes in the industry and shifts in the demographics of the Australian consumer base are driving consumer expectations as to their interactions with the insurance industry. In addition, the increased regulatory scrutiny of the insurance and reinsurance sectors, changes to the life insurance remuneration model and changes to product design requirements has been accompanied by an increased focus on consumer protection measures. Industry players will need to dedicate resources towards these developments to implement processes and procedures to ensure compliance with the changing regulatory environment.