August 2008 - DOFI Legislation imposed on a heavily regulated industry
The Federal Government’s new legislation on direct offshore foreign insurer’s (DOFIs) came into effect on July 1.
In essence, the new law prevents business being placed with a DOFI, unless it fits within one of three exemption categories. The exemptions cover high-value insureds (total group gross operating revenue in Australia of $200 million or more, or total group assets in Australia of $200 million or more, or 500 or more employees in Australia); atypical risks (nuclear, war, terrorism, medical clinical trials, aviation liability and ship owners’ protection_; and customised risks (unique risks that cannot be placed under the previous two limbs, taking into account lack of market capacity, material difference in terms or conditions impacting on the business or benefits accruing to the maintenance of an ongoing relationship between the insurer and the insured).
The legislation has been contentious and subjected to much scrutiny by the industry. There are many who believe the DOFI legislation is a case of using a sledgehammer to crack a nut. Onshore insurers argued loudly that DOFIs were in a privileged position, as they were not subject to APRA regulation; there were many demands for a “level playing field”.
The counter argument was “buyer Beware”. The type of business being placed with DOFIs was large corporate’ accounts and, frequently, hard-to-place business. As sophisticated purchasers, they had the ability to assess he security of their carrier and make their own decision. There is no doubt that some DOFIs are located in suspect jurisdictions and may have very little capital behind them to pay claims. But there are many DOFIs that are highly capitalised, strong entities, many with better balance sheets than some onshore, APRA-regulated insurers.
The legislation has prompted some DOFIs to seek an Australian financial services licence. For example, Axis Capital, the security behind several underwriting agencies in the Stardex Insurance Group, was one of the first to receive an AFSL.
Estimates of the amount of business being placed with DOFIs were just that – rough estimates. No data was collected on the amount or type of business placed offshore with DOFIs, although that will soon change as part of the new legislation.
The broker community argued strongly that the legislation was being rushed and brokers were being given insufficient time to adjust to the new regime. A valid argument, given that the onus is on brokers to justify why business is placed with a DOFI. Brokers need time to train their staff and gain familiarity with precisely how the new law affects the way they do business.
Mark Radford, a Sydney-based partner with law firm Blake Dawson, which acts for the National Insurance Brokers Association, criticised the short time given to brokers when he spoke at an AILA seminar in Brisbane.
The final regulations were released on June 20, to take effect from July 1.
Mr Radford said the Federal Government had not indicated it would make any concessions, such as having a settling-in period or a moratorium on prosecuting offenses under the regulations. He agreed there had been earlier drafts published, but said the government’s view that brokers should be exposed to comply totally with the new laws just days after their publication was “not a reasonable approach”.
The DOFI regulations provide for fines of up to $27,500 for breaches by corporations and $5,500 for individuals, including brokers.
“Brokers have to be very careful because in some cases, such as the high-value (insured) test, they will rely on information provided by the insured influencing their view of whether an exemption is justified” Mr Radford said.
“In the case of a customised exemption, a broker has to issue a certificate saying a risk under the contract cannot reasonably be placed with an Australian insurer. In that instance, a broker has to have appropriate procedures in place to justify the decision.”
From a practical standpoint, it will be interesting to observe how brokers interpret terms such as “material difference” in premium rates, or material difference in “terms and conditions” and how much scope they are given to do so. Similarly, in determining whether a risk can, in reality, be placed in the Australian market, how broad an inquiry is required?
Like so much legislation, the devil is in the detail. Time will tell how the legislation pans out and the ramifications for the industry.
It is, however, disappointing that the government has chosen to impose more compliance requirements on an industry that is already very heavily regulated.
That adds to the cost of doing business, and those costs, inevitably, are borne by policyholders.