Author: David Mills, Director, Gold Seal.

With the hardening of the insurance market, the Compliance helpline has received a number of requests regarding the use of Unauthorised Foreign Insurers (UFIs). So, we thought it timely to remind you of the rules surrounding these placements and your obligations when placing business with UFIs.

‘Unauthorised Foreign Insurer’ is a term that was introduced in 2008 to make it clear that these insurers are not authorised as general insurers in Australia. It replaces the previous term, ‘Direct Offshore Foreign Insurers’ (DOFIs).

UFIs do not need to hold an Australian Financial Services Licence (AFSL), because they don’t ‘carry on a financial services business in Australia’. If they did, they would need to be authorised by the Australian Prudential Regulatory Authority (APRA) and hold an AFSL licence if they offered ‘retail’ insurance.

Indeed APRA-authorised insurers that only provide insurance to wholesale clients, are not required to hold an AFSL. Their agents are not required to be licensed either – and this applies equally to Lloyd’s syndicates and their Coverholders.

Brokers are only allowed to deal with foreign insurers in these limited circumstances:

  • a contract of insurance with a high-value insured;
  • a contract of insurance for an atypical risk;
  • a contract of insurance for other risks that cannot be reasonably placed in Australia; and
  • a contract of insurance required by a foreign law.

High-value insured’ is defined as a policyholder that either alone, or as part of a related group, has:

  • operating revenue derived in Australia of $200 million or more; or
  • gross assets in Australia of $200 million or more; or
  • employees in Australia of 500 or more

The insured and/or their AFSL holding intermediary will “self-assess” against these thresholds, which are set out in the Insurance Regulations 2002. If the insured meets the definition of “high-value insured”, the business could then be placed with a UFI without the UFI or AFSL holder being in breach of the prohibitions.

Atypical risks” recognises that there are a number of limited specific atypical insurance risks that currently cannot be placed, on a stand-alone basis, with authorised insurers.

The exemption applies to the following lines of insurance:

  • Nuclear
  • War
  • Terrorism
  • Satellite or space
  • Biological risk
  • Medical clinical trials
  • Equine
  • Aviation liability
  • Shipowners’ protection and indemnity other than for pleasure craft

The insured and/or their AFSL holding intermediary will self-assess against this list of insurance lines. If the insured is seeking a policy that corresponds to one of these lines, the business could then be placed with a UFI without the UFI or AFSL holder being in breach of the prohibitions.

Other risks” recognises that there will be a further range of circumstances where a business, or consumer has a unique risk that cannot be placed with an authorised insurer, or with a DOFI under the previous exemptions.
An assessment is made and documented by an AFSL holding intermediary that represents the insured (i.e. an insurance broker) to determine if a specific risk cannot be placed with an authorised insurer, taking into account the following criteria:

  • a lack of market capacity;
  • a material difference in price;
  • a difference in non-price terms and conditions bearing a material impact on the business or consumer; and
  • material benefits accruing from continuity of an ongoing relationship between a given insurer and the business or consumer.

If the AFSL holding intermediary is satisfied that the risk cannot be placed with an authorised insurer, the business could then be placed with a UFI without the UFI or AFSL holder being in breach of the prohibitions.

The AFSL holder’s determination would need to be “reasonable” and based on a “reasonable” level of investigation and market analysis.

  • Assessment of the exemption will be made at the time of negotiation, inception, renewal or material change in the terms and conditions of the relevant policy.
  • Further exemption

Contracts required by foreign law

As a separate additional ground of exemption, an arrangement with a UFI that is required by the law of a foreign jurisdiction will be exempt.

For example, an Australian business operating in a foreign country that requires a client by law to take out workers’ compensation insurance with an insurer authorised in that country, will be able to place this business with the UFI in that country without the UFI or an AFSL holder being in breach of the prohibitions.

Administration

The Australian Securities and Investment Commission (ASIC) will collect data from AFSL holding intermediaries about the insurance business that is placed with DOFIs under the exemptions. This allows ongoing monitoring of the business flowing offshore and will enable the exemption arrangements to be reviewed.

For assistance or guidance on any Compliance matter, visit the Compliance section on this website or call 03 9510 5100