Placing business with an unauthorised foreign insurer

Brokers generally place business with Insurers and Lloyds underwriters authorised under the Insurance Act (sections 12 and 93 respectively). This includes a foreign general insurer who is authorised under section 12 of the Act.

The purpose of being APRA authorised to carry on insurance business in Australia is to protect our local market and policyholders. There are inherent protections in the Insurance Act and through the Prudential Standards issued by APRA.

This protection flows through to an Underwriting Agency or Lloyds Coverholder who act on behalf of an APRA regulated insurer (including Lloyds underwriters). Additional consumer protection arises under financial service laws.

When can an Insurance Broker place business with an Unauthorised Foreign Insurer (UFI)?

Our laws recognise that the Australian market relies on the global insurance market to adequately meet the needs and requirements of Australian businesses, hence there is a mechanism available to use an UFI (or DOFI) in certain circumstances.

Section 3A of the Insurance Act and the Insurance Regulations 2024 provide 4 exemptions:

• 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

A person is a high?value insured at a time (the test time) in a financial year if:

?(a)?the average of the person’s Australian operating revenue for the 3 previous financial years is at least $200 million; or

?(b)?the average of the person’s gross Australian assets for the 3 previous financial years is at least $200 million; or

?(c)?the average of the person’s number of Australian employees for the 3 previous financial years is at least 500.

Insurance for atypical (or unusual) risks

This exemption applies to a contract of insurance if each risk insured under the contract is a risk of any of the following:

?(a)?loss or liability arising from the hazardous properties (including radioactive, toxic or explosive properties) of nuclear fuel, nuclear material or nuclear waste;

?(b)?loss or liability arising from the hazardous properties of biological material or biological waste;

?(c)?loss or liability arising from war or warlike activities (within the meaning of the Insurance Contracts Regulations?2017);

?(d)?loss or liability arising from a terrorist act (within the meaning of section?100.1 of the Criminal Code);

?(e)?liability arising from health?care related research;

?(f)?loss of, or liability arising from the operation of, a space object (within the meaning of the Space (Launches and Returns) Act 2018);

?(g)?liability arising from the ownership or operation of an aircraft (but not loss of the aircraft or its cargo);

?(h)?liability and expenses arising from a person owning, chartering, managing, operating or being in possession of a vessel other than a pleasure craft (within the meaning of subsection?9A(2) of the Insurance Contracts Act 1984);

?(i)?loss or liability arising from equine mortality or fertility and related risks. However this does not apply to Equestrian packages (as defined in the Reg);

?(j)?loss or liability incidental to a loss or liability mentioned in paragraphs?(a) to (i).

Insurance required by foreign law

If a law of a foreign country requires that the insurance contract be issued by an insurer, or a kind of insurer, authorised or permitted under a law of that country to issue that kind of contract; and the unauthorised foreign insurer is so authorised or permitted, or is an insurer of that kind.

Risks that cannot be reasonably placed in the Australian market

This exemption is often the most used during a hardening local market. It also requires the most care by AFS Licensed General Insurance Brokers.

Insurance Brokers must note:

• only a AFS Licensed General Insurance broker with the relevant 'use of broker terms' as a condition on their licence is permitted to undertake a written assessment of whether the risk can be reasonably placed with an Australian-regulated insurer
• the broker (acting as a reasonable broker) must demonstrate that their enquiries with the local market have been exhaused
• 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.
• provide a UFI Notice to the insured at the time they provide advice to clients. A UFI notice explains that the insurer is not authorised under the Insurance Act, is not subject to the provisions of the Insurance Act, and is not a declared general insurer under the 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.

Failure by an Australian insurance broker to properly discharge the obligations (above) may be a matter affecting the financial services licence of that broker.

What is the exemption for a risks that can't be reasonable placed in the Australian market?

An Australian insurance broker has certified in writing that the risks insured under the contract cannot reasonably be placed with an Australian insurer.

This means, after making reasonable enquires, the Australian insurance broker is satisfied, on reasonable grounds, that, for each of the risks:

?(a)?there is no Australian insurer that will insure against the risk; or

?(b)?the terms (including price) on which any Australian insurer will insure against the risk are substantially less favourable to the insured than the terms on which the relevant unauthorised foreign insurer will insure against the risk; or

?(c)?insurance with an Australian insurer would be substantially less favourable to the insured than with the relevant unauthorised foreign insurer because of other circumstances

Placing business with an UFI

AFS Licensed insurance brokers must comply with the requirements of the Insurance Act ) & regulations) when placing business with an UFI, or risk breaching the requirements of their AFSL.

Contact me if you would like an independent review of the adequacy of your compliance arrangements to comply with UFI and AFSL obligations.