The Australian Securities and Investments Commission (ASIC) today released a summary of the results of its campaign on the unauthorised foreign insurance market.

An 'unauthorised foreign insurer' is the term generally used for an insurer who carries on a general insurance business outside Australia. Unauthorised foreign insurers are able to offer insurance in Australia. However, they are not regulated by the Australian Prudential Regulation Authority (APRA) and don't need to meet APRA's capital or other requirements.

'A wide range of professions and occupations need insurance, particularly professional indemnity and public liability insurance, to be able to work. Consumers that are unable to obtain domestic cover may be likely to place business with unauthorised foreign insurers', ASIC's Executive Director of Financial Services Regulation, Mr Ian Johnston said.

'It is important to note that the current law requires the Product Disclosure Statement of an unauthorised foreign insurer to disclose that it is not regulated under the Insurance Act. Unauthorised foreign insurers must also inform retail clients that they should consider getting further information about the system of financial supervision that applies to the unauthorised foreign insurer in its home jurisdiction', Mr Johnston said.

ASIC undertook the campaign in 2003, reviewing the operations of eight Australian general insurance intermediaries who placed business with unauthorised foreign insurers.

'The main purpose of ASIC's campaign was to examine how these intermediaries conducted their business and whether they complied with relevant legislative requirements applying at the time. By doing this we improved our understanding of the unauthorised foreign insurance market', Mr Johnston said.

ASIC was also responding to numerous consumer concerns and complaints relating to unauthorised foreign insurers and intermediaries, including:

• the alleged non-payment of claims;
• doubts about the adequacy of regulation of some unauthorised foreign insurers (they may not be subject to the same prudential controls as APRA-regulated insurers);
• alleged inappropriate sales practices of insurance intermediaries acting on behalf of unauthorised foreign insurers;
• concerns about ownership links between intermediaries and the unauthorised foreign insurers; and
• alleged difficulties in making complaints or enforcing claims against unauthorised foreign insurers.

Between 2001 and 2003, the business provided to Australian clients by unauthorised foreign insurers increased significantly. This was largely because of difficult market conditions that reduced the number of insurers in the Australian market offering professional indemnity and public liability cover.

In conducting its campaign ASIC found that the eight intermediaries reviewed placed $145m of premium for general insurance products with nine unauthorised foreign insurers between1 January 2002 and 30 June 2003. (The range of insurance products provided by the unauthorised foreign insurers is indicated in the list that forms part of the attachment to this information release.)

'ASIC detected several apparent breaches of the law, mainly relating to registration, disclosure and dispute resolution requirements, and we have commenced investigations in relation to these matters', Mr Johnston said.

At the time the campaign was conducted, the intermediaries reviewed were subject to the Insurance Agents and Brokers Act 1984 (the IABA), which was repealed when the Financial Services Reform Act 2001 (the FSR Act) came into full effect on 11 March 2004.

Most of the business placed with the unauthorised foreign insurers, notably professional indemnity insurance and public liability insurance, is now classified under the Corporations Act 2001 as 'wholesale' business. This means that the intermediaries offering these products to consumers are not subject to the conduct and disclosure requirements introduced by the FSR Act for 'retail' business.

'ASIC will continue to monitor the unauthorised foreign insurance market, including continuing to assess whether the current law provides adequate disclosure and other protections in relation to consumers of insurance provided by unauthorised foreign insurers', Mr Johnston added.

The attachment to this release sets out the methodology and findings of ASIC's campaign in more detail.

Review of Direct Offshore Foreign Insurers

On 12 September 2003, in response to the recommendations of the HIH Royal Commission's final report, the Government commissioned Mr Gary Potts, former Executive Director of the Treasury, to undertake an independent study of unauthorised foreign insurers (the Potts Review). The key findings were released on 27 May 2004 and are located on Treasury's website, www.treasury.gov.au.

In summary, the Potts Review has recommended, and the Government has accepted, that it should increase levels of protection to consumers where intermediaries place business with unauthorised foreign insurers (referred to in the report as 'Direct Offshore Foreign Insurers'). In particular, the Potts report recommends that:

• there should be greater consistency of regulatory standards applying to authorised insurers and unauthorised foreign insurers; and
• prudential regulation of unauthorised foreign insurers should be improved.

The report also canvasses the possibility of enhanced disclosure obligations being placed on foreign insurers. ASIC has given its detailed campaign findings on the unauthorised foreign insurance market to Treasury and APRA to assist in the process of reforming the law.

Attachment

Campaign methodology

ASIC collated a list of 26 unauthorised foreign insurers who were believed to be issuing products in Australia over the previous 12 months. This information was obtained from a variety of sources, including complaints, enquiries and referrals from APRA, industry bodies, industry participants and consumers, as well as media sources and publications.

ASIC identified suitable participants for review by identifying intermediaries who placed business with unauthorised foreign insurers in the previous two years. From these, ASIC selected eight intermediaries who were arranging insurance with nine unauthorised foreign insurers. These did not include any insurance intermediaries that were the subject of any current ASIC investigations.

ASIC served notices on the selected intermediaries under Part 3, Division 3 of the ASIC Act 2001, requesting material on the disclosure made to consumers about the use of unauthorised foreign insurers. ASIC staff reviewed this information against a checklist that sought responses about intermediary business placed with unauthorised foreign insurers, in particular about agreements, authorisations in home jurisdictions, notifications under s34 of the IABA, claims handling and complaints.

Findings

Between 1 January 2002 and 30 June 2003 the eight intermediaries placed $145 million of business with eleven unauthorised foreign insurers for the various types of general insurance cover outlined below:

Two of the eight intermediaries appeared to be failing to comply with their obligations under the IABA to:

• register as insurance brokers or foreign insurance agents;
• lodge with ASIC copies of their agreements with unauthorised foreign insurers; and
• have formal or written agreements with the relevant unauthorised foreign insurers when placing insurance business with them.

Five of the eight insurance intermediaries had common directors, shareholders or parent company ownership with unauthorised foreign insurers and, of these, three failed to fully disclose the nature of their related party interests to consumers. One insurance intermediary provided consumers with information on related party ownership. However, the information was set out in a number of documents and was difficult to follow.

Although, in most cases, the intermediaries advised insured persons that the relevant insurer was an unauthorised foreign insurer, as required by s34 of the IABA, four of the intermediaries reviewed appeared to have made misleading statements about the status of the unauthorised foreign insurers in the s34 notification or in other documents.

Six of the insurance intermediaries reviewed had authority to handle and settle claims in Australia on behalf of an unauthorised foreign insurer. ASIC noted a wide variation in claims handling arrangements used by unauthorised foreign insurers. These ranged from the insurance intermediaries having no authority to settle a claim, to established claims reserves being maintained in Australia for settlement purposes. There did not appear to be a uniform or standard system in place for the settlement of claims by unauthorised foreign insurers, with reliance being placed on the insurance intermediary to negotiate and establish a process with the unauthorised foreign insurer.

Seven of the insurance intermediaries had processes in place for internal dispute resolution (IDR). Only one insurance intermediary failed to provide information on IDR processes. Four of the insurance intermediaries reviewed were not members of an external dispute resolution (EDR) scheme. Two of these placed retail business and became members of an approved EDR scheme as part of the process of obtaining an Australian financial services (AFS) licence.

Actions

Over the last 18 months, ASIC has taken action to protect consumers from misconduct involving unauthorised foreign insurers.

On 27 May 2003 ASIC stopped four Australian companies that had been writing insurance on behalf of a Bosnian-based insurer. ASIC took further action on 6 June 2003 and the court appointed a provisional liquidator to the companies. At least 1100 people held policies, many for high-performance sports car insurance, and over $2 million in premiums had been paid to cover a potential exposure of approximately $240 million. For more information see Media Releases [MR 03/167] ASIC obtains court orders concerning foreign insurance contracts and [MR 03/181] Check your insurance from AMCO or United: it may be worthless.

In March 2003 ASIC commenced proceedings against a general insurance broker following concerns that representations on the company's website about a Vanuatu-based insurance company were misleading and deceptive. On 4 August 2003 ASIC obtained an undertaking from the company to permanently remove the representations from its website. The company also agreed to take corrective action in a form acceptable to ASIC. For more information see Media Release [MR 03/241] ASIC obtains court undertakings from Rural and General Insurance Broking and [MR 03/181] Rural and General International Insurance.

On 3 September 2003 ASIC reiterated its warning to customers of two insurance brokers based in Cootamundra and Lennox Head to check that their insurance premiums had been received. ASIC initially took action due to concerns that the parties were not licensed to act as insurance brokers under the IABA and had failed to gain an AFS licence, and had arranged contracts of insurance on behalf of a number of insurers without a written agreement as required under the IABA. For more information see Media Release [MR 03/279] Further information for Cootamundra and Lennox Heads insurance customers.

On 3 December 2003 ASIC obtained injunctions against an insurer registered in the Cayman Islands. ASIC concluded the proceedings on 11 June 2004 and the court made declarations that the insurer had carried on a financial services business from 1 August 2002 until 10 March 2004 without holding an AFS licence. The court also made an order permanently restraining the insurer from carrying on any financial services business in Australia in contravention of the Corporations Act. The insurer consented to declarations that it had made misleading or deceptive statements and the court made further orders in relation to corrective action to be taken by the insurer. For more information see Media Releases [MR 03/381] ASIC obtains injunctions against foreign insurer and [MR 04/185] ASIC concludes action against foreign insurer.

On 2 June 2004 ASIC obtained orders to wind up an unauthorised foreign insurer incorporated in the Solomon Islands and its Australian agent following complaints from Australian policy holders that more than $1 million of insurance claims and policy refunds had not been paid. For more information see Media Release [MR 04/173] Liquidator appointed to unauthorised foreign insurer and local agent.