Underwriting Agencies generally require an APRA regulated insurer as a partner to provide general insurance products in Australia.
The Underwriting Agency typically has delegated binding authority from an insurer (see section 916E Corporations Act). In this instance the Agency is acting on behalf of the insurer. In other arrangements, such as an open-market placement, it’s likely that the agency is acting on behalf of the insured (commmonly referred to as wholesale broking) and would require the relevant authorisation under their AFS Licence.
It is necessary for an Underwriting Agency to ensure that the insurer is authorised by APRA to carry on general inusrance business in Australia.
Who is an insurer and what authorisation does an insurer require to carry on general inusrance business in Australia?
Under the Insurance Act 1973, it is an offence to conduct insurance business in Australia without the proper authority, If your business intends to conduct any business that can be classed as insurance business, you need a licence from APRA giving you the authority to conduct insurance business in Australia.
Part 3 of the Insurance Act defines ‘insurance business’ as the business of undertaking liability by way of insurance (including reinsurance), in respect of any loss or damage. It includes liability to pay damages or compensation, contingent upon the happening of a specified event, and any business incidental to insurance business as so defined. There are some exclusions to the definition of insurance business, such as life insurance (covered by the Life Insurance Act 1995) and health insurance (covered by the Private Health Insurance Act 2007).
The Insurance Act only allows corporations or Lloyd’s underwriters to carry out insurance business in Australia, which means APRA cannot consider applications from partnerships or unincorporated entities.
APRA expects all applicants to be able to comply with all of its prudential requirements, as set out in the Insurance Act and prudential standards, from the commencement of insurance business in Australia and continuously thereafter.
Requirements
APRA will consider the following matters in the application:
- ownership
- governance including board complosition and FAR
- Capital and Assets in Australia including minimum capital requirements
- Risk mananagement framework
- Compliance
- Reinsurance management
- Informations security and accounting systems
- Intra-group transactions and arrangements
General insurers authorisation – Section 12
A general insurer, including a foreign general insurer, is authorised under section 12 to carry on general insurance business in Australia. The obligation to comply with APRA Prudential Standards applies to general insurers authorised under section 12.
Lloyds Underwriters – Section 93
Part VII, section 93 of the Insurance Act authorises Lloyd’s Underwriters to write Australian insurance business. Sections 65 to 73 of the Act provide for special Australian policyholder protection provisions associated with Lloyd’s.
At all times, Lloyd’s must ensure that security trust fund arrangements, and ancillary or incidental arrangements, in accordance with Lloyd’s security trust fund instrument No. 2 of 2017 are in existence.
Unauthorised foreign insurers
Certain insurance business is an exemption under the Insurance Act (subsection 3A(1))
Insurance Regulation Section 8 provides that where insurance is provided by an unauthorised foreign insurer (UFI or DOFI) (see Reg section 5); and any of the prescriber criteria applies, it is not deemed to be insurance. This means that an UFI may be used by an AFS Licensed insurance broker, but only when any of the following criteria applies:
- at least one party to the contract (other than the insurer) is a high-value insured (Reg section 9);
- Reg section 10 (insurance contracts for atypical risks) applies to the contract;
- an Australian insurance broker has certified in writing that the risks insured under the contract cannot reasonably be placed with an Australian insurer (see Reg section 11); or
- Reg section 12 (insurance contracts required by foreign laws to be issued by specified insurers) applies.
In respect of Reg section 11
An Australian insurance broker (AFSL holder or an authorised representative of a licensee) must not certify a matter in relation to the risks insured under a contract of insurance unless, after making reasonable enquiries, the Australian insurance broker is satisfied, on reasonable grounds, that, for each of the risks:
- there is no Australian insurer that will insure against the risk; or
- the terms (including price) on which any Australian insurer will insure against the risk are substantially less favourable to the insured that the terms on which the relevant unauthorised foreign insurer will insurer against the risk; or
- insurance with an Australian insurer would be substantially less favourable to the insured than with the relevant unauthorised foreign insurer because of other circumstances
An Australian insurance broker that certifies a matter in relation to the risks insured under a contract of insurance must keep written records of:
- its inquiries into the matters mentioned; and
- its reasons for being satisfied of those matters; and
- must, if requested by the insured, give a copy of the certificate to the insured
Most brokers will include a UFI notice when they place business with a UFI with the advice they provide to the client. This is a statement that explains that the insurer is not authorised under the Insurance Act 1973 (Cth) to conduct insurance business in Australia, is not subject to the provisions of the Insurance Act, and is not a declared general insurer under Part VC of the Insurance 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. A UFI notice must always be given to retail clients (usually within the Product Disclosure Statement prepared by the insurer) and to wholesale clients when giving personal advice on personal accident and sickness insurance or consumer credit insurance which is placed with a UFI.
Underwriting agencies
It’s important that Underwriting Agencies ensure that they have the proper arrangements in place with their insurer (including Lloyds) and that those arrangements are aligned with their AFS Licence authorisations or proposed authorisations if seeking a new licence. This often requires legal advice being obtained given the severe consequences of non-compliance.
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