DOFI bill strikes balance

The long-awaited bill regulating activities of direct offshore foreign insurers ("DOFIs") in Australia has finally been released. Although the broad aspects of the Bill were released on 3 May, we've had to wait for the Bill before fully understanding how it will strike a balance between the need to regulate DOFIs and the need for local insureds to be able to access international insurance.

Briefly, the Financial Sector Legislation Amendment (Discretionary Mutual Funds and Direct Offshore Foreign Insurers) Bill 2007 expands the definition of "insurance business" to prevent DOFIs from advertising or marketing their products in Australia, but importantly it doesn't prevent local insureds from going offshore to seek cover for business in Australia.

General prohibition

The Bill introduces into the Corporations Act 2001 (Cth) a prohibition on financial services licensees and their authorised representatives dealing in a general insurance product involving an insurer that is not either:

• a general insurer within the meaning of the Insurance Act 1973; or
• a Lloyd's underwriter within the meaning of the Insurance Act; or
• a person allowed to carry on insurance business without being authorised under the Insurance Act by determination of APRA.

The third stipulation above is interesting, as it clearly contemplates DOFIs which currently underwrite or which propose to underwrite Australian business being able to make application to APRA to be allowed to continue doing so, without the need to establish an authorised branch or subsidiary in Australia. No doubt there will be some fairly strict regulatory provisions to satisfy.

So what is an insurance business?

The Bill expands the definition of carrying on insurance business in Australia to cover DOFIs, their onshore agents (direct or indirect) and brokers of DOFIs' products (again, direct or indirect) or brokers' agents.

Advertising and marketing activities will be within the definition of insurance business, and will be taken to occur in Australia to the extent that they have or are likely to have effects in Australia.

Certain insurance contracts may be excluded from the definition of insurance business, leaving open the possibility that local insureds will be able to access insurance for business that is not being covered by the local market.

Exemption for reinsurance

The Bill exempts reinsurance business carried on by:

• a body corporate incorporated in a foreign country; or
• an unincorporated body established under the law of a foreign country capable of either suing or being sued, or holding property in the name of an appropriate office holder

that is not an Australian authorised general insurer. This is intended to preserve the Australian insurance market's access to foreign reinsurance.

Implications for the Australian insurance market

The Bill has been a long time coming. The Potts report identified the competing policy issues, and the Bill attempts to strike a balance between them by restricting DOFIs' activities here while maintaining local insureds' ability to go offshore for cover if they need to. The Bill also allows for possible carve-outs in the future to allow DOFIs to operate here directly in limited ways so that specialist areas of the insurance market not being served by the local industry could still obtain cover. For that, the Bill is to be welcomed, but we consider that further input is required to fine-tune it.