Which DOFIs are to be exempt from new authorisation requirements?

A new discussion paper sets out the proposed new exemptions for direct offshore foreign insurers ("DOFIs") from the requirement to be authorised by APRA, with comments needed by 31st October.

The need for exemptions has been long understood; not every risk can be covered by a local insurer, and so local insureds will in some circumstances need to access the global insurance market. The key issue has been the nature of those exemptions.

The paper released by Treasury yesterday sets out the three possible exemptions and the proposed tests for an insured to fall within them. It is expected that, as the local market becomes more responsive to the risks which form the basis of the exemptions, the exemptions will be narrowed.

It is important to note that a DOFI which provides cover within the exemptions above will still be required to have APRA authorisation if it writes non-exempt business.

Exemption 1: High value insureds

This exemption acknowledges that large businesses frequently have complex, multi-layer insurance programs, which sometimes requires accessing the global market.

While the discussion paper does not precisely define the term "High value insureds", it proposes that such insureds ought to satisfy one of the following:

• the consolidated gross operating revenue for the financial year of the insured and the entities it controls (if any) is $200 million or more; or
• the value of the consolidated gross assets at the end of the financial year of the insured and the entities it controls (if any) is 200 million or more; or
• the insured and the entities it controls (if any) have 300 or more employees at the end of the financial year.

Treasury is seeking views on this and also on two alternative tests:

• a test based on an aggregate premium; or
• a test based on the amount of insurance cover purchased, being in aggregate at least $30 million.

Exemption 2: Atypical risks

There are some risks that currently cannot be placed as standalone insurance lines locally. These atypical risks would also attract the exemption, even if they are available as part of a bundled product:

• kidnap and ransom
• malicious product tampering
• commercial shipping hull
• ship owners protection and indemnity in excess of $50 million
• asbestos
• nuclear
• political
• environmental impairment
• war; and
• satellite or space cover.

Exemption 3: Customised exemption

This exemption would cover insureds who do not fall within the first two, and who have a unique risk that cannot be placed with an authorised insurer, whether because the insurance product is not offered, or because of other factors, such as capacity, price, or quality (that is, non price terms and conditions).

Treasury is looking for comment on two issues. First, are the criteria listed appropriate? Secondly, should this be assessed by insurance brokers or by a regulator?

Implications

While Exemption 3 will require third party assessment (either by a regulator or an insurance broker) exemptions 1 and 2 will be managed on a self-assessment basis. The proposed exemptions largely address insurance buyers' concerns that exemptions were needed to allow flexibility for sophisticated insureds and hard to place risks. The proposed exemptions will also have a significant impact on whether certain DOFI's will be affected by the refinements to prudential regulation proposed in the discussion paper recently issued by APRA. While comments on the proposed exemptions are required by 31 October 2007, submissions in respect of the APRA discussion paper are due on 28 September 2007.