Update

Insurance Laws Amendment Bill 1997

Underwriters of Lloyd's of London will soon be required to provide extra protection for Australian policyholders by establishing security trust fund arrangements in order to satisfy judgments obtained in Australia against the underwriters. The Insurance Laws Amendment Act 1997 assented to on 22 April 1998, amends the prudential supervisory arrangements under Part VII of the Insurance Act 1973 so as to reflect the restructuring of Lloyd's in the UK and make adequate preparation for any future liabilities.
The Act reflects the response in the UK to the heavy losses suffered by Lloyd's in the late 80s and 90s which made questionable the additional security provided by Names and the members' trust fund. The Australian legislation will, amongst other things, give the proposed Australian Prudential Regulation Authority (APRA) similar powers to externally regulate Lloyd's as those to be held by the Financial Services Authority in the UK.

The major changes the Insurance Laws Amendment Act introduces in relation to the regulation of Lloyd's include the following.

Security trust funds to meet debts of Lloyd's underwriters

The establishment of `designated security trust funds' by Lloyd's underwriters in Australia, including former underwriters, to make funds available for the satisfaction of final judgments obtained in Australia against Lloyd's underwriters in respect of any class of insurance liabilities specified in the trust deed. The trustee is required to be a qualified corporation.

Security deposit to meet costs of judicial trusteeship

The funds may be placed under the judicial trusteeship of the Federal Court if the Court is satisfied that it is in the interests of the relevant policyholders or the fund is not being properly managed. Lloyd's, or a company nominated by Lloyd's, is required under the Act to provide to the Treasurer a deposit of $2 million, the ownership of which is transferred to the Commonwealth, to be available to meet the costs of judicial trusteeship of the trust funds. The Treasurer is to return any interest on the security deposit on application by Lloyd's, in order to maintain equality between Lloyd's and other corporate insurers who are free under the 1973 Act to invest the solvency margin amount.

Regulatory powers held by APRA

• Under the Act, the APRA has power to suspend or cancel authorisation for Lloyd's to carry on insurance business. It is interesting to note that this power is also exercisable if as a result of UK legislation, a substantial change is made to the constitution, powers, rights or obligations of Lloyd's or of Lloyd's underwriters. But it is unlikely to be used in this context since any move toward external regulation in the UK is unlikely to prejudice policyholders.
• The APRA has powers of inquiry, direction and investigation in relation to the designated security trust funds, enabling it to monitor closely the adequacy of the security provided by them. The APRA is also able to requisition actuarial reports which may provide advance notice of any threat to policyholders.
• The Act also provides for similar powers to regulate record keeping, auditing of accounts and disclosure as those which are currently held by the Insurance and Superannuation Commission in relation to corporate insurers.

Whilst recognising the unique role Lloyd's plays in the international insurance market, the Insurance Laws Amendment Act 1997 is intended to place Lloyd's underwriters on a level playing field with its competitors as regulated by the Insurance Act 1973. It is hoped that the safeguards provided by this Act will be sufficient to cover any future contingencies but that the future performance of Lloyd's will make recourse to them unnecessary.