Author
Ann Newbrun  
Special Counsel
Peter Stockdale  
Partner
T +61 2 9296 2330
Philip Ward  
Partner
T +61 2 9296 2213

Brisbane
Justin McDonnell  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Canberra
John Topfer  
Consider whether the issues and developments referred to in this publication may impact on your business. We can help.

Hong Kong
Stuart Valentine  (萬思陶)
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06 October 2008

DOFI legislation goes live

Ann Newbrun recently chaired a panel discussion on the direct offshore foreign insurer (DOFI) regime at the Australian Professional Indemnity Group (APIG) National Conference. The panel was made up of a member of APRA, a broker and an insurer. Discussion revolved around how the new regime is working in these early days of its introduction.

Overview of the DOFI regime

From 1 July 2008, direct offshore foreign insurers may only sell insurance in Australia if that insurance falls within one of the following exemptions:

  • high value insured exemption
  • atypical risks exemption
  • customised or broker exemption
  • foreign law exemption.

The scope of carrying on insurance business in Australia has been clarified and expanded. If an insurer carries on insurance business in Australia that does not fall within an exemption, it must be authorised by the regulator, APRA.

Issues with the DOFI regime identified at APIG

Some challenging issues were identified at APIG:

  • Care needs to taken when dealing with the London market to ensure that the underwriters are Lloyd’s who are already authorised, and do not include unauthorised insurers.
  • Where a multinational corporation with global cover has a small operation in Australia that does not satisfy any of the thresholds in the high value insured exemption (alone or as part of a related group), does that operation have to be separately covered by an Australian authorised insurer?
  • While not strictly an outcome of the new regime, APRA has introduced new capital charges for authorised insurers reinsuring with unauthorised reinsurers that do not establish security arrangements in Australia. This has resulted in a number of applications for authorisation from offshore reinsurers. It also restricts fronting insurance risks, that is, where a locally authorised insurer accepts insurance in Australia under an arrangement where it reinsures all or a significant percentage of the risk to an unauthorised foreign insurer.
  • The treatment of blended products where a part of the cover is listed in the atypical risks exemption but another is not, for example, policies providing P&I cover and hull cover.
  • Brokers have been provided with a framework for satisfying the customised or broker exemption but have essentially had to self regulate in developing compliance systems and criteria for satisfying that framework. The broker’s determination needs to be reasonable and based on a reasonable level of investigation and market analysis. An assessment of the exemption is to be made at the time of negotiation, inception, renewal or material change in the terms and conditions of the relevant policy. These present practical challenges.
  • Analysis of data collected from brokers and other AFSL holders will be crucial to determining the efficacy of the performance of the new regime over time. However the regulations for data collection are still at the consultation stage. Treasury is intending to release draft forms and draft regulations for discussion shortly. The expected start date is 1 January 2009.
  • According to APRA there is a change in terminology - DOFIs will now be referred to as “UFIs” - unauthorised foreign insurers.