Who does this affect?

General insurers and eligible general insurance policyholders.

What do you need to do?

Consider how the FCS developments will impact on you if a general insurer goes into liquidation.

Author
Ann Newbrun  
Special Counsel

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Philip Ward  
Partner
T +61 2 9296 2213

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Sydney
Peter Stockdale  
Consider how the FCS developments will impact on you if a general insurer goes into liquidation. Ann Newbrun  
Consider how the FCS developments will impact on you if a general insurer goes into liquidation.

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The Insurance Amendment Regulations 2008 were made on 12 December 2008 amending the Insurance Regulations 2002. The amendments facilitate the practical operation of the Financial Claims Scheme (FCS) which was established by amendments to the Insurance Act 1973 (Cth)(Insurance Act) in October 2008.

The FCS protects certain policyholders by providing compensation to certain policyholders and other claimants who make valid claims on an insolvent general insurance company. The FCS was previously known as the Policyholder Compensation Facility and the features of this scheme are described in our Client Alert of 28 October 2008.

APRA is responsible for the administration of the FCS and for making payments to policyholders. The FCS applies when APRA has determined that a general insurance company is insolvent and the company is placed under judicial management, and the Treasurer determines that the FCS will be applied to the insurance company.

The FCS applies to insurance policies provided by general insurance companies authorised by APRA. Regulation 7B specifies insurance policies to be excluded from coverage under the FCS. They include:

• State and Territory mandated policies that are already protected through arrangements administered by a State or Territory
• policies issued when the insurer was not regulated by APRA, and
• reinsurance and retrocession.

The Insurance Act permits APRA to exclude additional policies from the scope of the FCS where APRA determines it to be appropriate to do so. This power ensures that the FCS is targeted to those individuals and businesses least able to assess risk and promote market discipline.

The FCS covers eligible policyholders and other claimants for the amount payable by the failed insurer in respect of a valid claim. The FCS applies to all valid claims by eligible policyholders and other claimants lodged with the insurer but not yet paid at the time the FCS is invoked and within a specified period after commencement.

For insurance claims worth more than $5000, Regulations 7D and 7E of the Insurance Amendment Regulations 2008 list those eligible to make a claim under the FCS. A person must:

• be an Australian citizen or a permanent resident
• if not an Australian citizen or permanent resident, be insured against a risk that is located in Australia, or
• be a small business entity, trustee of a family trust or a non-profit body that has its central management and control located in Australia.

Regulation 7C(1) indicates that the FCS is open to receive claims pursuant to the FCS from the date the Minister makes a declaration in relation to the general insurer and claims can be made up to 12 months from this date (APRA has the discretion to extend this period).

Regulation 7B makes an excess payment under the FCS a debt due to APRA which APRA is entitled to recover from claimants.