1. Reinsurance Regulation in Australia an overview
Mark Radford – Principal

2. Overview
Any regulation of re/insurance in Australia can be broken down as follows:
prudential regulation - ie regulation ensuring a re/insurer has systems to help ensure there are sufficient assets available to meet its contractual promises to insureds; and
consumer protection regulation - ie regulation governing the conduct of re/insurers towards the re/insureds.

3. Reinsurer regulation overview
Consumer Protection Risks
Reinsurer
Prudential Risks
Reinsurance contract
Re/insurer won’t pay insurer/cedent
Insurer/Cedent
Re/insurer can’t pay insurer/cedent
Insurance contract
Insurer won’t pay policy holder
Policy Holder
Insurer can’t pay policy holder

4. Overview
Australia has a 'federal' system where powers are divided between a central government and 6 individual states.
Prudential regulation of re/insurance is managed at a federal level by APRA.
Consumer protection regulation is effectively managed at a federal level by ASIC.

5. Prudential regulation of General Re/insurance
Most general insurance (including reinsurance) is managed under the Insurance Act 1973 (Cth) by the Australian Prudential Regulation Authority (APRA).
It does not apply to life insurance and private health insurance and some other specified exceptions.
The Act can catch reinsurers carrying on general insurance business in Australia which are not otherwise exempt.

6. Prudential regulation of General Re/insurance Cont.
The scope of what is seen to be carrying on general insurance business in Australia was broadened in
The tests differ in important respects for reinsurers as opposed to insurers (e.g certain activities such as dealing with an insurance broker or agent in Australia which catch a foreign insurer won’t catch a foreign reinsurer)

7. Prudential regulation of General Re/insurance Cont.
"insurance business" means the business of undertaking liability, by way of insurance (including reinsurance), in respect of any loss or damage, including liability to pay damages or compensation, contingent upon the happening of a specified event, and includes any business incidental to insurance business as so defined… (section 3(1) of the Insurance Act).

8. Prudential regulation of General Re/insurance Cont.
Re/insurer will be caught (unless the carve outs apply) if:
it directly undertakes liability under policy (ie enters into it) or undertakes any pre contractual incidental activities in Australia;
any person acts in Australia in relation to the insurance business of the insurer carried on outside Australia:
directly or indirectly on behalf of the insurer (which undertakes liability overseas); or
as a ‘broker of insurance’ provided by the insurer (which undertakes liability overseas), or directly or indirectly on behalf of such a broker.
[This second trigger is N/A if the business is solely a business of reinsurance]

9. Prudential regulation of General Re/insurance Cont.
the insurer (undertaking liability overseas) directly or indirectly from outside Australia:
induces others to enter into contracts of insurance with the person as the insurer;
publishes or distributes a statement relating to the person's willingness to enter into a contract of insurance as an insurer; and/or
procures the publication or distribution of such a statement
[This trigger is N/A if the business is solely a business of reinsurance]

10. Prudential regulation of General Re/insurance Cont.
Because of the broadening of the definition new carve outs were included in 2008 in section 3A and the regulations:
Regulation 4B Insurance contracts for high-value insured –assets/revenue/employee test.
Regulation 4C Insurance contracts for atypical risks – e.g loss or liability arising from the hazardous properties (including radioactive, toxic or explosive properties) of nuclear fuel.
Regulation 4C Insurance contracts for other risks that cannot reasonably be placed in Australia - A policy will be exempt if an Australian insurance broker certifies in writing that the risk insured under that contract cannot reasonably be placed with an Australian insurer
Regulation 4E Insurance contracts required by foreign laws

11. Prudential regulation of re/insurance General Insurance Cont.
Effectively, reinsurers have a choice to structure their business so as to:
effectively operate offshore and avoid being caught; or
operate within the jurisdiction and comply with the significant prudential obligations of the Act.

12. Prudential regulation of re/insurance Life Insurance
Life insurance (including reinsurance) is managed under the Life Insurance Act 1995 (Cth) by APRA.
The scope of what is seen to be carrying on life insurance business in Australia is also broad.
The Act can catch reinsurers carrying on life insurance business in Australia which are not otherwise exempt.

13. Prudential regulation of re/insurance Life Insurance Cont.
Certain persons will be taken to carry on life business (s19):
a person who publishes or distributes, or procures the publication or distribution of, a statement relating to the willingness of the person to do something that constitutes the carrying on of life business
A person in the situation where :
Business that, under this Act, would constitute life business is carried on by another person outside Australia; and
the first‑mentioned person acts, in Australia, as the agent of that other person in relation to the business carried on outside Australia.

14. Prudential regulation of re/insurance Life Insurance Cont.
There are some specified exemptions for particular types of business.
Certain activities are also not regarded as carrying on life business. A person is not taken to be carrying on life business merely because they :
collect premiums under a policy issued outside Australia to a person who was resident outside Australia at the time of issue of the policy; or
make payments due under such a policy.
APRA can declare certain business to be life insurance business under sections 12A and 12B of the Act.

15. Prudential regulation of re/insurance Life Insurance Cont.
As with general insurance, reinsurers have the choice to structure their business so as to:
effectively operate offshore and avoid being caught; or
operate within the jurisdiction and comply with the significant prudential obligations of the Act.

16. Consumer protection regulation – specific re/insurance based legislation
There is significant specific insurance consumer protection legislation in place for general and life insurance under the:
Insurance Contracts Act; and
the Corporations Act 2001(Cth).
BUT neither of these apply their consumer protections to reinsurance.
The Life Insurance Act also contains some limited consumer protection provisions.

17. Consumer protection regulation specific re/insurance based legislation Cont.
Marine Insurance is subject to the operation of the Marine Insurance Act but the protections are less than under the Insurance Contracts Act and not applicable to reinsurance.
The reinsurance Prudential Standards imposed by APRA on authorised insurers can impact on the required terms of a reinsurance contract with such insurers and capital charge etc.

18. Consumer protection regulation – State based re/insurance legislation
In Australia, the court’s approach has been to treat reinsurance as being covered by the words “contract of insurance”, where reinsurance is not expressly excluded.
Various state legislation can impact reinsurance depending on circumstances e.g section 25 of The Instruments Act 1958 (Victoria).

19. Consumer protection regulation – General consumer protection legislation
There is also general consumer protection law which can apply to reinsurers depending on the circumstances. E.g:
Australian Consumer Law/ASIC Act – misleading and deceptive conduct provisions and provisions relating to restrictive trade practices e.g. third line forcing.
Discrimination - there is various anti-discrimination legislation applicable in Australia.

20. Consumer protection regulation – Common Law
Apart from the potential impact of the above mentioned legislation, a reinsurance contract between a reinsurer and cedent in Australia will principally be covered by the common law.
Where there is no Australian case law on a matter the Australian courts will typically look to the decisions of other common-law jurisdictions, in particular the United Kingdom and United States as persuasive

21. Reinsurer regulation overview
Consumer Protection Risks
Reinsurer
Prudential Risks
Reinsurance contract
Re/insurer can’t pay insurer/cedent
Reinsurer’s authorised in Australia significant prudential protection
Reinsurer’s not authorised in Australia – limited indirect protection applied via prudential obligations on insurer by APRA
Re/insurer won’t pay insurer/cedent
Principally C.L
Limited state legislation
General consumer protection legislation
Insurer/Cedent
Insurance contract
Insurer won’t pay policy holder
Significant legislative protection e.g Insurance Contracts Act 1984, Corporations Act 2001 (Chapter 7), Common Law where legislation not applicable.
Insurer can’t pay policy holder
Insurer’s authorised in Australia significant prudential protection
Insurer’s not authorised in Australia – no real local protection
Policy Holder