Chapter 4 - Issues
Introduction
4.1
The Committee received eight submissions, most of which focussed on the exemption
provision on Direct Offshore Foreign Insurers (DOFIs). Before reviewing the
debates on that issue, there will be a short overview of the submissions which
focussed on other aspects of the Bill and on the complementary Corporations
(National Guarantee Fund Levies) Amendment Bill 2007.
Corporations (National Guarantee Fund Levies) Amendment Bill 2007
4.2
The Committee received two submissions on the Corporations (National
Guarantee Fund Levies) Amendment Bill 2007. Both the Australian Financial
Markets Association (AFMA) (submission 4) and the Australian Securities
Exchange (submission 8) supported the Bill's introduction.
4.3
The AFMA commented that the amendments:
...would leave the regulatory protection afforded to securities
investors materially unaffected but it would increase the potential for
competition and efficiency, improved delivery of services and enhanced
financial stability.[1]
4.4
The Australian Securities Exchange strongly supported the Bill.
ASX believes that the imposition of a cap on the levies payable
by exchanges and their participants in any one year offers the potential to
allow the National Guarantee Fund (NGF) to attract a wider range of,
well-capitalised, institutions to consider direct participation in ASX markets
and associated clearing facilities.[2]
Financial Sector Legislation Amendment (Discretionary Mutual Funds and
Direct Offshore Foreign Insurers) Bill 2007
4.5
The remaining six submissions essentially focussed on the legislation
pertaining to Direct Offshore Foreign Insurers (DOFIs) and its exemption
provisions.
4.6
While most of the six submissions provided in principle support for the Bill,[3]
the Law Council of Australia, and the Association of Consulting Engineers
Australia (ACEA) were more judicious. ACEA expressed concern about the impact
of the Bill on the consulting engineering industry's ability to obtain adequate
levels of professional indemnity insurance.[4]
4.7
The Law Council expressed their 'considerable concern' over the
regulation of both Discretionary Mutual Funds (DMFs) and DOFIs.[5]
Although DMFs were included in the Law Council's concerns, their correspondence
essentially focussed on the same concerns as the remaining submissions; the
access of Australian companies to DOFIs and the lack of information regarding
the exemption provisions provided in the Bill.
Concerns over the DOFI provisions
4.8
The concern expressed by all six submissions is essentially that should
DOFIs effectively be precluded from the Australian market through stringent
provisions and limited exemptions, then Australian companies will loose access
to essential insurance products which can only be supplied at a competitive
price by DOFIs due to their much larger economies of scale, and spread of risk
that such international insurers can access.
4.9
ACEA commented:
...that the proposal in the DOFI Bill will be detrimental for
consumers because decreased competition from DOFIs coupled with the requirement
to buy locally means that insurers are less likely to provide cover at
commercially competitive rates or to insure an adequate range of risks, because
they have a captive market. Even if local insurers do attempt to manage larger
and more complex risks, previously insured overseas, they will look to spread
that risk by increasing the cost of premiums.[6]
4.10
The National Insurance Brokers Association (NIBA) gives in principle
support to the Bill, agreeing that stronger regulation of insurers is needed.[7]
However, they share the same concerns as ACEA:
Access to global markets is important for Australian larger
businesses. They provide these businesses with consistency of cover
particularly for more complex risks and in a hard market cycle are often the
only markets offering meaningful cover.
The proposed approach in the Bill is unlikely to result in many...
global market participants seeking local authorisation. Such global players
are simply not interested in placing risks in particular country silos or
adding another layer of compliance costs and red tape to their businesses.[8]
4.11
The Law Council of Australia supports these arguments, and also argues
that the DOFIs are more resilient in the face of global financial upheavals due
to their larger size compared with Australian insurers.[9]
4.12
The Bill provides for DOFI exemptions – such as Lloyd's of London – but
does not clarify under what criteria these exemptions are given, and it is a
clarification of these criteria that a number of submissions seek.[10]
4.13
A number of submissions also noted the Bill's deviation from the recommendations
of the 'Potts Review'[11]
and suggested that the recommendations made by the Review should be adopted
within the Bill, rather than the current proposed provisions.[12]
Treasury response
4.14
Treasury officials provided evidence at the Melbourne hearing on 27 July 2007 via teleconference. The officials advised the Committee that Treasury had
consulted widely with stakeholders, including those organisations which had
lodged submissions to the inquiry.
4.15
Treasury is planning the release of a discussion paper on the planned
exemptions in August 2007 for further comment and input by stakeholders, with
the intention of publishing an exposure draft setting out the insurance
regulations for the exemptions in late 2007, or early 2008 for finalisation in
early 2008. Treasury advised the Committee that it is aiming to achieve a balance
through a set of exemptions that are practical, flexible in terms of the
insurance market cycle, minimise cost to government of administration, was well
as minimise costs to customers while still maintaining prudential standards.[13]
4.16
Officials said that Treasury aims to create arrangements so that
Australian companies can still access suitable insurance cover from DOFIs
should Australian insurers be unable to deliver the required cover at
competitive rates. Their aim is to structure exemptions so as not to
discourage large and reputable DOFIs from entering the Australian market, while
at the same time not discouraging Australian insurers from producing domestic insurance
products that can compete with those of the DOFIs.[14]
Committee conclusions
4.17
The Committee, having heard the concerns expressed in the submissions,
is satisfied that the consultative mechanism to be implemented by Treasury with
regard to DOFI exemptions will produce a set of regulatory provisions that will
satisfy the requirements of Australian businesses for access to suitable
insurance products, while still maintaining the required prudential standards
for the insurance industry. The Committee supports the closure of regulatory
gaps identified by the HIH Royal Commission, and the International Monetary
Fund. The Committee does not share the fears expressed by some witnesses as to
possible significant negative market effects from changes to regulation.
Nonetheless, Treasury and APRA should actively monitor market effects to be
certain of this.
Recommendation 1
4.18
The committee recommends that the bill be passed.
Senator the Hon.
Michael Ronaldson
Chair
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