Offshore operators a risk to insurance industry
Overseas organisations are posing a threat to the integrity and equitable operation of the domestic insurance market, according to the head of one of Australia’s leading insurance providers.
“These entities are not subject to the same level of prudential regulation by APRA [Australian Prudential and Regulatory Authority] in the same way that Australian domiciled insurers such as Promina are,” chief executive of Promina Michael Wilkins said.
In particular, the type of organisations posing the biggest risk are direct offshore foreign insurers (DOFIs), which are not required to adhere to the local regulatory framework and are often based in locations such as the Cayman Islands, where rigid regulatory standards for insurance do not exist. These operators currently hold 7.5 per cent of the domestic premium pool.
Wilkins felt the ability of these companies to operate outside of the Australian prudential framework gave them a distinct competitive advantage over their domestic rivals due to the significantly lower compliance costs they experienced.
“Because DOFIs avoid these costs both at home and here in Australia, it makes it much harder for the domestic market to offer competitive products based on price alone,” he explained.
“If DOFIs emerge to provide cover in a particular industry or sector, this advantage will make it harder for domestic insurers to offer quality products in a competitive environment and with effective consumer protection through APRA’s scrutiny of insurance companies and their products.”
Wilkins harboured concerns about the damage that would be done to the local insurance market’s reputation and the backlash it would receive from the public if one of these offshore companies failed to cover an insured event, especially in light of the recent collapse of HIH.
As such, he suggested a change be made to the regulatory system in Australia that would make DOFIs subject to Australian Securities and Investments Commission scrutiny and bound by Australian Financial Services licensing requirements and the insurance industry code of conduct.
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