Insurance and reinsurance law in Australia derives from the general law of contract and common law insurance principles. In relation to contracts of insurance, these principles are modified to some extent by legislation including the Insurance Contracts Act 1984 (Cth) (for general and life insurance) and other more specific legislation for other types of insurance. Reinsurance contracts are not subject to the Insurance Contracts Act 1984 (Cth) and are generally governed by Australian common law.
Insurance and reinsurance activity in Australia is regulated on a federal level through two main authorities – the Australian Prudential Regulation Authority (APRA), and the Australian Securities and Investment Commission (ASIC) (often referred to as the "twin peaks model"). APRA determines the prudential standards for general insurers, non-operating holding companies of general insurers and reinsurers in Australia pursuant to the Insurance Act 1973 (Cth). APRA also regulates banks, credit unions, building societies, life insurers, private health insurers, friendly societies and most members of the superannuation industry. ASIC exercises consumer protection functions under various Acts including, amongst others, the Insurance Contracts Act 1984 (Cth) and the Corporations Act 2001 (Cth).
Regulation of general and life insurance contracts falls under the Insurance Contracts Act 1984 (Cth). Other types of insurance contracts are regulated by more specific legislation including, amongst others, the Marine Insurance Act 1909 (Cth) and the Health Insurance Act 1973 (Cth). Worker’s compensation insurance contracts in Australian states and territories are governed by the respective state or territory scheme legislation. Generally, reinsurance contracts are not regulated under legislation but are governed by Australian common law.
In order to carry on an insurance business in Australia, a general insurer, meaning a body corporate (or a Lloyd's underwriter) who has been granted authorisation by APRA, must meet minimum requirements. These include:
General insurers must also comply with APRA’s prudential standards, along with other regulatory and legal requirements. These include, for example, submitting a reinsurance management framework, which contains a compulsory reinsurance management strategy (REMS). A REMS is a high-level strategic document setting out key elements of the framework, as well as supporting policies and procedures. APRA then assesses the policies and procedures to determine the adequacy and appropriateness of the proposed measures.
As of September 2018, there were 97 APRA authorised general insurers and ten APRA authorised reinsurers operating in the Australian market.
Insurers, brokers and other intermediaries must hold an Australian Financial Services Licence (AFSL), issued by ASIC, or must themselves be authorised by a licensee. Reinsurers operating outside of Australia are not required to hold an AFSL.
No information has been provided.
Foreign-incorporated entities can operate in the Australian market by establishing a locally incorporated subsidiary (known as “foreign-owned subsidiaries”) to carry on an insurance business. Insurers who are foreign-incorporated (known as “foreign insurers”) may also seek authorisation to operate in Australia through a local branch.
APRA does not impose restrictions on the size, mix or number of organisations of foreign-owned subsidiaries or foreign insurers that are carrying on insurance business in the Australian market. However, both “foreign-owned subsidiaries” and “foreign insurers” are subject to similar legislative and prudential requirements to those applicable to locally incorporated general insurers. Foreign reinsurers who write reinsurance for Australian insurers through brokers or intermediaries do not require APRA authorisation.
In certain circumstances, “unauthorised foreign insurers” (UFIs) are permitted to provide insurance in Australia without prior authorisation from APRA for “atypical risks”, or where risks cannot be reasonably placed in Australia through domestic insurers. UFIs can also provide insurance to “high-value insureds”, which are entities who for each of the last three financial years have:
Reinsurers, foreign or otherwise, do not necessarily need APRA authorisation. However, the capital framework for general insurers imposes higher capital requirements for reinsurance recoverables from non-APRA authorised reinsurers relating to older events.
Fronting arrangements are not prohibited in Australia and whether they will be permitted by Australian regulators or not is likely to depend on the nature and details of the particular transaction.
Australia has witnessed an increased level of insurance-related M&A activity in recent years, particularly in the life insurance sector. Many of Australia’s largest retail banks are returning their focus to core businesses in retail, commercial and institutional banking by exiting from low-returning life insurance businesses.
For example, in September 2017, the Commonwealth Bank of Australia (CBA) agreed to sell its Australian life insurance business to Hong Kong-based AIA for AUD3.8 billion, making it one of the largest Asian buyouts of an Australian financial firm.
More recently, in February 2019, Suncorp agreed to sell its life insurance business to TAL (a wholly owned subsidiary of Dai-ichi Lite Group, Japan) for a reported AUD725 million. In June 2019, the Australian and New Zealand Banking Group (ANZ) completed the sale of ANZ OnePath Life to Zurich (Switzerland) for AUD2.85 billion – a deal which was first announced in late 2017. This was part of ANZ's strategy to simplify its operations.
In August 2019, AMP agreed to divest AMP life to Resolution Life (UK) for AUD 3 billion (subject to regulatory approval in Australia, New Zealand and China, the latter because, as part of the deal, AMP is seeking to transfer its holding in China Life Pension Company from AMP Life to AMP Limited).
The large Australian general insurers have been seeking to streamline their businesses, and M&A activity has included divesting some overseas operations, smaller portfolios and investments in brokers and managing agents.
Overseas insurance M&A activity has also resulted in changes to major insurers’ Australian operations, including French insurer AXA’s acquisition of Bermuda-based insurer XL Group for USD15.3 billion (AUD21.1 billion), which includes various Australian branches of XL Catlin on 12 September 2018.
The Australian Government's Royal Commission into misconduct in the Banking, Superannuation and Financial Services industry was held during 2018 – with a final report being released in February 2019. The Royal Commission uncovered scandals at many major Australian Financial Institutions – and the final report recommended significant reforms in the financial services industry.
It is generally expected that the outcome of the Royal Commission will be a catalyst for simplification and banks may look to further divest remaining insurance businesses. Further, it is anticipated that M&A due diligence processes will become more onerous and increased governance considerations may slow the progress of individual M&A transactions.
Reports indicate that increased competition with the emergence of technological innovations, slowing organic growth opportunities for general insurers, increased pressure to divest non-core assets, and an economic environment in which regulators are continuing to increase capital requirements, are encouraging consolidation through inorganic growth. It is predicted that M&A activity in the financial services sector will continue through 2020.
The distribution of insurance and reinsurance products in Australia varies depending on the type of insurance product and the intended market. Consumer insurance products, such as home and contents, health, automotive and life insurance, are advertised directly to Australian consumers, generally without any restrictions.
A number of the recommendations made by the Royal Commission (which were wholly accepted by the Australian Government) impact on distribution of consumer insurance products in Australia. In August 2019, the Australian Government published an "Implementation Road Map" setting out the timetable for legislative and industry reform.
Relevantly, the announced reforms include the following;
It is noted the proposed ban on the making of unsolicited offers of insurance will require product distributors to reconsider their sales models and practices.
Other forms of insurance, such as worker’s compensation and compulsory third-party (CTP) insurance, often form part of compulsory government schemes with certain cover/entitlements provided on a “no-fault” basis.
Home and Contents Insurance
Home and contents policies generally cover property damage caused to a domestic property and the contents within it. For tenants, insurers also offer contents-only policies to cover their personal belongings within their home. The policies can extend to cover theft or loss of items, and can include added cover for specific high-value items and/or public liability risks. Home and contents insurance policies are often sold directly to consumers or through various other financial institutions. In some cases, these policies can be combined with other insurance products, such as automotive insurance, often with reduced bundled premiums.
Australia has a government-funded healthcare system called Medicare; however, consumers have the option of supplementing their healthcare with private health insurance, which offers tax incentives to high income earners. Health insurance is often written and distributed by sector-specific insurers, and is usually available through comparison agencies who assist in connecting consumers with providers. Some employers also offer corporate health insurance programmes to employees, as part of their employee benefits and entitlements, often at reduced premiums.
Automotive insurance is generally issued by automotive-specific insurers; however, in recent years there has been an emergence of new distributors, including national retailers (although the policies themselves are often underwritten by national insurers and/or the Australian arms of international insurers). The cover ranges from liability for third party property damage only, to comprehensive insurance covering both first and third party property damage and replacement vehicles while repairs are being carried out. Various other automotive insurers are continuing to offer tailored, low-cost vehicle insurance in which the premium is based on the consumer’s vehicle usage and/or parking conditions.
Life insurance in Australia is provided via around four policy types:
Life insurers sell to consumers through direct advertising as individual or combination packages. Superannuation funds (and until recently, retail banks) also offer and sell life insurance products to existing fund members, often at discounted or subsidised rates. In the case of life insurance products through superannuation funds, individual premiums are usually deducted from members’ funds.
Insurers issue a wide range of corporate insurance products to Australian-based corporate entities. Products are also offered to those on the smaller end of the scale, such as landlords, tradespeople and small businesses.
On the larger end of the scale, medium and large businesses often purchase a number of insurance products, ranging from directors’ and officers’ liability, general (public and product) liability, employment liability, to property damage/business interruption insurance and contractor works insurance. Although it is possible to place such insurance in Australia larger policyholders often write portions of risk in foreign markets through non-Australian insurers, due to the relatively small size of the Australian market.
Compulsory Third-Party Insurance
Australian states and territories require vehicle owners/drivers to possess compulsory third-party (CTP) insurance, which provides coverage for the owner/driver’s legal liability for personal injury to third parties. The regime for the purchase of CTP insurance varies between the states and territories, but commonly, the cost of CTP insurance is included in an annual vehicle registration fee paid to the relevant state or territory government.
Workers’ Compensation Insurance
Australian states and territories have workers’ compensation schemes that cover workers (and employers in respect of their legal liability to those workers) for injuries sustained in the course of their employment. The various state and territory governments operate their respective schemes; however, there are differences between the jurisdictions. In some states, schemes are centrally funded, while in others premiums are paid to private insurers. There is also a Federal scheme, known as Comcare, which extends to employees of Commonwealth Government agencies and statutory authorities, the Australian Capital Territory Government and corporations or authorities that have been granted a license to self-insure.
Brokers are most commonly involved in sourcing corporate insurance products for SMEs and almost always for large corporates (with the latter often involving or requiring insurance for wide-ranging risks across multiple jurisdictions).
Proposed consumer protection reforms arising from the Royal Commission include creating a best interests duty for mortgage brokers and reforming mortgage broker remuneration.
Markets such as Lloyd’s provide licenses to domestic coverholders and underwriting agencies, enabling Australian organisations to place risk at Lloyd’s with relative ease.
There are a number of third-party claims-handling organisations operating in Australia, which provide support to foreign-based insurers with claims management services for domestic claims and insureds.
A planned reform arising from the Royal Commission is to capture claims handling as a "financial service" so that the general conduct obligations in the Corporations Act 2001 (Cth) will apply to regulate the conduct and settlement of claims.
There is duty of utmost good faith owed in respect of contracts of insurance. There is also a statutory duty implied into certain contracts of insurance by the Insurance Contracts Act 1984 (Cth) which requires both parties to act with the utmost good faith.
There is also a duty of disclosure. Prior to entering into an insurance contract, the insured is generally obliged to disclose to the insurer any matter that the insured (or a reasonable person in the insured's position) would consider relevant to the insurer's decision whether to accept the risk and, if so, on what terms. There are some exceptions to this obligation, including information that reduces the risk to the insurer or that the insurer already knows.
An announced reform arising from the Royal Commission is for the existing duty of disclosure for consumer insurance to be replaced by a new duty to take reasonable care not to make a misrepresentation (following the position adopted in the UK in 2012).
The Insurance Contracts Act 1984 (Cth) sets out the statutory notice required to be given by insurers, prior to entering into an insurance contract, in relation to the disclosure requirements of an insured.
The Insurance Contracts Act 1984 (Cth) provides that, for insurance contracts regulated by that Act, where an insured has failed to comply with its duty of disclosure, or has made a misrepresentation to the insurer before the contract was entered into, and the failure to disclose or misrepresentation is fraudulent, the insurer may avoid the policy. Where the failure to disclose or misrepresentation is not fraudulent, the insurer may still reduce its liability under the insurance policy to the extent of any prejudice suffered by it as a result of the failure to disclose, or the misrepresentation. This means that, where the insurer would have entered into the contract in any event, it is not entitled to avoid the contract because there has been a non-fraudulent failure to disclose, or misrepresentation.
An intermediary may act as agent for either an insurer or an intending insured. Brokers are usually the agent of the insured. However, sometimes they act under binders, which authorise them to bind insurers by entering into insurance contracts on the insurers’ behalf. For certain purposes under the Insurance Contracts Act 1984 (Cth), an intermediary (who is not a broker acting under a binder) is deemed to be the agent of the insurer and not of the insured. Brokers and other intermediaries are regulated by, and subject to the conduct requirements in, the Corporations Act 2001 (Cth).
Under common law, the basic requirements for an insurance contract are that for payment of consideration (the premium), a person (the insurer) agrees to pay to the other (the insured) a sum of money or some benefit upon the occurrence of one or more uncertain events (which event is usually adverse to the insured’s interests). In accordance with the Insurance Contracts Act 1984 (Cth), an insurable interest is not required for the valid formation of a contract of general insurance.
In practice, contracts of insurance and reinsurance are generally evidenced by a written policy. In relation to contracts of insurance to which the Insurance Contracts Act 1984 (Cth) applies, upon request from an insured, an insurer is required to provide an insured with a statement setting out the provisions of the contract.
In relation to insurance contracts to which the Insurance Contracts Act 1984 (Cth) applies, a third-party beneficiary has a right to recover from the insurer in accordance with an insurance contract, the amount of any loss suffered by the third party beneficiary even though the third-party beneficiary is not a party to the contract. The third-party beneficiary has the same obligations to the insurer as the insured and may discharge the insured's obligations in relation to the loss.
Reinsurance contracts are not subject to the Insurance Contracts Act 1984 (Cth) and are generally governed by Australian common law. Therefore, many of the protections available to insureds under the Insurance Contracts Act 1984 (Cth) do not apply to reinsurance contracts, meaning there may be more scope for reinsurers to avoid claims.
In relation to consumer contracts, the consumer protection provisions in Part 2, Division 2 of the Australian Securities and Investments Commission Act 2001 (Cth) referred to below would also apply.
The use of ART products, including cat bonds, side cars, special purpose reinsurance, insurance-linked securities and industry loss warranties has been modest to date in Australia, although activity and interest has increased significantly.
Australian regulators have not explicitly stated whether or not they will recognise ART transactions, including those written in other jurisdictions, as insurance or reinsurance contracts. It is likely to depend on the transaction.
APRA has issued guidelines regarding “Limited Risk Transfer Arrangements", which are defined as arrangements that do not typically involve significant transfer of insurance risk over the life of the arrangement between the insurer and the reinsurer. These arrangements may encompass some ART transactions. The guidelines state that (for the purpose of determining compliance with prudential requirements) APRA may approve the arrangement as either a reinsurance arrangement or a financing arrangement. APRA will consider a “Limited Risk Transfer Arrangement” to be a reinsurance arrangement where the purpose and effect of the arrangement is to transfer genuinely significant insurance risk from the insurer to another reinsurer.
APRA has stated that a key concern with ART transactions is whether they provide the cover needed for regulatory capital purposes. APRA has also expressed concerns that new supplies of capital from institutional investors into the reinsurance market could lead to underwriting risk and insurer/reinsurer pricing not properly reflecting risk. Despite these concerns, APRA has stated that it welcomes the development of ARTs as providing more depth to the market.
No information has been provided.
As a starting point, insurance contracts in Australia are interpreted in the same way as other contracts; however, there are particular legal principles and legislation that apply specifically to the interpretation of insurance contracts. Legal principles include, for example, the "contra proferentem" rule (as a rule of last resort), under which unresolvable ambiguity in an insurance contract is construed against the party which drafted it.
The key piece of legislation governing the interpretation of most insurance contracts is the Insurance Contracts Act 1984 (Cth), although it does not apply to reinsurance contracts, medical or hospital insurance, insurance entered into by a friendly society, marine insurance, worker’s compensation insurance, and third-party motor vehicle insurance.
Consumer protection provisions in Part 2, Division 2 of the Australian Securities and Investments Commission Act 2001 (Cth) also apply to financial services, including insurance contracts, where a person acquires the service as a consumer. This occurs if the price of the services does not exceed AUD40,000 or in other specified circumstances. These provisions include various prohibitions on misleading and deceptive, and unconscionable, conduct, which may affect the interpretation of a contract.
A planned reform arising from the Royal Commission is the application of unfair contract terms provisions (which apply to consumer and small business contracts) to insurance contracts.
Similarly to other types of contracts, there is a general prohibition on extrinsic evidence to contradict the express terms of a contract (called the "parole evidence" rule). However, an exception to this rule is evidence of circumstances existing at or before the date of formation of the contract, which form part of the factual background. Extrinsic evidence of the parties' intentions and expectations is not, however, permitted.
Warranties in an insurance contract do not need to be expressly described as such. No particular form of words is necessary to constitute a warranty. The issue is whether the parties intended a term to be a warranty.
Under common law, a warranty in a contract of insurance, if breached, entitles the innocent party to repudiate the contract and sue for damages. However, for insurance contracts governed by the Insurance Contracts Act 1984 (Cth), Section 54 applies to warranties that are continuing in nature. Section 54 of the Insurance Contracts Act 1984 (Cth) states that, subject to certain exceptions, an insurer may not refuse to pay a claim in circumstances where it would otherwise be entitled to do so by reason only of an act occurring after the insurance contract is entered into. However, the insurer's liability in respect of the claim may be reduced by the amount that fairly represents the extent to which their interests were prejudiced as a result of that act.
Similarly to warranties, describing a condition in an insurance contract as a condition precedent to an insurer's liability will not necessarily give it that characteristic. Whether a condition is a condition precedent will depend on the intention of the parties, as revealed in the language used.
Under common law, breach of a condition precedent to an insurer's liability entitles the insurer to avoid liability. However, the common law is modified for insurance contracts governed by the Insurance Contracts Act 1984 (Cth), in respect of which Section 54, outlined above, applies.
In Australia, coverage disputes are traditionally resolved by the courts, and may be determined by either federal or state courts. Increasingly, however, coverage disputes are resolved by negotiation between the parties or by some form of ADR. The position is generally the same in respect of both insurance and reinsurance coverage disputes.
Disputes between insurers and consumers are often resolved by the Financial Ombudsman Service although, from 1 November 2018, they are now being resolved by the Australian Financial Complaints Authority.
The limitation periods for starting proceedings in respect of an insurance claim are regulated by State and Territory law in Australia. The standard principle is that the limitation period for action for breach of contract runs for six years starting on the date of the accrual of the action. The key date is that of "accrual".
Firstly, in the context of first party insurance policies, in the absence of clear High Court authority, the date of accrual has been subject to some inconsistency between jurisdictions. On the one hand, a number of jurisdictions have aligned with the settled position in the United Kingdom. That is, that a cause of action against the insurer of a first party insurance policy accrues immediately on the occurrence of the insured event. On the other hand, in jurisdictions such as New South Wales, this position has been open to some uncertainty. This issue was addressed by the New South Wales Court of Appeal earlier this year in Globe Church Inc v Allianz Australia insurance Ltd  NSWCA 27. The effect of this decision was to confirm that the cause of action against an insurer of a first party insurance policy accrues immediately on the occurrence of the insured event.
Secondly, in the context of a third-party liability policy, the settled position in Australia is that the insured event is the establishment of the liability of the insured to the third party. As such, the limitation period for commencing proceedings against an insurer for breach runs from that date.
In general, common law in Australia allows parties to choose the law applicable to an insurance contract, as well as the jurisdiction in which disputes will be resolved, although this is not absolute. The Insurance Contracts Act 1984 (Cth) operates to prevent parties seeking to contract out of it by choosing a non-Australian jurisdiction in circumstances where the proper law of the policy is Australia.
If there is a dispute between the parties as to the proper law of the policy or the most suitable jurisdiction, courts will consider the parties' intentions as a matter of construction of the contract and will also apply common law rules. There are no international conventions on jurisdiction and choice of law that are applicable in Australia. Australia has not yet acceded to or implemented the Hague Convention on Choice of Court Agreements, although it has been advised to do so by a committee of Australia's parliament.
The Australian civil court structure consists of both state-level and federal-level courts, with the cross-vesting scheme permitting state and federal issues to be heard in any state, territory or federal court of first instance. Any of these courts may constitute an appropriate forum within which an insurance action can be brought. Some courts only have jurisdiction to hear disputes up to a certain claim value, with such limits varying across the states. Generally, civil cases will be heard only before a judge, unless the court considers an order for a jury trial to be in the interests of justice.
The basic procedural steps in most courts are as follows:
The period of time that a claim may take to be heard in court is on average around 18 months, although this is dependent on a variety of factors.
A foreign judgment does not have a direct right of execution in Australia. However, the Foreign Judgments Act 1991 (Cth), and similar legislation in each state and territory, creates a system of registration of certain foreign judgments. Those foreign judgments that can be registered are those pronounced by countries that have assured substantial reciprocity of treatment in relation to the enforcement in those countries of judgments given in Australian courts. To be registerable, a judgment must also be final and conclusive, and judgments in respect of taxes, fines or other penalties are excluded.
A registrable judgment must be recognised in any Australian court as conclusive between the parties to it in all proceedings founded on the same cause of action, and may be relied on by way of defence or counterclaim in any such proceedings. Once registered, a judgment has the same force and effect as if it were a judgment of the court of registration.
Arbitration clauses in insurance and reinsurance contracts are generally unenforceable in Australia.
Section 43 of the Insurance Contracts Act 1984 (Cth) makes void any provision in a contract of insurance to which the Act applies which has the effect of requiring disputes to be referred to arbitration. Where the Insurance Contracts Act 1984 (Cth) does not apply, state legislation will generally apply to render compulsory arbitration clauses void.
In relation to reinsurance contracts, there is authority that Section 19 of the Insurance Act 1902 (NSW), which provides that compulsory arbitration clauses do not bind an insured, applies to reinsurance contracts.
If a party receives an award in arbitration, there are a number of means available to enforce it. The most commonly used is the Model Commercial Arbitration Acts, which provide that an award made under an arbitration agreement may, by leave of the court, be enforced in the same manner as a judgment or order of the court to the same effect. Where leave is given, judgment may be entered in the terms of the award.
Australia is also a party to the New York Convention. Where the conditions set out in the New York Convention are met, an Australian court is obliged to enforce the award.
In Australia, the insurance (and reinsurance) industry has traditionally lagged behind the United States in its use of ADR to resolve insurance disputes; however, this is changing in line with increases in the use of ADR to resolve disputes in Australia generally.
Increasingly, courts are ordering parties to a dispute to attend mediation. Further, in the Federal Court, parties are required to take "genuine steps" to resolve their dispute before coming to court.
ADR is even more likely to be used to resolve disputes between insurers and consumers, due to the prohibitive cost of litigation for many consumers. Typically, disputes will be mediated via an external agency, currently the Australian Financial Complaints Authority (AFCA). Following the Royal Commission, regulations were made requiring all compulsory AFCA members to take reasonable steps to cooperate with AFCA in the resolution of disputes.
If an insurer refuses to pay a valid claim or delays excessively in paying a valid claim, the insured is entitled to damages for the losses they have suffered as a consequence. The insured may also be entitled to damages on the basis that the insurer has breached their duty of utmost good faith.
The insured is also normally entitled to interest. For insurance contracts subject to the Insurance Contracts Act1984 (Cth), insurers are required to pay interest on any amount they are liable to pay under an insurance contract, commencing on the date from which it was unreasonable for them to withhold payment (which is generally after they have had a reasonable time to investigate the claim). Where the Insurance Contracts Act 1984 (Cth) does not apply, there is legislation permitting courts to award interest.
Unlike the US, there is no tort of bad faith in Australia, which permits insureds to recover punitive damages.
In recent times, financial technology, or “fintech”, has altered the landscape of the financial services industry by disrupting status quo business models and providing innovative new ways for customers to interact with service providers. Though the insurance industry has somewhat lagged behind other financial services in this area, it is no exception to the trend.
In the USA, innovators have already begun to disrupt the insurance industry through “insurtech” developments. The application of insurtech in the insurance industry is quite broad and examples include companies providing peer-to-peer insurance and drone insurance policies.
Further, there has been significant progress made in Asia, where the pace of development tends to be less encumbered by regulatory brakes on innovation or outdated legacy systems. For example, AIA Hong Kong has launched a blockchain platform which allows the life insurer and its respective bank distributors to share documents and policy data in real time. It also enables improved transparency, streamlining of on boarding processes and the reconciling of commissions automatically through smart contracts.
However, the Australian insurtech industry has not grown to the same extent as the USA or Asian markets. Insurtech companies have reported that they are still struggling to gain traction with large companies in Australia in comparison to insurers overseas.
Nonetheless, there has been a significant growth within the last three years with more than AUD10 million raised by insurtech companies. Government-funded programmes such as Landing Pad and access to foreign accelerators have contributed to this growth.
Insurtech players in Australia are already dealing with most aspects of the insurance value chain, such as underwriting, sales and distribution and claims management. Blockchain and smart contracts are yet to be utilised widely in Australia; however, it is likely that they will very soon make their mark. Some early examples are AXA's product “fizzy”, which provides for money to be transferred virtually immediately if a flight is delayed where a customer buys flight delay insurance.
Many of Australia’s major insurers have indicated an intention to invest in and promote their own insurtech developments. For example, QBE Insurance Group has created a AUD50 million insurtech fund and has already invested in artificial intelligence companies RiskGenius and Hyperscience, and entered into a partnership with insurtech Zeguro. Meanwhile, Suncorp Group has bought a USD5 million equity stake in a US-based micro-insurance start-up and teamed up with Spanish start-up Traity, which uses Blockchain to protect consumers conducting peer-to-peer online exchange.
One of the obstacles hampering the expansion of insurtech in Australia is the lack of development in the regulation of the industry. The current regulations imposed by APRA and ASIC impose restrictions on domestic and overseas insurtech start-ups operating in the Australian market.
ASIC has made an attempt to address these issues by launching a fintech regulatory sandbox, which authorises fintechs to test some financial products and services without a licence for up to 12 months, including general insurance for personal property and home contents up to AUD50,000 insured. There have been attempts by the insurtech industry to expand these time and monetary limits, so as to increase the breadth of operation of the sandbox; however, to date these have not been successful.
Progress has been slow and start-ups are, for the most part, still required to tag on the back of major insurers to get their products to the market. Although there are still limits on the growth of insurtech in Australia, APRA and ASIC have announced that the regulatory environment is very much open to insurtech.
Cyber Attacks and Data Breaches
The number of cyber attacks targeted at domestic Australian organisations continues to grow. The Office of the Australian Information Commissioner was informed of 245 data breaches, including cyber attacks, between 1 April 2019 and 30 June 2019 – in excess of 2.5 breaches a day.
Notable incidents have included attacks on the Australian National University reportedly involving the theft of substantial personal data; scammers breaking into a new payment database entitled Pay ID affecting customers at major banks in Australia; as well as cyber attacks on Victorian hospitals in suspected ransomware attacks.
Australia’s financial institutions, many of whom are engaging in strategies that will store and process data externally, are particularly vulnerable to these attacks. Australian CEOs now rate cyber threats as the equal greatest threat to the growth of their organisations, with the average cost of a data breach affecting Australian companies approximately AUD2.8 million.
Changes to the Australian Privacy Act 1988 – applicable since February 2018 – established a scheme that includes an obligation to notify affected individuals and the Australian Information Commissioner of any potentially harmful data breach. The scheme is one of the strictest disclosure regimes in the world.
In Australia, the cyber insurance market is growing rapidly and the Insurance Council of Australia identified it as the industry's "fastest growing commercial segment". However, despite the risk of cyber attacks in Australia outlined above, Australian businesses are still lagging globally in obtaining cyber insurance. This is likely due (at least in part) to misunderstandings of the nature of the risk in certain industries and/or the difficulty brokers face in matching policies to those risks.
Artificial Intelligence (AI) and Autonomous Vehicles
The rapid development of AI is impacting the insurance industry, in part by bringing numerous potential efficiency benefits for insurers. Artificial intelligence is already being applied in efforts to improve the current claims processes used within the insurance industry. Going forward, data analytics will continue to become more useful in driving underwriting decisions, focusing risk selection, providing more targeted support for customers and improving pricing accuracy. However, the increased use of AI technology is likely to change the risk landscape in the insurance market, creating unforeseen risks that may result in complex liability issues.
Autonomous vehicles have the potential to significantly change the motor vehicle insurance industry by shifting responsibility from drivers and reducing claims overall. The insurance market is likely to shift emphasis to policies issued to car manufacturers and software suppliers.
This disruption has not yet occurred in Australia, although it is coming. Trials are continuing in most Australian states of driverless vehicles on Australian roads. A number of state governments have announced funding to initiate driverless vehicles trials. For example, there is a joint project between IAG and the University of New South Wales – for the purpose of assisting the insurance industry to have a thorough understanding of the technologies involved, and the impact on mobility and insurance business models.
Autonomous vehicles will undoubtedly see the development of new insurance products to meet the needs of consumers and organisations in the future. There are already examples of autonomous vehicle manufacturers partnering with insurers to offer targeted insurance policies (such as the partnership between Tesla and Liberty Mutual). It remains to be seen whether there will be a legislative response in Australia (such as in the UK) to the liability issues regarding autonomous vehicles. However, changes will need to be made to Australia's compulsory third-party insurance legislation, which is based on the concept of driver responsibility.
Catastrophes and Climate Change
Major catastrophes, often in the form of bushfires, floods and cyclones, are a relatively common occurrence in Australia.
Unique “new” catastrophe risks are not a particularly common risk written in the Australian market, although such insurance can be placed through foreign insurers not authorised by APRA where the insurance is to cover “atypical risks” (such as nuclear or biological hazards risks).
Climate change has been having an impact on the insurance industry in Australia for some years. Extreme weather events are occurring more frequently and the quantum of payouts following events are increasing.
The insurance industry is responding to these risks in a number of ways. For example, insurers are assessing aggregate exposures and in particular at geographies or industries which have greater exposure to extreme weather events. Ultimately, it is anticipated that insurance will be more difficult to obtain and premiums will increase. This set of circumstances, in combination with a hardening market, has resulted in prices rising and has created an environment for exploring alternative avenues such as the captive market.
Further, many insurers are under pressure from their own stakeholders not to support perceived climate change unfriendly industries. For example, some insurers will no longer ensure thermal coal mines or might only do so under more restricted circumstances.
Drones are becoming increasingly popular and are being applied in various commercial settings in Australia. New drone insurance policies continue to be introduced in the Australian market. The insurance covers damage or loss to the drone itself, being the Unmanned Aerial Vehicle (UAV), and the software and ground control system, together comprising the Unmanned Aerial System (UAS). Policies may also include liability cover and protection from cyber threats which may cause data loss.
The new products or alternative solutions being developed to address the emerging risks are identified as part of the discussion in 11.1 Emerging Risks.
Banking Royal Commission
The Royal Commission into misconduct in the Banking, Superannuation and Financial Services industry was held during 2018 – with a final report released in February 2019. The Royal Commission heard evidence of misconduct encompassing product design issues (including issues with add-on insurance products and outdated medical definitions in policies); product distribution (including aggressive sales practices, barriers to cancellation and misleading website marketing material) the charging of fees for no service and the charging of fees to deceased persons – as well as instances of conflicts of interest and poor governance.
The Royal Commission made 76 recommendations, including 12 specific recommendations for the insurance industry (not including those for group life insurance that touch on superannuation). In August 2019, the Australia Government published its "Implementation Road Map" setting out a timetable for reforms for the financial services industry. This has been described as the most comprehensive corporate and financial services law reform package since the 1990's. In addition to those reforms highlighted above, these include;
The extension of the BEAR is expected to impact many aspects of governance for APRA regulated insurers. In particular, director and senior executive roles in those financial institutions will be held to the same heightened standards of accountability imposed on banks and their senior leadership – including deferred remuneration and notification obligations. All accountable persons must be registered with APRA.
Since the Royal Commission, many financial services entities, including insurers, have taken steps voluntarily to withdraw products from the market or remediate consumers. For example, five insurers have stated that they will refund over AUD100 million in allegedly "junk" add-on insurance products sold by car dealerships.
The Australian Government has committed to retaining the twin peaks model of regulation (ASIC and APRA). Following the Royal Commission, the Government has focused on ensuring that both APRA and ASIC are strong and effective regulators going forward. This has given rise to increased funding and announced reforms which provide additional regulatory and investigative powers.
There is a strong impetus for the regulators to be seen as active, and increased enforcement activity is expected. ASIC has established an Office of Enforcement for the purpose of strengthening its enforcement culture and effectiveness, and to implement a single enforcement strategy within ASIC. The Office will lead the application of ASIC's "why not litigate" enforcement approach.
Further, there will be some changes to the roles of APRA and ASIC (and how they interact). For example, the roles of ASIC and APRA under the Superannuation Industry Supervision Act 1993 will be adjusted such that APRA will be responsible for establishing and enforcing prudential standards, and ASIC's role will concern the relationship between licensees and individual consumers.
As anticipated, a number of class actions have followed the revelations at the Royal Commission. These include a class action against Insurance Australia Group (and its subsidiary Swann insurance (Australia) Pty Ltd) over its sale of add-on insurance products for motor vehicles which are alleged to be of little or no financial value; a class actions against Commonwealth Bank's superannuation arm (Colonial First State) for allegedly charging excess fees to customers for financial advice; and a shareholder class action against AMP arising from alleged systematic misconduct and failure to disclose market sensitive information to the ASX.
Combustible Cladding Claims
Following the Grenfell Tower fire in London and a fire at Lacrosse – a Melbourne high rise residential apartment building – there has been greater awareness of risks associated with potentially combustible cladding. This has led to increased activity by regulators, and the potential for claims by owners and owners corporations against various participants in the building and manufacturing industries.
Across Australia, building regulators are conducting audits of buildings to determine whether combustible cladding is present, and are issuing rectification orders to building owners to replace cladding or take other measures. Owners' attempts to recover these costs by bringing claims against participants in the building industry (including builders, building surveyors, architects and fire engineers among others) may lead to exposures under professional indemnity policies or potentially directors' and officers' liability policies. There may also be third-party claims against suppliers or manufacturers leading to exposures under product liability policies.
Class Actions – Common Fund Orders
A recent High Court of Australia decision, BMW Australia Ltd v Brewster & Anor; Westpac Banking Corporation & Anor v Lenthall & Ors  HCA 45 has determined that the Federal Court of Australia and the NSW Supreme Court do not have power to make Common Fund Orders (CFO's).
This decision is seen as a blow to litigation funders and may result in a slowdown in the commencement of new class actions and a return to "closed" class actions. A CFO has been a commonly made order in class actions, supported by a litigation funder, in recent years. A CFO requires all group members who benefit from the class-action (regardless of whether they have signed funding agreements) to contribute a percentage of their benefit received from any settlement award or judgement amount to the litigation funder (and to share the legal costs incurred).
In this way, a CFO is a mechanism which has evolved, through judicial decisions in recent years, to address the potential for a disparity of outcomes as between funded and unfunded group members in a funded class-action. A CFO provided a significant advantage to a litigation funder because it was not required to sign up individual group members (to derive a benefit from them) through a book build process, which is typically expensive and time-consuming.
By a 5:2 majority, the High Court found that, properly construed, Section 33ZF of the Federal Court of Australia Act 1976 (and its New South Wales equivalent) did not empower the courts to make CFO's. The majority said that the respective legislation authorised a Court to make an order "to advance the effective determination by the Court of the issues between the parties to the proceeding".
The question of funding was not found to be an issue between the parties to the proceedings. Rather, it was a matter between parties and third parties, and as such, a CFO does not advance the proceeding.
The High Court acknowledged a "free-rider" problem arises to the extent that, if the class-action is successful, group members who have not signed an agreement with the litigation funder would receive a greater benefit than those who have entered into such an agreement (in particular, not being required to provide a percentage of this windfall to the funder). The High Court noted that this eventuality could be resolved at the conclusion of proceedings, with the making of a Funding Equalisation Order (FEO). An FEO is an order that redistributes the commission payable to the litigation funder by the funded group members, across all group members.
As a result of this decision, litigation funders will need to revert to their previous practice of book building to ensure there are sufficient group members (to justify the financial risks) before launching a class action.
Significant legislative and regulatory developments have arisen from the Royal Commission – as canvased in 12.1 Developments Impacting on Insurers or Insurance Products.
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