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 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").
The 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), and also regulates banks, credit unions, building societies, life insurers, private health insurers, friendly societies and most members of the superannuation industry. The 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 (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 2020, there were 86 APRA authorised general insurers 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.
This is an issue which falls outside the authors' area of expertise.
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.
Increased M&A Activity
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. However, the impact of COVID-19 has seen a reduced level of M&A activity in 2020.
Prior to 2020, 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 AUD3 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).
Changes to M&A Activities Domestically and Internationally
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.
Reports state that M&A activity in the insurance sector may increase as lockdown measures implemented in response to the COVID-19 pandemic are eased and markets recover.
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.
On 12 November 2020, the government introduced a bill to implement several of the recommendations from the Royal Commission into misconduct in the Banking, Superannuation and Financial Services industry (Royal Commission reforms bill). Some of these reforms concern the sale of insurance products, such as:
The proposed ban on the making of unsolicited offers of insurance will require product distributors to reconsider their sales models and practices. Distributors will only be able to offer to sell or issue insurance to a consumer who has specifically consented to being contacted for the purpose of being offered that product.
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).
On 6 February 2020, legislation was passed which:
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.
One of the reforms in the Royal Commission reform bill 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. This means that claim handlers will be required to hold an Australian financial services licence which cover claim handling or be authorised by someone who holds the licence.
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.
One of the reforms in the Royal Commission reform bill is to replace the existing duty of disclosure for consumer insurance with a new duty for insureds 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.
Third-party beneficiaries needn't be a party to the contract, but must be specified or referred to in the contract as a person to whom the benefit of the insurance cover provided by the contract extends. They do not need to be specifically named.
An insurer can raise the same defences to claims brought by third-party beneficiaries as it can against insureds. This is the case even where those defences relate to the insured's conduct, such as insured's non-disclosure.
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) 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.
"Limited Risk Transfer Arrangements"
The 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) the APRA may approve the arrangement as either a reinsurance arrangement or a financing arrangement. The 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 (re)insurer.
Concerns with ART Transactions
APRA has stated that a key concern with ART transactions is whether they provide the cover needed for regulatory capital purposes. The 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, the APRA has stated that it welcomes the development of ARTs as providing more depth to the market.
See 7.1 ART Transactions.
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
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.
Unfair Contract Terms Provisions
From 5 April 2021, the unfair contract terms provisions in the Australian Securities and Investments Commission Act 2001 will apply to insurance contracts. The result is that certain consumer and small business contracts will be void if they are:
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 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, Globe Church Inc v Allianz Australia insurance Ltd  NSWCA 27 confirmed 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.
The Insurance Contracts Act 1984 allows a "third-party beneficiary" to recover from an insurer for the amount of loss suffered by that third-party beneficiary.
A "third-party beneficiary" as defined in the Insurance Contracts Act 1984 (Cth) must be "specified or referred to" in the contract. Although ordinarily identified by name in the policy, third-party beneficiaries can be identified 'by name or otherwise'. Whether a person is 'otherwise' specified or referred to in the policy depends on the nature of the reference that person and other factors relevant to that policy.
Other parties can seek to take the benefit of the insurance contract but only in limited circumstances. Third-party claimants can join an insolvent defendant's insurers to proceedings, in order to seek a declaration that an insurer is liable to indemnify the defendant. In cases of liability insurance, a person to whom the insured or a third-party beneficiary is liable for damages may recover directly from the insurer where the insured or third-party beneficiary has died or cannot be found. Legislation in New South Wales allows a third party to recover from an insurer in a wide range of circumstances, but only with the court's permission.
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 USA, there is no tort of bad faith in Australia, which permits insureds to recover punitive damages.
When an insurer indemnifies the insured, the insurer is entitled to be subrogated to all the rights the insured has against third party wrongdoers and sues in the insured's name.
An insurer's right of subrogation may either be excluded under the policy, or may be effectively discarded in circumstances where an insured has agreed with a third party to limit the insured's ability to recover from the third party.
Rights of subrogation are further limited under the Insurance Contracts Act 1984 (Cth) but only in limited circumstances, such as instances where the insured and the third party have a familial or personal relationship.
In exercising its right of subrogation, an insurer is entitled to receive up to the amount to which the insurer has paid the insured. Amounts for which the insured has not been paid and that are in excess of the amount paid to the insured by the insurer belong to the insured.
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 and Blockchain
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, particularly with the increased number of people working from home due to the COVID-19 lockdown. A cybercrime was reported, on average, every ten minutes in Australia between July 2019 and June 2020 according to the Australian Cyber Security Centre's Annual Cyber Threat Report. One in six Australians experienced cyber-attacks during the COVID-19 lockdown, according to the NortonLifeLock Digital Transformation Report. Notable incidents have included the ramsomware cyber-attacks on the Toll Group which forced the company to shut down most of its IT infrastructure for days and manually process parcels stalling deliveries; attacks on Zoom reportedly involving the theft of personal account data; as well as a WA Department of Health data breach which lead to confidential patient information published online.
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 cyberthreats 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, 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.
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 cyberthreats which may cause data loss.
Catastrophes and Climate Change
Major environmental catastrophes, often in the form of bushfires, floods and cyclones, are a relatively common occurrence in Australia. Unique “new” catastrophe risks are not commonly 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. Moreover, the shift to renewable energy will need new insurance solutions to address operational needs and facilitate innovation.
Most countries, including Australia, are expected to face recession as a result of the pandemic containment measures. The pandemic led Australia's economy into its first recession in nearly 30 years. The insurance market in the country is projected to be impacted adversely by the economic downturn, which put household budgets under pressure and reduced consumer spending. The reduced demand for insurance, particularly life insurance, could lead to lower premium income as insurance companies adequate the prices to new economic environment.
Further, changes in customer behaviour after the pandemic may reduce need for certain policies and create a demand for new products.
See 11.1 Emerging Risks Affecting the Insurance Market.
Response to COVID-19
On 27 April 2020, the Australian Securities and Investments Commission (ASIC) wrote a letter to directors of general insurance companies outlining ASIC’s expectations about insurers’ responses to COVID-19. ASIC noted that insurers should, among other things:
Business Interruption Insurance
COVID-19 business interruption claims have been very much in the news lately. On 18 November 2020, the New South Wales Court of Appeal (NSWCA) decided the COVID-19 business interruption test case in Australia, HDI Global Specialty SE v Wonkana No 3 Pty Ltd  NSWCA 296, which was brought by the Australian Financial Complaints Authority (AFCA) and the Insurance Council of Australia (ICA). The decision provides that claims under business interruption insurance cannot be denied on the basis that they are covered by an exclusion which excludes "diseases declared to be quarantinable diseases under the Quarantine Act 1908 (Cth) and subsequent amendments".
This was because in 2016, well before either policy commenced, the Quarantine Act was repealed and replaced by the Biosecurity Act. Unlike the Quarantine Act, the Biosecurity Act did not include or refer to the term “quarantinable diseases”. Instead, the Biosecurity Act provided for diseases to be determined to be a “listed human disease”. The NSWCA's position is that the Biosecurity Act is not a "subsequent amendment" of the Quarantine Act, and that the exclusion should not be construed as extending or referring to "diseases determined to be listed human diseases under the Biosecurity Act 2015 (Cth)".
This is a critical decision for businesses impacted by the pandemic and it sets the scene for a significant increase in insurance claims being brought by businesses that suffered losses due to COVID-19 measures. However the outcome of claims will still be largely dependent upon the policy wording.
On 19 November 2020, the ICA stated it is in discussions with the AFCA, insurers and other stakeholders to consider a further test case that explores outstanding policy coverage matters, including proximity and prevention of access, relating to the pandemic and business interruption insurance. There are two other relevant cases presently running on the Federal Court of Australia, a claim by Star City Casino, and a claim by a Melbourne café, Vanilla Lounge, which will address the business losses caused by the action taken by authorities to prevent the spread of the disease.
Future Legal Developments
Please see our answers to the questions above regarding the legislative developments arising from the Royal Commission into misconduct in the Banking, Superannuation and Financial Services industry.
As anticipated, a number of class actions have also followed the revelations at the Royal Commission. As of 30 June 2020, 17 class actions, relying on a variety of causes of action have been commenced, including:
See 12.1 Developments Impacting on Insurers or Insurance Products.
Australia is a federation of states and territories bound together by the Australian Constitution. It has an overarching federal system of government with its own courts, although each state and territory within the federation has its own system of government and courts.
Like most countries that formed part of the British empire, Australia’s system of government is modelled on the Westminster system with a central hallmark being an independent judiciary. Australia’s legal system was also inherited from common law of the United Kingdom. Insurance and reinsurance law are no different, albeit there have been statutory and regulatory modifications including the enactment of the Insurance Contracts Act 1984 (Cth) (ICA) and the Corporations Act 2001 (Cth). The ICA aims to strike a fair balance between the interests of insureds, insurers and other members of the public, and to ensure that provisions in contracts of insurance and the practices of insurers in relation to such contracts operate fairly.
Against this backdrop, the Australian insurance industry and its participants are presently grappling with numerous market, economic, legal, regulatory and environmental challenges. These include:
This article will provide a high-level snapshot of the key issues, and likely trends and developments facing industry participants and various lines of business.
Liability, Industrial Special Risk and Property
The law relating to liability (injury and property) throughout Australia has been relatively stable since reforming legislation was introduced in the early 2000’s. Such reforms essentially codified tests of causation and negligence, and to provide additional specific defences (including proportionate liability for non-injury claims). These reforms were to address an "insurance crisis" arising from steep premium increases and a perception that court judgments did not reflect public expectations.
The body of case law surrounding this state-based legislation continues to develop incrementally to provide increasing certainty to those in the industry. As there has not been a repeat of those steep premium increases or the same media criticism of court judgments, these reforms have effectively had a stabilising effect.
The nature of liability claims however changed with the 2017 Royal Commission report into Historical Institutional Child Sexual Abuse leading to a surge of historic abuse claims against state departments and religious bodies. While a National Redress Scheme provides for no-fault compensation, the abolition of limitation periods for such abuse claims and the ability to set-aside prior confidential settlement agreements has facilitated these challenging claims being brought.
Further, latent/exposure injury claims have not diminished despite the use of asbestos products effectively being banned approximately 40 years ago given the presence of those products from prior use (with Australia having the highest use in the world) and the emergence of fibrotic silicosis claims for workers in the artificial stone industry.
The complexity and uncertainty surrounding liability for work related accidents continues with diminishing no-fault workers compensation benefits and limitations on recovering damages from employers encouraging injured workers to pursue non-employers and attempts to maximise their potential compensation. This is further exacerbated by the increasing use of contractors or labour-hire work forces (including on mining and infrastructure projects) which effectively shifts liability to entities not directly involved in the work system or site, including by means of contractual assumption of risk. The permutations of potential outcome for these claims adds to the uncertainty for insurers.
Australian property insurers continue to be affected by volatile and increasing natural risks, with bushfire, storm and flood damage claims a large feature of 2020. Prior uncertainty and inconsistency as to flood cover has largely been resolved through the use of a standard definition of the exclusion. Against the background of climate change concerns, the insurance industry continues to call for improved regulation and action to avoid or mitigate the impact of these natural risks as a more economic approach than increased premiums.
The industry’s exposure to COVID-19 business interruption claims has increased following an industry-initiated test case seeking clarification of the effectiveness of standard pandemic exclusions in business and ISR policies which referenced the repealed Quarantine Act, rather than the current Biosecurity Act. The industry was disappointed when it was unanimously held in November 2020 that reference to the repealed Act was not sufficient to enliven the exclusion, despite the apparent intention of this exclusion to exclude declared pandemics. The judgment resulted in market announcements and revised provisioning by a number of Australian insurers, and for one insurer a capital raising of almost AUS1 billion (USD700m).
An appeal to the High Court of Australia has been announced. However, given business insurance cover in Australia is generally triggered by property damage or prevention of access to property, there remains a number of hurdles to be addressed before cover would be available to most businesses. A significant issue is likely to be the cause of any business interruption loss and the industry will no doubt heed the UK High Court’s rejection of the approach in Orient Express Hotels which diminished an insured’s rights to cover.
Recent and current concerns
Combustible cladding claims have been emerging over the past three years, with the building owners and the construction and insurance sectors grappling with the unexpected cost of replacing cladding. It remains a significant legacy exposure for builders and insurers. Continuing concerns with the performance of engineers and builders, and challenges with legal recourse against them for defects, led to the introduction in NSW of legislation to impose (if not, confirm) a duty of care on builders and designers with a ten-year retrospective limitation period. The object is to improve building standards or otherwise hold participants responsible, but an incidental effect is increased exposure of insurers for building defect claims. This reform also has significant implications for construction professionals (including architects and building surveyors) and their PI insurers, discussed below.
The insurance industry continues to aspire to hold itself to high standards and meeting community expectations through its own Code of Practice, for which a revised version commences in January 2021. That revised Code partly arises out of issues identified by the FSRC but also includes standards for customers affected by domestic violence or financial hardship. New legislation has also been earmarked, which will deem “claims handling” to be a financial service within the meaning of the Corporations Act, which will impose additional compliance and regulatory burdens on insurers across many lines of business.
Life Insurance and Superannuation
Design and Distribution Obligations
From 5 October 2021, distributors and issuers of most financial products will have to comply with Design and Distribution Obligations (DDO) to ensure that retail product distribution is consistent with consumer needs, pursuant to the Treasury Laws Amendment (Design and Distribution Obligations and Product Intervention Powers) Act 2019 (Cth). The legislation is similar to recently imposed UK legislation.
Issuers of financial products must develop a Target Market Determination (TMD) for products, which identifies a target market for the product, being consumers for whom the product is suitable. Distributors must ensure that distribution is consistent with the TMD.
Financial products cannot be distributed until a TMD has been made. Issuers must review the TMD to ensure it remains appropriate and notify the Australian Securities and Investment Commission of any significant dealings in a product which are not consistent with the product’s TMD.
The DDO does not apply to default superannuation, ordinary shares in companies and margin lending schemes.
Removal of default “opt in” insurance cover for the under 25s
In Australia, minimum levels of default Death and Total and Permanent Disability (TPD) cover are provided alongside employer funded compulsory superannuation. This insurance is provided on a default basis, namely an “opt out” basis. However, the premiums are deducted from superannuation contributions. For members with low superannuation account balances, typically members under 25 years of age, the effect of this can significantly erode their superannuation balances.
To address this issue, the scheme for the provision of insurance was changed in 2019 following the enactment of the Treasury Laws Amendment (Putting Members’ Interests First) Act 2019. This removed default Death and TPD cover for members aged under 25, with superannuation balances of less than AUD6,000 or with inactive accounts. The long-term effects of this change are expected to be significant including more people being underinsured and increasing premiums for remaining members given the younger members typically subsidise the premiums of older members.
Changes to non-disclosure and avoidance rights
With life insurance contracts entered into (or varied, but only to the extent of the variation) on or after 1 January 2021 (or the date of Royal Assent, if later), the duty of disclosure in respect of life insurance contracts will be changing in response to one of the recommendations of the FSRC. That recommendation was that the duty of disclosure should be replaced with the duty to take reasonable care not to make a misrepresentation. Prior to this amendment taking place, the test has been what the insured knew to be relevant or what “a reasonable person in the circumstances could be expected to know to be a matter so relevant".
A duty to take reasonable care not to make a misrepresentation to an insurer places the burden on an insurer to elicit the information that it needs in order to assess whether it will insure a risk and at what price. The duty does not require an individual to surmise, or guess, what information might be important to an insurer. In reality, this will mean that specific questions need to be asked in application forms. “Catch all” type questions can no longer be used.
Another change arising out of the FSRC relates to insurers’ avoidance rights for breach of the duty of disclosure. Specifically, Section 29(3) of the ICA will be amended so that an insurer may only avoid a contract of life insurance on the basis of an innocent breach of the duty of disclosure, if it can show that it would not have entered into a contract on any terms. In reality, this is simply a reversion to the requirements prior to the 2012 changes to the ICA. This change will apply to contracts entered into (or varied, but only to the extent of the variation) on or after 5 October 2021, unless the insurer opts in earlier.
Pandemic exclusions in policies and COVID
The life insurance industry has faced recent scrutiny over its response to COVID-19, after one insurer announced it had added an exclusion clause in respect of claims resulting from COVID-19 to a small number of new policies and that the same exclusion could be applied to more customers who had recently travelled abroad, were showing symptoms of COVID-19, or were in high risk groups. That insurer subsequently stated that such exclusion would not apply to new customers including doctors, nurses and other frontline health workers.
Since then, the Australian insurance industry has attempted to reassure customers that COVID-19 would be of little impact to their cover, with the Financial Services Council (the representative of Australia’s large insurance companies) announcing that there would be no restrictions in coverage of medical workers who purchased life insurance during the pandemic.
Unfair Contract Terms
After much lobbying, the laws governing Unfair Contract Terms (UCT) in Australia will now extend to insurance contracts, including life insurance contracts, entered into on or after 5 April 2021 (or renewed or varied after that date, but only to the extent of the variation). The move has been in response to the FSRC. Insurers have previously argued that insurance contracts are a different form of contract to the typical contracts subject to the UCT regime and that, unlike those typical contracts, insurers are already subject to a duty of good faith which would arguably overlap with the UCT regime.
From 5 April 2021, however, the central elements of the existing UCT regime will apply to insurance contracts where:
An insurance contract will be a standard form contract even if a consumer can choose between several options, such as levels of cover, provided the consumer does not have the ability to negotiate the underlying terms and conditions. It will, therefore, generally apply to retail life insurance contracts and direct life insurance contracts but it is expected that group insurance contracts should be exempt as they are negotiated and owned by a superannuation trustee.
Although there is an exception to the UCT regime for the main subject matter of a contract, this has been defined narrowly as what is being insured – that is the insured person and the sum insured, such that nearly all terms of an insurance contract will be subject to the UCT regime. This will create uncertainty in the industry for some time.
Payment of Job Keeper and offset of Income Protection Benefits
In response to the economic impacts of COVID-19, the Australian Government introduced the Job Keeper Scheme in March 2020. The scheme supports Australian businesses significantly affected by COVID-19 to help keep people in jobs. The government subsidises salaries for businesses who suffer a significant downturn due to COVID-19 with the aim of permitting those businesses retain their staff. The scheme runs until March 2021 subject to any further extensions.
The issue for insurers is whether the Job Keeper payments can be offset from Income Protection Benefits, assuming the terms of the offset clause permit that. However, even where it is permissible to offset the payments, community sentiment is that insurers should not profit from the scheme.
The alternate arguments as to whether Job Keeper should be offset are:
Anecdotal evidence suggests that insurers are approaching this issue on a case by case basis, with some insurers offsetting the Job Keeper payment where the claimant is receiving a windfall, but not otherwise.
Directors and Officers, Professional Indemnity and Financial Institutions
There has been significant amounts of litigation and regulatory investigations over the past few years. This is very likely to continue over the coming years for various reasons.
Australia’s friendly class action regime. Specifically, the lucrative profits to be earned by litigation funders and the relatively low barriers to entry for such funders. This has been coupled with more and more opportunistic law firms willing to investigate and pursue class actions, and generating significant fees in the process.
The fallout from the FSRC. The Royal Commissioner has made several recommendations for reform including treating claims handling as a financial service. Otherwise, the FSRC has proved to be a fertile ground for plaintiff law firms, litigation funders, the corporate regulator (the Australian Securities and Investments Commission (ASIC)) and the prudential regulator (the Australian Prudential Regulation Authority). One recent example included the Federal Court of Australia declaring that a building and contents insurer breached its utmost duty of good faith by failing to handle and finalise a policyholder’s claim in an expeditious manner. Such claims handling issues might lead to further referrals for declaratory relief and insurers reviewing their claim procedures.
In the regulatory context, ASIC has adopted a "Why not litigate?" mantra. More and more frequently, investigations and proceedings against companies and their officers seeking pecuniary penalties, disqualification orders and related orders have been brought, especially against the large Australian banks and other financial service providers. One recent example includes ASIC bringing a civil penalty proceeding against a financial services provider for failing to have adequate cybersecurity systems in place, which is understood to be the first kind of complaint. It is also common for plaintiffs and funders to rely on any findings or agreed facts in third-party claims that are brought in tandem with regulatory actions or subsequently.
In the D&O (Side A/B/C) context, this has seen much activity and attention especially the class action risk. There are no signs of this slowing.
Summary of headline points
In the professional indemnity space, non-compliant cladding looms large and several claims have been brought against construction professionals including the Lacrosse decision. This trend is expected to continue as more properties undergo remedial works crystallising losses for owners and tenants.
Also, the COVID-19 pandemic has resulted in extreme share market volatility in recent months. As a consequence, financial planners, investment managers and superannuation trustees are likely to come under the spotlight from aggrieved clients and beneficiaries, which have suffered significant losses on their investment portfolios and superannuation balances. This represents fertile ground for PI claims against wealth professionals. Auditors and accountants are likely to face increased scrutiny. Specifically, it remains to be seen whether auditors will be prepared to sign off on unqualified audit statements and questions about going concern considerations, especially once the government relief and assistance measures wind down and cease.
Also expected is ever more social engineering fraud and other cyberfraud claims being brought against professionals, including those who hold funds on trust on behalf of their clients.
Marine law in Australia has remained relatively settled for the last 30 years. Marine insurance in Australia is governed by the Marine Insurance Act 1909 (Cth) (MIA). This was based on the relevant UK law in place at the time, although the ICA excludes pleasure craft from the operation of the MIA. In 2015, the UK significantly reformed its Marine Insurance Act. While the Maritime Law Association of Australia and New Zealand has proposed that the MIA be amended to ensure that Australia’s marine law is consistent with international law, there is no current legislative proposal to amend the MIA, but it may be the case of watch this space in the next few years.
Otherwise, the Admiralty Act 1988 extended the admiralty jurisdiction from the Federal Courts to the State and Territory Supreme Courts. The Carriage of Goods By Sea Act 1991 (COGSA) gives effect to a modified version of the Hague Visby Rules. Importantly, Section 11 of the COGSA sets out that:
COVID-19 has had a huge effect on all aspects of marine life, and it is anticipated it will have a significant effect on marine law in the next few years. The cruise industry has been significantly affected with most cruise liners being docked around the world. Container ships have been delayed and containers being transported for shipment have been delayed resulting in businesses around the world suffering losses.
Clarkson Research reports that the global effects of COVID-19 have caused in a decline in world seaborne trade of around 1 billion tonnes. It is anticipated that significant litigation will arise in relation to supply chain disruption causing spoiling and loss of cargo and subsequent lost profits.