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House: Senate

Portfolio: Treasury

Commencement: The formal provisions of the Bill will commence on Royal Assent. The provisions described in this Digest will commence on a day or days fixed by Proclamation. However, if the provisions have not commenced by the end of six months after the Bill receives the Royal Assent they will commence the day after the end of that period.

Purpose

The main amendments contained in this Bill will:

* alter the rules for the calculation of the value of the assets of general insurance companies which have shares in a related insurance company;

* require insurance brokers to have an `acceptable' indemnity contract;

* clarify the liability of insurers for the actions of their agents;

* widen the circumstances where the Insurance and Superannuation Commissioner may refuse to register a broker or cancel or suspend their registration;

* increase the Commissioner's investigative powers; and

* introduce secrecy provisions to make it an offence for the Commissioner or offices of the Commission to disclose information gained in their employment.

Background

The general insurance industry operates under the Insurance Act 1973 and provides insurance for such things as motor vehicles, houses and contents and third party insurance. Life insurance is regulated under a separate Act, the Life Insurance Act 1945. There were 160 private general insurance companies as at June 1993, plus government insurance companies, with the top 5 companies sharing 49% of the market. The next 6 to 50 companies shared 41% of the market, with the remaining companies having 10% of the market. The 160 private insurance companies had assets of approximately $28 billion as at June 1993, while the government insurance companies had assets of approximately $12 billion. Premiums were approximately $7.8 billion in 1992 (the last year for which figures are available). 1

The major change in the general insurance industry in the recent past has been the trend to privatise government insurance organisations. The first body to be sold was the N.S.W. GIO, which was listed on the sharemarket in July 1992. The Victorian Workcare Scheme has also been privatised. The latest bodies to be prepared for privatisation are the Western Australian SGIO and the Queensland banking and insurance company Suncorp. The major arguments in favour of the privatisation of such bodies are:

* the business is not a function that should be performed by government as there are no social justice issues involved;

* the government insurance bodies are in competition with private enterprises and should compete on the same footing;

* the funds raised from the sale of such organisations can be used for more appropriate purposes, such as health or education spending or the reduction of government debt; and

* their sale removes any potential future liability for governments that may result from bad investment decisions of the organisations.

The main arguments for their retention as government bodies are:

* the existence of government insurance companies ensures competition;

* some people prefer to deal with an agency which is backed by the financial resources of the government;

* they provide a regular source of revenue rather than a single injection of funds that arises on their sale; and

* the profits from such organisations adds to revenue and allows greater expenditure in other areas.

Insurance brokers sell both general and life insurance and are required to be registered under the Insurance (Agents and Brokers) Act 1984. The Act aims to protect consumers and requires brokers to act for the policyholder; have indemnity insurance; and comply with rules relating to the handling of insurance premiums and claims. Brokers play an important role in the insurance industry and dealt with almost half of the total premiums paid in 1992- 3. There were 1034 registered brokers at the end of 1992- 3. 2 The regulation of both insurance companies and brokers is supervised by the Insurance and Superannuation Commission.

Main Provisions

Insurance Act 1973

Section 33 of this Act deals with the calculation of the valuation of the assets of an insurance business. It provides that the value of shares held in a related insurance company are to be reduced in accordance with the formula contained in the section. Part of the formula involves calculating the number of shares held in the related company and multiplying this by the total number of shares in the related company reduced by the greater of $1 million or 20% of its premium income. Clause 4 will amend this section to provide that the amount of the reduction will be the greater of $2 million, 20% of the premium income or 15% of its outstanding claims. The effect of the amendments will be to reduce the value of the shares in a related insurance company for the calculation of the assets value of the first insurance business. Clause 7 provides that this amendment will apply from the third financial year after 6 January 1992. As well, there will be a transitional period for the third financial year after 6 January 1992 during which the relevant figures will be $1.5 million instead of $2 million and 12.5% rather than 15% (clause 9).

Section 51 of this Act provides that where it appears to the Commissioner that an insurance business is, or is likely to become, unable to meet its liabilities, an inquiry into the business may be conducted and the business may be directed not to deal with or dispose of assets. Clause 5 will amend this section to provide that the business may also be directed that it may only deal with an assets under the terms and conditions contained in the notice given to the business.

Insurance (Agents and Brokers) Act 1984

Clause 12 will insert a new section 9A, dealing with indemnity insurance, into this Act. For a contract of indemnity insurance to be acceptable it must be accepted by the Insurance and Superannuation Commissioner and indemnify the insured at least to the extent specified in the regulations. A misrepresentation by the insured, whether innocent or fraudulent, will not allow the insurer to avoid the contract. An insurer may not cancel a contract without providing the Commissioner with notice of the intention to cancel and the reasons for the proposed cancellation. Clause 15 will amend section 19 of this Act to provide that a person is not to act as a broker unless they have an acceptable indemnity contract.

Section 11 of this Act will be amended by clause 14 to clarify the situations where an insurer will be taken to be liable for the conduct of their employee or agent even if the employee or agent acts outside their authority. The amendments clarify the following positions:

* if an agent acts for more than one insurer but only acts for one insurer in respect of a particular class of insurance, the latter insurer is liable for the acts of the agent in respect to that class of insurance whether the agent acted within their authority or not;

* if an agent acts for more than one insurer in respect of a class or classes of insurance, the insurers are jointly and severally liable in respect of the actions of the agent for those classes of insurance whether the agent acted within their authority or not;

* if an agent acts for more than one insurer in respect of a class or classes of insurance and acts outside the authority of some of the insurers but within the authority granted by other insurers, the insurers within whose authority the agent acted are liable for the acts of the agent;

* if a person is an agent for one or more insurers but is not the agent of those insurers for certain classes of insurance, the insurers will be jointly and severally liable for any policies that the agent writes even though the agent was not the agent of the insurers for that class of insurance;

* if an agent appoints a sub- agent the insurer will be liable for the actions of the sub- agent even if the agent was forbidden to appoint the sub- agent;

* if an agent acts for a life insurer and a general insurer, the general insurer will not be liable for actions of the agent in respect of life insurance.

The registration of brokers is dealt with in section 21 of this Act which will be amended by clause 17. The main changes are that the Commissioner will be given power to refuse to register a broker if they, an employee or agent are bankrupt or insolvent or if the applicant or an associated insurance intermediary have failed to abide by an obligation contained in a decision making principle formulated by the Commissioner under proposed section 41A. The amendments also provide that a broker is to provide the Commissioner with audited accounts within four months, or such longer time as allowed, of the end of each accounting period (generally a year).

Similar amendments to those contained in clause 17 will be made to section 25 which deals with the cancellation of registrations. The Commissioner will be given power to cancel or suspend a brokers registration if they, their employee or agent becomes bankrupt or insolvent, breaches an obligation or if the broker provides audited accounts during the period for which they are registered and the accounts are such that registration would have been refused had they been provided at the time of the application for registration (clause 18).

Proposed section 25C will require brokers to keep accounts that explain the transactions entered into by the broker and the brokers financial position. The maximum penalty for a breach of this requirement without reasonable excuse will be a fine of $10 000 (clause 20).

Clauses 23 to 25 will amend provisions dealing with the registration of foreign insurance agents (i.e. people who carry on business as an agent of a foreign insurer who is not registered under the Insurance Act 1973). The amendments are similar to those described above, with the exception that there is no requirement for foreign agents who operate in Australia to supply audited accounts.

Sub- section 27(9) of this Act provides that where an insurer declines to accept all or part of a risk at the end of 30 days after the premium is accepted, the person seeking the insurance is to be notified within 7 days of the end of that period that all or part of the risk has not been accepted. Clause 22 will amend this provision to provide that the money associated with that part of the risk that is declined is also to be returned within the 7 day period.

Insurance intermediaries, other than brokers, (insurance brokers operate for people seeking insurance while intermediaries also operate for insurers) who operate for more than one insurer are currently required to notify people seeking insurance which insurer they are acting for. Proposed section 33A, which will be inserted into this Act by clause 27 will require such people to notify insurers for whom they operate of the details of other insurers for whom they operate. They will also be required to notify the insurers of their intention to become an agent for additional insurers or to cancel or renew an agent agreement.

Clause 28 will insert new sections 34A to 34U into this Act that will increase the powers of the Commissioner to investigate the actions of insurance agents. The provisions are of a standard nature for investigative bodies and include power to:

* direct intermediaries to provide information;

* require intermediaries to produce documents;

* enter premises with consent or with a warrant issued by a Magistrate; and

* issue warrants by telephone.

The provisions also provide that the Commissioner and officers of the Commission are not to disclose information that has been acquired through their performance of functions under this Act except where the disclosure is:

* in the execution of functions under the Act;

* to the Minister, a court for the purposes of the Act or to a person whom, in the Minister's opinion, it is in the public interest should have that information; or

* to a Secretary or authorised officer of a Department for the purposes of advising the Minister of that Department for the purpose of making a submission connected with the administration of this Act (proposed section 34U).

Section 37 of this Act provides that money paid to an insurance agent who is not a registered broker but acts as an agent of an insurer are to be paid to the insurer as soon as reasonably practicable. Amendments contained in clause 29 provide that such funds are to be paid to the insurer within 37 days of receipt unless an exemption has been granted under proposed section 37A (see below). If an exemption is granted but ceases to be in force, the money is to be paid to the insurer within 30 days of the exemption ceasing to have effect.

Proposed section 37A allows agents who are subject to the proposed amendments to section 37 to apply to the Commissioner for an exemption from the requirements contained in the amendments, which will mean that the money must be remitted to the insurer as soon as reasonably practicable. Exemptions may be granted in relation to a class or classes of insurance, but must not be granted unless the Commissioner is satisfied:

* that the intermediary is acting under a binder from the insurer (i.e. authority to enter into insurance agreements or to settle claims); and

* it is not commercially practicable to remit the money within the timeframe contained in the proposed amendments to section 37; and

* the insurer has consented to the intermediary being granted the exemption.

The Commissioner may revoke an exemption in a number of circumstances, including where:

* the intermediary, their employee or agent has been convicted of an offence and the Commissioner is of the opinion that the offence renders the person unfit to hold an exemption;

* the intermediary, their agent or employee becomes bankrupt or insolvent;

* the insurer indicates to the Commissioner that they no longer consent to the exemption; or

* for any other reason the Commissioner considers it inappropriate for the intermediary to hold the exemption (clause 30).

Clause 32 will insert a new section 41A into this Act that provides for the Commissioner to formulate decision- making principles that are to be followed when the Commissioner is making a decision regarding the registration of a broker, the suspension or cancellation of a broker's registration or requiring an intermediary to supply information.

Proposed section 46A provides that offences against this Act are generally to be prosecuted within three years after the commission of the offence. The Attorney- General may extend this period (clause 33).

References

1. Insurance and Superannuation Commission 1992- 3 Annual Report, pp. 19- 22.

2. Ibid., p. 26.

Chris Field (06 2772439)

Bills Digest Service 22 February 1994

Parliamentary Research Service

This Digest does not have any official legal status. Other sources should be consulted to determine the subsequent official status of the Bill.

Commonwealth of Australia 1994

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Published by the Department of the Parliamentary Library, 1994.