On 1 January 2021, Schedule 7 to the Financial Sector Reform (Hayne Royal Commission Response) Act 2020 (Cth) made 'claims handling and settling services' a 'financial service' in Australia. Since 1 January 2022, carrying on a business of providing these services in Australia has generally required a person or entity to hold an Australian Financial Services Licence (AFSL) with claim handling authorisation, or to be an authorised representative of an AFSL holder with this authorisation.
A 'claims handling and settling service' is defined to include making a recommendation or stating an opinion in response to an inquiry about a claim or potential claim, making a recommendation or stating an opinion that could influence a decision about making or continuing with a claim, assessing whether an insurer is liable under an insurance product, making a decision to accept or reject all or part of a claim, quantifying an insurer's liability under an insurance product, offering to settle all or part of a claim or satisfying a liability of an insurer under a claim.
These reforms are still in their infancy and are yet to be tested by the courts. However, insurance claims handling is very much on the radar of the regulator, the Australian Securities and Investments Commission (ASIC), having been declared a 2024 enforcement priority. In its Corporate Plan 2023 – 2027 (Focus 2023 – 2024), ASIC clarifies that its focus is on claims handling practices and misconduct in general insurance, particularly in home insurance – which is unsurprising in light of its recent Report 768: Navigating the storm: ASIC's review of home insurance claims.
Notwithstanding ASIC's focus on claims practices, as opposed to licensing matters, the consequences for failure to comply with the licensing requirements are significant. Carrying on a financial services business in Australia without a necessary licence to do so is an offence that carries a penalty of up to 5 years imprisonment and/or a fine of up to $187,800 (or $1.9 million for a corporation). There are also civil penalty provisions of up to $1.6 million or 3 times the benefit obtained and detriment avoided (or for a corporation, the greater of $15.65 million, 3 times the benefit obtained and detriment avoided or 10% of annual turnover capped at $782.5 million).
Particular challenges in meeting the claims handling licensing requirements can arise for unauthorised foreign insurers looking to do business in Australia. We canvass some relevant considerations below.
Unauthorised foreign insurers doing business in Australia
Before addressing the challenges in meeting the specific insurance claims handling licencing challenges for unauthorised foreign insurers, we briefly address how these insurers can do business in Australia. Generally, an unauthorised foreign insurer is not permitted to underwrite business in Australia, but there are certain exemptions for certain types of insurance contracts. There are also AFSL licensing considerations applicable to issuing insurance.
A person or entity carrying on a general insurance business in Australia generally requires authorisation to do so from the Australian Prudential Regulation Authority (APRA). This requirement applies not just to being in Australia, but also where another person in Australia acts on behalf of a foreign insurer (directly or indirectly) and where another person acts as a broker of insurance provided by a foreign insurer, or directly or indirectly on behalf of such a broker. However, an unauthorised foreign insurer does not need to be authorised in Australia if the insurance is exempted as not being 'insurance business'. This is the case in the following situations: a contract under which at least one policyholder is a high value insured, a contract for atypical risks or a contract not otherwise referred to in the exemptions that cannot be reasonably placed in Australia. Certain classes of business cannot be written on a non-admitted basis (i.e. workers' compensation, compulsory third party motor insurance, builders warranty insurance and medical indemnity).
In addition, to issue a contract of general insurance, generally the person or entity must have an AFSL or must be an authorised representative of an AFSL holder. This is because 'dealing' in general insurance products is a 'financial service'. However, these options may not be practical or appropriate for an unauthorised foreign insurer. It may be possible for the unauthorised foreign insurer to rely on the exemption in section 911A(2)(b) of the Corporations Act 2001 (Cth), that applies where the insurance contract is provided through an intermediary (i.e. broker for the insured or an agent of the insurer) which holds an AFSL covering dealing in general insurance products.
Provision of insurance claims handling in Australia
As with dealing in general insurance products, providing a 'claims handling and settling service' is a 'financial service' which generally requires holding an AFSL with a claims handling authorisation, or being an authorised representative of an AFSL holder with this authorisation. Unauthorised foreign insurers who do business in Australia typically look to the engage one of a number of limited exemptions to overcome these requirements, however their application must be considered carefully. We identify some of the key challenges as follows:
Using a local Australian law firm
Some unauthorised foreign insurers may look to use Australian lawyers to provide insurance claims handling services. It can be problematic to rely on the exemption for professional legal services provided by a lawyer in a professional capacity relating to insurance claims handling, provided in section 911A(2)(en) of the Corporations Act 2001 (Cth). This is because this exemption is not intended to cover lawyers in respect of all possible functions they may perform in relation to insurance claims handling.
The Explanatory Memorandum introducing this provision confirms that if a lawyer provides services which are not in their professional capacity as a lawyer (e.g. deciding whether an insurance claims should be fulfilled) then they may be required to hold an AFSL for claims handling. Without an AFSL, a lawyer can advise about matters of law or application of the law to the facts, provide advice that is a necessary part of being a lawyer, determine liability and quantum, negotiate a claim or any conduct of the lawyer where acting on the client's instructions.
Using another local Australian intermediary
An insurer can outsource the entirety of the claims handling process to another type of intermediary (i.e. claims manager). However, that intermediary must hold an AFSL with claims handling authorisation or be an authorised representative of an AFSL holder with such authorisation. A difficulty arises if the intermediary does not meet these requirements.
An exemption that is commonly considered is found in section 911A(2)(a) of the Corporations Act 2001 (Cth), which permits a 'representative' (i.e. anyone acting on behalf of a person) to not hold an AFSL in respect of providing claims handling on behalf of a second person who carries on a financial services business (i.e. foreign insurer). However, this exemption has a critical proviso that the second person must either hold an AFSL with a claims handling authorisation or must meet one of the other exemptions. The representative would need to comply with section 911B(1)(e) of the Corporations Act 2001 (Cth), which means the representative can only provide the services on behalf of that second person if that second person would be exempt from the requirement to hold an AFSL pursuant to one of the other exemptions. Simply put, if the intermediary is not an AFSL holder or authorised representative, the intermediary cannot provide claims handling unless the foreign insurer itself holds an AFSL or meet the requirements of an exemption.
A separate challenge arises if the claims handling services are provided by an intermediary, but the unauthorised foreign insurer seeks control over or participates in claims handling. In such a situation, the insurer must hold an AFSL, be an authorised representative or an exemption must apply.
One exemption that may be relevant is found in section 911A(2)(el) of the Corporations Act 2001 (Cth) and regulation 7.6.01AAAB of the Corporations Regulations 2001 (Cth), which provides that the foreign insurer can provide claims handling services in relation to a retail client insurance claim, if the foreign insurer has an arrangement with an intermediary that covers claims handling and the intermediary holds an AFSL. Under the arrangement, the AFSL holder must be permitted to provide the claims handling and settling service, and importantly, either the intermediary or the foreign insurer must hold an AFSL which covers claims handling. This exemption is intended to apply to claims handling services provided by the foreign insurer, on the basis that the intermediary holds an AFSL covering claims handling.
Another exemption is found in section 911A(2)(em) of the Corporations Act 2001 (Cth), and provides that an insurer can provide claims handling services in relation to a wholesale client insurance claim, if the insurer has an arrangement with an intermediary that is an AFSL holder. Again, this exemption is intended to apply to claims handling services provided by the foreign insurer, not the intermediary.
An unauthorised insurer is unlikely to be able to rely on the exemption in section 911A(2)(g) of the Corporations Act 2001 (Cth), because that exemption would only apply if the foreign insurer were regulated by APRA, and the service (i.e. claims handling) is one in relation to which APRA has regulatory or supervisory responsibilities and the service is only provided to wholesale clients. Even if the claims handling was in relation to wholesale clients, an unauthorised foreign insurer is not regulated by APRA. Also, claims handling is unlikely to be a service for which APRA has regulatory or supervisory responsibilities, given that APRA regulates insurers' prudential stability, whereas ASIC regulates licensing to provide financial services.
For more information, please contact our team
