Explanatory MemorandumCirculated By the Authority of the Treasurer, the Hon Wayne Swan Mp
Policyholder compensation facility
Outline of chapter
2.1 Schedule 1, Part 2 of the Bill amends the Insurance Act 1973 (Insurance Act) to establish the Policyholder Compensation Facility (PCF).
2.2 The PCF provides eligible general insurance policyholders with timely access to funds owing as a result of an insurance claim in the event of a failure of a general insurer.
2.3 As part of the Financial Claims Scheme (FCS), the PCF complements, the Early Access Facility for Depositors (EAFD).
2.4 The PCF facilitates the efficient management of a general insurance failure.
2.5 The Australian Prudential Regulation Authority (APRA) will administer the PCF and will be responsible for ensuring that any payments are made in accordance with the legislation establishing the scheme and for arranging for the scheme's claims to be pursued in liquidation.
2.6 APRA's costs of administration will be recoverable through the scheme.
2.7 The PCF provides a mechanism that supports the 'retail end' of the general insurance market, covering individuals, small businesses and not-for-profit organisations. It is not intended that the PCF would provide compensation where an Australian general insurer provides cover on a cross-border basis to foreign persons or entities.
2.8 All risk mitigation products offered by general insurers, including the Australian branch of an authorised foreign general insurer, are covered by the PCF.
2.9 Insurance mandated by State and Territory governments (such as compulsory third party motor vehicle and workers' compensation insurance) is excluded from coverage by the PCF on the basis that protections already exist for these policyholders under State and Territory law. In some cases States and Territories also impose levies to fund such schemes, as well as undertaking various levels of prudential supervision.
2.10 Consistent with the coverage of the HIH Claims Support Scheme, the following insurance related products will also be excluded:
- insurance provided by unauthorised foreign insurers (as defined in Regulation 4 of the Insurance Regulations 2002 ); and
- insurance-like products (for example, those products offered by discretionary mutual funds).
2.11 In contrast to the EADF, the PCF will rely primarily on focused eligibility criteria to protect against moral hazard. Access to benefits under the PCF will be limited to specific classes of policyholders:
- individuals who are Australian citizens or permanent residents or non-resident individuals who have insured against risks in Australia with an APRA-regulated general insurer;
- small businesses as set out in sub division 328-C of the Income Tax Assessment Act 1997 (in broad terms a 'small business' for the purposes of this legislation is a business with annual aggregated turnover of less than $2 million);
- family trusts which own property for private and residential purposes or for a qualifying small business; and
- Australian-based non-profit organisations.
2.12 Because of the operation of these eligibility requirements, a number of policyholders, including the largest policyholders such as large corporations, will not be covered by the PCF. Those policyholders that do not meet the PCF eligibility requirements will be eligible to recover any funds owing to them in the normal course of the liquidation of the general insurer.
2.13 As a result of their exclusion from the PCF, these policyholders will continue to have strong incentives to monitor the health and stability of their general insurance company and assess the counterparty risk that might impact on the value of their insurance coverage. The imperative of winning and keeping these clients will impose market discipline on general insurers and mitigate any moral hazard being created by the PCF.
2.14 In addition, the PCF will not compensate policyholders for the loss of unexpired premiums. This is consistent with the arrangements under the HIH Claims Support Scheme.
2.15 However, in the interests of administrative simplicity, claims up to $5,000 will not be subject to the eligibility criteria.
Context of amendments
2.16 Australia has had limited experience with financial institution failure despite exposure to international instability. When failures have occurred the response has been ad hoc.
2.17 While Australia's prudential regulatory framework includes arrangements to minimise the risk of failure and to assist in managing failures where they occur, there are currently no explicit, predetermined arrangements for assisting policyholders in the event a general insurer fails.
2.18 The failure of the HIH Group of Companies (HIH) in 2001 revealed significant gaps in the crisis management framework.
2.19 The failure cost the Australian Government (the Government) an estimated $861 million, with the Government likely to recover only 25 to 30 per cent in liquidation. The total cost of the HIH failure is around $5 billion.
2.20 The management of the HIH failure was complicated by the delay in establishing and commencing payments under the HIH Claims Support Scheme as well as by the complex eligibility criteria and entitlements which varied across different lines of insurance.
2.21 Schemes similar to that introduced by the Bill are common in developed economies.
2.22 Standing arrangements to assist policyholders have been considered in a number of forums since the HIH collapse, including the HIH Royal Commission report, a report on Financial System Guarantees in 2004, as well as by the Council of Financial Regulators and the International Monetary Fund (IMF).
2.23 The 1997 Financial System Inquiry ('the Inquiry') noted the need for specialised regulation of financial institutions due to the complexity of financial products, the nature of promises made and the adverse consequences to consumers where those promises were breached. Following the Inquiry and the HIH Royal Commission Report, the prudential regulatory framework was strengthened for general insurance.
Summary of new law
2.24 The amendments establish the PCF and provide the framework for activating the PCF, determining and making payments to eligible policyholders and recovering funds in liquidation where possible.
2.25 APRA is the PCF administrator.
Comparison of key features of new law and current law
|New law||Current law|
|Provides for Government assistance to eligible policyholders in the event of a general insurer's failure.||Policyholders' claims against a failed insurer are pursued in the liquidation process.|
|APRA is responsible for administering the scheme|
|The PCF will be activated via a Ministerial determination which will include an appropriation for up to $20 billion for payments to policyholders and $100 million for administration purposes.||Assistance for policyholders of a failed insurer has been ad hoc and there is no standing arrangement in current law.|
|Policyholders will only be eligible for assistance if they are covered by a 'protected policy', meet the criteria set out in regulations, and are not excluded by a determination under the scheme legislation.|
|Eligible policyholders will be paid the full amount of a claim for which the declared general insurer is liable.|
|A policyholder's rights against the failed insurer are automatically assigned to APRA, to the extent that APRA pays out that liability under the PCF.|
Detailed explanation of new law
Administration of the PCF
2.26 APRA is the administrator of the PCF, should it be activated, and the Bill recognises the addition of this role to APRA's mandate by amending the Objects of the Insurance Act. [Schedule 1, Part 2, Item 19, Paragraph 2A(2)(f)]
Activation of the PCF
2.27 The PCF is intended to ensure that eligible individuals, not for profit organisations and small businesses with valid insurance claims are protected in the event that their general insurer fails. APRA would pay those persons the amount they are entitled to before they would receive any payment in the winding up of the general insurer, and in return APRA would take those persons' places as creditors in the liquidation of the general insurer. [Schedule 1, Part 2, Item 27, Section 62ZW]
2.28 As well as being responsible for making early payments to claimants under the PCF, APRA will assist the Minister in preparing for the activation of the scheme. [Schedule 1, Part 2, Item 27, Section 62ZX]
2.29 The PCF will be activated by a Ministerial declaration which would relate to a specified general insurer or foreign general insurer. [Schedule 1, Part 2, Item 27, Section 62ZZC(1)]
2.30 Before the Minister can make a declaration, the general insurer must be under judicial management under Division 1 of Part VB of the Insurance Act (see Part 1 of Schedule 3 of the Bill), and APRA must have advised the Minister that it believes the general insurer to be insolvent (or in the case of a foreign general insurer, APRA must have advised that it believes that it is unable to pay, from its Australian assets, all its Australian debts and liabilities other than pre-authorisation liabilities, when those debts become due and payable). [Schedule 1, Part 2, Item 27, Subsection 62ZZC(1) and 62ZZE]
2.31 Because the PCF is intended to respond to specific circumstances around the failure of a particular insurer, the Ministerial declaration must specify a general insurer individually and may not specify insurers by reference to a class of general insurers.
2.32 In declaring that Division 3 should apply in relation to a specific general insurer, the Minister will be required to specify the amount to be credited to the Financial Claims Scheme Special Account.
2.33 At the time of declaration, the Minister will specify the amounts to be credited to both the Financial Claims Scheme Special Account and the APRA Special Account. The amounts credited will be based on an assessment by the Minister of the likely costs of, respectively, the policyholder entitlements to be met and the administration costs of the scheme. This assessment will be based upon, among other things, advice from APRA, ASIC and the Reserve Bank of Australia (RBA).
2.34 The amount to be credited to the Financial Claims Scheme Special Account must not be greater than $20,000,000,000. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(2)]
2.35 The funds credited to the Financial Claims Scheme Special Account will only be available to meet entitlements to be paid out under Division 3.
2.36 The amount to be credited to the APRA Special Account must not be greater than $100,000,000. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(3)]
2.37 Funds credited to the APRA Special Account will only be available to meet the costs of the administration of this Part in relation to a declared general insurer.
2.38 There is scope for the Minister to amend the declaration of a general insurer, but only in relation to the amounts specified to be credited to either the Financial Claims Scheme Special Account or the APRA Special Account or both. The Minister does not have the ability, under the legislation, to amend the declaration with regard to the financial institution for which the Scheme is being invoked. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(4)]
2.39 Although the amounts specified in the declaration may be altered, there is no scope for a Minister to revoke a declaration. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(5)]
2.40 A high level of certainty is necessary with respect to the 'triggering' of the PCF. Disallowance of the Minister's declaration, possibly many weeks after the commencement of PCF operation, would create substantial uncertainty to affected policyholders, the declared general insurer and its liquidator and APRA. Automatic sunsetting of the Minister's declaration may disrupt the conduct of litigation relating to insurance claims covered by the PCF, even if it occurs many years after the declaration. As a result, subsection 62ZZC(6) declares that section 42 (disallowance) and Part 6 (sunsetting) of the Legislative Instruments Act 2003 do not apply to the Minister's declaration or an amendment to it. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(6)]
2.41 Because of the need for prompt action in response to a financial institution failure, and the need to ensure those with an entitlement under the PCF are paid without delay, the declaration of a general insurer or the amendment of such a declaration will take effect from the time they are made, rather than from the time they are registered on the Federal Register of Legislative Instruments. [Schedule 1, Part 2, Item 27, Subsection 62ZZC(7)]
2.42 The exclusion of a declaration under this Part from the effect of subsections 12(1) and 12(2) of the Legislative Instruments Act 2003 is necessary to ensure that delays in the registration of an instrument in the Federal Registry of Legislative Instruments does not delay the provision of assistance to policyholders in the event of a general insurance collapse.
2.43 The timeliness of assistance under the PCF will be particularly relevant to policyholders who may be receiving payments under a salary continuance policy or similar arrangement, who would be reliant on continuing regular payments to provide funding for their day-to-day living expenses.
Advice and information for making a declaration
2.44 Prior to taking any decision about making a declaration in relation to a general insurer, the Minister may seek information relevant to making that decision from APRA, ASIC or the RBA.
2.45 A request for advice should be made in writing and can relate to any matter relevant to making a declaration, including matters that are relevant to the affairs of a general insurer. [Schedule 1, Part 2, Item 27, Subsection 62ZZD(1)]
2.46 APRA has an explicit power to advise the Minister on its belief of the solvency or otherwise of a general insurer. [Schedule 1, Part 2, Item 27, Section 62ZZE]
2.47 Secrecy provisions in Part 6 of the Australian Prudential Regulation Authority Act 1998 , section 127 of the Australian Securities and Investments Commission Act 2001 and sections 79A and 79B of the Reserve Bank Act 1959 should not be taken to prevent APRA, ASIC or Reserve Bank staff or members from providing information to the Minister as required by sections 62ZZD and 62ZZE. [Schedule 1, Part 2, Item 27, Sections 62ZZD and 62ZZE]
2.48 Once a written request has been made by the Minister, agencies must respond as soon as is reasonably practical by providing the relevant advice to the Minister. [Schedule 1, Part 2, Item 27, Subsection 62ZZD(2)]
2.49 The purpose of the provision of information is to inform the Minister about the financial status of the general insurer in question, whether it is likely to be in a position to meet its liabilities and whether it is appropriate that the PCF be activated in relation to the general insurer in question.
2.50 While the Minister must take into account the advice or information that he or she receives, if any, the advice and information provided in no way limits what the Minister may take into account in making the decision. [Schedule 1, Part 2, Item 27, Section 62ZZD(3)]
2.51 The failure of agencies to provide advice in a timely fashion in response to a request from the Minister should not in anyway limit his or her ability to make a declaration with regard to a general insurer.
2.52 The Bill creates a category of policy which is eligible for coverage under the PCF. These policies have been termed 'protected policies'.
2.53 A protected policy will be determined by reference to regulations which will set out those types of policies which will not be eligible for coverage under the PCF. [Schedule 1, Part 2, Item 26, definition of 'protected policy' in subsection 3(1)]
2.54 This mechanism will ensure that the PCF is targeted to those individuals and businesses least able to assess risk and promote market discipline by those excluded from the scheme.
2.55 The flexibility of designating those policies which will not be considered 'protected policies' through regulation is important to allow for the scheme to be responsive to developments in the industry and in the public's usage of general insurance products.
2.56 In the initial stages of the PCF's implementation it is intended that mandated lines of insurance not be covered by the scheme where they are already protected through arrangements administered by the State and Territory Governments. This may mean the exclusion of compulsory third party motor vehicle insurance, workers' compensation and builders' warranty insurance in a number of States and Territories.
2.57 Although it is not proposed that the scheme would cover lines of insurance where duplicated protection is provided under State and Territory law, these lines of insurance could be brought into the scheme under an appropriate agreement with the States and Territories.
2.58 By providing that the scope of the term 'protected policy' can be altered by regulation, such changes will be able to occur in a timely manner.
2.59 It is intended that under the regulations, reinsurance and retrocession will be excluded from the definition of 'protected policy'.
2.60 Reinsurance and retrocession are not defined in the Insurance Act 1973 . It is intended that reinsurance will be taken to mean a transaction whereby one insurance entity (the 'reinsurer') agrees to indemnify another insurance entity (the 'cedent') against all or part of the loss that the latter sustains under a policy or policies which it has issued. Retrocession will be taken to mean a transaction whereby one insurance entity (the 'retrocessionaire') agrees to indemnify another insurance entity (the 'reinsurer') against all or part of the loss that the latter sustains under a policy or policies of reinsurance that it has issued.
Lodging claims under the PCF
2.61 Under the PCF, claimants are required to apply for assistance, providing sufficient information for APRA to assess the claim against the PCF's eligibility criteria.
2.62 Section 62ZZB will give APRA the power to approve forms for the purposes of making applications to the PCF. [Schedule 1, Part 2, Item 27, Section 62ZZB]
2.63 As outlined in Item 5 of Part 1 of Schedule 1 to the Legislative Instruments Regulations 2004 , approval of a form is not a legislative instrument.
Entitlement to claim under the PCF
2.64 To be entitled to make a claim under the PCF a person must have a claim under an insurance policy issued by an insurer which has become a declared general insurer. This claim may arise because the policy in question provides cover to the person, or because the person is otherwise entitled to claim under the cover, for example, if that person has legal 'cut-through' rights to payment from the insurer such as those available under section 51 of the Insurance Contracts Act 1984 . [Schedule 1, Part 2, Item 27, Section 62ZZF(1)]
2.65 A time period during which a person is required to make a claim will be prescribed by regulations. [Schedule 1, Part 2, Item 27, Subparagraph 62ZZF(1)(b)(i)]
2.66 For the purposes of determining the time period during which valid claims can be lodged under the PCF, APRA may specify a later day than the day on which the end of the period is prescribed by regulation. [Schedule 1, Part 2, Item 27, Subparagraph 62ZZF(1)(b)(ii)]
2.67 Applicants will only be entitled to payment of claims under the PCF if they make a claim in the prescribed manner during the period which is prescribed in the regulations, or during the additional time specified by APRA. Persons whose claims are made outside this time period will not be eligible for coverage under the PCF.
2.68 Entitlement to the provision of assistance under the PCF is limited to policyholders who meet specified eligibility criteria.
2.69 It is intended that eligibility criteria be set so as to include those policyholders least able to effectively assess the prudential stability of the general insurers with whom they deal. Other policyholders will be eligible to recover claims in the normal course of liquidating the insurer.
2.70 In general terms, these groups would include individuals, small businesses, some family trusts and not-for-profit organisations.
2.71 To ensure that the PCF, whenever it might be activated, continues to cover appropriate classes of policyholders, the eligibility criteria will be specified in regulations. [Schedule 1, Part 2, Item 27, Paragraph 62ZZF(3)(b)]
2.72 Initially these regulations will limit eligibility to:
- individuals who are Australian citizens or permanent residents or non-resident individuals who have insured against risks in Australia with an APRA-regulated general insurer;
- small businesses as defined in sub division 328-C of the Income Tax Assessment Act 1997 ;
- family trusts which own property for private and residential purposes or for a qualifying small business; and
- Australian-based not-for-profit organisations.
2.73 By setting eligibility criteria through regulation these criteria can be updated as needed to ensure that, as much as possible, they remain aligned with similar definitions of small business in other legislation and that they are consistent with eligibility criteria set for other relevant programs.
Fast-track for low value claims
2.74 To allow for the rapid assessment and payment of low-value claims, and to limit the likelihood that the cost of determining eligibility under the PCF will exceed the value of the claim in question, APRA will not be required to test the eligibility of claims where the amount of the liability in respect of the claim is less than $5,000. [Schedule 1, Part 2, Item 27, Subsection 62ZZF(2)]
2.75 In such cases, the claimant will be entitled to be paid, by APRA, an amount equal to the insurer's liability to the person in respect of the claim.
2.76 Claimants are not eligible for a payment unless APRA has determined that the insurer is liable to pay the claimant in respect of the claim, nor are they eligible if the claimant is a member of a class of policyholder or insured which has been excluded from the PCF by a determination of the Minister under section 62ZZ. [Schedule 1, Part 2, Item 27, Paragraph 62ZZF(1)(d)]
2.77 APRA is responsible for determining both whether the declared general insurer has liability with respect to the person's claim as well as the amount of the claim and whether the claim should be paid out under the fast-track procedures, or whether it is necessary to test the claimant's eligibility with respect to the eligibility criteria.
2.78 The fast-track provisions are intended to streamline the process of paying claims. It is expected that in many cases a significant proportion of the claims arising due to policies issued by the declared general insurer will fall below the $5,000 limit and be eligible for the fast-track.
Treatment of third parties
2.79 The only circumstances where third-parties, other than persons who are covered under a policy, are eligible to claim is where they would normally have a legal right to claim directly from an insurer although they are not the insured or the policyholder.
2.80 Such rights to claim are generally referred to as 'cut-through' rights. Section 51 of the Insurance Contracts Act 1984 sets out the requirements for a person to have 'cut-through' rights.
2.81 APRA will be required to determine whether it is satisfied that the person applying to recover funds from the declared insurer meets the requirements of section 51 of the Insurance Contracts Act 1984 . [Schedule 1, Part 2, Item 27, Paragraph 62ZZJ(4)(a)]
2.82 This determination should be made in writing as soon as is reasonably practicable after the application is made.
2.83 APRA must also determine what the amount to be recovered, if any, is. [Schedule 1, Part 2, Item 27, 62ZZJ(4)(b)]
2.84 If APRA determines that a person would be permitted to recover an amount from a general insurer under the provisions of the Insurance Contracts Act 1984 , that is, that the person has a 'cut-through' right, then that person may be eligible for coverage under the PCF as a third-party. [Schedule 1, Part 2, Item 27, Section 62ZZG(1)]
2.85 A person who belongs to a class of persons which has been excluded from coverage under a determination by the Minister, under section 62ZZ, is not eligible to recover an amount under the scheme as a third party.
2.86 The fast-track process also applies to claims made by third parties, that is, where the recoverable amount is determined by APRA to be less than $5,000, the person is entitled to be paid without meeting the eligibility criteria established in the regulations. [Schedule 1, Part 2, Item 27, Subsection 62ZZG(2)]
2.87 However, where the recoverable amount is determined by APRA to be $5,000 or more, eligibility criteria, prescribed by regulation, will apply. [Schedule 1, Part 2, Item 27, Subsection 62ZZG(3)]
2.88 It is intended that the eligibility criteria prescribed by regulation for the purposes of subsection 62ZZG(3) will correspond to those established for subsection 62ZZF(3).
2.89 By setting eligibility criteria through regulation these criteria can be updated as needed to ensure that, as much as possible, they remain aligned with similar definitions of small business in other legislation and that they are consistent with eligibility criteria set for other relevant programs.
2.90 The intent of the eligibility criteria is to target the assistance provided by the PCF to those groups most likely to be in greatest hardship.
Determining claims under the PCF
2.91 In the event of a general insurer's failure there are likely to be certain classes of policyholders or insureds with a greater knowledge of and/or involvement in the events leading to the failure.
2.92 These policyholders would be in a very different position from the general body of policyholders who are unlikely to be well placed to determine the counterparty risks they are taking on by doing business with the insurer.
2.93 Section 62ZZ will allow the Minister to exclude by determination certain classes of policyholders and insureds from the scheme. [Schedule 1, Part 2, Item 27, Section 62ZZ]
2.94 It is intended that this power allow the Minister to exclude from benefiting from the scheme those persons with direct knowledge of or involvement in the events leading to the failure of the insurer, such as directors and officers of the failed insurer, their families and associates. Unlike the intended beneficiaries of the PCF, these policyholders are well placed to assess and avoid the counterparty risks of dealing with the general insurer.
2.95 This approach was also taken under the HIH Claims Support Scheme, which deemed as ineligible anyone who was, at any time in the three years prior to the collapse, a director or officer of HIH (as defined in the Corporations Act 2001 ) or in a position to influence or to provide advice to any of the directors or officers of any company in the group on any matter related to corporate governance.
2.96 The power given to the Minister by section 62ZZ is deliberately flexible to account for the wide range of possible circumstances surrounding a general insurance failure and the need to be able to exclude the relevant classes of policyholders depending on these circumstances.
2.97 Detailing the various classes of policyholders to be excluded as part of the primary legislation, or in regulations to be proclaimed before the time of a failure, would present a real risk of either including or excluding classes of policyholders on a basis which is not relevant given the circumstances of the particular failure.
2.98 A similar ability to impose broad conditions on a grant of compensation for financial loss is available to the Minister in paragraph 233(1)(d) of the Superannuation Industry (Supervision) Act 1993 .
2.99 There a risk that individuals with knowledge of an insurance company's financial situation, who expect the scheme to be activated could seek to exploit the PCF by taking actions primarily for the purposes of receiving a payment from the scheme through a third party.
2.100 To help prevent any intentional action specifically designed to lead to payment under the PCF, section 62ZY gives APRA the power to determine that a policy not be eligible for coverage under the scheme if it is reasonable to conclude, from the nature of the policy and/or the circumstances in which it is issued, that the policy was issued primarily to make the policyholder eligible for a payment under the PCF. [Schedule 1, Part 2, Item 27, Section 62ZY]
2.101 Where a person makes a claim under the PCF, within the prescribed time period, relating to a protected policy issued by a general insurer which has been declared by the Minister, APRA will be responsible for determining whether the declared insurer has a liability to a claimant. APRA is also responsible for determining the amount of the liability, if any. [Schedule 1, Part 2, Item 27, Section 62ZZI]
2.102 It is intended that APRA determines the insurer's liability under the insurance policy according to the terms and conditions of the contract of insurance, taking into account the limitations of the policy, any exclusions, any deductible amounts or excesses and any limits on the amount of the liability.
2.103 The determination APRA is required to make is in the nature of determining a contractual liability. APRA is not required to make a determination on compensation based on any other criteria, such as fairness or hardship.
2.104 Where APRA makes a determination of an insurer's liability under section 62ZZI, the determination is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 .
2.105 Once a policyholder or insured person applies to APRA as the scheme administrator for assistance, using the form approved by APRA, APRA must determine in writing whether the person meets the eligibility criteria outlined in the regulations. [Schedule 1, Part 2, Item 27, Section 62ZZJ]
2.106 APRA must make this written determination as soon after the lodgement of the application as is practicable.
2.107 In cases where the applicant is a third-party seeking to exercise 'cut-through' rights to be paid under a policy, APRA must determine in writing whether it is satisfied that section 51 of the Insurance Contracts Act 1984 permits the person to recover an amount from the declared general insurer, and how much that amount is, if any.
2.108 Where APRA makes a determination of an insurer's liability under section 62ZZI, the determination is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 .
2.109 Where APRA makes a written determination about a claimant's eligibility under the PCF, or whether they would be permitted to seek cut-through rights to payment, APRA must provide the applicant with a copy of the determination as soon as is practicable. [Schedule 1, Part 2, Item 27, Subsection 62ZZJ(5)]
Allowing extra time for claims
2.110 For the benefit of the creditors of the failed insurer, and in the interests of reducing the administration costs of the scheme, the period during which claims may be made against the scheme will be limited.
2.111 APRA will be able to specify in writing the date on which the period for making claims for assistance under the scheme will end. [Schedule 1, Part 2, Item 27, Subsection 62ZZA(1)]
2.112 The period during which applications will be accepted can be set for particular policies or for policies generally.
2.113 Where APRA makes an instrument under subsection 62ZZA(1) which relates to a single identified policy, the instrument will not be a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 1, Part 2, Item 27, Subsection 62ZZA(2)]
2.114 However, instruments made by APRA under subsection 62ZZA(1) which do not specify a single identified policy would otherwise meet the meaning of section 5 of the Legislative Instruments Act 2003 . [Schedule 1, Part 2, Item 27, Subsection 62ZZA(3)]
Notionally extended cover
2.115 In the event of a general insurance failure, with a failed company unable to meet its claims or write new policies, a degree of hardship will be caused to both those with claims on foot, or potential claims, and those whose cover is now in question, who will need to seek replacement cover.
2.116 If the decline and failure of the general insurer occurs rapidly, some policyholders may not be in a position to seek out replacement coverage immediately. If the failing general insurer cancels the policy in question, or the policy renewal falls due and the insurer does not renew the policy as expected, a range of persons who had fully intended to insure a certain risk may be left without coverage.
2.117 To provide protection in such cases, the PCF provides for notionally extended cover such that coverage will continue, under the terms of the policy, for a period of 28 days after the time the general insurer becomes a declared general insurer. [Schedule 1, Part 2, Item 27, Section 62ZZH]
2.118 This notional coverage will be provided on the same terms as the coverage being provided by the policy that preceded it, with the same limits, exclusions, and deductible or excess amounts. The coverage will be deemed to be extended, even if the policy is cancelled within the 28-day grace period or the period of cover would otherwise have ended during the 28-day grace period.
2.119 This section does not extend the declared insurer's liability beyond its existing liability by forcing an alteration of the contract terms or by preventing the cancellation of the policy. The notional coverage provided by the section 62ZZH is only for an entitlement to be paid under the PCF.
Methods of payment
2.120 A person's entitlement under the PCF may be:
- paid by APRA to the person as a single amount or in instalments determined by APRA;
- applied, as a single amount or in instalments determined by APRA, for the person's benefit; or
- paid, in part, to the person by APRA with the remaining entitlement applied for the person's benefit.
2.121 Regulations may be prescribed specifying ways in which a person's entitlement under the PCF may be met. [Schedule 1, Part 2, Item 27, Section 62ZZK]
Recovery in liquidation
2.122 As scheme administrator, APRA will initially seek to recover the costs of operating the PCF, both in terms of the payouts to claimants and the administration costs, through the liquidation of the declared general insurer.
2.123 To allow APRA to recover these funds, the rights of claimants against the declared insurer will be transferred to APRA. APRA will then stand in the shoes of the claimant in the liquidation process. [Schedule 1, Part 2, Item 27, Section 62ZZL]
2.124 The transfer of rights will be taken to have occurred at the time at which APRA makes the last necessary determination related to the claimant's entitlement.
2.125 The legislation does not alter the priority in liquidation for a general insurer. APRA, as a creditor in the liquidation of a declared general insurer, will have the same priority as the claimant would have had if the transfer had not occurred.
2.126 Claimants, being eligible for a payment from the PCF equivalent to their entitlement to claim from the insurer, will have been fully compensated for the rights which are transferred to APRA.
2.127 Acting as scheme administrator will involve significant costs for APRA. These costs will be initially funded by an appropriation credited to the APRA Special Account under subsection 62ZZC(3).
2.128 APRA will then seek to recover these costs through the liquidation where possible.
2.129 Costs incurred by APRA in relation to the administration of the PCF in relation to a declared general insurer are to be taken as a debt due by the declared general insurer to APRA. [Schedule 1, Part 2, Item 27, Section 62ZZU]
2.130 The debt will be admissible in the liquidation of the declared general insurer and will have the same priority in the winding up as a claim relating to amounts owed as a result of a contract of insurance with the declared general insurer.
Transfers of other rights
2.131 Although the rights a successful PCF claimant has against the declared general insurer become APRA's rights, allowing recovery in liquidation, other rights the claimant may have that are relevant to the claim are not transferred to APRA.
2.132 In particular, any rights an insured person may have against a third party in relation to causing the insured losses are not transferred to APRA.
2.133 Normally, such rights would be transferred to the insurer through subrogation, assignment or abandonment once the party had been paid the indemnified loss under their insurance contract.
2.134 Because the payment of the indemnified loss, in the case of a declared general insurer, would be made by the PCF rather than by the insurer, the operation of the PCF could disrupt the normal transfer of these rights. In some circumstances it could mean that a person would have been fully compensated for the loss through a payment from the PCF, but still have rights against a third party.
2.135 To resolve this issue, the payment to an applicant of their entitlement under the PCF will be taken to be a payment from the general insurer under the protected policy for the purposes of these transfers of rights (subrogation, assignment or abandonment). [Schedule 1, Part 2, Item 27, Section 62ZZM]
2.136 The intent is that rights available through subrogation, assignment or abandonment would be available to the insurer, which may be in liquidation, and that the liquidator could then pursue those rights as appropriate, with any successful recoveries adding to the funds available in the liquidation.
2.137 APRA would be a creditor in the liquidation and would benefit from these increase recoveries in proportion to its size relative to other creditors.
APRA to ensure it is aware of claims
2.138 APRA is to take all reasonable steps to ensure that it is aware of the making of a claim described in section 62ZZI within the required period specified by paragraph 62ZZF(1)(b). This will assist in ensuring that APRA's determination of claims occurs as quickly as possible. [Schedule 1, Part 2, Item 27, Section 62ZZN]
Requiring assistance and obtaining information from general insurers
2.139 APRA may require assistance from the declared general insurer (or another general insurer) or the liquidator of the declared general insurer (or another liquidator) to perform its functions or exercise its powers in administering the PCF. APRA must make this request in writing. [Schedule 1, Part 2, Item 27, Section 62ZZO]
2.140 APRA will require information from a declared general insurer (or another general insurer) or the liquidator of the declared general insurer (or another liquidator) so that it is able to assess the validity of claims and the extent of the coverage provided under protected policies. APRA must make this request in writing. [Schedule 1, Part 2, Item 27, Subsection 62ZZP]
2.141 Specifically, APRA requires information to:
- identify persons who may have a claim against the failed general insurer as a result of coverage by a protected policy;
- determine whether an applicant for assistance has an entitlement under the PCF;
- determine the amount of that entitlement; and
- meet a person's entitlement, either by payment to that person or otherwise.
2.142 APRA can also seek information for preparatory purposes. For example, APRA may seek information to determine whether a general insurer would be able to provide (in a timely way and in a useable format) the information APRA would need for it to be able to administer the PCF if it were activated in relation to that insurer. APRA may also seek information to develop its own systems to be able to administer the PCF if it were activated. [Schedule 1, Part 2, Item 27, Paragraph 62ZZP(4)(e)]
2.143 In seeking to meet its obligations, APRA may obtain personal information. [Schedule 1, Part 2, Item 27, Paragraph 62ZZP(3)]
2.144 The requested information can be required to be given to APRA, an APRA member, an APRA staff member who has relevant responsibilities, a person to whom APRA has delegated responsibilities under Part VC or a person who is an officer or employee of the person to whom responsibilities have been delegated. [Schedule 1, Part 2, Item 27, Subsection 62ZZP(2)]
2.145 Section 62ZZQ imposes substantial civil and criminal penalties on a general insurer that fails to comply with APRA's request for assistance or for information. The maximum fine for a general insurer is 200 penalty units. The maximum civil penalty for a general insurer is 10,000 penalty units. [Schedule 1, Part 2, Item 27, Subsections 62ZZQ(1) and (2)]
2.146 Part 2.4 of the Criminal Code and clause 3 of Schedule 1 to the Insurance Act extend that criminal liability and civil liability, respectively, to persons who:
- aid, abet, counsel or procure a contravention of an offence or civil penalty provision;
- induce, whether by threats or promises or otherwise, a contravention of an offence or a civil penalty provision;
- conspire with others to effect a contravention of an offence or a civil penalty provision.
2.147 In addition, a person who is in any way, directly or indirectly, knowingly concerned in or party to, a contravention of a civil penalty provision is also deemed to have contravened that provision.
2.148 A person who attempts to commit an offence or procures the commission of an offence by an innocent agent also commits an offence.
2.149 Subsection 62ZZQ(4) also makes it an offence for an officer of a general insurer to fail to take reasonable steps to ensure the general insurer complies with APRA's requirements. The maximum fine is 50 penalty units. [Schedule 1, Part 2, Item 27, Subsections 62ZZQ(4)]
2.150 These substantial criminal and civil penalties are required because assistance and information from general insurers is likely to be vital for the effective implementation of the PCF in a timely way.
2.151 The offences that apply to officers of a general insurer are continuous offences to encourage the provision of assistance and information necessary to implement the scheme in a timely way. The offences are indictable offences due to the serious nature of non-compliance and to ensure a link to 'fit and proper' and other requirements that apply to auditors and officers in senior positions of prudentially regulated financial institutions.
2.152 A liquidator is subject to the regime for non-compliance under the Corporations Act if they fail to comply with APRA's requirements. [Schedule 1, Part 2, Item 27, Subsection 62ZZQ(7)]
Obtaining further information from PCF claimants
2.153 If APRA has insufficient information to make the determinations necessary in regard to a claim under the PCF, APRA may request that the claimant provide the necessary information to a specified person, and in a form specified by APRA and within a reasonable time. [Schedule 1, Part 2, Item 27, Subsection 62ZZR(1)]
2.154 Failure of a person to provide the information requested by APRA in the form requested may delay the processing of the person's claim. APRA need not make the determination relating to the claim until after the information requested has been provided. [Schedule 1, Part 2, Item 27, Paragraph 62ZZR(1)(b)]
2.155 Persons requested to provide information in these circumstances can only be requested to provide the information to APRA, an APRA member, an APRA staff member who has responsibilities relating to the implementation of the PCF, a person to whom APRA has delegated functions under Part VC or an officer or employee of a person to whom functions have been delegated. [Schedule 1, Part 2, Item 62ZZR(2)]
2.156 Given the nature of the determinations APRA is required to make, some of the information requested from claimants may be personal information. [Schedule 1, Part 2, Item 27, Subsection 62ZZR(3)]
Recovery of Overpayments
2.157 Regulations may be made to provide for the recovery of overpayments made under the PCF. [Schedule 1, Part 2, Item 27, Section 62ZZS]
APRA may delegate functions and powers
2.158 APRA may delegate its functions and powers under the Part VC. [Schedule 1, Part 2, Item 27, Section 62ZZT]
Exemption from competition assessments
2.159 Actions in connection with Part VC, including:
- anything done in exercise of powers or performance of functions;
- anything done to enable or facilitate the exercise of those powers or the performance of those functions; and
- anything incidental to the above;
- is exempt from Trade Practices Act 1974 competition assessment. [Schedule 1, Part 2, Item 27, Section 62ZZV]
2.160 This exemption is necessary because competition assessments may frustrate, unduly delay or create undue uncertainty in relation to the implementation of the PCF.
2.161 Civil penalties may be enforced under Schedule 1 of the Insurance Act, which is made effective through section 129E. The burden of proof in proceedings for a civil penalty is on the balance of probabilities and there is no requirement to prove any fault elements in relation to the offending conduct. [Schedule 1, Part 2, Item 34, Section 129E]
2.162 Within 6 years of a person contravening a civil penalty provision APRA may apply, on behalf of the Commonwealth, to the Court for an order that the person pay the Commonwealth a pecuniary penalty. [Schedule 1, Part 2, Item 35, Schedule 1, Subclause 1(1)]
2.163 If the Court is satisfied that the person has contravened a civil penalty provision, the Court may order that person to pay to the Commonwealth for each contravention the pecuniary penalty that it considers appropriate. However, the Court may not order an amount to be paid that is greater than the 'relevant amount' specified for the provision. The 'relevant amount' is the maximum civil penalty that may be imposed, for example, 10,000 penalty units is the relevant amount specified in subsection 62ZZQ(1). [Schedule 1, Part 2, Item 35, Subclause 1(2)]
2.164 In determining the pecuniary penalty, the Court must take into account the matters set out in paragraphs (a) to (d) in subclause 1(3). [Schedule 1, Part 2, Item 35, Subclause 1(3)]
2.165 If a person's conduct contravenes more than one civil penalty clause and proceedings are instituted in relation to contravention of more than one clause, then the person cannot be subject to more than one pecuniary penalty in relation to the same conduct. [Schedule 1, Part 2, Item 35, Subclause 1(4)]
2.166 Contravening a civil penalty provision is not an offence. [Schedule 1, Part 2, Item 35, Clause 2]
2.167 A person must not:
- aid, abet, counsel or procure a contravention of a civil penalty clause;
- induce, whether by threats or promises or otherwise, a contravention of a civil penalty clause;
- be in any way, directly or indirectly, knowingly concerned in or party to, a contravention of a civil penalty clause; or
- conspire with others to effect a contravention of a civil penalty provision. [Schedule 1, Part 2, Item 35, Subclause 3(1)]
2.168 Schedule 1 applies to a person who contravenes the extended civil penalty provisions in subclause 3(1) as if that person had contravened the principal civil penalty provision. [Schedule 1, Part 2, Item 35, Subclause 3(2)]
2.169 However, the relevant amount applicable to an individual (that is, a natural person) that contravenes a civil penalty provision is one fifth the relevant amount that would otherwise apply if the individual (that is, a natural person):
- contravenes a civil penalty provision because of the extended civil penalty provisions in subclause 3(1); and
- the principal penalty provision can only be contravened by a body corporate. [Schedule 1, Part 2, Item 35, Subclause 3(3)]
2.170 Civil pecuniary penalties ordered to be paid by the Court are penalties payable to the Commonwealth and the Commonwealth may enforce the order as if it were a judgment of the Court. [Schedule 1, Part 2, Item 35, Clause 4]
2.171 The Court is required to apply the rules of evidence and procedure for civil matters in proceedings for a civil penalty order. This means that the civil standard of proof, that is, the balance of probabilities, will apply. [Schedule 1, Part 2, Item 35, Clause 5]
2.172 The Court must not make a civil penalty order against a person where the person has been convicted of a criminal offence for substantially the same conduct. [Schedule 1, Part 2, Item 35, Clause 6]
2.173 Where proceedings for a civil penalty order and criminal proceedings are started against a person for substantially the same conduct the civil proceedings will be stayed. The civil proceedings will be dismissed if the person is convicted of the offence but may be resumed if the person is not convicted of the offence. [Schedule 1, Part 2, Item 35, Clause 7]
2.174 The fact that a civil penalty order has been made against a person does not prevent criminal proceedings being started against the person for substantially the same conduct. [Schedule 1, Part 2, Item 35, Clause 8]
2.175 Where criminal proceedings are commenced against a person who has already given evidence or produced documents in civil penalty proceedings arising from substantially the same conduct, that evidence inadmissible in the criminal proceedings. This does not apply to criminal proceedings relating to the falsity of the evidence in the civil proceedings. [Schedule 1, Part 2, Item 35, Clause 9]
2.176 Definitions of 'APRA Special Account', 'civil penalty provision', 'declared general insurer', 'Financial Claims Special Account' 'penalty unit' and 'personal information' are inserted in subsection 3(1) of the Insurance Act. [Schedule 1, Part 2, Items 20 to 25]
2.177 Consequential amendments are made to section 116A of the Insurance Act to apply that section's modified definition of assets and liabilities in Australia to the PCF. [Schedule 1, Part 2, Items 28 to 33]