Terry Towell, MD of Allianz Australia, perceives weaknesses in the proposed DOFI regulations

Almost exactly 12 months after the Federal Government announced that it would introduce legislation to regulate the activities of direct offshore foreign insurers (DOFIs), insurers are resigned to the fact that the new regulation regime for DOFIs has become a mirage as a result of wide-ranging exemptions.

Indeed, a recent announcement by a local underwriting agency suggests that unless Treasury drafts the exemption regulations with extreme care, the regulatory regime may end up being further undermined, with the exemption rules characterised by loopholes within loopholes.

In September last year, Treasury released a discussion paper on the exemption regime for DOFIs that proposed three exemption "limbs". The paper clearly suggested that Australian insureds would only be allowed continued access to DOFIs if local authorised insurers were not capable of providing the insurance cover they required.

It gave the impression that the requirement for insureds to "clearly demonstrate they cannot obtain insurance through an authorised insurer" was the "tree" they would have to climb before they could get out on one of the exemption "limbs".

However, it quickly became apparent that there would in fact be no requirement that insureds or their brokers would have to demonstrate, verify or provide evidence of the fact that a "particular risk cannot be insured through an authorised insurer".

Simply, if an insured met any of the criteria for the exemption "limbs", they could use a DOFI, no questions asked.

On April 8 the new Assistant Treasurer, Chris Bowen, announced the final shape of the exemptions, which were little changed from those in the discussion paper.

The insurance industry has always accepted that some insureds need to obtain cover offshore, primarily for reasons relating to constraints on local capacity in terms of the amount or the nature of the cover required.

But on any analysis, the three limbs together create an exemption regime so broad insurers don't expect the regulation of DOFIs to have any material effect on the insurance market or the ability of insureds and brokers to use DOFIs. It is in this sense that DOFI regulation has turned into a mirage.

Given the breadth of exemptions, it was with concern I read in the April 14 edition of insuranceNEWS.com.au that Pacific Underwriting, a subsidiary of Stardex, plans to enter the luxury pleasurecraft insurance market in conjunction with a DOFI. The article indicated that Pacific Underwriting was "confident the policy will fall under the exemptions to the new direct offshore foreign insurer regime".

A Stardex spokesman was quoted as saying that the use of the DOFI "would fit in the high-value insured [limb] and, if not, it would always fit in customised risks".

It seemed to be argued that the cover would fit under the customised exemption limb, presumably, the "non-price terms and conditions" criterion, because policy features such as "crew personal accident insurance" is "not cover anyone is offering in Australia".

At Club Marine, the specialist pleasurecraft insurance business of Allianz, we have never seen a demand from Australian pleasurecraft owners for "crew personal accident insurance". Crews employed on Australian-insured vessels are covered by workers' compensation insurance in the jurisdiction in which the employing company is located. Volunteer crews would generally be covered by the third-party liability component of the vessel's property cover.

But, more to the point, if the demand for such cover did materialise, local pleasurecraft insurers would quickly adapt their policies to meet their customers' needs.

Thus, of significant concern to insurers, is the potential risk apparent in the Pacific Underwriting proposal that DOFIs will be able to include unnecessary features in a policy as a way of creating a false "difference in non-price terms and conditions".

What this highlights is the need for Treasury to take extreme care to ensure that the policy intent of the exemption limbs and their associated criteria is fully reflected in the wording of the forthcoming regulations.

For example, the "materiality" condition contained in the non-price terms and conditions criterion of the third "limb" needs to be carefully articulated to not only ensure differences are material but also that they in fact even exist in reality, or haven't just been dreamed up in order to create a further loophole within an exemption regime that arguably already represents one great big loophole.

Also of importance will be requirements in the regulations for brokers to document their assessments and decisions about whether an insured or the cover they seek meets the exemption criteria.