A flurry of interest ran around the industry last week when the Australian Financial Review quoted a briefing note from “one of the country’s largest insurers” warning of the dangers of insuring households through unauthorised foreign insurers (UFIs).

The identity of the “largest insurer” isn’t important, because recently the corridors of the Federal Parliament have been full of insurance industry lobbyists advising MPs of the hazards that letting UFIs loose on the Australian personal lines market could bring.

It’s a development that has the potential to be a game-changer for the personal lines sector. Right now, all we have to go on is a few lines in a media release from Finance Minister Mathias Cormann:

“The Government is also boosting competition by clarifying that licensed brokers can sell policies from foreign insurers where they offer consumers a better price.”

That was announced at the same time as the formation of a government-run comparison website. Since then there has been no real detail released on the UFI issue – beyond the comment that the initiatives are intended to be introduced with minimal “regulatory burden”.

Local insurers are concerned that Senator Cormann’s decision to open the market to UFIs – taken in the absence of sidelined Assistant Treasurer Arthur Sinodinos – will create many new problems without solving the original one of affordability in north Queensland.

The only view insuranceNEWS.com.au has been able to gather from the insurers is that they see this initiative as appalling public policy, framed with no understanding of the long-term consequences and behind closed doors. Several insurers we contacted have compared the Government’s lack of consultation with that of former financial services minister (and now Opposition Leader) Bill Shorten following the Queensland floods.

We don't know if the plan was first referred to the Australian Securities and Investments Commission or the Australian Prudential Regulation Authority (APRA), but Canberra sources have told insuranceNEWS.com.au both regulators are “unimpressed”.

Piecemeal policy-making often throws up unexpected side-issues, and only time will tell how challenging these will be for regulated personal lines insurers. The overall question for now has been expressed best by one of the many brokers who contacted insuranceNEWS.com.au last week in the hope we might be able to provide some enlightenment: “What the hell were they thinking?”

Brokers are most concerned about Senator Cormann’s faith in their ability to take on the role of unofficial regulator of UFIs, and his presumption that their professional indemnity (PI) insurers are prepared to act as a compensation fund if UFIs refuse to pay claims their Australian counterparts would.

Consumers will still be able to use the formal processes of the Financial Ombudsman Service to seek redress – not from the UFI but from the broker who sold them the cover.  They will also be able to use the consumer facilities of the countries of origin of the UFIs – wherever that might be.

It appears that brokers also weren’t consulted about their planned central role in the initiative. The National Insurance Brokers Association (NIBA) is saying little, possibly because it has been singled out several times by Senator Cormann as a cheerleader for the open market.

NIBA CEO Dallas Booth said on October 23 that the Government's approach to UFIs “would give brokers the flexibility to determine where the best cover for their clients might come from”. While the rest of his statement was full of cautionary points, it’s this sentence only which has been used by the minister to justify his belief that brokers are all for the initiative.

There’s no escaping the fact that there are potential opportunities for some of NIBA’s largest members – mainly the large international brokers – if they can find ways to move their high-value clients on to an internal personal lines channel linked to a UFI.

And Steadfast MD and CEO Robert Kelly is a supporter of the Government’s initiative, which coincided with the launch of Steadfast Direct, a personal lines sales channel for brokers backed by capital from Berkshire Hathaway.

But the likelihood of individual brokers being able or willing to arrange cheap property cover through a UFI – and the preparedness of their PI insurers to support them – is the big unknown.

So far Senator Cormann has had an easy run over this issue. The mainstream media doesn’t seem to be interested or tried to understand it, so in the absence of any noise from the parliamentary press gallery, here’s a few questions that have been raised with insuranceNEWS.com.au by brokers over the past few days:

• UFIs will have the entire country to compete in. It’s much easier to compete on the basis of price in large markets, so why would any UFI bother covering risks in cyclone-prone north Queensland when the big cities of the south have been opened up to them?

• Has the Government considered that this is exactly the same problem as the one insurers have raised about comparison websites? It makes the process all about the price rather than the reliability of the cover.

• Are the UFIs going to be forced to cover property in the north with lower premiums as a condition of their licence? (That’s an easy one. No, because they won't have a licence, or be regulated.)

• How will GST and state stamp duty charges be administered when the insurer is offshore? Will that role fall to the broker too? How much will brokers have to add to the basic premium to cover their administration and compliance costs?

• Who will be responsible for producing the product disclosure statements of foreign insurers not domiciled in Australia?

• The foreign insurers will use their own wordings. How can the broker ensure the wordings carry the same legal interpretations as Australian wordings?

There are many more questions, and hopefully the Government is waiting on the answers before moving on to their next seemingly simple problem.

The major issues for property insurers is that the playing field is no longer level. Burdened with all the compliance and other costs of doing business in Australia, they will not be able to compete with UFIs on price.

While there are a few hurdles for UFIs to jump – not least brokers’ and PI insurers’ lack of trust in them – where there’s a will, there’s a way. Someone will find a way to make this work, particularly in the big cities, where UFIs were presumably never intended to go.

This initiative undermines a tightly regulated industry sector that focuses on consumer service and reliability – and all because a relatively small number of people are being required to pay an accurate premium commensurate with the higher level of risks they face.

When you start to consider the possible ramifications, the silence of ASIC and APRA over this issue is troubling. They are charged with protecting the interests of consumers and setting stringent rules for insurers in Australia, and they should be clearly stating any reservations they have about public policy made on the run.

Perhaps they’re discussing the consequential issues behind closed doors in Canberra, where industry input is overcome by political expediency. According to industry sources insuranceNEWS.com.au has spoken to, that’s how this government prefers to operate.