Insurers, brokers and businesses have been given their first glimpse of how new rules regulating direct offshore foreign insurers (DOFIs) will operate from next year.

However, as the Australian Prudential Regulation Authority (APRA) moves to bring foreign insurers into the regulatory fold, questions remain over how it will apply different rules to different insurers.

The latest discussion paper from APRA sets out five classification groups for insurers, with regulations modified to suit each sub-group. The paper also neglects to mention the exemptions foreign insurers will have from local prudential standards.

Trowbridge Deloitte General Insurance Practice Leader Elaine Collins says the document leaves many questions unanswered.

“APRA is trying to take the actual risk faced by the insurer more into account, rather than having a ‘one size fits all’ approach,” she said.

“The big change for Australian general insurers is around those that are wholly owned by overseas corporations.

“I suppose what each company would do is see whether it would use the group actuary or still have some Australian flavour. The danger could be if the overseas group actuary doesn’t pay enough attention to the Australian market.

“The two main questions we have are: what happens to overseas insurers writing business in Australia and what happens to captives domiciled overseas?”

Brokers and the Large Law Firm Group – which represents the top nine law firms in Australia – are opposed to a blanket regulatory framework on DOFIs, arguing it would limit access to markets that handle niche risks not covered locally.

The local insurers say they are concerned foreign insurers offering products without paying compliance costs will erode their market share.

APRA Executive Member John Trowbridge says proposed refinements to the prudential framework will affect local and foreign insurers.

Under APRA’s new approach, insurers will be classified as locally incorporated insurers, wholly owned local or foreign subsidiaries, foreign insurers, associated captives or sole parent captives.

While the Federal Treasury prepares exemptions for DOFIs, brokers are urging APRA to consider exemptions for certain insurers placing difficult risks.

NIBA wants exemptions on overseas policies with premiums greater than $30,000 – which it describes as “sophisticated cover”. It is also seeking exemptions for captive insurers and businesses that place insurance with companies that operate in the same market as the risk.

“For example, an Australian company with a [Papua New Guinea] operation may decide to insure vehicles operating in PNG with a PNG insurer,” a NIBA submission said. “The PNG insurer is well placed to access and pay claims, whereas an Australian insurer may not be so well placed.”

NIBA also wants risk that is hard to place – such as marine, political risk, warranty and weather cover – to be exempt from prudential regulation. It says local authorised insurers will not insure some types of risk.