The Australian Prudential Regulation Authority (APRA) will modify its regulatory framework following the addition last week of direct offshore foreign insurers (DOFIs) to its responsibilities.

The Government’s proposed amendments to the Insurance Act mean DOFIs will have to be authorised by APRA to carry on business in Australia.

APRA says “the Insurance Act will apply to DOFIS, including ‘captives’, foreign insurers and foreign reinsurers operating in Australia as APRA-authorised branches or subsidiaries, domestic insurers and domestic reinsurers”.

The regulator’s existing enforcement powers will be enhanced to enable investigation of breaches, and those who offend will be liable for prosecution.

Limited exemptions will apply to enable Australia’s largest businesses and those unable to obtain appropriate cover domestically to retain access to international insurance markets.

APRA says exemptions will also be available for “specialised risks that cannot be underwritten in Australia” – a clause likely to cause plenty of debate in the future – but the prudential requirements for Lloyd’s underwriters will not change.

It will refine its prudential standards so that categories of insurers with lower risk profiles will have less extensive prudential requirements.

Insurers may have different risk profiles arising from factors such as customer base, home regulatory environment, ownership structure, reinsurance arrangements and type of business offered.

APRA will review in particular its prudential standards relating to capital requirements, including recognition of reinsurance, reporting requirements and some aspects of risk management.

One of the options for DOFIs that want to be authorised will be to establish a branch operation in Australia. Requirements for branches are already dealt with in the prudential standards and in some respects are less stringent than for companies.

APRA will soon publish a discussion paper on its prudential approach, and a second round of consultation on draft prudential standards will take place at the end of this year.