Insurance brokers are urging several changes to the Federal Government's three-pronged exemption system for foreign insurers.

While the National Insurance Brokers Association (NIBA) has welcomed Treasury's approach to market-based regulation, CEO Noel Pettersen says exemptions for direct offshore foreign insurers (DOFIs) and brokers are too restrictive.

Under proposals by Assistant Treasurer Peter Dutton in September, large companies and certain niche risks will be exempt from new laws banning DOFIs from offering cover in Australia without APRA approval.

In a submission sent to Treasury on October 31, Mr Pettersen says the Federal Government's "high value insured" test - business with either operating revenue of more than $200 million, gross assets of more than $200 million or more than 300 employees - is poorly conceived.

"The number of company groups that satisfy this exemption is very small," he said. "An international insurance broker... estimates that less than one-half of 1% of the policies it places will qualify for this exemption.

"Not only is this proposal very restrictive in its application but it is not as well directed as it could be."

Mr Pettersen says the exemption doesn't take into account other types of business structures, such as joint ventures, partnerships and trusts. It also doesn't recognise sophisticated but smaller businesses operating in high-risk industries such as tunnelling, mining and oil drilling.

"NIBA believes that it would be appropriate to have some regard to premium in determining the high value of insured exemption," he said.

The premium value test proposed by NIBA would see all policies with premiums greater than $50,000 exempted from the DOFI regulations.

NIBA is also arguing for bans on brokers advising clients who choose to insure with a DOFI to be dropped. Exemptions for parent companies should also extend to their subsidiaries, Mr Pettersen said.

NIBA is also proposing the Government adopt a fourth "limb" where a client can choose to insure with a DOFI once a broker has advised of the risks involved.

Mr Pettersen says the Federal Government should also enshrine a "reasonableness test" for brokers self-assessing their eligibility for an exemption.

This would provide some protection for brokers and DOFIs from legal action should ASIC determine a self-determined exemption was unfounded.

NIBA has also proposed extending the list of atypical risks exempt from DOFI laws to include contingency event cancellation, weather, residual value, accidental contamination and product recall, clinical trials liability, bloodstock, control of well, terrorism and marine insurance.