A general introduction to the insurance and reinsurance markets in Australia

All questions

Introduction

There are 89 general insurers,² 24 life insurers³ and 32 registered health insurers⁴ operating in the Australian insurance market. In 2021, the general private insurance market earned approximately A$57.5 billion in premiums but incurred A$43.2 billion in claims. The table below⁵ indicates that the overall market improved in 2022.

Key performance indicators for the year at a glance

	Year ended 31 December 2021	Year ended 31 December 2022	Yearly change
Number of insurers	93	89	-4
Gross earned premium	A$57.5 billion	A$62.8 billion	9.2 per cent
Net earned premium	A$40.3 billion	A$44.4 billion	10.0 per cent
Gross incurred claims	A$38.5 billion	A$46.2 billion	19.8 per cent
Net incurred claims	A$26.6 billion	A$27.4 billion	3 per cent
Underwriting result	A$4.0 billion	A$6.8 billion	69.4 per cent
Investment income	A$0.4 billion	A$-1.7 billion	–
Net profit after tax	A$1.7 billion	A$2.3 billion	34.3 per cent
Return on net assets	5.6 per cent	7.2 per cent	1.6 percentage points
Gross loss ratio	61 per cent	69 per cent	8 percentage points
Net loss ratio	66 per cent	62 per cent	-4 percentage points
short-tail property	69 per cent	66 per cent	-3 percentage points
long-tail classes	71 per cent	60 per cent	-11 percentage points
Underwriting expense ratio*	24 per cent	23 per cent	-1 percentage points
PCA coverage ratio†	1.7x	1.74x	0.04x
* Underwriting expense ratio is underwriting expenses divided by net written premium. † PCA is the prescribed capital amount. The higher the ratio, the higher the ability of the insurers to service their liabilities.

The insurance market is, however, under pressure in the long-tail and directors' and officers' insurance (D&O) sectors. This pressure has been developing and is a function of the highly litigious nature of the Australian market with an increasing number of shareholder class actions. According to analysis undertaken by Finity on data⁶ collected by the Australian Prudential Regulatory Authority (APRA), the Construction Professional Indemnity has been in a loss-making phase since 2013. This has led to the withdrawal of some insurers from the Australian market.⁷ However, decennial liability insurance for structural and waterproofing defects in residential apartment buildings has recently arrived in New South Wales.⁸ The table, however, indicates that there might be, at least, a temporary reprieve with a small reduction in the net loss ratio arising from increased earned premium.

For the year ending December 2022, the life insurance industry reported a net profit of A$0.5 billion and a return on net assets of 1.8 per cent, a deterioration from the previous year. This was a result of a A$6.6 billion decrease in investment revenue of over the past 12 months.⁹

Regulation

i The insurance regulator

The Australian insurance industry is highly regulated.¹⁰ There are two regulators. First, APRA and second, the Australian Securities Industry Commission (ASIC). APRA, an independent statutory body, as the prudential regulator, supervises institutions across banking, insurance and superannuation, and its purpose is to promote financial system stability in Australia. As the insurance regulator, it regulates the general insurance, life insurance and health insurance industries. APRA sets prudential standards for minimum capital requirements, reinsurance management, risk management, outsourcing and governance.¹¹ General, life and health insurers have to apply to APRA to be authorised to carry on business. There are, however, some exceptions to this:

1. contracts for which the policyholder is a 'high-value insured'. This applies if the value of its gross assets in Australia at the end of a financial year is at least A$200 million, averaged over three years;¹²
2. contracts for specified atypical risks. This includes, for example, loss or liability arising from hazardous properties, war or warlike and terrorist activities.¹³ Liability for these occurrences is typically excluded from liability policies in Australia;
3. contracts for other risks that cannot reasonably be placed in Australia;¹⁴ and
4. when contracts are required to be issued by an insurer, or a kind of insurer, under a law of a foreign country where they are authorised or permitted to do so.¹⁵

ASIC is the corporate regulator. ASIC's role is to ensure that insurers and insurance brokers:

1. offer insurance efficiently, honestly and fairly;
2. employ qualified staff who are trained to perform their role;
3. use advertising to inform consumers, rather than to mislead them;
4. give consumers the proper product disclosures and do so at the right time;
5. promptly submit the reportable situations to ASIC; and
6. handle any complaints properly including by accepting the decisions of the Australian Financial Complaints Authority (AFCA).

ASIC also licenses¹⁶ and regulates insurers, their agents and insurance brokers.¹⁷ ASIC takes action against insurers who fail to comply with the financial services laws. This includes taking action against insurers who are being misleading or deceptive or are acting unconscionably.¹⁸

ii Position of brokers and insurance agents

Most insurance is placed in Australia by insurance agents (of insurers) or brokers (agents of the insured), both of whom are required to be licensed under Part 7 of the Corporations Act 2001 (Cth) (the Corporations Act). Reinsurance brokers, however, do not need to be licensed as reinsurance is not a financial product, as defined in the Corporations Act.

A broker, however, acts for both the insurer and the insured in two instances. First, where the broker is authorised to grant interim cover to the insured while the insurer is considering the proposal of insurance.¹⁹ Second, where the broker is acting under a 'binder' or 'bordereaux' agreement with the insurer such that it is authorised to make certain decisions on behalf of the insurer.²⁰ Such decisions may include the authority to grant final cover to the insured on the insurer's 'normal policy terms, conditions, stipulations, endorsements and wordings', and it may only enter into contracts of insurance containing 'extensions' or 'variations' with the prior approval of the insurer.²¹

iii Regulation of individuals employed by insurers

Employees of insurers who are licensed under Part 7 of the Corporations Act do not need to be licensed.²²

iv Compulsory insurance

There are several classes of compulsory insurance in Australia. These include:

1. workers' compensation insurance for employers;
2. third-party personal injury liability insurance for motorists;
3. home warranty insurance for home builders in New South Wales.²³ This scheme is, however, underwritten by the state of New South Wales after the private insurers left the market; and
4. professional indemnity insurance for design and building practitioners as a result of newly introduced legislation in New South Wales designed to raise consumer confidence in residential apartment buildings.²⁴

v Compensation and dispute resolution regimes (within the financial services context)

The Financial Claims Scheme (FCS) is an Australian government scheme that in part protects most policyholders of general insurers if a general insurer fails. APRA is responsible for administering the FCS once it is activated by the Australian government.

AFCA is designed to provide consumers and small businesses with fair, free and independent dispute resolution for financial complaints concerning certain types of insurance, including medical indemnity insurance, life insurance, income protection, funeral, trauma, total and permanent disability, accidental death and endowment policies.

A consumer who is unhappy with the outcome of the dispute resolution process may always commence Supreme Court or Federal Court proceedings against the insurers to have their dispute determined.

vi Taxation of premiums

State governments charge stamp duty of between 9 per cent and 11 per cent on insurance premiums. The New South Wales government also imposes an emergency services levy of 20 per cent or more²⁵ on most retail business insurance policies. Goods and Services Tax, a Commonwealth tax, of 10 per cent is also charged on all policies.²⁶

The legal framework

Insurance and reinsurance law

i Sources of law

The Commonwealth legislative framework includes the following pieces of legislation:

1. the Insurance Act 1973 (Cth) and Insurance Regulations 2002, which provide the framework for the authorisation and prudential regulation of insurance policies issued by general insurers and Lloyd's underwriters.²⁷ The Insurance Act 1973 (Cth) also governs reinsurance.²⁸ In addition, pursuant to Division 3A of the Insurance Act 1973, a general insurer may not transfer its rights and liabilities under policies to another Australian regulated insurer, except under a scheme confirmed by the Federal Court of Australia;
2. the Insurance Contracts Act 1984 (Cth) and Insurance Contracts Regulations 1995, which regulate most contracts of general and life insurance;
3. the Life Insurance Act 1995 (Cth) and Life Insurance Regulations 1995, which regulate both insurance and reinsurance. In addition, the Federal Court of Australia must approve the transfer to, or amalgamation with, another life insurance company of the life insurance business of a life insurance company;²⁹
4. the Corporations Act and Corporations Regulations 2001, Chapter 7 of which sets out the licensing, disclosure and conduct requirements of general and life insurance products;
5. the Australian Securities and Investments Commission Act 2001 (Cth) (the ASIC Act), which in part prohibits insurers (as financial services providers) from engaging in misleading or deceptive conduct as well as unconscionable conduct;
6. the Marine Insurance Act 1909 (Cth);
7. the Private Health Insurance Act 2007 (Cth) and the Private Health Insurance (Prudential Supervision) Act 2015 (Cth) regulate private health insurance providers in Australia. Private health insurance supplements Medicare, the national public health insurance;
8. the Insurance Acquisitions and Takeovers Act 1991 (Cth), which is also relevant as it governs the acquisitions of Australian companies authorised to carry out the business of insurance under the Insurance Act or the Life Insurance Act; and
9. the Financial Sector (Shareholdings) Act 1998 (Cth) and Financial Sector (Business Transfer and Group Restructure) Act 1999 (Cth), which, in part, regulate the shareholding of insurance companies.

The insurance industry is also governed by the following codes of practice:

1. the General Insurance Code of Practice, which was updated in July 2021 and is a voluntary code of conduct. The Code requires insurers to provide their services openly, honestly and fairly. It also sets time frames for insurers to respond to claims, complaints and requests for information from consumers;³⁰
2. the Life Insurance Code of Practice, which is mandatory to members of the Financial Services Council. It requires life insurers to provide services to their customers of a high standard and in a timely, honest, fair and transparent way;³¹ and
3. the Insurance Brokers' Code of Practice 2014 applies to all members of the National Insurance Brokers Association. It can also be voluntarily adopted by non-members. A new 2021 code is in the consultation phase and will come into force in September 2022.³²

ii Making the contractEssential ingredients of an insurance contract

The common law rules applicable to the formation of contracts apply to the formation of an insurance contract. The key elements are therefore offer, acceptance, consideration as well as an intention to create legal relations. Interim cover can arise when an insurer, either through its agent or broker, indicates that interim cover is in place, for example, by the provision of a cover note by the insurer to the insured.

Final cover arises when an insurer indicates that the insured's proposal for insurance has been accepted. This typically arises when the insurer issues an invoice for the premium, and accepts the payment of premium by providing the insured with a schedule of insurance. The insurance schedule operates as proof of the creation of the contract of insurance. While it is best practice for the insurer to provide the insured with a copy of the policy wording, this is not an essential ingredient of the creation of the contract of insurance.³³ The policy wording can be incorporated by reference into the contract of insurance via its identification on the schedule of insurance. The Corporations Act, however, requires an insurer to provide an insured who enters into the contract as a retail insured, with confirmation of the contract of insurance as soon as practicable.³⁴

Information provided to the insurer at placement: utmost good faith, disclosure and representations

To enable the insurer to assess the risks, an insured is under common law obligations to disclose all material facts known to the insured (but not known to the insurer)³⁵ to the insurer and not to misrepresent any of those material facts. Silence where there is an obligation to disclose may amount to a misrepresentation that there is nothing to disclose.³⁶

Misrepresentation and non-disclosure by the insurer

Both under common law and pursuant to the Insurance Contracts Act, the insurer is also under obligations to disclose material facts to the insured and not to misrepresent material facts to the insured. Further, pursuant to the Insurance Contracts Act, an insurer is required to clearly inform an insured, in writing, of 'unusual' terms before the contract is entered into. If the insurer does not do so then the insurer may not rely upon the term.³⁷ In addition, in relation to certain prescribed contracts,³⁸ an insurer must provide an insured with a 'Key Facts Sheet'.

iii Interpreting the contractGeneral rules of interpretation

A policy is a commercial contract and should be given a business-like interpretation. This requires attention to the language used by the parties, the commercial circumstances that the contract addresses, and the objects that it is intended to secure.³⁹ Commercial contracts are construed in accordance with the following principles:

1. the meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean;⁴⁰
2. a commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience';⁴¹
3. a reasonable commercial construction according with commercial efficacy or common sense is to be preferred to 'strict literal meaning' or a 'literal interpretation';⁴²
4. in construing a commercial contract in its context, its terms must be considered as a whole, giving consistent meaning to all its terms and avoiding any apparent inconsistency; and⁴³
5. preference is to be given to a construction that gives a 'congruent operation to the various components of the whole'.⁴⁴

Avoiding a contract of insurance for misrepresentation or non-disclosure

At common law, if the insured, misjudging the materiality of the facts, fails to disclose those facts to the insurer then the policy may be terminated.⁴⁵ This is a function of a breach of the 'basis of contract clause' in the policy pursuant to which the insured warrants the truth of the representations contained in the proposal form. The insured also agrees that the basis of the contract with the insurer is the truth or the existence of certain matters. Termination is typically effective from the date of breach, which is the date of entry into the contract of insurance.⁴⁶ The issue of whether marine insurance contracts will be treated as automatically discharged in Australia in accordance with the House of Lords authority in Bank of Nova Scotia v. Hellenic Mutual War Risks Ass'n (Bermuda) Ltd (The Good Luck)⁴⁷ has not been resolved although some commentators expect it to be adopted.⁴⁸

However, these common law obligations have been modified by the Insurance Contracts Act. The basis of contract clause has now been deprived of all effect.⁴⁹ Representations that are untrue but were made on the basis of a reasonable belief in the truth of the representation are not treated as misrepresentations.⁵⁰ Further, in 2021, the Insurance Contracts Act was amended so that an insured only has to take reasonable care not to make a misrepresentation.⁵¹

A general contract of insurance and a contract of life insurance may be avoided if the non-disclosure was fraudulent. Otherwise, if the insurer would have still entered into the contract of insurance despite the non-disclosure, then the contract of insurance may not be avoided. If the insurer would have entered into the contract of insurance albeit on different terms, then the liability of the insurer is so varied.⁵² For example, if subsequent to the placement of a policy of life insurance, the insurer becomes aware of facts that reveal the insured had not complied with its duty of disclosure or had made a made a misrepresentation, then the insurer may obtain further information before determining what its attitude to acceptance of the risk would have been. The insurer is then entitled to bring the results of those consequent inquiries to bear in that exercise. If after making those enquiries it determines it would not have been prepared to enter into any policy, it can avoid the policy.⁵³

In AIA Australia v. Sharma⁵⁴ the Full Federal Court found that a life insurer that had taken over group life policies from an earlier life insurer for a superannuation fund could rely upon fraudulent misrepresentations that had been made to the earlier group life insurer by a life insured. The incoming life insurer had not undertaken a risk assessment when it took over the group life policies. However, the Court said that the earlier fraudulent misrepresentation of the life insured remained of operative effect for the purposes of Section 29(2) of the Insurance Contract Act.

iv ClaimsNotification

The contract of insurance typically requires an insured to notify an insurer of a claim promptly. However, if an insured fails to comply with its contractual obligation to notify promptly, then Section 54 of the Insurance Contracts Act is likely to operate to excuse the tardiness of the insured.

Section 54 of the Insurance Contracts Act

Pursuant to Section 54 of the Insurance Contracts Act, where the effect of a contract of insurance would, but for Section 54, be that the insurer may refuse to pay a claim, either in whole or in part, by reason of some act of the insured or of some other person, being an act that occurred after the contract was entered into but not being an act in respect of which Subsection (2) applies, the insurer may not refuse to pay the claim by reason only of that act but the insurer's liability in respect of the claim is reduced by the amount that fairly represents the extent to which the insurer's interests were prejudiced as a result of that act. Section 54(2) provides that, where the act could reasonably be regarded as being capable of causing or contributing to a loss in respect of which insurance cover is provided by the contract, the insurer may refuse to pay the claim.

The act must, however, occur after the contract of insurance was entered into and the insurer may reduce the amount paid under the claim by an amount that reflects the prejudice that it has suffered.

Section 40 of the Insurance Contracts Act

Further, pursuant to Section 40 of the Insurance Contracts Act, if:

1. a contract of liability insurance provides that the insurer's liability is excluded or limited by reason that notice of a claim against the insured in respect of a loss suffered by some other person is not given to the insurer before the expiry of the period of the insurance cover provided by the contract; but
2. the insured gave notice in writing to the insurer of facts that might give rise to a claim against the insured as soon as was reasonably practicable after the insured became aware of those facts but before the insurance cover provided by the contract expired; then
3. the insurer is not relieved of liability under the contract in respect of the claim, when made, by reason only that it was made after the expiry of the period of the insurance cover provided by the contract.

Insureds have attempted to use Sections 40 and 54 of the Insurance Contracts Act together to force an insurer to extend indemnity under a liability policy when an insured has not provided notification of circumstances that might give rise to a claim prior to the expiry of the policy. However, the New South Wales Court of Appeal recently confirmed that the insured is only entitled to indemnity in this scenario if the policy of insurance includes a deeming provision that says notification of circumstances during the period of insurance will operate to deem the claim as one being made during the period of insurance of that policy if and when it eventuates.⁵⁵ Although such deeming provisions were once common in Australian liability policies, they no longer are.

Good faith and claims

The statutory duty of utmost good faith applies to claims.⁵⁶ An insurer's failure to make a prompt admission of liability to meet a sound claim for indemnity and to make payment promptly may be a breach of the duty of utmost good faith of the insurer. Further, the failure of an insurer to make and communicate within a reasonable time a decision of acceptance or rejection of a claim for indemnity by reason of negligence or unjustified and unwarrantable suspicion as to the bona fides of the claim by the insured may also be a breach of the duty of utmost good faith of the insurer.⁵⁷

There are several insurance decisions in Australia and New Zealand in which an insured has been awarded damages for consequential losses as a result of the insurer's failure to make timely payment.⁵⁸

In addition, that duty has been supplemented by the duty of the insurer, as a financial services provider, to act efficiently, honestly and fairly in relation to claims.⁵⁹

Dispute resolution clauses

An insurer is required to have a dispute resolution mechanism in place as a condition of its licence. The internal dispute resolution mechanism must meet the standards or requirements made or approved by ASIC.⁶⁰

Financial lines policies of insurance typically include 'senior counsel' clauses pursuant to which the parties may obtain an opinion from a senior counsel or senior insurance lawyer if the parties cannot resolve the issues in dispute between them. This may include issues as to whether the insured is entitled to indemnity under the policy of insurance and whether the claim ought to be settled or defended.

Dispute resolution

i Jurisdiction, choice of law and arbitration clauses

Section 43 of the Insurance Contracts Act provides that differences or disputes in connection with the contract of insurance must be determined by an Australian court. Any arbitration clause in a contract of general insurance and life insurance that provides otherwise is void. However, parties may agree to submit a dispute or difference to arbitration if the agreement was made after the dispute or difference arose. Further, Section 52 of the Insurance Contracts Act prevents a party from contracting out of the effect of Section 43 of the Insurance Contracts Act.⁶¹

Exclusive jurisdiction clauses which provide that disputes in connection with the contract of insurance are to be dealt with by a non-Australian court are an example of a clause that would contravene the public policy behind the Insurance Contracts Act.

In Akai Pty Ltd v. People's Insurance Co Ltd,⁶² Toohey, Gaudron and Gummow JJ had to consider whether proceedings in Australia should be stayed in favour of court proceedings in the United Kingdom pursuant to a jurisdiction clause. The application was made on the basis that a UK court would not be obliged to apply the provisions of the Insurance Contracts Act. Akai had relied upon Section 54 of the Act to respond to the denial of liability by People's Insurance. The plurality said that:

s 52 [of the Insurance Contracts Act provides] a direct answer [to the application for a stay] . . . The section operates to render void a provision of the Policy which would, but for s 52(1), have the effect of excluding, restricting or modifying, to the prejudice of Akai, the operation of the Act. The phrase 'the operation of this Act' includes the operation, to the advantage of Akai, of s 54.

The High Court therefore declined to order a stay of the Australian proceedings as a result.

An arbitration agreement in a contract of reinsurance is, however, enforceable.

ii Litigation

The Federal Court of Australia has its own specialist insurance list and discrete insurance disputes may be determined in that forum. Otherwise, the dispute may be determined within the state or territory court systems. The relevant court will be determined by the amount in dispute as the courts within the state or territory court systems each have jurisdictional limits. Further, the Supreme Court of New South Wales has its own insurance list in the Common Law Division. Parties, however, sometimes opt to commence their proceedings in the Commercial List of the Equity Division. Proceedings are typically commenced by pleadings with each court having their own rules as to form.

Evidence

Evidence is via exchange of affidavits and other expert reports. That evidence is read into evidence during the trial and parties have a right to cross-examine.

Costs

A successful party is generally entitled to its reasonable costs of the proceedings. The rules of court typically provide a mechanism for parties to protect their costs position by the service of an offer of compromise. A party is automatically entitled to indemnity costs if it has served an offer of compromise in accordance with the rules of court and it has ultimately done better than the offer of compromise. Unless a lump sum costs order is made by the court then the quantum of the costs would have to be assessed by a costs assessor.

iii Arbitration

Insurance arbitrations can either be conducted on an ad hoc basis or subject to the institutional rules of an arbitration institution of choice. The Australian Centre for International Commercial Arbitration and the Resolution Institute are two popular institutions, each with their own sets of procedural rules.

Domestic arbitrations are governed by the Commercial Arbitration Act of the relevant state or territory that seat of the arbitration. If the arbitration is an international arbitration, then the International Arbitration Act 1974 (Cth) would apply.

Evidence

Evidence in an arbitration is similar to evidence in court proceedings.

Costs

As in court proceedings, a successful party is entitled to its costs. However, depending upon the application rules governing the arbitration, those costs may be capped. For example, the Resolution Institute arbitration rules caps the fees recoverable depending upon the quantum in dispute. It is open to the parties to waive these caps.

iv Mediation

Mediations and informal settlement conferences are very popular in Australia. They are actively encouraged by the courts, and parties may either organise their own mediator or use a registrar provided by the court. Cases typically do not proceed to final hearing before the parties have engaged in a mediation.

Year in review

In a recent key case, Allianz Australia Insurance Ltd v. Delor Vue Apartments CTS 39788,⁶³ the High Court of Australia said that an insurer can change its mind to deny indemnity even after it has told the insured that indemnity is granted. The latter is not a waiver of an insurer's right to deny indemnity in accordance with rights under the Insurance Contracts Act. The High Court said that (in Australia), there are two categories of election. A person's rights are extinguished as a consequence of either the completed exercise of a power to extinguish the rights, or the full satisfaction of alternate and inconsistent rights. Contrary to what the Full Federal Court had said, there is not a third category of election that would prevent a person from adopting inconsistent positions.

Outlook and conclusions

It remains to be seen whether the insurance market will continue to tighten for long-tail claims and D&O insurance. It is the view of the writer that the market will continue to tighten for construction professional indemnity insurance in the short term before the legislative changes implemented in New South Wales have their desired effect of raising the quality of residential apartment buildings in New South Wales. At the time of writing, the quality of residential apartment buildings in New South Wales is such that it will be very difficult for design and building practitioners to fulfil their obligation to carry professional indemnity insurance for their work on residential apartment buildings. However, as more and more developers and builders obtain decennial liability insurance for residential apartment buildings, this will lead to an increase in the quality of build for residential apartment buildings and a collateral reduction in claims. There have been significant price increases for professional indemnity policies for engineers and certifiers with reports that insurers are offering lower limits of indemnity. Similar legislative changes to raise consumer confidence are in the works in Victoria and the rest of Australia. Change is, however, slow.