Last week, the Australian Government passed legislation in response to the global financial crisis. Of particular interest to insurers is the Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 (the “FCS Bill”), which is designed to assist policyholders should a general insurer become insolvent. A general insurer is an insurer licensed to transact insurance business in Australia and includes foreign insurers. The FCS Bill allows eligible policyholders to make claims through a dedicated compensation scheme, rather than through the normal liquidation process. Eligible policyholders include, among others, many individuals and small business, but not large corporate insureds or reinsurance policyholders. Investment products, such as mutual funds, and products offered by institutions not regulated by the Australian Prudential Regulation Authority (“APRA”) will not be covered.
The FCS Bill allows the APRA to administer a Policyholder Compensation Facility (“PCF”). APRA will determine whether claims are valid and make payments to eligible insureds. If compensation is paid, the insured's rights are transferred to APRA, which can then make a claim against the insolvent insurer. Should the insolvent insurer be unable to cover the costs of the PCF an assessment of other general insurers not to exceed 5% of gross premiums is allowed under another bill, the Financial Claims Scheme (General Insurers) Levy Bill 2008 (the “Levy Bill”).
The FCS Bill also provides that APRA or the insolvent insurer may apply under certain circumstances to have a judicial manager oversee the liquidation in the interests of policyholders, rather than the customary external liquidation administration in the interests of creditors or members.