Bills Digest No. 121 2002-03
Medical Indemnity (Prudential Supervision and Product
Standards) Bill 2002
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Concluding Comments
Endnotes
Contact Officer & Copyright Details
Passage History
Medical Indemnity (Prudential
Supervision and Product Standards) Bill 2002
Date Introduced:
12 December 2002
House: House of Representatives
Portfolio: Treasury
Commencement:
1 July 2003
Purpose
The purpose of
this Bill is to create a regime for the regulation of providers of
medical indemnity insurance.
This Bill forms part of the Government s package
of reforms, announced by the Prime Minister in October 2002, to
address the problems being experienced by providers of medical
indemnity insurance in Australia.(1)
The current medical indemnity insurance crisis
is characterised by an inability to provide affordable medical
indemnity cover to insureds at a level that is financially
sustainable to insurance companies. Clear evidence of the effects
of this crisis have been large premium increases for
insureds(2), and the appointment of a provisional
liquidator to the country s largest medical defence organisation
(MDO), UMP Insurance, in May 2002.
The medical indemnity crisis forms part of the
broader insurance crisis in Australia. Several reports have been
commissioned which document and inquire into the sources of the
crisis.(3) These reports have identified a number of
cost elements as having driven up the price of indemnity insurance
in Australia (for example, increases in the costs of claims and the
downturn in the international investment market). The Government s
package of medical indemnity bills passed by Parliament in December
2002 in part addresses some of the cost pressures that have led to
the insurance crisis through the provision of premium subsidies and
Government funding for large claims notified after 1 January 2003.
A discussion of these bills is contained within Bills Digest No
71 Medical Indemnity Bill 2002(4).
Also included in the list of factors
contributing to the medical indemnity crisis has been the weakness
in the regulatory supervision of MDO s.
The Trowbridge Consulting report of November
2001 noted that:
As MDO s are not insurers, they have not been
subject to the same accounting and reporting requirements as
insurers. MDO s need to comply with the usual company accounting
standards but do not need to comply with AASB1023 or AAS26 which
apply to general insurers. This has led to a variety of accounting
practices in relation to:
-
- The reporting of Incurred But Not Reported (IBNR) claims
..
-
- Full insurance disclosures of known claims liabilities
Liabilities for known, reported claims have
always been reported in MDO s balance sheets. However, there has
been inconsistency in reporting of IBNR s between MDO s, with some
including the IBNR on their balance sheet, others disclosing it in
a note to the accounts, and others not disclosing the extent of the
IBNR.(5)
The report to the Australian Health Ministers
Advisory Council (AHMAC) stated that:
One of the reasons that the MDO industry has
experienced financial difficulties is that it has not been subject
to same prudential scrutiny as insurers. The difficulties faced by
UMP were of a kind which may well have been identified and acted on
earlier if there were a regulatory regime in place. Some of the key
problems of competitive underpricing of products and a failure to
adequately reserve for potential liabilities are likely to have had
to be addressed at an earlier stage.(6)
Many MDO s are currently not required to comply
with the insurance specific regulatory requirements in the
Insurance Act 1973. The requirements within the
Insurance Act 1973 apply to all other providers of general
insurance (including other forms of professional indemnity
insurance).
The Insurance Act 1973, which was
substantially amended in 2001, contains a rigorous prudential
regulatory regime in relation to general insurers. It requires that
insurers comply with the following regulatory requirements;
-
- APRA authorisation to a body corporate for carrying on an
insurance business in Australia.(7)
-
- Standards of conduct, including fit and proper person
requirements for directors, senior managers and other
representatives of general insurers and their authorised non
operating holding companies (NOHC s).(8)
-
- Prudential supervision of general insurers, including APRA
determination of prudential standards.(9)
-
- All general insurers to have an APRA approved actuary and
auditor.(10)
-
- Standards of conduct, including fit and proper person
requirements for actuaries and auditors.(11)
-
- Minimum asset requirements placed on general
insurers.(12)
The legislation and standards made pursuant to
it, focus on governance and the insurers financial ability to meet
claims.
In essence, this Bill draws providers of medical
indemnity cover under the regulatory arrangements contained within
the Insurance Act 1973. The bill will also states that
insurance contracts will need to meet minimum standards to ensure
that health practitioners receive cover for all claims that may be
made against them.
The Australian Financial Review in an
article dated 18 February 2003(13), reported that three
MDO s, the Medical Protection Society of Tasmania, Queensland
Doctors Mutual and the Medical Indemnity Protection Society had
expressed opposition to the bill.
Whilst the article does not set out in detail
the concerns held by each body, the article does raise two key
issues of concern for MDO s, namely that;
-
- indemnities will now need to be provided on a contractual
rather than a discretionary basis (see discussion at page 5).
-
- the MDO s may be unable to meet their obligations in relation
to minimum capital requirements
(see discussion at page 6 ).
Claims made cover: insurance cover for
claims reported to the insurer during the term of the insurance
policy.
Normally claims made cover only insures against
incidents that occurred during the term of the insurance policy.
Events that took place prior to the commencement of the insurance
policy but which were notified during the operation of the
insurance policy will be covered if the insured holds retroactive
cover.
An insured who holds claims made cover ,
retroactive cover and run off cover will essentially have the same
coverage as claims incurred policy.
Claims incurred cover: otherwise known
as incident occurring or occurrence based cover is insurance cover
for any claim arising out of an incident that took place during the
term of the insurance policy, regardless of when the claim was
notified.
Retroactive cover: insurance cover for
claims arising out of incidents that took place before the
commencement of the current insurance policy.
Retroactive cover is often provided in
conjunction with claims made cover. Where retroactive cover is
provided in conjunction with claims made cover, it insures against
claims arising out of incidents that occurred before the
commencement of the current claims made policy, but which are
notified during the term of the current claims made policy. Without
retroactive cover, these claims would be uninsured.
Run off cover: or extended reporting
benefit cover is cover for claims that are made after a claims made
insurance policy expires for incidents that occurred during the
term of the policy.
Incurred but not reported claims: are
claims where there is a time lag between when the incident
producing the claim occurs and when the insurer is notified of the
claim. Claims incurred cover creates a vast number of incurred but
not reported claims.
Part 1 Division 1 of the Bill
sets out the objects of the Act, namely to ensure that health care
professionals have access to medical indemnity cover that is
provided by properly regulated insurers and to specify minimum
standards to be provided to health care professionals.
Key definitions including claim , providing
medical indemnity cover , claims made based cover and incident
occurring based cover , are contained within clauses 4
6 of the Bill. Clause 7 of the bill sets
out the period when arrangements for death, disablement and
retirement cover are taken to be entered into for the purposes of
having to meet the requirements of the Act.
The Bill excludes certain groups from the
application of the Act including State Government and Commonwealth
Government provided insurance (clause 8) and
extends the application of the Bill to the external territories
(clause 9).
As discussed above, many providers of medical
indemnity cover are not captured by the prudential regulatory
requirements that apply to other general insurers in
Australia.(14) MDO s provide protection to their members
on a discretionary basis. Discretionary cover entitles a member to
seek indemnification from an MDO. However, a member has no legal
right to be indemnified, and the MDO can exercise its discretion
not to indemnify the member.
While this discretionary medical indemnity cover
appears in substance to be an insurance product, it does not fall
within the terms of the definition of insurance business for the
purposes of the Insurance Act 1973. Since providers of
this cover are not conducting an insurance business, they are not
required to become an authorised insurance company in order to
provide the cover. As a result, APRA does not have the power to
regulate these MDO s nor are they subject to the prudential
requirements contained within the Insurance Act 1973.
Clause 10 of the Bill amends
the law to ensure that providers of medical indemnity cover become
subject to the same regulatory requirements that apply to other
providers of general insurance.
Clause 10 of the Bill contains
two key requirements. It states that a person that offers, invites
an offer, enters into or renews medical indemnity cover must be a
general insurer (therefore authorised under the Insurance Act
1973 to carry on insurance in Australia). In addition, the
clause provides that the insurance must be provided through a
contract of insurance , thereby ensuring that provision of the
cover is regarded as insurance business .
In effect, these amendments will mean that MDO s
will be unable to provide discretionary cover and as stated above,
they will be required to comply with the requirements of the
Insurance Act 1973.
Contravention of this provision is a criminal
offence with a maximum penalty of 12 months imprisonment.
The Bill also limits the conduct of insurance
intermediaries (for example insurance brokers) in regard to the
provision of medical indemnity cover. Clause 11
provides that an insurance intermediary can only arrange, offer to
arrange, renew or recommend that someone enter into or renew
medical indemnity cover if the cover provider is a general insurer
and the arrangement is effected by way of a contract of insurance
.
Contravention of this provision is a criminal
offence with a maximum penalty of 12 months imprisonment.
As a result of clause 10 of the
Bill, providers of medical indemnity insurance will need to become
authorised(15) and hence will be required to operate in
compliance with the prudential standards(16) that have
been developed by APRA. APRA will be responsible for enforcing
compliance with these prudential standards (clause
28).
The legislation contains transitional provisions
that give providers of medical indemnity insurance time to comply
with the prudential standards relating to minimum capital
requirements. Prudential Standard GPS 110 sets out minimum capital
requirements for insurers. This prudential standard requires that
insurers hold a minimum of $5 million capital at the point of start
up. Some MDO s may not be in a position to comply immediately with
these obligations and the Bill contains transitional provisions to
give MDO s until 1 July 2008 to acquire the $5 million in
capital.
In order to take advantage of these
arrangements, MDO s may apply to APRA for an exemption from the
capital requirements (clause 13-14). An MDO s
application will need to be accompanied with a funding plan which
sets out the detail of how the insurer intends to bring their
capital requirements up to the minimum level set down in the
prudential standards.
APRA will be required to grant the exemption
from the capital requirements provided:
-
- The body corporate is not a general insurer at the time of the
application,
-
- The body corporate is not able to meet the capital requirements
when the legislation commences operation,
-
- The body corporate lodges a funding plan which is,
-
- in the prescribed form,
-
- certified by an independent auditor and actuary, and
-
- complies with the guidelines issued by APRA.
APRA s decision to exempt an MDO from the
capital requirements is subject to review by the Administrative
Appeals Tribunal (clause 14).
Part 3 sets out requirements
that medical indemnity insurance contracts must meet.
The insurance contract must satisfy the
following minimum claim requirements, namely, that
-
- the minimum cover for a single claim must be $5 million
(clause 17), and
-
- the minimum cover for all claims in any given year of $5
million (clause 18).
It is an offence for an insurer to provide cover
of less than this amount. A contravention of this requirement
incurs a maximum penalty of 12 months imprisonment (clause
17).
The Bill also states that providers of claims
made medical indemnity cover will be required to offer to the
insured retroactive cover (clause 21 and 22) and
run off cover (clause 23) to ensure that the
insureds are comprehensively covered for all claims that may be
made against them.
Until 1997, all MDO s provided protection on a
claims incurred basis. Currently some MDO s only offer claims made
policies.(17) The Trowbridge Report stated that the main
reason for this shift has been;
The greater level of predicability of the costs
of claims made protection rather than claims occurring protection,
owing to the long reporting delays that can occur with medical
indemnity. From a pricing perspective, it was very difficult to get
it right ; when protection is issued on a claims occurring basis
[because of the large number of incurred but not reported
claims](18)
There are however gaps in the coverage of claims
made policies and this Bill seeks to remove these gaps by imposing
the requirement to supply additional cover.
Under the Bill, retroactive cover must be
offered at the time that the insurer offers claims made cover.
Retroactive cover , will ensure that incidents that took place
before the commencement of the claims made policy that give rise to
claims notified during the term of the claims made policy, are
covered by indemnity insurance. If the insured does not hold
retroactive cover , these claims will be uninsured as claims made
cover only applies to incidents that occur and are notified
during the term of the policy.
In addition, an insurer that provides claims
made cover to an insured must offer run off cover to the insured if
the insured dies, becomes disabled, retires, terminates their
insurance policy, does not renew their insurance contract, or
during the term of the policy, specifically makes a request for run
off cover. A claims made policy ceases when one of these events
(other than making a request for run off cover) occurs. A claim
that arises from an incident that occurred whilst the claims made
policy was active and that was notified after the policy terminates
will be uninsured. Run-off cover provides indemnity insurance for
these claims.
Failure to provide retroactive or run-off cover
is an offence with a maximum penalty of 12 months imprisonment
(clauses 22 and 23).
Offers for run-off cover and retroactive cover
must comply with the requirements set out in clause
24, including the requirement that the offer must take the
form an insurance contract, and the premium to be paid on the
policy is reasonable.
APRA may issue guidelines to determine if the
premium that is payable is reasonable (clause
25).
The Australian Securities and Investments
Commission is responsible for the ensuring that these minimum
standards are met (clause 30). If an insurer fails
to comply with the requirements to provide retroactive and run-off
cover, the Federal Court may grant an injunction ordering the
insurer to offer the cover.
Insurance intermediaries are also required to
ensure that the policies that they offer comply with the minimum
cover requirements in clauses 16-20 or the
retroactive cover requirements in clause 22.
Interestingly, an insurance intermediary is not required to ensure
that the policies that they offer comply with the requirement to
offer run-off cover.
Part 5 of the Act contains
anti-avoidance provisions. Under these provisions, where
arrangements for medical indemnity cover were entered into before 1
July 2003 and the sole or dominant purpose of entering into these
arrangements was to avoid having provisions of the Bill apply to
them, the arrangement will be one that is treated as being entered
into after 1 July 2003 and hence subject to all the requirements
within the Bill.
This Bill puts in place key regulatory
requirements to ensure that providers of medical indemnity
insurance meet the prudential regulatory requirements that are
imposed on all other providers of general insurance in
Australia.
In addition to this, the Bill states that
medical indemnity insurance contracts must have certain key
attributes so that health care professionals have access to
insurance policies that give then complete coverage.
The Bill forms part of the Government s package
of legislative measures to respond to the insurance crisis and are
designed to address underlying deficiencies in the current
arrangements for the regulation of MDO s in Australia.
- A New Medical Indemnity Insurance Framework, Media
Release, Mr John Howard, Prime Minister, 22 October 2002:
http://www.pm.gov.au/news/media_releases/2002/media_release1937.htm,
(25 February 2003).
- The AHMAC Legal Process Reform Group, Responding to the
Medical Indemnity Crisis: An Integrated Reform Package, 2002
stated that in 2001, UMP premiums rose by an average of 50% (page
4): [http://www.health.act.gov.au/publications/medicalindemnity/index.html],
(25 February 2003).
- Gillian Harrex et al, Medical Indemnity in Australia, Presented
to the Institute of Actuaries in Australia XIII General Insurance
Seminar, Trowbridge Consulting, November 2001: [http://www.trowbridge.com.au/4A2568A90009B04D/0/B5C44D7ADCDC789DCA256BDC0001B3F3/$FILE/Med_Indem_Aust_Apr02.pdf?OpenElement],
(25 February 2003) AHMAC Legal Process Reform Group, Responding
to the Medical Indemnity Crisis: An Integrated Reform Package,
2002: [http://www.health.act.gov.au/publications/medicalindemnity/index.html],
(25 February 2033) Australian Competition and Consumer Commission,
Second Insurance Industry Market Pricing Review (2002),
September 2002.
- Susan Dudley. Medical Indemnity Bill 2002 , Bills Digest No 71,
2002 2003, Department of the Parliamentary Library: http://www.aph.gov.au/library/pubs/bd/2002-03/03bd071.htm
- Gillian Harrex op. cit, p. 19.
- The AHMAC Legal Process Reform Group op. cit, p. 95.
- Insurance Act 1973, sections 9 17.
- Insurance Act 1973, section 24 27.
- Insurance Act 1973, section 32 35. APRA has released a
number of prudential standards; Capital Adequacy for General
Insurers, Assets In Australia for General Insurers, Liability
Valuation for General Insurers, Risk Management for General
Insurers, Reinsurance Arrangements for General Insurers, Transfer
and Amalgamation of Insurance Business for General Insurers, Early
Approvals of Auditors and Actuaries. A copy of these
prudential
standards is located at: [http://www.apra.gov.au/General/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=4206],
(25 February 2003).
- Insurance Act 1973, section 39 40.
- Insurance Act 1973, section 44.
- Insurance Act 1973, section 28.
- Doctors insurance plan in trouble , The Australian
Financial Review, 18 February 2003.
- It is not entirely accurate to say that MDO s are never subject
to the Insurance Act or APRA regulation. For example Australian
Medical Insurance Limited (AMIL) provide insurance policies to
doctors.
- Section 12 Insurance Act 1973.
- Section 32 Insurance Act 1973.
- Gillian Harrex op. cit p. 12.
- Gillian Harrex, op. cit p. 13.
Susan Dudley
3 March 2002
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