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Licensing framework for specialised insurers

1. Introduction

1.1   The Workers Compensation Act 1987 (1987 Act) provides for the licensing of insurers in NSW.

1.2   Specialised insurers are licensed under the 1987 Act to underwrite workers compensation risks for employers of a defined industry.

1.3   The Licensing framework for specialised insurers under Division 3 of Part 7 of the Workers Compensation Act 1987 (the framework) will not be applied in substitution for, or by way of restriction on, the State Insurance Regulatory Authority (SIRA) statutory discretion to grant, refuse, suspend or cancel specialised insurer licences (licence).

1.4   This framework covers the requirements for obtaining a licence, general licence conditions and the conduct required of specialised insurers, including their ongoing obligations to SIRA as the regulator of licences and to their insured employers and workers.

1.5   This framework is subject to periodic review by SIRA and may change following a review.

1.6   Where appropriate, the requirements of this framework are reflected in licence conditions.

2. Relevant legislation

2.1   Division 3 of Part 7 of the 1987 Act contains the legislation relevant to specialised insurer licenses. Users of this framework should make their own reference to the relevant legislation and obtain independent professional advice if necessary.

2.2   A specialised insurer is defined in section 3 of the 1987 Act as: ‘a licensed insurer whose licence is endorsed with a specialised insurer endorsement’. The granting of a specialised insurer endorsement on a licence is the mechanism for achieving specialised insurer status under the 1987 Act.

2.3   Section 177(1) of the 1987 Act states that an application may be made for a licence by:

a) any body corporate if the application is conditional on the licence being endorsed with a specialised insurer endorsement.

2.4   Section 177(A) of the 1987 Act provides for certain criteria to be satisfied by an applicant before a specialised insurer endorsement can be granted and the suspension or cancellation of the endorsement if those requirements do not continue to be met by an existing licensed insurer.

2.5   Section 178 of the 1987 Act gives SIRA the discretion to grant or refuse a licence application and identifies what it may take into consideration in its determination of an application for a licence.

2.6   Section 181(1) of the 1987 Act enables SIRA to impose conditions on the grant of a licence. Conditions may also be imposed or varied by SIRA on renewal of the licence or at any time during the currency of the licence. For current licence holders, SIRA will give reasonable notice of intention to exercise this power and give the licence holder an opportunity to make representations in relation to it before the changes take effect.

2.7   Section 182 of the 1987 Act provides a list of the types of conditions that may be included in a licence. The list is non-exhaustive and conditions may be imposed for any other purpose that is consistent with the legislation.

2.8   The cancellation or suspension of licences is outlined under section 183 of the 1987 Act.

3. Licensing framework objectives

3.1   SIRA is the regulator of the workers compensation system in NSW and its general powers to promote the objectives of the workers compensation system are relevant to the exercise of its authority to issue and regulate specialised insurer licenses. The Workplace Injury Management and Workers Compensation Act 1998 (1998 Act) specifies that the general functions of SIRA include, but are not limited to:

  • a.  ensuring compliance with the workers compensation and the work health and safety legislation
  • b.  monitoring the operation and effectiveness of the workers compensation and work health and safety legislation, and the performance of the schemes to which the legislation relates, and
  • c.  reviewing key indicators of financial viability and other aspects of the schemes.

3.2   The primary objectives of the framework for specialised insurers are:

  • a.  ensuring the efficiency and viability of the NSW workers compensation system
  • b.  ensuring that the specialised insurers will not have an adverse effect on the efficiency of the workers compensation scheme
  • c.  ensuring that the specialised insurers will deliver optimum workers compensation outcomes to employers and workers sustainably by:
    • i.  promoting work health and safety, recovery outcomes and return to work practices for the Defined Industry
    • ii.  providing access to fair and reasonable workers compensation insurance in connection with suitable risk assessment
    • iii.  satisfying the requirements of the Australian Prudential Regulation Authority (APRA) to demonstrate the solvency of the specialised insurers.
  • d.  ensuring that the specialised insurers will invest in appropriate systems and infrastructure to meet the legislative and SIRA’s requirements, as well as reasonable expectations of employers and workers, in respect of:
    • i.  support to the employer’s work health and safety practices
    • ii.  underwriting and premium calculation
    • iii.  claims management
    • iv.  return to work planning and administration
    • v.  data and information required to assist SIRA in its ongoing monitoring, regulation and review of the specialised insurers.
  • e.  ensuring that the specialised insurers will comply with legislative requirements, licensing framework and licensing conditions, and statutory guidelines as required.

3.3   This framework applies to all applications to renew or for a new specialised insurers licence from the date of issue. Where necessary, a transition period up to 12 months from the issue date of this framework will be provided to existing licence holders to adopt the licencing conditions under this framework.

4. Industry definition

In accordance with section 177A of the 1987 Act, a specialised insurer will be licensed to underwrite policies for a particular industry or class of business or employer. The agreed coverage is referred to as the ‘Defined Industry’.

The Defined Industry will be a list of primary activities agreed by SIRA within the WorkCover Industry Classification (WIC) codes as defined in the Insurance Premiums Order.

Once a Defined Industry is approved by SIRA for a specialised insurer, SIRA will not allocate this Defined Industry or part thereof to any other specialised insurer.

The Defined Industry will be strictly applied to determine coverage or otherwise of an employer under the licence. A specialised insurer shall issue or renew a policy of workers compensation insurance to employers operating in the Defined Industry that request coverage, and will not be permitted to exclude which risks are covered.

The Defined Industry will not be restricted to employers by connection to any membership or specified group or association.

5. Application requirements

SIRA will consider an application for a specialised insurer licence in accordance with the provisions of Part 7 Division 3 of the 1987 Act and on its individual merits.

5.1 Notification and information to be provided

Interested parties intending to apply for a licence should contact SIRA as early as possible to understand SIRA’s expectations. SIRA will assist any prospective applicants on any aspects relating to their licence application, including the assessment of their proposed Defined Industry.

Applications for a new specialised insurer licence must provide all the information detailed in the Application for a new specialised insurer licence: requirements. Applications are to be accompanied by a declaration made by an authorised officer of the applicant.

Applications to renew a specialised insurer licence must provide all the information detailed in Application to renew a specialised insurer licence: requirements. Applications to renew are to be accompanied by a declaration made by an authorised officer of the applicant.

5.2 Application fees and payments

An application fee is payable to the State Insurance Regulatory Authority at the time of application for an initial licence. The fee, as specified within the Application for a new specialised insurer licence: requirements, is non-refundable irrespective of the outcome of the application.

No fee is payable to apply to renew a specialised insurer licence.

5.3 Notice of Application

On receipt of an application for a new licence or to renew an existing licence, SIRA will provide notification on the SIRA website or through other means. The period of notification and content of the response are stated within the Specialised insurer stakeholder consultation: requirements.

6. Licensing framework

6.1 Compliance with statutory requirements and licence conditions

Specialised insurers must comply with all statutory requirements and licence conditions.

Under section 181 of the 1987 Act, SIRA may vary or impose further conditions on a licence. This will only occur after notice to the licence holder and the licence holder is given an opportunity to make representations in relation to the proposed addition or variation.

6.2 Defined Industry restrictions and premium setting

A licence will contain specific conditions that restrict a licensee’s business to their Defined Industry.

A specialised insurer is only permitted to issue and renew workers compensation insurance policies to employers operating in the Defined Industry.

Any request to materially change the Defined Industry may require the specialised insurer to make an application in accordance with the Application for a new specialised insurer licence: requirements.

It is the responsibility of a specialised insurer to provide access to fair and reasonable workers compensation insurance to all employers operating in the Defined Industry that request coverage. A specialised insurer will not be permitted to exclude which risks are covered. This requirement ensures that specialised insurers will not have an adverse effect on the efficiency of the workers compensation scheme by choosing which risks are covered. Where this requirement is not met, SIRA will investigate any circumstances of non-compliance and may impose additional licence conditions.

6.3 APRA authorisation to carry on insurance business

Unless lawfully authorised by specific legislation, a specialised insurer must be authorised under the Insurance Act 1973 (Commonwealth) to carry on general insurance business in Australia at all times during the term of a licence. A specialised insurer must comply with the financial conditions and directions to which its authority under the Insurance Act 1973 is subject.

A specialised insurer must notify SIRA in writing within five business days of:

  • any material non-compliance with the financial conditions and directions to which its authority under the Insurance Act 1973 is subject; and
  • any material non-compliance with a requirement of the Financial Sector (Collection of Data) Act 2001, the Insurance Act 1973 or Commonwealth insurance regulations.

The notification must be in writing to SIRA in accordance with the Requirements for providing notification by specialised insurers and include all details relating to the non-compliance including any financial or operational impact and outlining a timeframe to resolve the issue.

A specialised insurer must provide to SIRA within five Business Days:

  • Copies of the GRF 110 Capital sections of the quarterly and annual financial returns submitted to APRA
  • In relation to the solvency of the specialised insurer, any notice issued by APRA or the Treasurer to the specialised insurer (or any authorised non-operating holding company) under the Financial Sector (Collection of Data) Act 2001 and the Insurance Act 1973.

There is no requirement for a specialised insurer to provide SIRA with any commercially sensitive information.

6.4 Control and ownership

A specialised insurer must be a body corporate that is owned and controlled by a relevant professional, business or other industry body with a substantive, long established peak (and publicly recognised) involvement with the particular industry or class of business that is the subject of the proposed specialised insurance arrangement.

A specialised insurer must satisfy the following criteria of ownership and control, with the relevant professional business or industry body having:

  • ultimate beneficial ownership of at least 50 per cent of the shares and paid up capital of the insurer; and
  • control of at least 50 per cent of the votes that may be cast at a general meeting of the insurer, except with the prior written consent of SIRA and on such terms as SIRA may specify and agree.

A specialised insurer must notify SIRA in writing within five business days of any change in the control and ownership of the specialised insurer.

A specialised insurer must notify SIRA in writing within 10 Business Days of becoming aware of an application made or an approval issued, under the Financial Sector (Shareholdings) Act 1998 or the Insurance Acquisitions and Takeovers Act 1991, in respect of the specialised insurer.

A specialised insurer must notify SIRA in writing within 10 business days of making an application, or obtaining an approval, under the Financial Sector (Shareholdings) Act 1998 or the Insurance Acquisitions and Takeovers Act 1991, in respect of another licensed insurer.

The notification must be in writing to SIRA in accordance with the Requirements for providing notification by specialised insurers.

A specialised insurer must not enter into any transaction the effect, or purported effect, of which is to transfer the whole, or a material part of, its NSW workers compensation portfolio without SIRA’s prior written approval.

6.5 Governance – appointed directors

A specialised insurer must have a board of directors that is able to soundly manage and underwrite its defined industry to achieve optimum outcomes for its insured employers and workers.

Except with the prior written consent of SIRA, the directors of a specialised insurer collectively must have extensive experience and skills in:

  • the industry that is the subject of the specialised insurance arrangement
  • workers compensation insurance and
  • underwriting.

6.6 Financial viability and security

6.6.1 Financial viability and strength

A specialised insurer must have long term financial viability, prudent claims reserving policies and sufficient financial resources to meet its workers compensation claims liabilities as a specialised insurer.

A specialised insurer must satisfy SIRA that it is adequately capitalised, has a strong financial position based on net tangible assets and has a sound profit and cash flow history. It will be expected to explain and advise what measures it will take to rectify any material decline in capital adequacy during the term of the licence.

6.6.2 Financial security

A specialised insurer must provide financial security to SIRA in respect of their outstanding workers compensation claims liabilities in accordance with section 182(1) of the 1987 Act. The provision of security ensures that other employers in NSW will not be required to incur the claims costs of specialised insurers in the event that they are unable to meet their workers compensation liabilities.

A specialised insurer must provide to, and maintain at all times with, SIRA financial security for its total outstanding claims liabilities.

The types and forms of security that will be accepted and the terms under which the security is accepted are outlined in Security deposits for self and specialised insurers: Policy.

The amount of security required is the value of outstanding liabilities as set out in section 6.6.3.

6.6.3 Actuarial determination of outstanding claims liability

A specialised insurer must provide SIRA with an actuarial report on at least an annual basis certifying the amount of total outstanding claims liabilities incurred as a specialised insurer.

Outstanding claims liabilities relate to all claims incurred prior to the valuation date, whether or not claims have been reported to the specialised insurer. The value of the outstanding claims liabilities must include an amount in respect of the expenses that the insurer expects to incur in settling these claims.

The minimum value of outstanding claims liabilities must be the greater of a value that is:

  • a. determined on a basis that is intended to value the claims liabilities of the insurer at a 75 per cent level of sufficiency; and
  • b. the central estimate plus one half of a standard deviation above the mean for the claims liabilities of the insurer.

The report must be prepared by an actuary in accordance with Professional Standard 300 (valuations of general insurance claims) issued by the Institute of Actuaries and identify the entity or entities covered by the report, clearly state the central estimate of outstanding claims liabilities, value of the claims liabilities at 75 per cent level of sufficiency and central estimate plus one half of the standard deviation above the mean and specify the assumptions upon which the determination is based.

In determining the amount of total outstanding claims liability, the specialised insurer’s actuary must also comply with all applicable professional standards and for APRA regulated specialised insurers, APRA requirements.

A specialised insurer not regulated by APRA because of specific statutory provisions is required to have its actuary adopt any assumptions advised and provided by SIRA from time to time regarding the appropriate discount rate, claims administration expenses and other such items in determining the central estimate of total outstanding claims liability.

6.6.4 Provision in financial statements for outstanding claims liability

A specialised insurer must make provision in its financial statements for outstanding workers compensation claims for an amount not less than the central estimate of the outstanding claims liabilities plus any additional risk margin required by Australian Accounting Standards and/or APRA prudential standards.

A specialised insurer not regulated by APRA because of specific statutory provisions is required to provide a letter stating that adequate provision has been maintained within the financial statements.

6.6.5 Re-Insurance

A specialised insurer must at all times have in place appropriate re-insurance coverage in respect of its workers compensation risks.

A specialised insurer not regulated by APRA because of specific statutory provisions must satisfy SIRA that it has appropriate re-insurance cover providing details of the arrangements including copies of the reinsurance policy and certificate of currency on an annual basis.

6.7 Workers compensation operational capability

6.7.1 Operational capability

A specialised insurer must demonstrate ongoing capability and capacity to undertake workers compensation insurance business in New South Wales and comply with all workers compensation statutory requirements.

Specialised insurers must have the necessary infrastructure, systems, processes and resources required to:

  • meet their workers compensation insurance business obligations and requirements under the applicable legislation and statutory guidelines
  • comply with the licence conditions
  • comply with any directions issued by SIRA under section 194 of the Act.

Unless otherwise agreed by SIRA, a specialised insurer is required to establish and operate a head office and/or branch network in NSW supporting an operational framework for the conduct of their workers compensation insurance business that includes:

  • underwriting and administration of policies of insurance
  • claims management and administration
  • complaints handling and management
  • information systems that capture, store, manage and provide accurate and timely workers compensation policy and claims data in accordance with SIRA’s data and information submission requirements.

6.7.2 Claims management

A specialised insurer is required to implement and operate a case management model incorporating injury management and claims administration in accordance with the requirements of the workers compensation legislation and statutory guidelines to achieve optimal return to work outcomes.

The specialised insurer is required to develop, implement and maintain an injury management program specific to the industry or class of business that is the subject of the specialised insurance arrangements for the timely, safe and durable return to work and recovery for injured workers. The injury management program must be developed in accordance with the requirements of section 43 of the 1998 Act with any revisions notified to SIRA.

The specialised insurer must comply with the requirements of the Insurer audit manual. Specialised insurers are required to submit self-audit results to SIRA in accordance with the Insurer audit manual or as otherwise specified by SIRA.

SIRA will conduct case management audits on specialised insurers periodically and at least once within a licence period, or as determined necessary, in accordance with the Insurer audit manual. The audit outcome will be considered part of the licence renewal process.

6.7.3 Claims handling by employers

Where a specialised insurer wishes to allow its insured employers to participate in the process of claims handling, this practice will not be discouraged, provided that the specialised insurer does not delegate its accountability and responsibility for claims management and administration, including return to work and recovery outcomes for injured workers.

6.7.4 Complaints handling

A specialised insurer is required to develop, implement and operate a complaints handling model in accordance with SIRA’s Complaints handling framework. Complaints are expected to be managed and resolved within the timeframes established by the framework.

6.7.5 Work Health and Safety Loss Management Program

A specialised insurer is required to demonstrate that it has a Work Health and Safety Loss Management Program in place. This program should focus on systematic work health and safety approaches and on work health and safety industry specific problems utilising risk management principles.

A specialised insurer has the flexibility to use a variety of proprietary or in house verification programs to assist insured employers meet their work health and safety obligations. SIRA will measure a specialised insurer’s performance against the work health and safety loss management assessment criteria. The assessment will be considered part of the licence renewal process.

6.7.6 Provision of data and information

A specialised insurer is required to provide policy and claims data and other information to SIRA on a timely basis and in accordance with the workers compensation legislation and SIRA’s data requirements. The information will:

  • allow SIRA to carry out its functions under the workers compensation legislation
  • facilitate the measurement and assessment of the performance of the specialised insurer, including comparison of the specialised insurer’s performance with the wider NSW workers compensation system and other insurers operating within the system (where applicable).

SIRA will from time to time determine performance measures across workplace health and safety and claims management, including return to work, which will inform the reporting requirements of specialised insurers. These measures may be used in the determination of an application for the renewal of an existing licence.

A specialised insurer must comply with the requirements of the Claims technical manual, and requirements issued by SIRA relating to policy information outlined in the Specialised insurer annual information: requirements.

A specialised insurer may be required to provide to SIRA any information and correspondence with APRA concerning the Financial Sector (Collection of Data) Act 2001, the Insurance Act 1973 and the Insurance Regulations, the specialised insurer’s capital adequacy and the insurer’s workers compensation business.

A specialised insurer must provide a certificate from its independent auditor certifying for the previous year the specialised insurer has remitted 4 per cent of gross premium collected to SIRA.

SIRA may use information and data provided from the specialised insurer for the purpose of carrying out its functions of ensuring compliance with the workers compensation legislation, monitoring the efficient operation and performance of workers compensation insurance arrangements and reviewing key indicators of financial viability and other performance aspects of the insurance arrangements. This may include reporting and benchmarking of the specialised insurer’s performance.

6.7.7 Outsourcing key operational functions

The specialised insurer may not outsource the whole, or any part, of any key operational functions of its workers compensation insurance business or change third party providers without the prior written consent of SIRA. Such operational functions include, although are not limited to:

  • underwriting
  • policy administration
  • case management incorporating claims and injury management, complaints management, dispute prevention and dispute resolution
  • information and data management, processing and submission
  • any other operational functions (functions that relate to the statutory obligations of insurers under the workers compensation legislation) from time to time as notified by SIRA to insurers.

A specialised insurer must request SIRA’s approval to outsource in accordance with Application for approval of specialised insurer outsourcing arrangements: requirements.

A specialised insurer must satisfy SIRA that such an outsourcing arrangement will not lead to a decrease in service standards and the performance of the specialised insurer, and that SIRA’s powers will not be actually or potentially impaired as a result of the proposed outsourcing.

SIRA regards the use of sub-contractors as a form of outsourcing subject to the requirements of this section.

A specialised insurer approved to outsource operational functions, remains responsible for maintaining the standard of those outsourced functions and is required to demonstrate adequate review and control of those functions.

6.8 Notification of significant matters

A specialised insurer must notify SIRA of significant matters as outlined within the licence conditions. Notification allows SIRA to monitor, from an early stage, legal or financial matters, or matters that may illicit public interest, which may have a significant impact on the operation of the NSW workers compensation system and/or on a specialised insurer.

The notification must be in writing to SIRA in accordance with the Requirements for providing notification by specialised insurers.

6.9 Contributions payable by specialised insurers

A specialised insurer may be required to pay contributions or levies as required by SIRA under:

7. Licensing term

7.1 Term of Licence

Section 180 of the 1987 Act provides that a licence granted by SIRA in accordance with Division 3 of Part 7 of the Act continues in force until the licence expires or the licence is cancelled whichever occurs first.

On approval of a new application for a specialised insurer licence, SIRA may issue a licence for a term of up to five years.

On approval of an application to renew an existing specialised insurer licence, SIRA may renew the licence for a term of up to five years.

A licence is not in force if it is suspended in accordance with Division 3 of Part 7 of the 1987 Act.

7.2 Breach of licence

The specialised insurer must notify SIRA of a breach of any condition of the licence. Such notification must be provided immediately or as soon as practicable after the specialised insurer has become aware of the breach.

On breach of a licence condition the specialised insurer must take all reasonable actions to address and remedy the breach and to mitigate the impacts of the breach.

A breach of a licence condition may result in SIRA suspending, cancelling or not renewing the specialised insurer’s licence. A contravention of a licence condition may also result in action by the SIRA Board to issue a letter of censure or to impose a civil penalty of up to $50,000 for the breach.

7.3 Cancellation or suspension of licenses

In accordance with section 183 of the 1987 Act, SIRA may cancel or suspend a specialised insurer licence for any reason it considers fit and for reasons that may relate to the New South Wales workers compensation system generally or to the efficiency and conduct of the specialised insurer.

Should SIRA propose to cancel or suspend the licence of a specialised insurer, the specialised insurer will be afforded the opportunity to make representations on the matter where it is reasonable and practicable.

8. Ceasing to be a specialised insurer

A specialised insurer may elect to cease underwriting new workers compensation policies from a certain date by providing at least three months’ notice to SIRA in writing. SIRA will endorse the specialised insurers licence to limit the specialised insurer issuing new policies from the date specified in the notification and agree with the insurer a disengagement plan to exit the defined industry.

A specialised insurer who makes an election covered by this section or has its licence suspended, cancelled or not renewed remains liable for all claims arising from policies of insurance issued by it over the period for which it held a specialised insurance licence and for the management of those claims unless otherwise agreed by SIRA.

A specialised insurer is required to notify policy holders who held policies with them over the period for which it held a specialised insurance licence, if it ceases its business operations.

9. Confidentiality

Where information is provided to SIRA, the information is protected by provisions in the 1998 Act and may only be disclosed externally in very limited circumstances. These provisions do not inhibit SIRA’s ability to:

  • create comparative data to conduct research and assess the performance of the workers compensation scheme
  • publish de-identified statistical, performance and research reports
  • provide information to the responsible Minister or as directed by the Minister
  • provide information to the Australian Prudential Regulation Authority.

Apart from these protections, personal information or health information provided to SIRA can only be dealt with in accordance with the Privacy and Personal Information Protection Act 1998 and the Health Records and Information Privacy Act 2002.

Although the Government Information (Public Access) Act 2009 (GIPA) creates a presumption in favour of the disclosure of government information when an access application is made, this can be overcome where there is an overriding public interest against disclosure. GIPA provides a specific public interest consideration against disclosure of information held by SIRA if (amongst other things) disclosure of the information could prejudice the business interests of any person or corporation.

GIPA provides a mechanism for consultation with a person or corporation if an access application is made for information that concerns the business, commercial or financial interests of that person or corporation. Any objection to disclosure received in the course of consultation must be taken into account in determining whether there is an overriding public interest against disclosure. Any decision by SIRA to make available that information contrary to an objection made in the course of consultation would be subject to a right of review by the Information and Privacy Commissioner or by the NSW Civil and Administrative Tribunal.

Catalogue No. WC01637 © Copyright State Insurance Regulatory Authority 2015