Commonwealth Numbered Regulations - Explanatory Statements

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INSURANCE CONTRACTS REGULATIONS (AMENDMENT) 1997 NO. 226

STATUTORY RULES 1997 NO. 226

Issued by the authority of the Parliamentary Secretary to the Treasurer

Insurance Contracts Act 1984

Insurance Contracts Regulations (Amendment)

The Insurance Contracts Act 1984 (the Act) and the Insurance Contracts Regulations (the Principal Regulations) provide for a fair balance between the interests of insurers, insureds and other members of the public, and ensure that the provisions included in contracts of insurance, and the practices of insurers in relation to such contracts, operate fairly.

Section 78 of the Act provides that the Governor-General may make Regulations for the purposes of the Act.

Section 57 of the Act was amended by the Financial Laws Amendment Act 1997 which commenced on 30 June 1997.

Section 57 provides for the payment of interest by insurers on claims that are unreasonably withheld. The effect of the amendment was to allow, as an alternative to the prescription of a rate of interest, the prescription of the manner in which such a rate is worked out.

The regulations amend the Principal Regulations to delete the currently prescribed rate of 13% and replace it with a formula which links the rate to a market rate of interest based on the 10 year Treasury Bond yield, including an additional margin of 3%. This is similar to the formula prescribed in the Life Insurance Regulations for the rate which life companies can charge for overdue premiums. That formula also includes a margin of 3% in addition to the market rate. The additional margin is designed as a disincentive for delayed payments.

The amendment is aimed at improving the procedure by which the rate is amended in line with market rate movements, thereby improving the operation of this provision for the benefit of insurers and policyholders, without affecting the incentive on insurers for prompt payment of claims.

The regulations are described in detail in the attachment.

ATTACHMENT

Insurance Contracts Regulations (Amendment)

Regulation 1 - Amendment

Regulation 1 is explanatory and includes a note that the regulations commence on gazettal.

Regulation 2 - Regulation 32 (Prescribed rate - Section 57)

Regulation 2 omits Regulation 32 of the Principal Regulations and replaces it with a new Regulation 32, entitled "Rate of interest on withheld payment - section 57 of Act".

The new Regulation 32 prescribes a formula for working out the rate applicable to a day in respect of which interest is payable by an insurer pursuant to Section 57 of the Act.

The formula links the rate of interest to a market rate of interest based on the 10 year treasury Bond yield, or an average of the 10 year Treasury Bond yields, at a point or points in time during (or before) the period that the claim is unnecessarily delayed, plus an addition of 3%.

Regulation 3 - Transitional

The rate that was prescribed by Regulation 32 before this amendment will continue to apply in respect of any day before the gazettal of these regulations in respect of which interest is payable by an insurer pursuant to Section 57 of the Act.