Instructions and Explanatory notes
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Instructions and explanatory notes on completing the Annual Premium Return up to and including 30 June 2010
Instructions and explanatory notes on completing the annual statutory declaration – Section 40 MFB and Section 77 CFA premium Returns for the financial year ended 30 June 2010
Completing Returns
(1.) The premium that needs to be returned is the full amount of gross premium charged for a policy of insurance that is subject to contribution (excluding Stamp Duty and Goods and Services Tax). The gross premiums declared must include:-
(2.) Gross premiums declared must be in respect to property located within the Metropolitan Fire District (MFD) or Country Area of Victoria, pursuant to the respective Acts. Returns however, may be lodged based on the MFD post-code locality listing (Current list available on MFB/CFA websites). Individual companies are responsible for correctly allocating post-codes.
(3.) The gross premium in respect to any insurance issued on property (stock in trade, plant and equipment, contents, business interruption and the like) without reference to a specific situation of risk or location should be fairly allocated to the MFB and CFA in accordance with the asset schedule of the insured.
(4.) For insurance intermediaries lodging Returns, only risks placed exclusively with an underwriting member of Lloyd’s can be returned under sections 40 (MFB) & 77 (CFA) You must also be a current member of the Australian Fire Brigade Charges Scheme. Risks placed with participating underwriter(s) must be declared under Sections 44A and 80A of the MFB & CFA Acts respectively.
(5.) Insurance intermediaries lodging Returns on behalf of Lloyds must include the words, “on behalf of Lloyd’s” following the company name.
(6.) The person signing the Premium Return - a Statutory Declaration - must be the Manager of the Company, the Secretary of the Company or the Appointed Agent of the Company, or a person occupying such positions for the time being. For example, CEO, CFO, Directors or Company/Corporate Secretary.
(7.) Contact details must be for the relevant person responsible for preparing and answering queries relating to the returns, not necessarily the person that signs the declaration. Position titles and group email addresses are acceptable.
Clarification on Classes of insurance subject to contribution
Commercial classes of insurance
Mobile plant and machinery / equipment
For the purpose of returning premiums under the respective Acts, Mobile plant and equipment that is not self propelled, not used as a road vehicle, is carried by another vehicle/trailer from one site to another and unable to be immediately removed in the event of an emergency - will require the provision of fire fighting services is therefore subject to contribution. Basically, property which moves with the assistance of motorized wheels will not be required to be returned. Please note; the above does not apply to contracts works policy which extends to cover this property.
Commercial / Residential strata title insurance
Where body corporate / strata title buildings / complexes incorporate mixed occupations including residential apartments, the premium needs to be allocated between domestic and commercial risk, based on a percentage of the sum insured (usually calculated on a floor space ratio, including common areas and car parks). The same applies for residential complexes which incorporate commercial / retail and office occupancy.
Hotels, motels, time share or serviced apartments (which provide a service office / concierge, cleaning facilities and any other service) is not considered to be domestic property. Premium splitting should not apply to these types of policies.
The above also applies and not restricted to Hostels / Nursing homes / Retirement homes / etc.
Under the Regulations, commercial risks are subject to contribution at the rate of 80%; and domestic/residential risks at the rate of 40%.
General property
We have noticed during our inspections, all risks cover on tools of trade, electronic equipment and the like, usually insured under a general property or similar policy is being insured under “goods in transit” policy or marine cargo type policy. Under the Contribution Regulations, general property is not required to be returned if fire is an excluded peril. Furthermore, Goods in Transit insurance, for the purpose of CFA/MFB regulations, relates to cargo/freight which is transported and delivered to an intended destination. We must also point out, although there are many different product titles covering these items, they all are classified under the regulations as a general property class of insurance.
Static marine
The static risk portion of premium is subject to contribution; however this excludes storage incidental to transportation. “Incidental”, for the purposes of the Acts, should be interpreted as any item(s) being transported and stored for a minor/short period of time. Static risk includes processing, packing or storage operations at any place. Insurers & intermediaries need to allocate static premium based on underwriting considerations; separated from that relating to transit cover so it can be identified as returnable premium.
Domestic classes of insurance
Personal mobile electronic equipment insurance
This type of insurance usually covers personal mobile phones, laptop computers and the like for all risks. As the risk of fire is covered under these policies then the portion of premium subject to contribution is 8% under item (5) of the Regulations.
Contents / personal valuables insurance
At inspections we have noted that items usually classified as contents (as per the standard definition of contents under most home/contents policies) are incorrectly allocated under “personal valuables” or similar sections of a domestic insurance policy and returned at the rate of 8% rather than 40%.
Common irregularities noted during contributor inspections that are not in accordance with legislation
Misallocation of premium
Premium misallocation between the MFB/CFA occurs due to the following reasons:
· on large risks where multiple locations are insured
· annual construction risk policies where annual declarations are not completed or if completed, only declaring the terrorism risk zones
· endorsements relating to change of risk location
· incorrect postcode allocation within systems
· incorrect manual processing
· binders/bordereaux where insufficient information is provided/requested by the insurer/underwriter.
Insurers and underwriters must follow the MFD postcode listing available on the MFB and CFA websites. Postcodes not appearing in the list relate to CFA areas. Please note; that the three terrorism zones as per ARPC legislation (CBD, urban and rural) do not coincide with the MFB/CFA boundaries.
Premium splitting
This issue remains a concern for the MFB/CFA, especially on Industrial Special Risks (ISR) or similar policies, and in recent times Contract Works policy.
The lack of transparency and rationale used by underwriters to derive the proportion of premium for non fire/extraneous perils continues to occur. During our inspections we commonly noted arbitrary splits. We understand this situation occurs mainly due to market pressures; however in some instances it is not in the spirit of legislative requirements and intent.
We reiterate that under Regulation 8 of the MFB (Contributions) Regulations 2009 and Regulation 7 of the CFA (Contributions) Regulations 2009, specifically (2)(b)(iv), reads: “does not include a part of a premium for a class of policy that is subject to a contribution if that part relates solely to an extension of the policy to include any other insurance….. in which the risk of fire is not an insured peril, if the extension -
(A) is offered and given as an optional extra; and
(B) has a separate premium allocation; and
(C) is exclusive of all other policy sections.”
Please Note: this requires all three conditions to be met.
Furthermore, returnable premium is not restricted to the fire peril only, and includes extraneous perils of any kind. Although, two separate sections or policies are devised, it does not necessarily meet all the above stated criteria under the Contribution Regulations.
The MFB/CFA will closely examine these policies when conducting routine inspections.
Net rating
During our inspections we observed greater compliance by insurance contributors when dealing with this matter, however we remind you of common issues identified during our inspections:
- Contributors not having an adequate system/process in place to capture any “net rating” accounts (whether FFS arrangement or variation in commissions outside the agreement), for the purpose of preparing and including such premium in their Statutory Returns. We will continue to focus on what system is in place to capture this information and the integrity of the system/process to produce accurate information to comply with their obligations under the MFB/CFA Acts.
- Contributors which have broker interface systems i.e. broker link, Sunrise, etc that allow insurance intermediaries to adjust commissions on policies. Contributors should have reporting parameters in place to identify when this situation occurs.
- Lack of documentation supplied by insurance intermediaries or requested by insurers to confirm Fee for Service (FFS) arrangement. Insurers/underwriters should receive written notification from insurance intermediaries via email/closing, etc, confirming such arrangement. The current practice of stating “nil” commission on closings does not satisfy this requirement (does not apply where the policy is being renewed and an existing FFS arrangement is in place), due to the fact that showing “nil” commission does not on every occasion represent a fee for service arrangement.
Please note; insurance intermediaries are not required to provide specific details of the FFS arrangement to insurers, as this is a confidential matter between the insurance intermediary and client.
- FFS arrangement should apply to accounts placed with a particular insurer. On a number of occasions we found that the property policy was closed on a FFS arrangement however other insurance for the insured such as public liability, motor, crime, etc were settled on commission basis with a particular insurer.
Insurers and insurance intermediaries must be conscious of this situation, in such cases the insurer should seek clarification from the intermediary as to the reasoning for this taking place, equally important the intermediary should be disclosing this information. Where there is no valid rationale for this scenario taking place then the obligation on the insurer is to gross the premium on the net rated account for the purpose of including such premiums in their statutory return.
Administration fees
Premium relating to administration fees (these range from a policy fee, insurer fee, underwriting fee, installment fee, cancellation fee, etc) in a number of instances is not being returned under the respective sections of the MFB/CFA Acts.
The MFB & CFA Regulations clearly state that if an insurance company or insurance intermediary is required to lodge a Statutory Return under the respective Acts, then the premium must include all administration charges. In both Regulations “premium” includes a premium or extra premium received for all extensions to a class of insurance for extraneous risks of any kind and all administration charges”.
Where an underwriting agency or insurance intermediary charge an administration fee or broker fee (separate from a fee for service arrangement or in addition to commission paid by the insurer), and it forms part of the total premium charged to the client, that fee amount is subject to contribution and required to be returned.
Administration fees charged by local insurers is the responsibility of each contributor to include these fees in their Return; whereas insurance intermediaries placing business with Lloyds or offshore insurers are required to include administration fees in their Return.
Those lodging Returns with PWC in accordance with the Australian Fire Brigades Charges Scheme (AFBCS), for business placed with Lloyds, should be declaring administration fees (identical amount returned to the MFB/CFA) as a manual adjustment with a zero amount for fire service levy (unless charged and collected) on the quarterly returns.
Binding/bordereaux arrangements, facilities and schemes between insurers and insurance intermediaries;
These arrangements often result in insufficient information provided by the intermediary and / or requested by the underwriter to produce accurate data for the purpose of completing returns.
Those involved in binder / bordereaux facilities / schemes - especially if required to furnish returns – must pay particular attention to information requested and provided by each party to ensure transparency, and that sufficient data is made available.
Common irregularities found during inspections include; inaccurate client information, insufficient risk location details, and details relating to sums insured, resulting in misallocation of premium and / or incorrect premiums returned.
When processing policies where the incorrect “fsl” premium has been charged by the insurance intermediary, in certain instances, we indentified that processing staff altered the fire base premium (reduced the premium) and altered premium on other sections (business pak policies) to compensate for the error. The MFB/CFA recommend in these instances amendments are completed via endorsements and the client/intermediary be charged / refunded the difference.
In addition, remuneration arrangements for the purposes of “net rating” must be examined.
Observations
Electronic records system
During our inspections we have noticed more contributors moving to an electronic records management system i.e. paperless office. The MFB/CFA has experienced difficulties in obtaining certain documentation, whether the records were not available on the system or not in a systematic order. We recommend that systems are put in place by contributors to ensure documentation / records are available in order to verify returns, and maximize resource utilization when conducting inspections.
Broker Interface system
A substantial amount of business is now generated via insurance intermediaries directly inputting polices on to contributors underwriting systems. We have found in certain instances that the incorrect information has been entered in the system. The MFB/CFA suggests contributors conduct regular audits on the integrity of data processed by insurance intermediaries.
Your company’s Premium Returns must be completed and lodged with the MFB and CFA before or on Monday 16 August 2010.
(While a completed Premium Return may be initially lodged by email or facsimile transmission before the 16 August 2010, the original signed document must be forwarded to the MFB or CFA by the next available mail)