Ladies and gentlemen, I am delighted to be able to speak here today at the Australian Insurance Institute's 2000 National Conference.
The theme for this year's conference, "Future Business Intelligence" is an opportune one. As we are all aware from both our professional and personal lives, times are changing fast.
To tap the great potential these changes offer and minimise any painful transitions we'll need to adapt quickly and intelligently to the forces shaping our lives.
The key to this, I believe, is education. But education is not a one-off process. To thrive amid change we must make education a continuous process of skill upgrading throughout our careers.
I am pleased to note that our hosts are playing an active role in enhancing the professional educational facilities available to the insurance industry both in Australia and in the Asia-Pacific.
I will touch on the importance of education later. Before this however, I would like to comment on the vital role insurance plays in our economy, and also point to some of the challenges and recent regulatory changes affecting the insurance industry.
It is not always appreciated within the community the vital role insurance plays in the smooth functioning of our economy.
Risk permeates all our lives. Whether as individuals, businesses or (especially!) Governments, we confront a vast range of risks.
Some must be accepted as facts of life. However, many risks can be managed in order to reduce, or even remove, their potential impacts.
Insurance is the most basic financial mechanism for dealing with risk. By pooling risks, insurance companies can face exposure to risky events that would be potentially ruinous for individuals.
Through the basic mechanism of risk spreading, insurance supplements social welfare provisions, it harnesses national savings, and facilitates a raft of activities such as international trade and the provision of credit that may not otherwise occur due to the risk of financial losses.
This goes far beyond the basic protection insurance provides individuals against financial loss or ruin.
While the importance of the insurance industry far outweighs its size in terms of its relative share of total assets in the financial sector, its size is nonetheless impressive.
General insurers hold total assets of approximately $60 billion and life insurers manage assets of around $177 billion, or 30 per cent of total managed funds in Australia.
Australians are enthusiastic users of insurance products. In 1998, Australia ranked fifth and ninth amongst OECD countries in the ratio of premiums to GDP for life and general insurance respectively.
While the Australian insurance market is robust, mature and efficient, the last few years have not been easy ones for the global insurance industry.
This is partly attributable to a soft market, fuelled by overcapacity and falling premiums due to competition.
Of greater longer-term importance have been the structural changes reshaping the global insurance market.
The most significant of these is the breakdown of traditional barriers that once segmented the market for financial services.
Driven by powerful new technologies and changing regulatory structures (for instance the repeal in the US of the Glass-Steagall Act in November 1999), the financial sector is witnessing a process of convergence in the delivery of products.
The rise of conglomerates poses a special challenge for insurers. Banks, with more capital and greater opportunities to cross-sell insurance with traditional bank products, are a threat to non-diversified insurers.
Indeed, in Europe bancassurance is already a fact of life, and conglomerates (Allfinanz businesses) will increasingly become the norm, rather than the exception.
Newer threats are emerging from non-traditional competitors such as retailers, finance companies and Internet providers, who are using new IT platforms to circumvent traditional marketing and distributional channels, such as insurance agents.
Together, these forces are leading to an unprecedented wave of consolidation in the insurance industry, both here and overseas.
As companies recognise that growth is the key to survival in a flat market, merger and acquisition activity is at record levels.
Insurers have to adapt to this fluid business environment. The cost is they'll be left behind.
This Government has not stood idly by while these changes are taking place.
Indeed, since 1996, we have almost completely overhauled the regulatory framework governing the financial sector. These reforms aim to provide this sector with a world-class regulatory framework that will allow it to prosper in the face of coming challenges.
It is worth highlighting these reforms in order to show how wide-ranging they have been.
Our reform agenda can be divided into 3 strands.
The first of these was the total overhaul of prudential regulation, consumer protection and market integrity regulation that emerged from the Wallis reforms.
The vision of the Wallis Report to create two integrated regulators is essentially in place, and I am pleased to say we have already captured significant benefits from the synergies created.
Secondly, we have refocused corporate law to take account of the impact of business regulation upon corporate decision making.
These Corporate Law Economic Reform Program reforms, or CLERP, aim to enhance our business regulation.
Streamlining corporate law while strengthening market integrity and consumer protection ensures that we promote economic activity.
As most of you here today would know, of most interest to the financial sector is the Financial Services Reform Bill, or CLERP 6, which I released for consultation in February.
These changes will see an integrated regulatory framework covering a wide range of financial products, including securities, derivatives, general and life insurance, super, deposit accounts and non-cash payment facilities.
It will apply to existing financial intermediaries such as insurance agents and brokers, securities advisers and dealers, and futures brokers, as well as any other person carrying on a financial services business.
Finally, the Government has introduced some of Australia's most significant tax reforms.
With the successful implementation of the GST, together with the progression of business tax reform through the Ralph Review of Business Taxation, Australia faces the future with a tax system that is fair, efficient and user friendly.
With the CLERP 6 and business tax reform initiatives still in the pipeline, I would like to note a recent High Court challenge to the constitutionality of the Corporations Law.
The Hughes case, I believe, is the most significant regulatory challenge facing Australian business.
I strongly urge all State Governments, particularly Western Australia and South Australia, to agree to the proposal to refer necessary powers to the Commonwealth to ensure that we maintain consistent and comprehensive regulation of our financial services industry on a national basis.
I should make it clear that the referral of powers is not a political stunt aimed at the centralisation of power in Canberra.
It is not a challenge to the liberty and independence of our Federation. It has no hidden agenda seeking greater power for the Commonwealth over industrial relations or environmental issues.
It is about creating certainty for business and maintaining a system based on commonsense.
Ladies and gentlemen, as globalisation is drawing our national economies together, the importance of establishing a transparent, flexible and growth-oriented regulatory framework cannot be overestimated.
It protects us from possible instability associated with these linkages, as demonstrated by our performance during the recent Asian financial crisis.
It also ensures we have in place a regulatory framework, which is international best practice, enabling Australian consumers and businesses to maximise the opportunities of globalisation.
The strength of our finance sector during the Asian meltdown and our path-breaking reforms have shown Australia's capacity to participate in the global growth within the financial services industry.
It was in this context that the Government launched the Centre for Global Financial Services, now known as Axiss, to enhance Australia's position as a provider of global financial services.
As Australia's 'Global Financial Services Ambassador' I have highlighted our credentials as a centre for global financial services in the Asia-Pacific time zone.
The insurance sector is an important part of the Axiss initiative.
I have met with major international insurance companies such as John Hancock and Nippon Life Insurance, while Axiss Australia is in regular contact with the Insurance Council of Australia.
We share a common aim to encourage the globalisation of Australia's finance industry. Some idea of the potential for the general insurance sector is gleaned from the fact that only 1.7 per cent of global general insurance revenue is generated in Australia.
But this is changing. 2 years ago about 50 per cent of dividends for QBE were franked. But in the last half year only about 10 per cent were franked, indicating that the majority of the company's profits were derived offshore.
Growth potential for insurance products is particularly favourable in the Asian region, with many countries enjoying high rates of savings.
Growth in the Chinese life insurance market has averaged over 20 per cent a year during much of the 1990s.
The opening up of new markets, especially in China under World Trade Organisation agreements, offers excellent opportunities for Australian insurers.
I am pleased to note that we already have an active presence in the Chinese life insurance market. The Commonwealth/Colonial and China Life partnership will soon open for business in Shanghai.
However, our integration with the Asia-Pacific region is about more than expanding business opportunities. This Government is committed to encouraging efforts to increase the transparency and robustness of regional regulatory structures.
As part of this goal of improving regional financial stability, the Australian Government and Australian life insurance industry are working with the Asian Development Bank to sponsor a project that will modernise life insurance regulation and improve the skills of life insurance regulators in China, Indonesia, India, Vietnam and Malaysia.
This initiative will make a real contribution to improving the stability and efficiency of regional capital markets.
The growing complexity of the financial sector raises special challenges not just to regulators but to senior management.
New technologies, convergence and rationalisation are undermining the old assumptions about how to do business. Much of this debate has pitted the 'old' economy against the 'new'.
Whatever the merits of this debate, there remains one unchanging fundamental to my mind, and that is the importance of good corporate governance practices to the success of companies.
Directors might need new skills in the 'new' economy, but the old fundamentals of disclosure and accountability remain unchanged.
Ensuring that directors are aware of their fiduciary duties means they need to be informed of the standards required of them both by law and best practice. Continuing education is the only way to achieve that.
And while education is vital, it should also be remembered that corporate governance is a dynamic and interactive process.
A point I recently highlighted is that investors, and those who represent them, will attain a better return on their investment if they take an active interest in the corporate governance of companies they have invested in.
This Government strongly encourages institutional investors to act in the best interests of those they represent and will continue to keep a close watch on their activity.
Ladies and gentlemen, I believe Australian insurers are well-placed to take advantage of the exciting times ahead.
With sound macroeconomic policies, a world-class regulatory structure, deep and stable capital markets and a highly-educated workforce, the Australian insurance industry should be well primed for the challenges they will face.
I'm sure the AII's 2000 National Conference will provide a fruitful and stimulating environment to address these issues.
Thank you