Firstly, I would like to thank the Insurance Council of Australia for inviting me to speak at your "Melbourne Dialogue" lunch.
We developed a good working relationship with the ICA in opposition and this has continued in Government.
We know that the insurance industry plays a central role in a strong economy like ours. The appropriate allocation of risk maximises the productive capacity of the economy.
And we know that without a reliable mechanism for pooling and transferring risk, much economic activity simply would not take place.
Insurance is not just important to the functioning of the Australian economy but it is also fair to say that Australia is world leader in insurance with some large Australian based insurance companies that are expanding offshore, particularly in Asia.
As many of you know, last week the prime minister and I hosted a financial hub summit in Sydney in conjunction with the NSW Government.
The promotion of Australia as a financial hub is a key part of our economic agenda. It is important because the commodity boom will not last forever, we need to ensure that we have strong value added industries in place which provide good highly skilled jobs for our young people to ensure our future prosperity and a diversified economy.
We have no illusions that we can be a NY or a London - because we cant, but there is no good or valid reason that we cant compete with Dublin, Luxembourg or more particularly HK, or Singapore as financial centres.
This is not about picking winners - it is about knocking down the barriers to this industry competing and then letting the financial services industry do what it does best - compete vigorously.
One thing to come through the summit - from several participants was the potential for insurance as a key potential new area for the promotion of Australia as a financial services hub.
Insurance in particular has grown more quickly in recent years more quickly than the economy. Its contribution to GDP as a percentage has increased accordingly. The challenge now for you and us is to improve the continue to improve the performance of insurance.
Australia's financial services sector is dynamic... innovative... and the most globally-integrated sector in our economy. The finance and insurance sector is the third largest sector in the Australian economy. The sector's share of total industry output accounted for 8.6 per cent in 2007. However, the industry is still predominantly domestically focused with minimal revenue coming from overseas. Despite its size, the sector accounted for less than 1 per cent of Australia's total exports (by value) in 2007.
The summit was from my point of view a success. Of course the key part now is we turn the summit from a talk fest into a platform for action.
The idea behind the summit was very simple, get all the ideas on the table, so we can pursue every avenue to ensure this sector is living up to its potential.
A range of issues were identified at the summit - covering the fields- tax, skills, regulation.
It was genuinely a worthwhile process which I personally found useful in identifying the key areas for further reform.
We will pursue the issues identified at the Summit. Some are being referred to the Henry Review of Taxation, others can be considered more directly but all are being pursued.
At the summit we announced that there would be a dedicated team in the treasury to drive the implementation of those recommendations raised at the summit that the government is able to accept.
One view that came though that as good as this is it would be could to one better - that we need a permanent team - an Olympic bid style Committee, to form the liaison between Government, industry to drive the push for more foreign funds into Australia both internationally and domestically.
I must say this is an idea that I think has quite a bit of merit. I'll be working with Treasury and FSAC as well as with industry bodies to develop this idea in terms of structure and personnel.
One issue that has come up from time to time is Australia's capital requirements. Ofcourse APRA is independent and those decisions are made at arms length as they should be. A well respected rigorous prudential regulation system is an important aspect of our ability to market our selves as the financial services hub - its vital that investors have the confidence in our prudential regime.
In passing can I say one of the reasons Australia is so well placed to withstand the current financial turbulence is the excellent jobs done by the RBA and APRA
I'm sure you will be aware that revised prudential standards and prudential practice guides for general insurers were finalised on 23 June this year with many of the changes coming into force on 1 July 2008.
The new framework is highly effective and well-targeted. This is due to the intense and active engagement of industry during the consultation process on the discussion papers APRA released last year.
Looking ahead, the Government welcomes APRA's commitment to recalibrate its minimum capital requirements in 2009. We are aware of the concerns of some in the industry about the overall levels of minimum capital requirements.
I am pleased to see that APRA is also considering the appropriateness of the overall regulatory capital requirements on insurers, as well as being mindful of any incremental change.
Of course, the acid test of the prudential framework is how it stands up in a changing environment.
It's one thing for a prudential framework to perform well when markets are expanding... investment returns are strong... and the claims experience is benign.
But it may be quite a different story when market growth is slower, investment returns fall below expectations and the claims experience worsens.
APRA is well aware - and well prepared - for this scenario.
The Government is aware that the insurance industry has been through a wave of reform in the wake of the HIH Royal Commission, and is now in a strong position to ride through the current turbulent times.
Of course, the ICA has also been vocal on stamp duties and I appreciate your concerns about non insurance and under insurance.
Access Economics research commissioned by the Finance Industry Council of Australia has modelled the inefficiencies of State stamp duties on insurance.
Of course the Henry Review was a unique opportunity to address many efficiency issues in tax, I am sure you will need no encouragement to get involved with submissions to the Henry Review.
One of the key issues to be addressed in the modernisation of Australia's taxation system is the harmonisation of tax bases.
Australia used to suffer from the tyranny of distance - our distance from the worlds largest markets of Europe and North America.
Now, as we are on the doorstep of the worlds fastest growing economies, we no loner face the tyranny of distance. Now we face the tyranny of difference - the differences in the way our states regulate business.
As we fragment our economy by imposing different regulatory tax regimes we make our economy smaller - something which makes no sense. Working co-operatively with the states to reduce and where possible eliminate these regulatory differences is a key priority in the first 8 months of the Rudd Government.
Competition between states on tax rates can produce better outcomes - states competing to attract business by edging tax rates down can result in better tax outcomes. But complex and differing tax bases can and does create administrative and compliance complexities which are counterproductive - I am sure you will agree.
The Government recognises that non-insurance remains a significant issue in Australia. And we appreciate the insurance industry's proactive stance in taking measures to address this problem.
According to the Insurance Council's May 2007 report, The Non Insured: Who, Why and Trends, 23 per cent of residential households do not have a building or contents policy. That's 1.8 million uninsured households.
State taxes will be examined as part of Australia's Future Tax System, the Government's current review of our taxation system. The architecture paper released last week discusses these stamp duties and they will be considered in the review.
On other matters, there has been developments on DOFIs as you would be aware. The regulation of DOFIs started on 1st July this year.
The Government encourages the entry of financially sound, well-managed foreign insurers into the Australian market. This increases competition and provides Australian business with adequate insurance options - of course the whole idea of the DOFI legislation is to ensure as level a playing field as possible.
The Government remains committed to collecting and publishing data on the use of DOFIs. This will help us to better understand the Australian insurance market and the role played by foreign insurers. We are continuing to work with industry to finalise the details of this collection in regulations with an expected start date of 1st January 2009.
FSWG and financial literacy
Another area that the ICA and the Government agree on is the need to streamline disclosure documents. You have no doubt heard my Parliamentary colleague, Minister Sherry, say that some of them may as well be written in Latin!
To combat this, earlier this year the Government set up the Financial Services Working Group, comprised of senior officers from Treasury, ASIC and the Department of Finance and Deregulation.
The Working Group's brief is to facilitate short, simple and readable disclosure documents.
Disclosure documents which will help consumers to better understand and compare the full range of financial services products.
Creating product disclosure documents which are simple and easy to understand is an important step forward.
Before I finish, I would like to congratulate the ICA on a number of initiatives you have been advancing.
The Insurance Council and the insurance industry has been active on a number of policy issues on your agenda this year including climate change, residential flood cover, the causes of non-insurance, and financial literacy.
I'd like to touch on some of those issues this afternoon.
It's important that households and businesses can access affordable insurance to help them manage the impact of natural disasters.
I welcome the work the insurance industry is doing as part of its flood risk project.
I am pleased to see that one insurer has recently started to offer flood insurance to its customers - the type of flood insurance people are after such as flooding from rising rivers. The lack of adequate flood cover and affordability has been of concern to many in the community for some time and it is good to now see some progress on this issue in the interests of Australian consumers.
As someone who remembers swimming in my parents backyard - not the pool - just the backyard - in the Western Sydney floods of 1986, I certainly welcome flood cover as an important step in assisting ordinary families at risk of flood.
I understand that the Insurance Council of Australia has lodged an application with the ACCC for authorisation to use, on a voluntary basis, a common definition of "inland flood" to better clarify flood insurance coverage.
You are no doubt aware that, on 3 July, the ACCC issued a draft determination for consultation that proposes to grant conditional authorisation to the Council to use this definition for two years.
The ACCC has sought submissions on the draft determination. A pre-decision conference was also held on 4th August at the request of the Consumer Action Law Centre. The ACCC proposes to make a final determination this month.
Still on the topic of flooding, the Government welcomes the work that the Insurance Council, together with Commonwealth, State, Territory and local governments, is doing to develop a national flood mapping tool.
The tool should help all insurers to test the risk applicable to a client's property... provide consistent information... and allow insurers to better price risk for individual locations.
Adopting a common definition of "inland flood", together with the data mapping exercise, should increase the availability of residential flood cover. And hopefully, help to clear up consumer confusion over what is covered under their current insurance policies.
Current Government work in addressing the issue of flood insurance
There is also a role for Government to play. Through a range of existing initiatives, we are working with insurers to manage the impact of natural disasters on the community.
Under the National Climate Change Adaptation Framework, COAG agreed to work with the insurance and finance industries to share nationally consistent data on climate change risks and impacts... identify adaptation actions to reduce risk... identify approaches that support the viability and robustness of the finance sector, society and business... and identify and fill gaps in the information needed to properly assess insurance risk.
As well, the National Flood Risk Advisory Group is continuing to work with the ICA on the issue of flood risk.
Ladies and gentlemen, again I would like to thank the Insurance Council of Australia for inviting me to talk with you today.
And I look forward to continuing to work with you in the future.