ACCC Insurance Industry Market Pricing Review

The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan and Parliamentary Secretary to the Treasurer, Senator Ian Campbell today announced the release of the Australian Competition and Consumer Commission's Insurance Industry Market Pricing Review. The Government requested this report last year, following significant increases in general insurance premiums in the wake of the collapse of HIH.

Senator Coonan said that the report will provide an important input into the debate on the cost drivers for public liability insurance to be considered at the Ministerial meeting on Public Liability Insurance to be held this Wednesday in Canberra.

The Report identifies the following factors impacting on the level of professional indemnity and public liability insurance premiums.

• General wage inflation.
• Low premiums in recent years, necessitating a restoration of premiums to an adequate level.
• Continuing increases in the cost of claims.
• Increased reinsurance costs as the industry recovers from recent losses.
• Insurers seeking to recover past losses.
• Very low returns which may have caused some insurers in addition to HIH to withdraw from the market. The removal of capacity means that insurers who set premiums at higher levels become more widely utilised.

The report relies on data received from insurers prior to the full impact of the failure of HIH and terrorist attacks in the US on September 11 flowing through to premiums.

Senator Campbell said that the ACCC will be asked to update the report and provide an analysis of the competitiveness of the public liability and professional indemnity sectors of the market to Government by July 2002.

The Australian Securities and Investments Commission will also be asked to consider the recommendations put forward by the ACCC to improve the information provided to consumers so that consumers can form a view as to the appropriateness of premium increases and are able to compare different insurance policies.

The report is available from the ACCC's web-site at www.accc.gov.au.

ATTACHMENT

Key Components of the ACCC Report

Industry Profitability

Underwriting losses (that is premiums received minus claims paid out) for the industry have exceeded $1 billion for the years ending 30 June 1999, 2000 and 2001. The highest ever underwriting loss of $1.2 billion was recorded in the year ending 30 June 1999. However, this could be exceeded by the 30 June 2001 result once the full impact of the liquidation of the HIH Group is included.

The return on equity for the insurance industry has averaged about 7 per cent from 1993-2001. The return was less than 5 per cent in 1998/99 and 1999/00. This is considerably lower than the 13 per cent return achieved by the Australian equity market over the same period.

• The returns illustrated for the insurance market are similar to the returns that would have been received by investments in risk free government bonds and the returns in 1998/99 and 1999/00 were lower than the cash rates.
• The return in 2000/01 was 10 per cent, however, if the HIH Group losses are included this could be reduced to a nil or even negative return.

Profitability and Performance Outlook by Class of Business

Reinsurance Market

The reinsurance market has been moving out of a cycle of low rates. Reinsurance premiums reached their lowest point in the cycle in 1999 or 2000. Losses stemming from inadequate premium rates over this period and the terrorist attacks in the US on September 11 may see reinsurance rates rise substantially.

Developments within the insurance market of any one particular region at any one time are unlikely to influence the reinsurance market to any significant degree, particularly a national insurance market the size of Australia.

Cost Drivers for Public Liability and Professional Indemnity Insurance

There has been a disproportionate increase in premiums for professional indemnity and public liability insurance is a result of:

• increases in premium in line with general wage inflation. Both insurers operating costs and the costs of claims tend to increase with wages;
• the low premiums of recent years necessitates a restoration of premiums to an adequate level;
• continuing increases in the cost of claims which drive premium increases at a greater rate than wage inflation;
• increased reinsurance costs expected to flow through to direct premiums as the industry recovers from recent losses;
• insurers seeking to recover past losses;
• very low returns may have caused some insurers to withdraw from the market (in addition to HIH). The removal of capacity means that insurers who set premiums at higher levels become more widely utilised.

Recommendations on Consumer Protection

The ACCC received a significant number of queries and complaints on increasing insurance premiums and has put forward some recommendations to improve the quality of information provided to insureds.

The ACCC has made the following recommendations to the general insurance industry intended to assist consumers to assess whether premiums being offered are acceptable.

• Increases to the previous policy's premium should be clearly explained when policies are offered for renewal. This could be achieved by a note summarising what premium was paid last year, whether coverage is extended or proscribed and what other factors, such as risk rating factors have been reassessed so as to cause a change in premium.
• The industry should provide consumers at large with general premium trend data for the various classes of insurance, and comprehensible explanations outlining the influence of the major cost drivers on premiums. The absence of publicly available premium information does not promote consumers general level of awareness or confidence in the general insurance industry.
• Insurers should improve their premium complaints and query handling systems to enable consumers to contest premium assessments and access to detailed explanations for specific increases.

In addition, the ACCC noted that where the industry continues to define events in different ways, draft exclusions in different and often confusing language, and use different terminology to describe similar situations, it will be difficult for consumers to compare policies and as such this presents a serious impediment to competition. The ACCC has made the following suggestions for consideration by the general insurance industry.

• Insurance contracts in each class and policy area sought by consumers, small business and community organisations should contain on the front page of policies a standard checklist that would use generic terms for each type of cover.
• Increase where practicable the use of standard terms across policies.
• Utilise large font, direct and plain English disclosure (supported by consumer testing of policy documents by companies) of the extent of any exclusions, with practical examples to highlight impacts.