The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan and Parliamentary Secretary to the Treasurer, Senator Ian Campbell today released the Australian Competition and Consumer Commission's Second Insurance Industry Market Pricing Review.
The report, requested by Senator Campbell on 27 March 2002, updates the ACCC's March 2002 Market Pricing Review, provides an analysis of the public liability and professional indemnity sectors of the market, and discusses the impact that the events of 11 September 2001 and the liquidation of the HIH Group have had on the general insurance industry.
Senator Coonan said the report would help inform Federal and State Governments about current conditions in Australia's insurance markets.
In its first report in March, the ACCC identified various factors impacting on the level of professional indemnity and public liability insurance premiums.
These include general wage inflation, continuing increases in the cost of claims, the increasing costs of reinsurance and insurance companies restoring premiums to adequate levels in light of heavy losses in these classes over recent years.
"In the report released today, the ACCC has identified some additional factors influencing premiums," Senator Coonan said.
"Lower returns from international equity markets mean that insurers can no longer make up underwriting losses on the back of high investment returns.
"In addition, the reduction in capacity within the international insurance market following the events of September 11, 2001 means that insurers are directing their relatively reduced capital bases towards less risky and more profitable classes of business."
Senator Campbell said that the report showed that the general insurance industry had faced serious challenges to profitability in recent years.
APRA statistics reported that for 2001 the return on equity was 5.5 per cent. However this figure excludes the impact of the liquidation of the HIH Group, and only partly reflects the impact of the events on 11 September 2001.
The insurance industry in 2001 has experienced the highest underwriting losses
ever recorded within Australia and worldwide.
Based on available information, had HIH been included in the 2001 APRA statistics,
reported losses would have been substantial, reducing the industry's return
on equity to -30 per cent.
The ACCC considers that the outlook for the industry is generally positive.
"Most classes of business have been restored to profitable levels, however, notwithstanding recent premium increases, the ACCC still sees the profit outlook for public liability and professional indemnity classes as low," Senator Campbell said.
The ACCC also noted that price controls on their own would be unlikely to solve the current problems.
Senator Coonan said the ACCC had correctly pointed out that while attempts could be made to set prices, they would likely fail as Governments have no power to force insurers to write unprofitable policies. This is particularly the case in a small insurance market such as Australia where international companies may decide to leave the market all together.
"Labor's constant call for the Government to jump in and attempt to set prices in insurance and many other financial markets ignores the basic fact that without the ability to set its own prices the industry is left with no alternatives other than reducing cover or withdrawing from unprofitable markets," Senator Coonan said.
Senator Campbell has asked the ACCC to monitor costs and premiums in the public liability and professional indemnity sectors of the insurance market on a six-monthly basis over the next two years. The ACCC has also been asked to give consideration to the impact on premiums resulting from measures taken by governments to reduce and contain legal and claims costs and to improve the data available to insurers to evaluate and price risk.
The report is available from the ACCC's web-site at www.accc.gov.au.