Acknowledgments
Mr Allan Reynolds, State Manager Allianz Australia and Conference Chairman, Mr Raymond Jones, Managing Director, QBE, President of the Insurance Council of Australia,
Ladies and Gentlemen
Introduction
It is a pleasure to open the Insurance Council of Australia's New South Wales Annual Conference. Can I say as the Minister having primary responsibility for insurance, I look forward to continuing a positive working relationship with the Council during the life of the Howard Government's third term.
It is a relationship that is already developing, I am pleased to have met now on several occasions with senior representatives of the Insurance Council of Australia to discuss a number of issues affecting the industry.
I propose that the hallmark of our relationship should be open and consultative as we work through the major problems that are confronting the industry.
It is somewhat of an understatement to say that the industry has faced major challenges in the past year!
In the same way that the September 11 attack has shaken our feelings of physical security, the problems of Enron, HIH and the Independent Insurance Company in the UK have cast shadows over the system of financial and corporate management. In many ways the world has changed forever.
Unfortunately, the effect of these events is not yet behind us - they continue to be felt in the community through rises in premiums and in some cases, a lack of availability in some types of cover.
For the industry, the loss of HIH, a major market player, has thrown up questions about industry stability, risk management practices and corporate transparency which are resonating throughout the insurance marketplace.
For Government, the challenge lies ahead, in considering any recommendations that may arise from the HIH Royal Commission and ultimately in whether regulatory safeguards need to be further strengthened.
Before speaking in some detail about these challenges, I will take this opportunity to outline what my responsibilities are as Minister for Revenue and Assistant Treasurer, because there have been some significant changes with the appointment of the new Ministry.
Roles and Responsibilities
Outline of portfolio responsibilities -
- taxation policy including design of tax laws, tax administration and compliance;
- superannuation; and
- prudential regulation and financial institutions including APRA, the HIH Royal Commission, HIH claims support and the safety of super review.
I won't say too much today about tax reform and superannuation, other than to say my priority over the coming months is to further develop and rollout our announced election polices.
This includes a range of business tax reforms, particularly the outstanding recommendations from the Ralph Review of business tax, revitalising the relationship between the ATO and taxpayers through greater and earlier consultation on policy initiatives and design of the office of the Inspector General of Taxation.
In the area of super the Government has announced a range of innovative measures designed to enhanced the overall attractiveness, accessibility and security of super. Through these policies, in particular superannuation for children and the splitting of super between spouses, the Government has taken the very important first steps in decoupling the link between superannuation and paid employment.
In respect of financial issues, my main objective will be to ensure that the prudential arrangements provide savers and investors with confidence in the system. This confidence must of course work both ways.
Industry in turn deserves to have a clear understanding of prudential requirements and rightly should expect consistency and fairness and practically in the way in which these prudential safeguards are administered.
In this context I would like to briefly mention how the insurance industry's new regulatory framework will provide a more effective and responsive marketplace for consumers and insurers.
Regulatory reform
As you know, the industry is on the verge of the commencement of the new general insurance regime - the most comprehensive reforms in a generation to the legal framework in which the insurance industry operates.
The newly amended Insurance Act will provide policyholders with a renewed level of confidence in this essential industry. The amendments will also provide insurers with a modern prudential framework within which to structure and manage their business affairs.
The legislative structure is similar to the Banking Act, in that it comprises a three-tiered hierarchy made up of the Insurance Act, a series of subordinate prudential standards and a set of non-statutory guidance notes.
In February, APRA finalised the new prudential standards for general insurers which sit under the Insurance Act. The standards cover:
- capital adequacy;
- assets in Australia;
- liability valuation;
- reinsurance arrangements;
- risk management; and
- the transfer and amalgamation of business.
The aim of these new standards is to establish -
- stronger capital adequacy requirements;
- improve the consistency and reliability of estimates; and
- enhance existing risk management systems.
The new regime comes into operation on 1 July 2002 with the exception of the capital adequacy standard where insurers will have until July 2004 to meet that requirement.
There has been some concern expressed in the media that the new requirements would squeeze out smaller insurers. The good news is that APRA's consultations indicate that the large majority of insurance companies will be able to meet the new capital requirements.
APRA is working to reauthorise all incumbent insurers under the new regime. In addition, APRA is working closely with those insurers who are currently unable to meet the new capital adequacy standards to ensure that they have a capital transition plan that will allow them to meet the standards by 2004.
The Financial Services Reform Act, which commences this month, has important implications for the Insurance industry. It introduces -
- harmonised licensing;
- a disclosure and conduct framework for all financial services providers; and
- establishes a uniform disclosure regime for different types of financial products.
The Act has been designed to compliment existing industry standards such as the General Insurance Code of Conduct, and recognises that effective regulation needs to be flexible enough to meet changing market conditions.
These measures to strengthen prudential and market regulation of the industry provide a timely opportunity for insurers to rebuild community confidence in their stability and in the products on offer. It is an opportunity I hope the Industry will continue to embrace with the commitment they have shown to date.
HIH
As for the HIH fallout, whether future regulatory reform will be needed is very much dependent on the outcomes and recommendations of the HIH Royal Commission.
I am of course very much constrained in my comments by the hearings of the Royal Commission.
However, there is little doubt that the exit of HIH from the market has had significant and far-reaching effects across our community.
Not only have former HIH policyholders been affected but also the market is still adjusting to the sudden decrease in availability of insurance cover. The reinsurance market has also significantly tightened over the last year, and particularly in the wake of September 11.
An important part of the Government's response to the collapse of HIH has been the establishment of the Royal Commission. The Royal Commission is well under way and hearings are continuing.
The Royal Commission is in the process of fully investigating the circumstances surrounding HIH's failure, the actions of Commonwealth and State regulatory bodies, and whether changes should be made to the current supervisory framework.
The Commission is due to report by 30 June 2002 and the Government looks forward to receiving the Commission's report.
The other key element of the Government's response to the collapse of HIH has been the establishment of an assistance scheme.
The Government quickly set up a $640 million assistance scheme for the relief of former HIH group policyholders suffering financial hardship
- HIH Claims Support Limited (HCSL) administers the scheme.
As you would be aware, HCSL was set up as a wholly owned subsidiary of the Insurance Council of Australia. I would like to underscore the Government's appreciation of the willingness of the ICA to assist in the management of the scheme. In particular, I would like to thank QBE, Allianz, and Royal Sun Alliance for managing eligible claims on a not-for-profit basis.
Public Liability Cover
I want to make some comments on public liability cover.
While I won't dwell on this topic for too long today, I would like to acknowledge the current community and business concern over the impact of rising premiums on the Australian way of life.
On a daily basis around the country the media are reporting stories of community groups, arts and sporting organisations and small businesses that are having difficulty in finding affordable cover, or who are realising that they can't obtain cover in Australia at all and, as a result, are finding their continued activities threatened.
The availability of appropriate cover at a reasonable price is vital to the efficient running of the economy, and to the welfare of society as a whole.
While there is much anecdotal information about the reasons for this lack of market flexibility, the drivers behind these premium rises need to be fully and closely examined. It is important for the confidence of consumers in the insurance industry that consumers are informed about the necessity for any premium increases. The current impasse will only further harm the reputation of the industry, which is already suffering the consequences of domestic and international upheaval.
How factors such as the exit of HIH from the market and September 11 terrorism attacks are impacting on the market is still being assessed.
Similarly, there is conflicting evidence about the impact of litigation, and particularly whether the size of payouts and the number of claims are having a disproportionately large impact upon the escalation of premiums.
Public liability is a complex product in a market that has changed significantly over the past decade. Many of the complexities are to be found in the way the industry structures its products and its business, including underwriting rules, coverage, excesses, the level of provisioning and profitability of the industry to mention a few.
That's why I have called a Ministerial Meeting of all State and Territory Ministers with responsibility for Insurance. The purpose of the meeting is three-fold -
- to examine the factors driving up premiums;
- to enable the States and Territories to exchange information about initiatives underway in their respective jurisdictions; and
- to examine the scope for a nationally consistent approach across jurisdictions.
The meeting will be held on 27 March in Canberra and I look forward to consulting with the Insurance Council and other interested groups in the lead up to the meeting. The interest in the meeting from various stakeholders has been overwhelming.
However, whilst it is important to acknowledge that there is a role for the Commonwealth in coordinating the approach of State and Territory Governments and industry, many of the forms of relief such as capping of claims or thresholds for claims fall within the jurisdiction of the States and Territories.
I believe that this conference will provide insurers with a timely opportunity to re-examine industry practices, to reassess market conditions for public liability insurance and to examine options that will reduce the cost of claims and bring down the cost of premiums.
In addition to this forum, some of you will be aware that the ACCC has been conducting an investigation into the impact that the failure of HIH has had on insurance premiums. I expect to receive this report shortly. This should further assist the Government to understand what is driving premiums and what might potentially done.
I look forward to hearing further about Industry proposals in the lead-up to Ministerial Meeting.
Terrorism Insurance
The events of September 11 have also forced the insurance industry to look closely at certain types of risk that previously had not been considered a major problem, such as terrorism insurance.
It perhaps was not surprising that the immediate reaction of insurers and reinsurers was to withdraw insurance coverage for these forms of peril. However, although the impact in Australia has not been immediate, it will have a significant impact on future commercial activity and possibly lending in the near future.
The Government has requested the Commonwealth Treasury to undertake a process of consultation with industry to determine a response to the withdrawal of insurance cover for terrorist risk.
A range of models have been proposed including the ICA's preferred option of a scheme modelled on the UK Pool Re.
The Treasury is currently preparing a report for the Government, which will include a full outline of the Council's views.
Conclusion
I note with interest the theme of this year's conference "The New General Insurance Era". The insurance industry is entering a period of adjustment within the context of a changing global economic and regulatory environment, and it is rewarding to see the industry rising to meet these new challenges in such a positive and constructive way.
I am very much aware of the challenges facing the industry, and also the impact on the broader community if risk cannot be transferred in the way of traditional insurance cover, and we must look for innovative ways to meet the communities needs in a changed and changing environment.
These are the great challenges ahead. I wish you well with your deliberations and trust that you will have a very enjoyable and productive conference.