Ladies and Gentlemen.
Thank you for inviting me to speak with you today on Checking the Political Radar: Government and Insurance.
In recent years, although it has certainly not always been the case, insurance is a topic that has generated a great deal of media attention.
It is fair to say that the Australian general insurance industry has withstood considerable turmoil over recent years, despite adverse global market conditions. It is equally fair to say that the pace of regulatory developments in Australia has been remarkable.
It is especially fitting for me to talk on this topic today, as February 2004 marks the eve of the second anniversary since I convened the very first Ministerial Meeting on Insurance Issues with my State and Territory colleagues. In fact, three days from now, I will be chairing the seventh such meeting.
Although some items have gone from the agenda they are being replaced with new ideas and issues in what is a dynamic and fast paced environment for insurers as Governments respond to those concerns facing the public as they seek to cover their risk in an affordable and effective fashion.
Six months ago, I described developments in regulatory conditions in general insurance up to that point, as having involved Australia in 'an unprecedented program of law reform.' Six months on, I am proud to report that the responsiveness of this Government to the difficulties that were being experienced in general insurance in Australia - coupled with the resilience of the Australian insurance industry - has already begun to produce improvements in the general insurance environment.
To appreciate the true significance of these reforms and how we got to where we are today, it is important to consider the background to the significant changes that have occurred in the Australian market in recent years.
Less than three years ago, operating conditions for Australian general insurers were less than ideal. Like insurers around the world, Australian general insurers faced very serious challenges.
Throughout the world, the volume and quantum of insurance claims had been rising, both because of increases in personal injury claims – especially asbestos-related claims - and the frequency and magnitude of major disasters. In particular, the shocking events of September 11, 2001, saw capacity reduce sharply throughout the global insurance market.
In the US, tort costs reached an all-time high of $233 billion in 2002, with each U.S. citizen paying $809 annually or $3,236 for a family of four.
Although Australia had not descended as far as the US the chairman of Lloyd's of London, Lord Levene, recently summed up the culture of blame that has affected Australia as the "can-sue" rather than the "can-do" culture.
It is clear to most in Australia that we were turning away from a culture of personal responsibility and towards a culture of blame, where every adverse event, no matter how minor or how far-fetched resulted in successfully blaming someone else.
To digress just for a minute, I recently read of a Wisconsin man who was threatening to sue a cable television company for failing to disconnect his service and giving him three years of free service. The argument went that his family's unwanted access to pay television had made his wife gain 25 kilos, and turned his children into lazy channel surfers. At the time of the report a claim was yet to be lodged but if the claim does go ahead it will be plumbing new depths when it comes to a lack of personal responsibility.
To use the language of the common law, this cause of action would be both far-fetched and fanciful!
On a more serious note, officials from my Department who were recently meeting with the London insurance markets to provide information about the reforms we have undertaken were told that there was a time when Australia was regarded as if it were another super-litigious State of the US.
Thankfully, however, recent reforms have significantly reversed this view of Australia and we are now seen as being at the forefront of reform, with anecdotal reports that the changes which have been made in Australia are being seen as a model for reform in other jurisdictions.
Of course burgeoning claims were not the sole harbinger of the crisis.
The impact on insurers as the pressure of soaring claim costs increased was magnified by weak economic activity in both the US and Europe. As insurers received lower returns from international equity markets, they could no longer make up underwriting losses on the back of high investment returns. To make up the funding shortfalls, they were forced to more diligently price the risks they were insuring.
The problems in international markets were also reflected in Australia. A significant withdrawal of capacity was experienced in some areas of insurance, whilst in other areas, insurers were increasing premiums, limiting their coverage, or in some cases doing both.
For example, in 2001, premiums in the hard hit classes of public liability and professional indemnity insurance increased by 24 per cent.
Understandably, the reaction of the Australian public was one of bewilderment and at times, anger — the stuff of talk back radio hysteria and front page headlines screaming "The Death of Fun".
It was not clear to the community why the insurance they had previously purchased with ease was now prohibitively priced, if available at all.
The community began to lose confidence in the general insurance industry.
Unfortunately, these difficulties were brought home more powerfully to all Australians by what was later to be described as possibly 'the largest corporate failure Australia has endured' – the collapse of HIH Insurance. The damage wreaked by the collapse of HIH was as broad as it was deep. HIH policyholders were suddenly faced with the uncertainty that their policies would no longer protect them against claims. The collapse left (and I quote the HIH Royal Commissioner, Justice Neville Owen): 'a community in distress'; 'a building and construction industry in turmoil,' 'a public liability insurance crisis'; and intense public scrutiny regarding the role and effectiveness of the prudential framework for general insurance.
As more and more Australians struck difficulties in accessing insurance cover, it was clear that concrete action was called for. The Australian Government answered that call.
It did so by appointing a Royal Commission in 2001 to investigate and report on the reasons for, and the circumstances surrounding, the collapse of Australia's second largest insurer. By doing so, the Australian Government could receive a thorough examination of the issues to enable it to respond comprehensively to any structural or systemic deficiencies affecting the domestic market.
The Australian Government also moved quickly to introduce strengthened prudential requirements for general insurers. The new requirements took effect from 1 July 2002. They provide a stronger and more risk responsive prudential framework that is consistent with international best practice.
These reforms were an important first step in restoring Australians' confidence in the general insurance industry.
However, further reforms were required to address concerns about the availability and price of insurance.
The Australian Government came to the view that of the many underlying drivers of the cost of general insurance premiums in Australia, it was the cost of claims that needed to be addressed most urgently. But those familiar with the Australian Constitution would know that the Australian Government does not have exclusive power to cover the field on insurance issues.
To remind you all of the complexity involved - insurance claims can be brought in each of Australia's eight State and Territory jurisdictions. They may be framed as a cause of action in tort, contract, statute law, or a combination of each. In early 2002, none of these laws were uniform between States and Territories. Indeed, very few were even consistent with each other.
Solutions would not be easy to find or simple to implement.
But an increasingly concerned community looked to the Australian Government to provide national leadership on what was an urgent and complex problem.
That has led to a series of Ministerial Meetings on Insurance Issues and placed insurance firmly on the political agenda.
Looking back at what has been achieved through this forum, in such a short period of time, it is certainly an impressive example of what can be done when Governments take a cooperative approach.
One of the first and major outcomes of the forum- in July 2002- was the unanimous agreement of all Ministers that the most effective contribution they could make was to reform their laws of negligence. With the support of the States and Territories, I commissioned Justice Ipp of the NSW Supreme Court, to review the laws of negligence, and make principled recommendations to restore balance between the interests of insurers, insureds and the community.
In October 2002, I released the final Ipp Review report. One month later, a landmark agreement by all Ministers to implement the Ipp Review recommendations was struck. Within a year all States and Territories were reporting that their reforms were either finalised or very close to finalisation.
Complementing these efforts, the Australian Government has taken action where it has had the Constitutional power to do so.
For example - by December 2002, the Australian Government had successfully amended the Trade Practices Act 1974 to enable the self-assumption of risk by users of recreational services. This was a significant early step to help contain insurance costs in a targeted way.
Early in 2003, the Australian Government fulfilled a major step in its undertaking to the States and Territories to remove loopholes in Commonwealth legislation that could undermine their tort law reform efforts.
It did so by introducing the Trade Practices Amendment (Personal Injuries and Death) Bill 2003. The Bill, which would implement one of the Ipp Review recommendations, is intended to remove the very real potential for lawyers to exploit the strict liability provisions for misleading and deceptive conduct to justify personal injury payouts. Unlike fault-based laws, strict liability means a person can be found to have breached a law regardless of whether the person acted reasonably, honestly, or even without intent.
The Bill not only has the unanimous support of all States and Territories, it also has the very strong support of Australian general insurers. It is also a forerunner to legislation introduced last week which implements related Ipp Review recommendations to ensure that limitation periods and constraints on damages arising from personal injury or death are consistent between Commonwealth, State and Territory legislation. These reforms will provide further certainty to insurers about the scope and extent of their liabilities.
Unfortunately, the Government's efforts have been stymied in the Senate, which on 11 February 2004 agreed to support Opposition amendments which leave a range of professionals – including doctors – under constant threat of litigation for damages, regardless of whether they were at fault or not. Let us not forget that uncertainties regarding doctors' insurance led recently to such unaffordable premiums that some threatened to resign from practice altogether.
The amendments can only be described as misconceived. It is the first political roadblock that has confronted insurance reforms. For the record, I note that these measures do not remove the prohibitions on fault-based misleading and deceptive conduct and other unfair practices. Nor do they remove criminal sanctions for fault-based conduct. Importantly, they do not take away rights of consumers.
The Australian Government will continue to press ahead with reforms to the Trade Practices Act to prevent tort law reforms by States and Territories being undermined.
Another important step the Australian Government has taken to help improve certainty for Australian insurers, is the commissioning of the Insurance Contracts Act Review. The Review is being conducted by former ASIC Chairman, Mr Alan Cameron, and specialist insurance lawyer and Clayton Utz partner, Ms Nancy Milne.
The review is aimed at improving the overall operation of the Insurance Contracts Act, by clarifying Australian insurers' rights and obligations.
The Australian Government has already received the first part of the report, which focuses on the operation of section 54 of the Act. Section 54 was an issue identified in the Ministerial Meetings as meriting urgent consideration.
Section 54 currently operates to excuse the late notification of claims or circumstances that might lead to a claim under 'claims made' and 'claims made and notified' indemnity insurance policies. It has been of particular concern to insurers, who have indicated that uncertainties flowing from its judicial interpretation are potentially impacting on the willingness of insurers to offer liability insurance in Australia.
I can briefly report that the Panel has recommended amendments to section 54. These amendments would require an insured person to notify their insurer of any circumstances that might lead to a future claim, during the period of cover, to ensure coverage under a 'claims made and notified' policy. A related recommendation is to introduce an extended reporting period of 45 days into the Act.
These recommendations in my view, attempt to resolve the problems that section 54 has caused for insurers in indemnity classes, whilst maintaining a balance between the interests of insurers, insureds and third party claimants.
The remainder of the report is due by 31 May 2004. I would encourage you to submit to the Panel, your views about the Act. I would also encourage you, later this year, to comment on draft amendments I expect will be released for public exposure.
Rounding off 2003, the Australian Government also introduced legislative amendments to ensure an anchor is in place for future State and Territory professional standards legislation. The legislation was introduced on 4 December 2003.
Professional Standards Schemes offer capped liability to professionals in return for compulsory insurance and alternative dispute resolutions, alongside improved risk management to provide greater protection to consumers.
On 4 December 2003, we also introduced proportionate liability reforms as part of the CLERP 9 Bill. These reforms will provide insurers in the indemnity classes with even more certainty about the scope and content of their insurance liabilities.
The Australian Government remains committed to examining the scope for further reforms to the regulation of Australian insurance industry throughout 2004.
We are currently considering the options put forward as part of the review into Direct Offshore Foreign Insurers and Discretionary Mutual Funds. The review was announced by the Australian Government in September 2003, in conjunction with its final response to HIH Royal Commission recommendations.
Following from another HIH Royal Commission recommendation, the Australian Government is expecting that by the end of March 2004, it will have received the technical study into the merits, scope and extent of a policyholder protection scheme in the Australian insurance market. I note the Government has not at this stage made a decision whether any form of explicit guarantee should be implemented in the Australian context. As with the Insurance Contracts Act review, I expect insurers will have the opportunity to express their views on any such scheme later in 2004.
Most of this audience would also be aware that APRA too, is considering the merits of possible further reforms to the prudential regulation of general insurance. APRA has released a Discussion Paper for insurance industry comment late last year. The Discussion Paper includes APRA's response to a number of the HIH Royal Commission recommendations referred to it by the Government last year, such as improved disclosure to the public regarding insurers' financial condition and reporting, and information reported to APRA by insurers, their auditors and actuaries.
It is important that APRA remain vigilant, to ensure that the prudential framework remains robust and effective. This is an important element in promoting high levels of community confidence. The adverse impact that a failure of a financial institution can have on the community was demonstrated most prominently by the collapse of HIH. Of course, it is also important that regulation not unduly impede the efficiency, competitiveness and flexibility of the insurance industry.
The APRA paper is primarily intended to serve as a basis for consultation. The insurance industry's views are critical to assisting APRA to identify reform options that are balanced and appropriate, having regard to its role and function.
I know there are some concerns among industry players in relation to some of the corporate governance proposals in the paper and I would encourage those who are concerned to actively participate in the consultation process.
The reform process embarked upon by all levels of government across Australia has been focused on getting the domestic conditions right, so that Australia is an attractive place to do insurance business. And we know that Australian general insurers are clearly showing signs of recovery from the turmoil of recent years.
They have succeeded in offsetting falling investment incomes. They have rebuilt their capital as a result of better underwriting performance. They recorded their first annual underwriting profit in seven years in March 2002. The latest General Insurance Industry Survey by JP Morgan and Deloitte, confirms these positive results. It goes even further, to project that capacity in the Australian insurance market will begin to increase.
Going forward, the outlook for Australian insurers' is positive. But with that success, we must avoid complacency. Insurers must price their risk appropriately. They must continue to provision properly for outstanding claims liabilities. They must maintain the focus on risk management and capital management.
At the same time, I cannot emphasise enough, the importance this Government places on insurers passing on the benefits of these reforms. The reforms I have outlined today have required great – and at times, unprecedented - political will and to put it in a way that would be meaningful to many of you here today, exposed themselves to political risk. It is critical that insurers share the dividends of these reforms if they are to maintain credibility with Governments and the insuring public. Governments, and the ACCC, will continue to watch closely, the way in which insurers respond to changing market and regulatory conditions.
Henry Ford once said that "Coming together is the beginning. Keeping together is progress. Working together is success."
Clearly, the reform efforts of the Australian Government have helped deliver to insurers the certainty they need to be able to operate in Australia. They have also restored confidence in the minds of the Australian community that insurance is available, and that their insurance claims can ultimately be met.
It is a testament both to the effectiveness of the reforms led by the Australian Government to date, as well as the strength of the Australian insurance industry, that the 'insurance crisis' – which is still being felt in many countries around the world – is, in Australia, truly abating.
Ensuring that relief from the crisis reaches down into the community relies on effective, efficient insurers, pricing risk well and passing savings on to consumers.
You all have a big role to play in this area and I look forward to continuing to do what I can as Minister to assist you in that role.
Thank you.