Ladies and Gentlemen.
Over the past 18 months, Governments across Australia have embarked on an unprecedented program of law reform. These reforms have been designed to improve the cost and availability of liability classes of insurance.
However, this process has not come about through any isolated event. To understand how we got to where we are today, we must consider the background to the significant changes that have occurred in the Australian insurance market over the past few years.
The reforms to the law of negligence follow on the back of a once in a generation overhaul of the prudential and consumer protection regulations that apply to insurance companies.
Together, this package of structural reforms has resulted in a paradigm shift in the Australian insurance market.
The transformation of the insurance environment will provide far reaching and long term benefits to Australian consumers in the form of safer, more stable insurance markets into the future.
But as with any major process of reform, this one has not been without pain.
The Catalyst for Change
Looking through the rear vision mirror, we can see the genesis for reform in the out workings of the report of the Government’s Financial System or ‘Wallis’ Inquiry in 1997.
The report of the Wallis Inquiry recommended a functional, rather than industry specific, approach to regulation. This new way of thinking provided policymakers with an opportunity to consider general insurance within the prism of broader financial services.
The new regulatory framework that took shape over the late 1990s gave rise to the Financial Services Reform Act and the beginnings of a new prudential framework for general insurance.
However, broad acceptance of the need for fundamental reforms to, in particular, the prudential regulation of insurance was not cemented until the failure of Australia’s second largest general insurer, HIH, in early 2001.
Whilst painful for all involved, this failure proved a turning point for the general insurance industry.
The great English poet, John Keats said it best when speaking of failure as: “the highway to success, inasmuch as every discovery of what is false leads us to seek earnestly after what is true, and every fresh experience points out some form of error which we shall afterwards carefully avoid.”
In the case of HIH, Royal Commissioner Justice Neville Owen concluded that the primary reason for its failure was inadequate provisioning for future claims.
The stark lesson for insurers arising out of this failure is that insufficient attention to pricing risk and the full and relative costs of capital can prove catastrophic to the fortunes of an insurance company in the long run.
This theme was reinforced by the introduction of the new prudential requirements for general insurers, which came into effect on 1 July 2002.
The new capital and liability valuation requirements provide a better focus for insurers in considering the capital consequences of writing different classes of insurance business.
From a consumer protection vantage, this is essential. It goes without saying that insurance companies must have sufficient resources to pay claims.
But this new, more focussed approach to underwriting, combined with a sharp hardening in international insurance markets, has had flow on effects for Australian consumers.
In particular, consumers have seen premium increases of enormous magnitude in the previously underpriced lines of public liability and professional indemnity insurance.
While some would see this adjustment as a necessary and overdue correction in the insurance market, the reality of the situation is that if insurance is unaffordable or simply unavailable, the insurance market is no longer performing its vital function of transferring risk across the economy.
A policy response from Government was necessary to address this issue. However, that response had to be targeted so as not to undermine the ongoing financial viability of insurance companies.
Claims Costs in Context
To achieve such an outcome was, to put it mildly, not an easy task.
It required a proper understanding of the underlying drivers of insurance premiums.
Factors affecting the price of insurance premiums are many and varied. Some are driven by international conditions in insurance and reinsurance markets.
However, one obvious factor which impacts on premiums and is influenced by domestic conditions is the cost of claims.
It is apparent that claims costs, and in particular the cost of personal injury claims, has escalated over recent years.
The enormity of these increases can be demonstrated in fairly simple terms by comparing the increase in consumer prices with the increase in court awards over the same period.
Over the past ten years, inflation has averaged 2.5 per cent per annum. In contrast, a study commissioned by the Government found that awards for personal injury have been increasing at an average rate of 10 per cent per annum.
When looking at large claims, the comparison is even more startling. Between 1979 and 2001, the CPI increased by 212 per cent. In contrast, over the same period the highest award for personal injury in Australia increased from $270,000 to $14.2 million, an increase of over 5,000 per cent.
Stabilising insurance premiums in such an environment required an urgent and comprehensive response.
A National Response
Unfortunately, solving a problem is seldom as easy as recognising and identifying what the problem is.
Insurance claims can be brought in eight different jurisdictions in Australia and a cause of action may be found in tort, contract, under statute or a combination of all three.
It was very clear from the outset that this was not an issue in which finger pointing or blame laying was likely to satisfy the public. What was required was national leadership to develop a cooperative and comprehensive response by all levels of Government.
To ensure this occurred, I convened a series of meetings with my State and Territory colleagues to thrash out some concrete solutions to this very difficult issue.
The first meeting was held in Canberra in March last year. This has been followed by a further five meetings – the latest taking place in Adelaide last week.
These meetings have seen a commitment to sweeping reforms that have fundamentally changed the public liability, medical indemnity and professional indemnity landscape.
Each of these meetings has been marked with a spirit of non-partisan cooperation and agreement to reforms that will deliver significant benefits to the Australian community.
A Blue-print for the Reform of Personal Injury Law
The first issue considered by Ministers in this context was the rapidly increasing cost of personal injury claims and its impacts on public liability and medical indemnity premiums.
Ministers commissioned an expert Panel, chaired by Justice David Ipp, to review the law of negligence as it applies to claims for bodily injury and to provide a blueprint to Governments for reform.
The Panel appointed to undertake the Review sought to strike a balance between the interests of injured people and those of the community at large and to impose a reasonable burden of responsibility on individuals to take care of others and to take care of themselves.
The Panel made 61 recommendations on specific changes that could be made to the law of negligence.
Turning the Ipp vision into a reality required strong leadership from the Commonwealth, State and Territory Governments.
I am pleased to say that States and Territories have substantially responded to the call. All jurisdictions have either implemented or announced their firm intentions to implement the majority of the Ipp recommendations.
The Federal Government is playing its part by committing to amend the Trade Practices Act to underpin State and Territory law reform.
This is consistent with the Ipp recommendation to ensure that the same rules apply to any action, regardless of whether it is brought under tort, contract or under a statute.
It is essential to amend the TPA to ensure that it is not used as an alternative cause of action in circumstances where a common law action may be prevented by State law reform.
The only foreseeable spanner in the works is the Federal Labor Party, which is threatening to kick an own goal by blocking these essential reforms to the TPA, seemingly in defiance of their own State and Territory Labor party colleagues.
Professional Indemnity
Having made great inroads in to the drivers effecting the cost and availability of public liability and medical indemnity premiums, Ministers have now turned their attention to a range of measures designed to improve the affordability and availability of professional indemnity insurance.
Professional groups have identified four areas requiring Government attention. These are replacing the principle of joint and several liability with proportionate liability; professional standards legislation; complementary reforms to the TPA; and issues surrounding section 54 of the Insurance Contracts Act.
Proportionate Liability
The operation of insurance and the law of joint and several liability has given rise to professionals often being singled out as the sole target for legal action in proceedings for property damage and pure financial loss. This may be the case even when a professional is only one of the parties involved and may have only contributed in a minor way to the loss.
This deep pocket approach to litigation is one factor driving exponential increases in professional indemnity premiums.
An alternative approach is a system of proportionate liability. Proportionate liability means that a defendant is only responsible to compensate for that part of a plaintiff’s loss which is attributable to the defendant’s own negligence.
Implementing a system of proportionate liability could be expected to help stem the unsustainable growth in professional indemnity insurance premiums.
I am pleased to say that all jurisdictions in Australia have endorsed a national model for proportionate liability for economic loss and property damage.
Under the model, courts should have regard to the responsibility of any potential defendant who is not a party to the proceedings. The model will also require defendants to notify a plaintiff in writing of the identity and alleged role of any other potential defendants.
Queensland has indicated that they will apply a slightly different form of proportionate liability by not allowing proportionate liability to apply to consumer transactions. This carve out has been put in place in part because of concerns in that State about the actions of some unscrupulous property investment marketeers.
The Commonwealth does not believe that such a consumer carve out is necessary and believes that it may significantly reduce the benefits of proportionate liability. Certainly, it will leave professionals in Queensland at a distinct disadvantage when purchasing insurance compared to their counterparts in other States.
Given the procedural protections envisaged under the proportionate liability model and risk management benefits of professional standards legislation, it is highly unlikely that consumers, including purchasers of real estate, will be materially disadvantaged by these reforms.
Fundamentally, the reforms are intended to ensure that professional indemnity insurance can be purchased at reasonable prices and that consumers can have greater confidence that the professionals with whom they deal are in fact covered by insurance.
Furthermore, the regulation of real estate agents is the responsibility of States and Territories. Queensland has already introduced legislation that regulates property marketeers.
The Commonwealth has already endorsed the merits of proportionate liability for economic loss applying to accountants and auditors in its Corporate Law Economic Reform Program number 9 (CLERP 9). The Commonwealth also proposes to amend the law to allow auditors to incorporate, to overcome some of the liability concerns of the accounting profession.
Notwithstanding the slightly different approach adopted by Queensland, the adoption of proportionate liability across Australia is a significant break through for professionals.
Professional Standards Legislation
Professionals have also had a win in relation to professional standards legislation.
At the Ministerial meeting last week in Adelaide, Ministers confirmed their strong support to implementing professional standards legislation on a nationally consistent basis.
This is expected to result in significant benefits, not only for professionals, but also for consumers by requiring professionals to comply with rigorous standards of risk management and to take out compulsory levels of insurance.
The Commonwealth has announced that it will support an approach to professional standards legislation by amending the Trade Practices Act and other relevant Commonwealth legislation.
Legislation to give effect to this commitment is expected to be introduced into the Parliament during the current sittings.
The Insurance Contracts Act 1984
A further issue which has been identified as affecting the willingness of insurers to offer professional indemnity insurance is the practical and legal operation of section 54 of the Insurance Contracts Act.
Insurers contend that judicial interpretation of section 54 of the Insurance Contracts Act has led to a circumstance where claims made policies may be held to have the same legal effect as occurrence based policies.
Insurers further content that this presents an obstacle to more insurers entering the Australian market for liability insurance adding to the cost and reducing the availability of cover.
The Commonwealth Government is currently considering an appropriate way in which to examine this issue and will shortly be making an announcement in this regard.
Insurers Need to Play Their Part
Having been through such an enormous period of change, it is essential that consumers and Governments start to see the benefits of reform.
The focus of the reform process has been about getting the domestic conditions right to make Australia an attractive place to do insurance business.
While at this stage, it is too early to tell the full effects of the reforms, there are some welcome early signs that capacity is returning to the Australian market.
Anecdotal evidence provided by insurers to Ministers in Adelaide last week indicated that about 80 per cent of businesses are now more readily able to access insurance.
But it must be appreciated by insurers that it has required great political will and determination from Governments across Australia to undertake such a wide-ranging suite of reforms.
To maintain credibility with Governments and the insuring public, insurance companies must take a leadership role in the broader community interest by assisting the 20 per cent of businesses still struggling to find insurance.
While it is accepted that insurers must be profitable to stay in business, as an industry, you can be more pro-active in helping organisations improve their risk management and other factors to make them a more attractive business proposition.
At last weeks Ministerial Meeting, the Insurance Council indicated a preparedness to help out in this regard – and I have already referred one group with particularly problematic issues to the ICA for assistance.
Governments, and the ACCC, will be watching closely the way in which insurers respond to changing market conditions.
Attracting International Insurers
Also critical to the success of these reforms is that the international insurance market recognises that the Australian insurance environment has fundamentally changed.
The willingness of insurers to commit their capital to the Australian market will depend on this message getting out.
Governments are currently considering how best we can market the reforms undertaken to the international market, including the preparation of a comprehensive guide to the changes affecting insurance in Australia. But this is an area in which Government will be looking to the Australian insurance community for assistance.
Australian insurers, reinsurers and insurance brokers can play a vital role in selling the benefits of reform to international players.
Conclusion
Benjamin Disraeli once said, “Change is inevitable. Change is constant”.
This has certainly been true of the Australian insurance market over recent years.
Moving forward, it is now time to consolidate on the successes of Governments in responding to the call of insurers and the community to reform the litigation environment in this country.
Insurers must play their part by responding to the actions of Government, or the credibility of this industry in seeking any future reform will be fundamentally undermined.
Of one thing we can be sure, and that is that the Australian insurance market has been through a paradigm shift.
One hopes that in the future, the constant and inevitable change of which Disraeli speaks is one of evolution rather than the revolution we have seen in recent years.
Thank you.