Ladies and Gentlemen.
It is a great pleasure to be here with ICA today in Melbourne.
With yesterday's passing of the first anniversary of the tragic events of September 11 in the US, it is timely to reflect on where the insurance industry stands one year on from the largest insured loss in history.
In the Australian context, September 11 is one of a number of factors that have coincided to create unprecedented awareness of the vital role that insurance plays in every aspect of our daily lives.
In that context, it is important that the insurance industry ensures that it can continue to offer a product that meets the needs of the community. There is also a role for Government to ensure that, with a limited set of resources, the needs of all members of our community are appropriately balanced.
In the words of Martin Luthur King Jn, "The ultimate measure of a man is not where he stands in moments of comfort, but where he stands at times of challenge and controversy."
I am pleased to say that, from what was essentially a standing start; Governments and industry have taken significant strides towards resolving the problems of the insurance industry over the past year to meet community needs and expectations.
The difficulties facing the insurance industry over recent times really started some time before September 11 last year.
In any retrospective look at the insurance industry, it would be remiss not to mention the effect that the failure of HIH has had in shaping the way the Australian community has viewed the insurance industry over the past year.
I would briefly like to consider two issues that arose out of this failure that have had a significant impact on the insurance industry's reputation.
First, the failure of HIH and the Royal Commission which has followed, has led the community to question the security of insurance companies and the corporate culture which exists more generally across the Australian business community.
It demonstrated the need for strong prudential and corporate governance requirements.
The Howard Government has undertaken a comprehensive program of corporate reform over the past six years through the Corporate Law Economic Reform Program (CLERP).
We have also undertaken the largest renovation of the prudential requirements governing insurance companies in 30 years, culminating in the commencement of APRA's new prudential requirements for general insurers on 1 July this year.
The Government will be considering whether, in light of the recommendations of the HIH Royal Commission due early next year, the regulatory framework needs further strengthening - or indeed whether any rules can legislate away human immorality?
In the words of Alan Greenspan, `...rules cannot substitute for character.' `Companies run by people with high ethical standards arguably do not need detailed rules to act in the long-run interests of shareholders and presumably, themselves.'
Restoring confidence in the insurance industry and the broader corporate community is not just a matter for Government. If the Government could simply set laws and ensure compliance, we would not require courts and we would not require jails.
Business leaders have a role in ensuring that they act not only in accordance with the letter, but also the spirit of the law.
The second enduring influence that HIH has had over the past year has arisen in part due to a coincidence in timing with a significant hardening in the insurance cycle. Through a combination of factors some classes of insurance have becoming unaffordable or unavailable to many businesses and community groups within the Australian community.
This issue had, and still has, the potential to significantly further undermine the reputation of the insurance industry in this country.
A range of factors has contributed to premium increases and a reduction in the availability of insurance over the past year.
The ACCC, in its first `Insurance Market Pricing Review' released in March identified a range of factors impacting on the cost of public liability and professional indemnity insurance. These include general wage inflation, insurance companies restoring premiums to adequate levels in light of heavy losses in these classes over recent years, continuing increases in the cost of claims and the increasing costs of reinsurance.
The first ACCC report relied 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.
In its second report, which I am currently considering and will soon release, the ACCC has identified some additional factors influencing premiums.
These include the downturn in international investment markets which means that it is no longer possible for insurance companies to 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 means that insurers are, understandably, directing their relatively reduced capital bases towards less risky and more profitable classes of business.
In the context of these drivers, the Federal Government has provided a leadership role and taken action in the limited areas in which it has responsibility. For example, we have introduced legislation to remove tax impediments to structured settlements, we are assisting the insurance industry to improve its risk rating of insurance through mandating the collection of claims data and have introduced amendments to the Trade Practices Act into the Parliament to allow effective waivers for risky recreational activities.
The Federal Government's view is that beyond this, the area in which we can make the biggest contribution to resolving the current state of the insurance market is to provide leadership to encourage reforms to stabilise the level of litigation. This should have the effect of improving the foreseeability of risk for insurance companies in writing liability classes and making this business relatively more attractive.
There is a widely held view in the Australian community that insurance has become unaffordable and unobtainable and that this is due in large part to the operation of the legal system.
The perception is that the law of negligence, as applied by the courts, is unclear and unpredictable. It has become too easy for plaintiffs to establish liability for negligence on the part of defendants and that damages awards are frequently too high.
It is not difficult to see how this perception has arisen given the number of high profile claims that have attracted the attention of the media in recent times and which the community cannot understand.
For example, the case of a teenager who was awarded $50,000 for being injured while trying to break into a Sydney pub, a report that Western Australian councils are paying out $70,000 per week for slip and fall injuries on footpaths, a $4 million award to a man who hit his head on a sand bank at Bondi Beach. The list goes on.
The existing system of compensation for negligence through the courts relies on the proposition that generous court awards are ultimately paid for by insurance companies with deep pockets.
This proposition comes sadly unstuck when we realise that the deep pockets of insurers are in fact funded through our insurance premiums. Large payouts inevitably flow through to all policyholders in the form of higher premiums.
Insurers need to collect sufficient premium in order to pay out claims by spreading the cost across all policyholders. This basic principle of insurance explains why a low claims history does not necessarily mean that an entity will be exempt from premium increases where the costs of claims in the general pool increase.
Advice to the Ministerial Meeting on public liability insurance in May indicated that bodily injury claims have been increasing on average by 10 per cent per annum over the past decade.
Government has a role in ensuring that the law reflects the reasonable views of society about what is fair and equitable.
In recognition of this role, the Federal Government, in close cooperation with State and Territory Governments, has worked to develop a nationally consistent solution to the current crisis in Public Liability Insurance.
So far, I have convened two meetings with my State and Territory counterparts to thrash out some practical solutions to the current problems.
Reforms to the law to reduce the uncertainty surrounding court awards and settlements and reforms to streamline the legal system are essential to stabilise the insurance market.
The States have responsibility for the common law and the courts. So it is essential to this process that State Governments sign on to a process of appropriate law reform.
The States have agreed to take action to reform the laws and court procedures in their jurisdictions, however, the pace of and commitment to reform varies significantly between State and Territory Governments.
Of particular note in this regard are recommendations emerging from the Ipp review.
In recognition of the difficulty for individual jurisdictions to formulate effective and equitable tort law reform, an expert Panel, chaired by Justice David Ipp, has been established to undertake a principled review of the law of negligence and make recommendations for reform. The Panel's advice to Government will be delivered over two reports.
In its first report to Government released on 2 September, the Panel reported on matters relating to professional negligence, the liability of recreational service providers, ensuring consistency between reforms made in the law of negligence and the Trade Practices Act and on limitation periods. Amongst the recommendations are some pragmatic suggestions to codify the negligence test for doctors and other professionals that have the capacity to re-balance the interests of plaintiffs and defendants.
In its second report, the panel will be reporting on the broad principles relating to the law of negligence, options to set limits on liability and the quantum of damages and will also consider the proposals to replace the law of joint and several liability with proportionate liability.
In considering whether proportionate liability is an appropriate alternative, one of the most difficult issues is whether an innocent plaintiff injured through no fault of their own bear the cost of a bankrupt or absconding defendant. Alternatively, should a defendant who is only partly to blame bear that cost?
The Panel will make a range of further recommendations in its second report to Government due at the end of this month.
The suite of recommendations of the Panel, if implemented, should provide a platform to bring claims for negligence more into line with community expectations.
As States and Territories have responsibility for laws in respect of claims for negligence, it will be largely a matter for State and Territory Governments to decide whether they have the political will to implement the recommendations of the Ipp review.
The response so far is encouraging. New South Wales and Queensland have enacted measures. Western Australia, South Australia and the ACT have introduced legislation. After a slow start Victoria, the Northern Territory and Tasmania have foreshadowed reforms but these are yet to be introduced.
States and Territories, may, in their own jurisdictions wish to move further than the recommendations put forward by the Ipp review. The Federal Government considers that this is a matter for individual State and Territory Governments.
However, I would consider that the Ipp recommendations so far form a minimum level of practical and common sense reform in the areas of public liability, professional and medical indemnity and should be implemented on a national basis.
Shortly, I will again meet with my State and Territory colleagues to discuss how the measures contained in the Panel's report might be progressed.
No one can afford to drop the ball on tort reform.
You can be assured that I am keen to maintain the momentum for reform and I would encourage those of you with an interest in this issue to make your views known to State and Territory Governments.
Some particular interest groups and organisations have expressed concerns about the desirability of amending the law of negligence and the potential impacts on plaintiffs. Considerable attention has been given to the position that insurance companies should not be allowed to profiteer from the amendment of the law of negligence.
This is not a proposition that I disagree with and about which I will comment shortly.
Various reports have suggested that legal and administrative costs make up as much as 40 per cent of the total costs of the personal injury liability system. It is not unexpected that groups that derive their income from this source would seek to maintain the status quo clothed in emotive advocacy for plaintiffs' rights.
It is also important in this context to recognise that relatively speaking, personal injury law provides very generous compensation to a very small proportion of the population at considerable expense to the rest of the community. This is an expensive lottery that the community cannot afford.
I would have thought that there is an overwhelming consumer interest in restoring the balance in a system where, at present, the benefits disproportionately favour the few.
Only very small proportions of deaths or injury result in the payment of compensation. The vast majority of those who are injured have to rely on their own resources and on other sources of assistance, notably social security.
This observation has important implications for proponents of no-fault schemes for compensation. A scheme of this nature would be expected to cost billions of dollars. The much touted New Zealand Accident Compensation Scheme for example, currently has unfunded liabilities of $3.9 billion in New Zealand dollars.
A scheme to provide care to the stock of those people who are catastrophically injured would cost many of billions of dollars per year. Medical negligence injury accounts for just five per cent of the total number of people catastrophically injured in this country each year.
The majority of catastrophic injuries are caused by motor vehicle accidents and a significant number relate to workplace and other accidents. Those injured must be adequately cared for however, responsibility for motor vehicle accident and workplace injury compensation rests with State Governments.
Notwithstanding these comments once these reforms are put in place, it is essential that the insurance industry deliver the results that Governments and the community expect and need.
We have seen some very positive signs of this occurring through the willingness of Suncorp to re-enter the market in jurisdictions that have had the political will to push forward on reform. The coinsurance panel for not-for-profit organisations announced by QBE, IAG and Allianz last week is another very positive step.
The reputation of the insurance industry depends on this trend continuing.
The Government for its part will be monitoring the effect of reforms through the ACCC.
The ACCC has been asked to continue to monitor the insurance industry on a six monthly basis over the next two years.
The past year has been one of unprecedented challenge for the insurance industry and for Governments.
I believe that we have taken concrete steps in resolving the very difficult issues that have confronted us.
As I travel around the country and speak to people from all walks of life, the importance of insurance is continually reinforced.
Whether it is small businesses that simply can't get the cover and need to keep operating, the cancellation of the Streaky Bay Camel Cup or parents who are concerned that their children's netball club is buckling under the weight of higher premiums, the availability and affordability of insurance remains a key concern.
From many perspectives, insurance is a vital thread running through the fabric of our society. We must all identify what we can do, and to act swiftly to restore back balance and some common sense to a system that we simply can't live without.
Thank you for your time today, I hope that you enjoy the rest of the conference.
Thank you.
* This speech was updated on 22 November 2002.