28 September 2001

Keynote Address for the Australian Insurance Law Association (AILA) National Conference, Gold Coast

Ladies and gentlemen

I am delighted to have the opportunity to speak today at the Australian Insurance Law Association's National Conference here on the Gold Coast.

2001 is certainly a year that the insurance industry will remember for a long time. The size and scope of events which have impacted on this industry during the course of this year were unimaginable 12 months ago.

On top of this, the industry has seen the passage of the most comprehensive reforms in a generation to the laws governing the insurance industry.

In this context, I should mention that I do expect to receive a very warm reception from an audience of insurance lawyers - I expect you will extraordinarily busy explaining these changes to clients.

As you would be aware, the amendments to the Insurance Act were passed by the Parliament in August. The newly amended Insurance Act will provide policyholders with a renewed level of confidence in this essential industry.

These reforms create a world-class regime for general insurers and provide significantly enhanced protection for Australian policyholders.

The new regime aims for a balance between its prudential objectives and to ensure the industry stays efficient, competitive and innovative.

Indeed, the new regulatory regime will encourage innovation in the general insurance industry and place Australian insurers in an enviable position in the years to come.

One of the key drivers of the reforms has been the desire to instill a new approach to prudential regulation. The reforms move beyond the current highly prescriptive regime with its reliance on black-letter law.

The new insurance regime is made up of a three-tiered legislative structure. The Insurance Act sits at the top of the hierarchy and contains high-level principles and powers for prudential supervision.

There are four sets of prudential standards that cover capital adequacy, liability valuation, reinsurance arrangements and risk management. These standards make up the second layer of the legislative structure and are disallowable instruments.

The final layer contains the guidance notes, which contain any prescriptive or interpretive detail.

The regime will allow our prudential regulation to rapidly adjust to market changes and technological developments. This will ensure it does not become outmoded over time as has happened with the current regime.

This flexibility allows the domestic regulatory structure to encourage and facilitate domestic players to take on world's best practice. In a changing environment, this provides significant competitive advantages.

The reform's twin aims are to provide better protection for policyholders and less intrusive regulation for industry.

For consumers, the benefits are risk-based capital requirements, better internal governance and stronger market discipline. Companies will benefit from the shift to flexible standards, the option to use internal models, and compliance self-assessment.

The new framework is similar with those now in place for other APRA regulated entities, such as authorised deposit-taking institutions and life insurers.

This is consistent with the recommendations of the Wallis Report, which argued for greater consistency for supervision across regulated financial service providers.

I am advised that APRA is aiming to release the final prudential standards in late October or early November.

It is expected that all general insurers will be operating within the boundaries of the new regime when it starts on 1 July 2002.

The only exception is the capital adequacy provisions, where insurers will have until July 2004 to meet that standard.

Ladies and gentlemen, insurers have much work ahead to ensure they are ready for 1 July next year. So I urge them to start thinking now about what needs to be done to ensure compliance from day one.

The HIH experience has shown the importance of insurance products and the links of insurance into the wider community. HIH's demise just shows how crucial our changes are.

As you would know the HIH liquidators have confirmed the company's serious financial position. Without the Government's help many policyholders would now be suffering severe financial hardship.

To this end, we have committed $640 million to help those people suffering financial hardship, and this package continues to help a growing number of Australians.

Last month [check] liquidators scaled up his estimates of HIH's losses. Now, the total HIH losses ranges between $3.6 billion and $5.3 billion, up from previous estimates of $ 4 billion.

However, the liquidators have advised me that $640 million is still the best estimate of Commonwealth liabilities available at this time.

A non-profit company, HIH Claims Support Pty Ltd or HCS, has been set up to process the Government's support package. HCS has drawn on existing insurance industry infrastructure and expertise to process eligible HIH claims.

I would like to thank those companies involved for participating in the scheme - Royal & Sun Alliance, QBE, Allianz and NRMA.

To date, HCS has received a total of 4339 applications for help, with these applications covering the spread of business in which the HIH Group companies were involved. A large number of these applications have been assessed for eligibility and passed on to insurance companies for claims management.

The scheme is well and truly operational many people have already received payments. This includes a young family from Townsville who, in August, received a cheque for $124,000 from the scheme. This family lost their house in a fire in October last year. This money will give them the chance to rebuild their house and rebuild their lives.

I'd like to return now to the second majorelement of Government policy that will have a broad impact on the insurance industry. As many of you will no doubt be aware, the Government has been successful in finalising another major initiative in the financial services industry - the Financial Services Reform Bill.

These reforms represent the culmination of many years of effort and consultation by Government and industry.

The reforms will place Australia at the cutting edge in financial services regulation.

This will benefit both the Australian financial services industry, and the customers it serves.

The reforms are ambitious, but are also necessary. They will help ensure that we can continue to grow a vibrant, flexible and adaptable finance services industry. An industry that is no longer hampered by confusing and inconsistent regulatory approaches.

That said, because this is such an important and major reform, it's been critical to ensure we don't rush towards an unrealistic start date.

I know that many industry participants and consumers have been keen to capitalise on the benefits from these reforms sooner rather than later. But others indicated that more time was needed.

On August 30, I met with more than 40 key companies and industry associations from the financial sector, to seek consensus on an appropriate start date.

The Government listened long and hard to industry, and agreed that a start-up date of 11 March next year would strike the most appropriate balance.

This date will give the financial sector sufficient time to ready itself for the start of the new regime. However, for those companies and individuals who feel they need it, the two-year transition period will allow plenty of time to adjust.

In this regard, the Government has already responded to the specific circumstances of insurance agents.

The legislation preserves the existing working arrangements for agents throughout the transitional period. These will continue to apply even if the insurers they represent choose to opt into the new regime before them.

I realise that there will be a wide range of stakeholders in today's audience who have their own take on what the Financial Services Reforms will mean for them.

In the insurance sector generally, there will be varying degrees of benefits. The magnitude of these benefits will depend on the extent of regulatory overlap and duplication that these businesses now face.

What is clear is that wherever you fit in the insurance industry, you will have the opportunity to capitalise on the benefits these reforms will bring.

Whether you are a major insurance company, or a broker or agent selling insurance products direct to the public, the FSR regime will provide you with a range of options.

For starters, reducing business costs by removing inflexible and inconsistent regulatory approaches, will benefit businesses and consumers.

Removing artificial barriers between the sale of different financial products and advice, will create opportunities for businesses, small and large.

Streamlining licensing arrangements will make it easier for businesses to grow and expand the scope of their operations. Not surprisingly, much has been made of the efficiency gains that large businesses, including insurance companies, may be able to achieve.

What have often been overlooked though, is the benefits that small-scale operators may be able to achieve.

We shouldn't forget that the brokers and agents in the insurance industry have the unique advantage of being close to their customer base.

In a harmonised regulatory regime these businesses - who recognise the faces and understand their clients better than most - can really capitalise on that relationship.

If they choose, the streamlined framework of the FSR regime can make it simpler for them to offer a wider range of services to these clients.

Their clients will be comforted by the consistent and comparable disclosure regime across this wider range of services, and importantly, they will be dealing with a familiar face.

The opportunities that the FSR regime offers are significant, but fully exploiting them will require certain industries to step outside of their comfort zones.

But having the confidence and wherewithal to pursue these opportunities can sometimes be daunting. This is particularly so, in such a rapidly changing and dynamic industry.

However, the harmonised nature of the FSR regime, will mean that confusing and inconsistent regulations will no longer be a barrier to business pursuing opportunities wherever they may arise.

I know the insurance industry is an industry with the expertise and vision to make the most of these opportunities.

Finally, before closing today, I would like to end by discussing further planned financial sector legislative reform.

Treasury is currently reviewing the enforcement provisions across all APRA administered Acts. This enforcement project will affect not only the general insurance industry but also the entire financial sector.

The project aims to create a more consistent and effective system of prudential supervision for APRA. This will involve assessing the appropriate powers needed to allow APRA to do its job across all industries and address any constraints the current powers place on APRA.

More specifically, this project will ensure that APRA has a consistent set of powers across all products, markets and institutions under its control to collect information, monitor compliance, complete on-site visits and investigations, conduct examinations of employees and give directions.

The decision to harmonise APRA's enforcement powers flows from recommendations made by the Wallis Report.

It is currently expected that Treasury will release a discussion paper by the end of this year or early next year.

In closing, the passage of the Financial Services Reform Bill and the General Insurance Reform Bill are significant milestones in the process of financial sector reform.

I am glad to say that we have come along way since the Wallis Inquiry and I am certain that the continuing reform of the financial sector will keep Australia at the forefront of regulation and supervision.

I am sure you will spend many enjoyable hours this week at this conference digesting this new legal framework for the insurance industry.

I look forward to the AILA's continuing support and involvement in this ongoing process.

Thank you.