Ladies and Gentlemen
I am delighted to have the opportunity to speak at the ICA's annual Canberra Conference.
Given that the Parliament is currently considering reforms of unprecedented scale and scope for the general insurance industry, today is a particularly timely event.
As you well know, the management and regulation of general insurance has in recent times been subject to intense scrutiny from the media, State and Federal politicians and the community at large.
Through the experience of HIH we have seen first hand the importance of insurance products and the links between insurance and the wider community.
The failure of HIH is clear evidence that our reforms to general insurance are absolutely necessary.
It has also given us the opportunity to reflect on what additional improvements could be made.
As the Minister responsible for guiding reform of the general insurance industry through the Parliament, I would like to update you today on the state of play of current reform projects and then look at what is driving change in the future.
As you know, there are now two sets of reforms before Parliament which affect general insurance.
Both affect the way the industry sells and markets its products and the way the industry holds and manages capital for risk.
First, the state of play on the Financial Services Reform Bill.
The FSR Bill has now been passed by the House of Representatives and is awaiting debate in the Senate.
Subject to the Bill's passage through the Senate, the two-year transition period will start on 1 October 2001.
The FSR Bill has been developed with extensive industry consultation, and I would like to thank the ICA for its contribution to that process.
The financial services industry is being challenged by changing customer needs, by globalisation, and the blurring of traditional boundaries between different financial service providers. So, it is crucial that regulation help innovation and promote business.
At the same time, it must also ensure adequate consumer protection and adequate market integrity.
I believe the FSR Bill achieves an appropriate balance between these competing regulatory objectives.
The FSR Bill has important implications for the insurance industry generally. It introduces a new harmonised licensing, disclosure and conduct framework for all financial service providers and establishes a uniform disclosure regime for different types of financial products.
Flexibility and responsiveness to market developments lie at the core of an effective regulatory framework.
Effective regulation needs to be flexible so that it can respond to the changes shaping the financial system.
The FSR Bill will be capable of flexible implementation in its application to different financial products. For example, industry codes of conduct, including the General Insurance Code of Conduct, are likely to keep playing an important role in fleshing out standards for meeting regulatory requirements.
The Government will continue its consultative approach as it develops the regulations to support FSR.
Along with broad public consultation, Treasury has set up an FSR Implementation Consultative Committee to consult more closely with industry on the regulations. I am pleased that the ICA has agreed to take part in the work of this Committee.
Turning now to the General Insurance Reform Bill.
As you know, this Bill provides the necessary legislative reforms to the Insurance Act to enable the implementation of APRA's new prudential standards for general insurers.
The Bill was introduced to Parliament during the 2001 Winter Sittings and is scheduled for debate during the current sittings.
I also understand that the final version of the prudential standards are due for release by APRA this September.
In addition to the measures originally included in the Bill, the Government will amend the Bill during the debate in the House of Representatives. These amendments have two purposes.
First, there are a few amendments which are merely technical in nature, designed to remedy drafting errors or omissions in the original Bill.
Second, there are a series of amendments to the enforcement provisions of the Insurance Act. I have brought forward from a more general project to harmonise and improve enforcement capabilities across all APRA-regulated institutions.
The amendments will improve APRA's investigative powers and its capacity to gather information and issue directions to general insurance companies.
The amendments also expand APRA's monitoring role, enable it to accept enforceable undertakings and provides a statutory mechanism for a voluntary transfer of business.
It was decided to bring forward these particular amendments in response to APRA's dealing with HIH. The Act's current enforcement provisions lack flexibility and require the establishment of a high level of certainty by APRA before it can take appropriate action.
The new requirements under the Insurance Act are scheduled to start from 1 July next year, to be fully operational by 1 July 2004.
The Bill and the final Standards mark the culmination of an extensive process of industry consultation.
The experience of HIH has clearly demonstrated the need for these reforms and I trust that the insurance industry will set about implementing the reforms in accordance with the spirit in which they were intended.
Before moving on to future events and projects impacting on the insurance industry, I should mention one other review which is currently on foot.
There has been much media coverage and reports to my office about extreme increases in insurance premiums in the wake of the HIH.
As a result of these reports, I have asked the ACCC to advise me on the reasons for these increases.
It is important that consumers can be assured of the necessity of any price increases. Unscrupulous pricing will only do further damage to an industry whose image has copped a battering in recent times.
I trust that the insurance industry will co-operate fully with the ACCC in this exercise.
Looking forward, there are two major Government initiatives that will impact on the general insurance industry: the upcoming review of the enforcement and resolution of failure provisions under the Insurance Act; and, of course, the HIH Royal Commission.
The enforcement and resolution of failure provisions is a joint project between Treasury and APRA. The project is aimed at harmonising the enforcement and winding up powers across all APRA regulated institutions.
The objective is to ensure APRA has a full suite of powers which can be applied in appropriate circumstances. For example, the current Insurance Act is fairly blunt in terms of what actions the regulator can take to remedy non-compliance.
Now, all APRA can do is withdraw an authorisation or send in an inspector. This is hardly appropriate for minor indiscretions.
Also, it is important that the regulator can deal with companies exiting the market. Concepts such as judicial management under the Life Insurance Act and voluntary and compulsory transfers of business under the Transfer of Business Act could have application to general insurance companies.
I expect that APRA and Treasury will release a discussion paper next year setting out proposals on these issues. It is expected that legislative reform would soon follow.
As you know, on 18 June, the Prime Minister announced the appointment of Justice Owen to head the Royal Commission into the failure of HIH, along with its terms of reference.
It is likely that the Royal Commission will provide further impetus for reform of the general insurance industry.
In particular, the terms include a reference to inquire into the adequacy and appropriateness of the regulation and prudential supervision of general insurance at Commonwealth, State and Territory levels and to inquire into the appropriateness of different State and Territory statutory insurance and tax regimes.
The reference to State and Territory statutory insurance and tax regimes is a good opportunity for the ICA to take part in the debate on issues which have long been a sore point for the industry.
I am certain that you need no encouragement from me to take up this opportunity!
Finally, before closing today, I would like to thank the ICA for its contribution to the Government's response to the failure of HIH through the formation of HCS Limited.
I would also like to thank Allinaz, Royal and Sun Alliance and QBE for their participation in the scheme.
The formation of these arrangements has been an extremely complex exercise. I am pleased to note that most of these arrangements have now been finalised and that assistance is now being delivered to those in need.
In closing, the outlook for the insurance industry appears to be one of continuing change.
The passage of the FSR Bill and the General Insurance Reform Bill are significant milestones, but reform of this sector is far from over.
I look forward to the ICA's continuing support and involvement in this ongoing process.