Related ArticlesAddress to the Insurance Council of Australia
The Hon. Chris Pearce MP, 4 February 2009
Good Morning, it is a pleasure to be here in Sydney this morning to engage in this important discussion about the primary challenges in insurance regulation.
The Coalition's Record
In Government, the Coalition implemented sweeping reforms which were overdue and much needed. The Coalition's financial services reforms and regulatory regime have proven to be forward looking and essential in combating the current financial crisis.
The former Coalition Government encouraged the general insurance industry to continue to spread this most-important financial product through industry growth. Insurers expanded their businesses in the knowledge that the Coalition Government was committed to easing the regulatory burden through careful and thoughtful consultation with industry.
The establishment of the Wallis Inquiry in 1996 laid the foundations of the much-needed overhaul of the financial system's regulatory structure. The Wallis reforms initiated the bringing together of similar regulatory functions of a number of Commonwealth and State regulatory authorities, thereby reducing duplication and inconsistency in regulation.
APRA was established in 1998 as the prudential regulator of life and general insurance. APRA was provided with comprehensive powers, including licensing and regulation of the institutions authorised to provide these financial services.
Subsequently, the IMF described the Wallis reforms as "... a package of path-breaking reforms, which puts Australia at the forefront of international practice ..."
The Financial Services Reform (FSR) Bill of 2001 continued implementing the recommendations of the Wallis Inquiry. That legislation was aimed at replacing the piecemeal regulation that had applied to the particular industry concerned or the product being offered.
The licensing regime established by FSR for financial sales and advice sought to provide consistent and comparable financial product disclosure in general insurance.
An important point I'd like to make on reflection of the Coalition's record is a pledge not to repeat one of Labor's actions whilst in opposition. After losing government in 1996, Labor decided in the misguided interest of political expediency that they would disown their considerable achievements in economic and financial market reform. Whilst floating the Australian dollar and opening the banking sector to international entrants enjoyed bi-partisan support, Labor wavered once in opposition and chose not to embrace their achievements.
In opposition, the Coalition has not made the same mistake. We are proud of the significant work undertaken in the area of financial services and corporate governance during the Coalition's term of office. Our record of consistent achievement in this area is very strong and we'll not be running from it.
Current Market Conditions
As a result of recent financial turmoil, the insurance industry is expected to experience changes in policy volumes; average claims costs and claim frequency.
Faltering economic activity can, of course, adversely affect business investment, motor vehicle sales, and house sales to name but a few. It has been estimated by industry stakeholders that general insurers will experience an average fall of around twenty percent in their profits this financial year.
Like any other financial services sector, apart from maybe insolvency, the present financial setting does not bode particularly well for the general insurance industry.
The financial wreckage of the past year or so across the globe has actually highlighted the strength of the Australian regulatory regime. It is widely recognised that Australian insurance companies are well capitalised, profitable and well regulated. So far, they are weathering the financial turmoil.
Our insurance companies are in good shape partly because of our strong and sensibly crafted regulatory regime. It is for this reason that I believe there is no need for a large scale review of the regulatory architecture. There will, of course, always be the need for targeted improvements, but I believe there is not currently a need for aggressive structural regulatory reform.
That is why Labor ruffled so many feathers in the financial services sector prior to the election when they floated their plan to merge ASIC with APRA. They appeared to be chasing the idea for no apparent reason other than they liked the idea of one body as could be found in Hong Kong or Great Britain.
In this country we decided upon a structure where both regulatory authorities have quite different roles. Under the ‘twin peaks' model, each regulator has a clearly defined statutory role within the regulatory framework. By creating a single agency, we would risk creating conflict and reducing regulatory specialisation.
The Coalition's approach to regulation is the same as it is to restructuring statutory bodies and industry regulators. ‘If it ain't broke, don't fix it.' Having said that, the Coalition does not hold a reluctance to regulate, but we do not believe in regulation for regulations sake. Any regulatory intervention should only be in the event of market failure and after careful consideration of the costs and benefits.
Striking the right balance is paramount, and despite the current market conditions, I would say to you that the balance of regulatory intervention in the insurance marketplace is currently adequate. In spite of this, the argument for some targeted reform remains.
Commonwealth/State Credit & Financial Reform
Last year the Council of Australian Governments (COAG) announced measures which will allow the Commonwealth Government to assume responsibility for the regulation of most remaining unlicensed or State-licensed financial services products.
Under the extension of the Uniform Credit Code, mortgage broking, margin lending and non-deposit lending institutions as well as remaining areas of consumer credit will be moved to Commonwealth jurisdiction.
The Government has announced plans to institute this change by July 1 this year. At this stage, we are yet to see an exposure draft or to get an indication of how this announcement will translate into practical application. At any rate, the Coalition supports these measures in principle as a natural extension of the licensing regime established after the Wallis Inquiry.
It is interesting to note that if these aforementioned financial services sectors are brought under the federal wing, the insurance sector will remain the only sector within financial services operating under both State and Federal supervision.
The Coalition is acutely aware of this newly created distinction between insurance and other financial services products. It is an exception worthy of examination as we assess the Government's approach and develop our own policies.
I would imagine that in a system where insurance was solely regulated by APRA, State and Territory involvement in regulation would no longer be required or necessary. Undue compliance costs and overlapping would most likely be eradicated and State-based insurance monopolies could be expected to disappear.
When examining the process of credit and financial reform currently being undertaken by the Government, I feel obliged to ask the question: why is it that insurance has been excluded from the process? It seems rather a strange decision to isolate insurance. After all, insurance is every bit as much a financial service as mortgage broking or margin lending.
I would suggest to you that tax is more than likely the answer to the question. In recent years, State Governments have displayed their unabashed desire to raise revenue through insurance taxes.
There is no better example of the tax slug on the insurance industry than right here in New South Wales. The mini-budget of last November saw the New South Wales Labor Government slash funding for the emergency services portfolio by almost $120 million over the forward estimates. The replacement, the increased fire services levy is being borne by policy holders.
This is a typical case of cost shifting onto mum and dad insurance holders by punishing them for being prudent enough to purchase an insurance policy. The levy imposed by the State Government will provide the State coffers with an estimated $39 million. This $39 million will be provided by the insurance holders; an estimated $10 premium will be added to each policy.
The terrible economic mess that has been made of this State's finances should not be haphazardly patched up by inefficient taxes on essential products and services. It beggars belief that a Government would impose disincentives to purchasing insurance policies.
These inefficient and industry-strangling taxes are disastrous for not only the insurance industry, but society in general. Such policies risk underinsurance. Any example of underinsurance by virtue of Government policy is totally unacceptable in my view.
It concerns me greatly that State Governments are able to stymie particular industries through tax hikes every time they have an economic haemorrhage. We must remain collectively vigilant and hold governments to account for such poor policy.
Henry Tax Review
The guiding paper of the tax review being conducted by Ken Henry indicates its desire to examine the issue of insurance tax federalisation; and I quote directly from page 293:
...Insurance products are subject to GST, insurance transaction taxes and, in some States, insurance companies can also be required to contribute directly to the funding of fire services. The interaction of these taxes increases the cost of premiums relative to other products, which may encourage people to take up less insurance than otherwise.
It is a well-made point, which seems reasonable to me. The Coalition is watching the Henry Review developments very closely, and indeed, we hope that progress is made into the examination of State insurance taxes.
We understand this issue to be particularly difficult as it is highly political because of the reliance of State Governments upon insurance tax. If there were to be any change which restricted State imposition of insurance tax, State Governments would need to find alternative funding arrangements as State insurance tax is not an insignificant amount.
The national total of insurance taxes through stamp duties and fire services levies last financial year amounted to $3.7 billion. As these amounts are significant, is seems likely that any solution which includes weaning the States off insurance taxation will take time.
While such a proposal would bring with it a significant lead time, there are certain taxes which could be immediately removed due to their own redundancy.
Again I find an example right here in New South Wales. The New South Wales Government's insurance protection tax, which contributes $69 million per annum to the State coffers, is a redundant tax. The insurance protection tax has been redundant ever since a financial claims scheme was introduced.
The ongoing operation of this State tax illustrates the problem of State insurance taxation. The Coalition acknowledges and understands this issue well. I pledge our ongoing commitment to a sensible alignment of insurance taxation levying between the Commonwealth and States.
Three levels of taxation through the fire service levy, stamp duty and GST is certainly a significant burden for both consumers and industry.
There is always room for constant improvement and in the case of some of the more onerous disclosure requirements of the Corporations Act, this edict applies. Insurance sales adjudged to be ‘time-critical' require considerable verbal disclosure when sales are conducted over the phone.
There is an additional protection measure here: a mandated cooling-off period. It has been put to me the two forms of consumer protection are too cumbersome and that the verbal disclosure requirements are the cause of significant inefficiency in the distribution networks.
The question of whether we need extensive verbal disclosure while we already have cooling-off periods deserves the attention of policy-makers. We need to determine whether these disclosures are actually necessary for assisting consumers to make the right choices.
I now want to move onto something quite different; issues of extreme weather. In recent years, we have witnessed some of the most volatile and dangerous weather that has ever been recorded. Indeed 37 of the 40 largest insured losses from natural catastrophes globally since 1970 have been weather related. One of the worst disasters, Hurricane Katrina caused an estimated US$135 billion worth of damage. That figure represents up to US$45 billion of insured losses.
Australia is particularly vulnerable to extreme weather which could be heightened through adverse climate changes. In our case, 19 of the past 20 most significant insurances losses since 1967 have been weather related.
Indeed it was only just over a month ago that a king tide rose against Sydney's coastline exposing areas vulnerable to rising sea levels and causing a seawall at Neutral Bay to collapse.
If we accept the argument that weather is becoming more volatile and unpredictable, the task of managing risk becomes increasingly difficult as past weather patterns will become poor predictors of future trends.
The ramifications of fickle and treacherous weather pattens for insurers are certainly adverse. Significant unanticipated losses will lead to large insurance payouts, reducing insurers' capital reserves. Such events will only heighten insurers' uncertainty about losses from future events. This will most likely lead to either the withdrawal of insurance products from certain areas, or increases in insurance premiums.
I note with interest that the Insurance Council has been one of the strongest proponents of establishing climate change mitigation measures such as emissions control and emissions trading. Any climate stabilisation which can be orchestrated by humans is understandably especially welcome for the insurance industry as it provides greater certainty over the longer term.
Although the Coalition is awaiting the result of our own independent review into the Government's emissions trading design, we have expressed our support for the concept of emissions trading whilst in Government and now in opposition.
It will not be just climate change mitigation measures such as emissions trading which will defray concern amongst the insurance industry. Improving the resilience of buildings to adverse weather conditions should also be included as an important aspect of the insurance sector's extreme weather mitigation strategy.
More robust building codes for dwellings should be given a high priority, particularly within regions which are likely to be affected by the symptoms of extreme weather conditions. If buildings can withstand greater natural force, the obvious result would be claims which represent lower values or fewer claims. Policymakers have an important role in ensuring that all future building codes are developed through close consultation with the insurance industry.
Proven fire mitigation strategies are also essential to improving the resilience of communities. The key to appropriate fire mitigation strategies and more general risk mitigation is a raft of planning measures such as zoning and building controls. A comprehensive understanding of the ramifications of planning measures and a cogent perception by all levels of Government are vital to improving community resilience.
I understand that there are numerous organisations which need to be navigated when considering planning. Building codes, State planning legislation, local Government by-laws, zoning arrangements and emergency planning arrangements must all be taken into account. I note that the Insurance Council is pleased that the centralised Climate Change Adaptation Centre has been established.
The Coalition shares the view of the council; I propose that the centre undertake a benchmarking survey to ensure that best practice risk mitigation strategies are in place.
We understand that our role as policy-makers in this area is to be a provider of leadership and assurance. For instance, policy-makers can assist insurers by requiring risk benchmarking surveys take place, thereby giving clarity and certainty to insurers that community resilience efforts are successfully occurring.
This morning I've endeavoured to outline the primary issues which I understand to be impacting upon the insurance industry. I wish to make it clear that the Coalition is not of the opinion that the general insurance regulatory regime is in a state of disrepair. Our insurance industry is in good shape, largely as a result of our world-class regulatory structures. There is no justification for radical regulatory reform in the insurance sector.
Despite this, I've outlined where I see the need for the possible deployment of targeted reforms. Targeted reforms including federalising insurance regulation and examining the appropriateness of State insurance tax such as fire levies and stamp duty.
Finally, I've flagged the all-encompassing issue of community resilience as an important aspect of both insurers and policy makers in order to address extreme weather conditions.
I see these issues as the most considerable challenges which face the industry today. I view the general insurance industry as strongly placed to continue meeting these challenges and indeed those presented by current economic challenges.
Whenever I am asked my views on the viability and stability of the general insurance industry, I always answer that I believe it to be stable, robust and competitive. All of these are key elements of a well functioning and efficient market, which is what we have here in Australia.
I look forward to working with you in the next Coalition Government.