“2014 A Year of Opportunity” 2014 FSAA National Conference · “2014 -A Year of Opportunity”...

“2014 - A Year of Opportunity”

2014 FSAA National

ConferenceSunday 18 – Tuesday 20 May 2014

ROBERT WHELAN

EXECUTIVE DIRECTOR & CEO

INSURANCE COUNCIL OF

AUSTRALIA

INDUSTRY UPDATE –

“FINANCIAL SYSTEM INQUIRY”

2014 The Year of…2

FINANCIAL SYSTEM INQUIRY

• ICA submission – key points and questions


FSI – TERMS OF REFERENCE (FOUR AREAS OF FOCUS)

• A stock take of the system post Wallis and post GFC

• Settling the principles, philosophy and objectives of Australia’s financial system

• Understanding the challenges, trends and futures in the financial system

• Recommendations for the future


FSI – WHAT WILL THEY BE LOOKING AT? THE KEY ISSUES IN THEIR ORBIT

• Funding Australia’s future (access to capital, the balance of payments, wholesale

funding dependence, superannuation balances and their role in investment)

• Technology (payments systems, transaction applications, risk identification and

clarification)

• Regulation (stability versus competition, Basel and international application)

• Too big to fail (GFC, contagion risk)

• Demography (ageing, annuities, superannuation, liquidity)

• Consumers and end users (disclosure, behavioural heuristics, access to financial

products)


FSI – WHAT IT MEANS FOR GI

• Affirmation of broad regulatory “twin peaks” arrangement – prudential supervision (APRA)

& conduct oversight (ASIC)

• Why efficient insurance markets are important in Australia – climate, ageing, government

capacity, personal responsibility

• Discussion on balance between stability & competition (when does too much prudence

serve as a brake to innovation or competitiveness)

• Affordability – where should the risk lie? Who is best placed to bear the risk at

the lowest cost to society?

• Technology – what has changed and where is this improving the efficiency

of insurance markets.


THE ICA SUBMISSION – ARTICULATION OF A FRAMEWORK

• How risk is allocated in the economy

• Insurable risk is always a transfer

• Classic problems in insurance, such as

information asymmetry, moral hazard and

adverse selection

• Risk is best allocated to the least cost

bearer of the risk

InsurersBusiness

Individual

Government

Principles for allocating risk

• Risk is allocated and pooled within the economy

• Risk is allocated towards those best placed to manage it

• The market provides price signals to encourage an efficient allocation of risk

Spectrum of risk

Disaster

Financial

Individual/home/property

Motor vehicle

Travel


CONTEMPORARY ISSUES IN GI

• Regulation post the Global Financial Crisis & excess regulatory burden

Is the balance right?

What are the costs to innovation of too much regulation?

Could the insurance sector absorb more risk if regulatory standards were more

accommodative?

• Affordability and accessibility

Where should the management of some risks rest?

Who is best placed to bear and manage such risk at the lowest cost to society?


CONTEMPORARY ISSUES IN GI (CONT.)

• Changes to, and impacts from, new technologies

How is technology changing the information flows between insured & insurer. Is

technology and “enabler” of access to insurance?

What about the “losers” – what are the societal consequences of better risk pricing

through technology?

• What are the drags to the financial system from transaction taxes? For example: taxes

on insurance driving a wedge between technical pricing and the final price leading to

underinsurance; property transfer duties undermining mitigation by increasing the cost

of relocation


FINANCIAL SYSTEM INQUIRY

• APRA

• ASIC

• Reserve Bank

• Department of Treasury


FSI – APRA

• Twin peaks arrangements working well

• APRA’s effectiveness turns on operational independence, active supervision and

adequacy of resources to complete its mission

• Evidence of erosion of its independence due to financial constraints

• Wallis could not have foreseen GFC

• Wallis envisaged internationalisation but this has been muted


FSI – APRA

• Supervision is not “crowding out” innovation and overseas expansion

• Establishment of consolidated APRA reduced “silos” across supervised sectors and

regulatory arbitrage

• HIH demonstrated the weakness of light handed regulation

• No trade off between stability and competition – need to focus on sustainable

competition


FSI – ASIC

• Financial products are examples of “credence goods” where performance and

quality is not apparent at the time of purchase. This provides a case for specific

regulation for financial products

• Post Wallis, it is evident that the financial system has reached its limits on disclosure

• Insights drawn from behavioural economics/psychology suggest that consumers

have built in “biases” which affect rational decision making


FSI – ASIC

• Behavioural insights require supervisors to have a more flexible regulatory tool kit to

improve markets and reduce costs by eliminating unnecessary regulation

• Recommendation to include a specific competition objective in the ASIC charter

• Superannuation sector needs to develop better products to manage ageing


FSI – ASIC

• “Choice” engines, such as decision making and comparison websites can provide

consumers with an interface to more easily compare products and to interpret

disclosure information

• Consideration to be given to layered disclosure

• In specific situations, self regulation and co-regulation has distinct advantages of

government regulation

• There exist some concerns with comparison websites


FSI – RESERVE BANK

• Insurance model is stable and unlike banking

• Use of insurance can support economic activities otherwise not undertaken for fear

of loss

• Can promote financial stability by shielding balance sheets from loss and because

they tend to have long term horizons, can act as a stabilising force when asset

prices are falling


FSI – RESERVE BANK

• Upfront funding of liabilities protects against risk of liquidity risk inherent in banking

markets

• Failed insurers can be resolved in an orderly fashion reducing risk of destabilisation


FSI – DEPARTMENT OF TREASURY

• The financial system must need to evolve to meet the needs of retirees and the

ageing population

• A vigilant and pro-active supervisor is superior to a rules-based approach to

regulation

• Mandated disclosure has reached its limits and needs adaptation to the digital age

• Precise individual pricing of GI promotes efficient allocation of capital and risk in the

economy


FSI – DEPARTMENT OF TREASURY

• Affordability should not be addressed by subsidising insurance except in exceptional

circumstances as it would mute price signals and lead to distortions

• Competition is the best antidote to affordability

• FSI explores improvements at the margin to foster greater competition through

assessing barriers to entry for overseas insurers and more effective price

transparency

• Consideration of pre-funding of Financial Claims Scheme


Source: APRA submission to the Financial System Inquiry

Annual industry performance



Gross claims costs from Australian natural catastrophes



Industry eligible capital and capital requirement


OTHER INQUIRIES

• Competition policy review

• Productivity Commission: inquiry into natural disaster funding

• Deregulation initiatives

• Addressing the high cost of home and strata insurance in North Queensland

(discussion paper)


COMPETITION REVIEW – MIX OF POLICY AND LAW

• Identifying the impediments across the economy that restrict competition and detract

from productivity

• Examination of the competition provisions in the Competition and Consumer Act

2010 to ensure they drive efficient, competitive and durable outcomes particularly

given globalisation

• Examine the competition provisions and special protections for small business in the

Act to ensure that all businesses, irrespective of size, can compete and have the

appropriate incentives to innovate and improve


COMPETITION REVIEW – MIX OF POLICY AND LAW

• Consider whether the broad structures and arrangements for the competition

institutions remain appropriate, given recent changes in the economy and the need

to reduce regulatory impact

• Review government involvement in markets through government trading enterprises

and direct ownership of assets or provision of services


WE NEED TO TALK ABOUT FNQ

• Wicked problem

• Range of opinions

• What is affordability?

• Implications for insurance process


WHICH PARTS OF AUSTRALIA ARE SUFFERING INSURANCE

STRESS.

NSW, 9.6%

VIC, 0.0%

QLD, 88.5%

SA, 0.0%

WA, 1.4%

TAS, 0.0% ACT, 0.0% NT, 0.5%

Share of stressed policies

3.5%0.0%

55.2%

0.0% 2.5% 0.0% 0.0%

64.1%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

NSW VIC QLD SA WA TAS ACT NT

% of all policies per State/Territory & % of a State/Territories polices in stressed postcodes

% of all policies

% of Jurisdicaiton's policies that are stressed

Insurance Stress is defined is defined as sum insured per dollar premium (value proposition) and premium per dollar of income


PREVIOUS 100 YEARSNAMED CYCLONE EVENTS

WITH WINDSPEEDS GREATERTHAN 100kmh

27


THANK YOU

QUESTIONS

“2014 A Year of Opportunity” 2014 FSAA National Conference · “2014 -A Year of Opportunity”...

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