Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
 Download Current HansardDownload Current Hansard   

Previous Fragment    Next Fragment
Wednesday, 30 November 1983
Page: 3104

Mr CONNOLLY(7.30) —I think that all members of this House who are present for this debate would have some sympathy with the views expressed by the honourable member for Hawker (Mr Jacobi), who for many years has fought, in a sense, a one-man campaign-at least on his side of the House-to reform various aspects of life insurance and general insurance in this country. The purpose of the Insurance Amendment Bill 1983 and the Life Insurance Amendment Bill 1983 is, of course, to strengthen existing arrangements for supervising both general insurance companies and life companies. As the honourable member so rightly pointed out, both these areas are vital to the overall economic health of the Australian nation. The life insurance industry, for example, as at 31 December 1982 had some 44 companies registered under the Life Insurance Act. In the area of general insurance we see that 197 companies were authorised under the Insurance Act 1973 to carry on insurance business in Australia. So one can see that the total committed funds to these areas depends to a large degree not only on the credibility which insurance companies have within the financial community as a whole, but also on the fact that they play a vital role in maintaining the wheels of commerce and industry and giving to all Australians a capacity to insure both their lives and their property against unforeseen circumstances.

The Insurance Act 1973, which is the principal Act, is the Commonwealth Government's legislative basis for the regulation of general insurance companies . The legislation aims to protect the interests of policy holders by requiring general insurers to meet certain minimum financial standards such as prescribed liquidity ratios, reserve and entry requirements. In addition, the Insurance Commissioner is empowered to monitor closely the financial condition of authorised insurers and to publish industry statistics.

Basically, the current Insurance Amendment Bill 1983 is similar in content to the Insurance Amendment Bill 1982, which was introduced into this Parliament last year, but which lapsed following the dissolution of the Parliament and the election. There is a major difference however, between the earlier text and this one, and that is specifically that adjustments have been made to the 1982 Bill to reflect the Government's decision not to sell the Housing Loans Insurance Corporation, which was one of the decisions taken by the previous Government and which we believe still is something with which the Government should have proceeded.

Paragraph 15 (1) (d) of the 1982 Bill, which covers the question of registration and control of agents, is also amended by this Act. As we understand it, the Government proposes to proceed with a specific piece of legislation relating to the practice of agencies in the insurance field. It is our strong belief that agencies can best be controlled by self-regulation through the industry. I think that a reasonable indication of this can be seen in terms of the law, for example, where solicitors who are registered are expected to make contributions to the solicitors' trust funds, which is therefore a basis upon which any breach of the law can be adequately compensated for. The arguments which have been presented for a closer control of insurance agents, in my opinion, do not overcome the simple fact that they are made up essentially of independent, small businessmen whose ability to act within the industry in most cases is beyond reproach. We are talking about the exceptions, not the generality. Therefore, again there is a real risk of establishing a legislative framework which ultimately will sink of its own weight and not necessarily give to the Australian people and the companies, which are the titular employers of the agents, the degree of protection which they deserve.

The overall provisions in these amending Bills were designed to limit the extent to which premium monies owing to insurers from insurance intermediaries could be counted as assets for the purposes of the solvency provisions of the principal Act. Proponents of the original paragraph 15 (1) (d) maintain that premiums outstanding through brokers could cause the collapse of an insurance company, particularly the marginally solvent insurers. Nevertheless, when one sees the situation as it is on the ground and relates it to conditions as they have developed over time, one must question whether, in a situation such as that of Bishopsgate Insurance Australia Ltd, which was referred to by my honourable colleague, the honourable member for Hawker, the situation is related to that. I think it would be preferable to refer to the Bishopsgate situation, which was that of a general insurance company which failed, in such terms as to see whether insurers were compelled to disclose information currently provided under the Insurance Act 1973. Then more onus or responsibility would be placed on the insured to exercise caution when effecting insurance. This would no doubt encourage companies with higher standards to publicise the fact, using it as a competitive weapon in the market place. Such proposals are in line with the philosophy of our Party which believes that we should, where possible, have less government regulation but ensure that the regulations which stand on the statute books be effectively implemented and be able to achieve the objects for which they were introduced in the first place.

Another element which is worth considering is the question of an early warning system. The Insurance Commissioner reported in his fifth annual report for the year ended 30 June 1979 that he was introducing new procedural arrangements which would provide an early warning system. This was apparently designed to indicate to the Insurance Commissioner in advance the possibility that an insurance company might default in meeting policy holders' claims. While the introduction of such a system was not dependent upon any legislative changes, improvements to the system have been sought by the Commissioner from time to time. However, the question which must be asked in this House of the Government is: Why was this not a useful technique in trying to indicate the Bishopsgate- type situation in advance? I believe it is relevant to point out that the Campbell Committee of Inquiry into the Australian Financial System noted:

The criticism by the liquidator of one insurance company concerning the inability of the Insurance Commissioner to take immediate action to investigate the affairs of an insurance company.

That is the type of problem which must also be looked at in that context. I believe that the Government should review the powers of the Insurance Commissioner and be assured that he has sufficient resources available to him to conduct the day to day investigations which are obviously important. My honourable colleague the honourable member for Hawker also referred to the question of the suitability of directors. He also noted the provisions in the Insurance Companies Act 1974 of the United Kingdom, which specifies that they must be fit and proper persons, that they must be of good fame and character and that they must have knowledge of the insurance industry. I believe that these three criteria are perfectly reasonable and should be the basis upon which people are permitted to maintain directorships of insurance companies where they are in a position not only to reflect upon the integrity of the industry as a whole but also to have enormous power over the capacity of both industry and individuals to maintain a viable position within the community and within the economic structure of Australia.

In relation to the question of the control of investments, investment policies of insurance companies are influenced indirectly by the various provisions in the Australian Government legislation supervising general and life insurance companies. These include, for example, the eligible assets in calculating the solvency margins under the Insurance Act 1973. That legislation looks at type of investment rather than at the diversification of investments. I suggest that this is a key question which again should be looked at very carefully by the Government in deciding upon any further amendments to legislation of this type. It is obviously of imperative importance that the basic security of both the investor and the policy holder should be the reason government regulations are established. But what one has to question is whether the regulations to date have effectively achieved those two most important points.

The Campbell Committee, in its report, emphasised the desirability of spreading investments. It believed that as a general principle all such companies should maintain a diversified investment portfolio. That is something I strongly applaud. The Committee recommended that:

(a) For the purposes of calculating the solvency test, the value of any individual asset (including related assets) should be taken into account only up to 5 per cent of an insurance company's total assets.

It went on to suggest that:

(b) Where the value of an individual asset exceeds this figure (arising, for example, from an asset revaluation or change in the market valuation of an investment), an insurance company should be exempt for 12 months from the applicable solvency margin discipline in respect of that asset.

(c) Where any of an insurance company's assets exceed the 5 per cent limit at the time these arrangements are implemented, an exempt period of three years should be permitted.

The question, therefore, is whether the management of a company investment portfolio should go outside the company's control. It is my strong belief that this should not be permitted. The directors of a company are the people who, by law, are responsible to the shareholders, the policy holders of a company. It is not satisfactory, therefore, that investments of company assets should pass outside the company's basic control.

It has been argued that the Act is not designed to deal with the problem of fraudulent practices and is limited in the amount of protection it provides to policy holders. If that is so-and I believe there is some evidence to bear that out-it is a weakness in the legislation as it currently stands. In the circumstances, consideration should be given to making provision in legislation for indemnity or other assistance to policy holders, similar to that contained in the provisions of the Policy Holders Protection Act 1975 in the United Kingdom. That legislation provides inter alia for payment to the United Kingdom policy holders of 90 per cent of the amount of any liability of a company in liquidation. Broadly, such arrangements would be similar to deposits insurance, with a government established solvency pool funded by levies on insurers or perhaps a levy by the insurance industry, establishing its own pool, independent of government control but perhaps subject to government regulation. From this pool policy holders would be able to make claims in the event of the failure of an insurance company. We will not see a perpetuation of situations such as occurred in regard to the Bishopsgate scandal. The existence of a safety net, however, has been regarded by some as being an incentive for a lack of responsibility or prudent management. That, of course, is seen as a moral hazard . But surely the present position is not satisfactory and all of these options need to be looked at most carefully.

I briefly make a few observations also on the second piece of legislation, which relates to life insurance companies. Like the first group I mentioned, they have a most important role to play in Australia. However, it is also worth pointing out that they have the capacity to harness a significant proportion of the savings potential of the Australian people. Therefore, they will continue, during our lifetime at least, to be an essential ingredient in providing the capital to develop the resources of this nation. Because the companies are acting as trustees for many millions of Australians who are making small but significant investments in life insurance or superannuation which are controlled by these companies, their responsibility to the nation is one of primary importance. It is an area to which I believe the Commonwealth and this Parliament must give further consideration.

In this context I make a very brief reference to the question of superannuation . Much examination has been given to this by parties on both sides of this House in recent years, especially in the context of the introduction of a so-called national superannuation scheme. It is my belief that the term 'national' is not appropriate in this context; rather, it should be called a universal occupational superannuation scheme. I make that point for one important reason. A national scheme, as seen in the context of its introduction in other countries , particularly in the United Kingdom, has essentially been an extension of the social welfare system, which has thus been under the basic control of the United Kingdom Government or, in the case of France and the United States of America, under the administration of their respective social welfare agencies. I am strongly of the belief, because we have in this country a firmly based private enterprise controlled insurance industry which is perfectly capable of developing programs which would be to the advantage of both government and all Australian citizens, that we must, in the development of programs in this area, emphasise the fact that it is the private sector essentially to which we will look to see that programs can be developed which will take into account concepts of portability, vesting and preservation. Those concepts are fundamentally important if we are expected to go to the Australian people at any stage in the future and suggest that there should be a wider expansion of the base of superannuation in Australia, thus encouraging all Australians, in the work force at least, to make a personal and lasting financial commitment in their financial viability when they ultimately retire. It is quite clear that the present situation is virtually getting out of control. I seek the permission of the Minister for Housing and Construction (Mr Hurford), who is at the table, to incorporate in Hansard statistics in relation to total pension commitments from the Government in this regard.

Leave granted.

The table read as follows-


1973-74 1983-84 Increase

% Total pension commitments $1,600 .1m $8,236 .0m 415 Pensions as a percentage of Commonwealth Budget out- lays 13 .08% 14. 52% 11 Expenditure on aged pensions $1,146 .4m $5,325 .0m 365 Number of welfare pensioners 1,228,775 2, 011,542 64.7 Number of aged and wives pensioners 950,459 1,417,218 49.1 Number in labour force 588,700 6,916,700 17.5

Mr CONNOLLY —These statistics are based, of course, on figures from the Australian Bureau of Statistics. They demonstrate quite clearly that total pension commitments between 1973-74 and 1983-84 increased by 415 per cent, that pensions as a percentage of Commonwealth Budget outlays increased over the same period by 11 per cent, that expenditure on aged pensions increased by 365 per cent, that the number of welfare pensioners increased by 63.7 per cent, that the number of aged and wives pensioners increased by 49.1 per cent and that the number in the labour force increased by a mere 17.5 per cent. Those figures demonstrate that if this nation is not prepared to make some fundamental changes in this area or, alternatively, by some miracle achieve a very high rate of productivity growth-which we have never seen-we will have major problems before us.