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Tuesday, 22 October 2002
Page: 5611


Senator JACINTA COLLINS (4:23 PM) —I present the report of the Economics References Committee entitled A review of public liability and professional indemnity insurance, together with the Hansard record of proceedings and documents presented to the committee.

Ordered that the report be printed.


Senator JACINTA COLLINS —I seek leave to move a motion in relation to the report.

Leave granted.


Senator JACINTA COLLINS —I move:

That the Senate take note of the report.

I seek leave to have my tabling statement incorporated in Hansard and make some additional remarks.

Leave granted.

The statement read as follows

BACKGROUND TO INQUIRY

There has been growing community concern about rising premiums for public liability and professional indemnity insurance for over two years. As 2001 progressed, and with the announcement of HIH's collapse, concerns about insurance premiums mounted. By the middle of that year, there were reports of huge increases in premiums that threatened the viability of small businesses, community and sporting groups and adventure tourism. Professional groups including lawyers, engineers and architects faced greatly increased premiums for professional indemnity coverage.

The terrorist attack in New York on 11 September sparked fears that the Australian domestic market would suffer from an increase in reinsurance rates. By year's end the situation appeared to worsen with media accounts of `staggering' increases in public liability insurance premiums.

As problems began to emerge in the public liability and professional indemnity area, the situation with medical indemnity deepened during 2001 with fears that some doctors, especially those practicing obstetrics, were contemplating resigning their positions because of the escalating costs of insurance. The upheaval in medical indemnity was felt even stronger when serious concerns were raised in February 2002 about the viability of Australia's major medical defence organisation, United Medical Protection.

It was against this background of mounting community and business concern about insurance coverage that the Senate resolved to have the matter referred to the Economics References Committee.

Submissions—cross section of the Australian community

The Committee received 166 submissions from business people, community and volunteer workers, and representatives from a wide range of professions.

Many submissions described sudden, exorbitant increases in premiums regardless of claims history. The Committee was told of community events being cancelled, volunteer groups disbanding, and professionals finding themselves unable to practise their professions. Groups were concerned not only with the level of increase in premiums but also with the reduction in the level of coverage being offered and the difficulty of finding insurance in a shrinking market.

Health professionals have also been hard hit, particularly in obstetrics and midwifery. According to submissions the number of doctors in rural areas who are prepared to undertake surgical procedures is declining rapidly, as their earnings do not cover the cost of medical indemnity insurance.

Unfortunately there is no indication that these problems will soon abate.

One of the most worrying aspects of the current situation was the suddenness and severity of the turn in the market which caught the industry and governments flat-footed.

The insurance industry failed to recognise the danger signs in the public liability and professional indemnity insurance market until the problem was full blown. Insurance companies during the second half of the 1990s did not take account of changing conditions in the market, such as increasing claims costs, and consequently underpriced premiums for certain classes of insurance. According to the Treasury, it also appeared that in some cases insurance companies were more intent on increasing market share than on maintaining profitability.

APRA, the industry's prudential regulator, was also slow to respond to the emerging problem.

The early identification of a problem allows a more orderly and coordinated approach to address the difficulty. At the moment, the insurance industry and the State and Commonwealth governments, confronted with escalating premiums, are looking to the available statistics to help them analyse the problem and understand the causes. The available statistics, however, are not providing the information needed to obtain a clear and sound appreciation of what is happening in the insurance market.

Clearly, this lack of adequate data has implications for insurance companies assessing costs and setting premiums; for consumers seeking to understand and manage the price rises; and for governments looking to address the problem of rising premiums.

The Committee believes that a well-informed market is far better equipped to anticipate shifts, to adjust to trends in the industry and to plan future strategies.

The Committee maintains that the present system for the collection of data is far from satisfactory and requires prompt attention. It fully endorses the establishment of a readily accessible, comprehensive and reliable database. Such a database would lay the foundations for a more stable and predicable market better able to respond to cyclical movements and to manage the uncertainty generated by long term claims. It is also of the opinion that APRA is best placed to collect and analyse information on the insurance industry and to assume responsibility for establishing and maintaining that database.

Although APRA is introducing a new regime, the Committee is unsure whether it intends to collect the range of data that some regard as essential for a thorough understanding of the insurance industry. Further, the Committee is not convinced that APRA has the resources to meet such expectations.

In light of these findings, the Committee made a number of recommendations including that the Government:

· make a commitment to the development of a comprehensive national database on the insurance industry in Australia;

· put beyond doubt that APRA is to be given the responsibility for developing and maintaining this database; and

· ensure that it is adequately funded so that it has the resources and level of expertise to effectively collect, collate and analyse data on the insurance industry.

The Committee believes that it is important for APRA to now prove itself as an effective and assiduous regulator in ensuring the prudential soundness of insurance companies. An efficient, strong and competent regulator will go some way to restore public confidence in the insurance industry.

The Committee recommends that the Government more actively monitor the activities of APRA and ensure that it has adequate powers and resources as well as a commitment to diligently supervise the industry.

The report also noted the problems created by the lack of good data management of court records throughout Australia and how they frustrate any detailed analysis of the underlying causes for premium increase.

In light of this ongoing problem of the lack of good quality, nationally comparable court data, the Committee recommends that the Attorneys-General treat this matter with urgency and, under the leadership of the Commonwealth Government, work together to ensure that good court data management systems are put in place throughout the country. The main objective is to have national standards apply so that the data across all jurisdictions is compatible, comprehensive and allows for consistency in interpretation.

One of the most persistent messages to emerge from this inquiry has been the confusion surrounding the assessment and pricing of premiums. Generally, witnesses were not only bewildered by the sudden and severe increase in premiums, despite relatively good claims history, but also by the growing use of clauses to exclude coverage of particular activities.

They assert that insurers do not seem to take into account claims history in setting premiums. One witness stated bluntly that underwriters `are picking and choosing clients without regard for previous good risks.'

Some suggested that coverage is being increasingly restricted with respect to policy wordings and endorsements as well as the introduction of new exclusions.

Moreover, the failure of the insurance companies to communicate effectively and openly with consumers about premiums has generated unnecessary disquiet at a time of difficulty in the industry.

While most acknowledged that insurance companies operate in a commercial environment and are accountable to their shareholders, they found difficulty in accepting the high increases and the lack of consideration shown by insurance companies to the consumer. A number harboured suspicions that the increases were not solely the result of rising claim costs but were related to attempts to recoup other business losses.

The general thrust of the need for improvement in the insurance industry focused on the principles of transparency, fairness and equity.

The Committee believes that at present consumers, in many cases, are not receiving adequate explanation for the increase in premiums or the refusal by an insurer to cover particular services or activities. This has been acknowledged by some companies in the industry.

The Committee accepts that the insurance industry is having difficulty adjusting to current conditions. However it is concerned at the many reports it has received of what seems to be inappropriate or exploitative conduct by insurers, particularly in relation to last minute offers of renewal on exorbitant terms. The Committee considers that at the least insurers should be obliged to give 14 days notice of the proposed terms of renewal or proposed refusal to renew a policy.

Clearly, in the current market, the option for dissatisfied customers to take their business elsewhere is limited. Indeed, evidence presented to the Committee shows that the current situation has certainly brought to the fore the issue of consumer protection particularly in the area of setting premiums. For some it is a captive market and under such market conditions the need for consumer protection is heightened.

The Committee recommends that the Trade Practices Act be amended to allow the ACCC to take enforcement action to ensure that any savings or benefits that accrue directly or indirectly from legislative reforms being implemented throughout Australia to minimise insurance premiums are passed on by the insurance companies to consumers.

Under this proposed price exploitation legislation, the ACCC would also have the responsibility to educate and inform business and consumers about their rights and obligations. The Committee believes that given such responsibility, the ACCC would be an effective force in protecting consumers from exploitation.

The Committee understands that the transfer of consumer protection responsibility in relation to financial services to ASIC was to ensure that ASIC would be concerned with all aspects of financial products. Thus, consumers would know that they could approach ASIC on any matter related to financial products. Despite this transfer of power from the ACCC to ASIC, the line separating them in their respective roles in consumer protection is not widely understood.

The Committee believes strongly that the roles of the ACCC and ASIC in relation to these matters must be placed beyond doubt.

It recommends that, in close consultation, the ACCC and ASIC review and report publicly on their respective statutory obligations in regard to consumer protection and market integrity in the insurance industry.

The Committee further recommends that the ACCC and ASIC actively promote their roles in consumer protection for all financial products, including general insurance.

The Committee regrets that the statutory complaint-handling procedures now in place do not meet the needs of the groups most affected by the insurance crisis, particularly not-for-profit organisations.

The Committee recommends that:

· the Government amend the Financial Services Reform Act to allow not-for-profit organisations to be included in the definition of `retail clients'.

· the Government, by regulation, include public liability insurance and professional indemnity insurance in the classes of insurance covered by the dispute resolution provisions of the FSR Act.

· ASIC monitor the effectiveness of the dispute resolution provisions and report on this annually to the Parliament.

· ASIC review, as a matter of urgency, the General Insurance Enquiries and Complaints Scheme and in consultation with the Insurance Council of Australia ensure that it covers adequately public liability and professional indemnity insurance and not-for-profit organisations.

The General Insurance Code of Practice appears to offer another avenue for improving consumer protection.

The code, however, is narrow in focus and has the same shortcomings as the General Insurance Enquiries and Complaints Scheme. It applies only to individuals, and relates to insurance for private or domestic use. The classes of insurance covered exclude public liability and professional indemnity. The Committee sees no logical reason for these exclusions.

The Committee recommends that:

· the General Insurance Code of Practice be revised so that it provides remedies for community groups and small businesses that are affected by price exploitation in relation to public liability or professional indemnity policies.

· Insurance Enquiries and Complaints Ltd submit the revised code for ASIC's approval under the FSR Act.

The recent increases in both public liability and professional indemnity insurance have had and will continue to have a dramatic impact on small business, community and sporting organisations, individuals and local councils. While the increases in public liability and professional indemnity insurance have affected the profitability of small business, they have also resulted in many community and sporting organisations being forced to reduce the level of services they provide or, in many cases, to cease operations altogether, due to their inability to obtain affordable, or sometimes any, insurance cover.


Senator JACINTA COLLINS —As background to this inquiry, for over two years there has been a growing community concern about rising premiums for public liability and professional indemnity insurance, as Senator Coonan would be well aware. As 2001 progressed, and with the announcement of HIH's collapse, concerns about insurance premiums mounted. By the middle of that year, there were reports of huge increases in premiums that threatened the viability of small businesses, community and sporting groups and adventure tourism. Professional groups including lawyers, engineers and architects faced greatly increased premiums for professional indemnity coverage.

The terrorist attack in New York on 11 September sparked fears that the Australian domestic market would suffer from an increase in reinsurance rates. By year's end the situation appeared to worsen, with media accounts of staggering increases in public liability insurance premiums. As problems began to emerge in the public liability and professional indemnity area, the situation with medical indemnity deepened during 2001 with fears that some doctors, especially those practicing obstetrics, were contemplating resigning their positions because of the escalating costs of insurance. The upheaval in medical indemnity was felt even more strongly when serious concerns were raised in February 2002 about the viability of Australia's major medical defence organisation, United Medical Protection.

It was against this background of mounting community and business concern about insurance coverage that the Senate resolved to have the matter referred to the Economics References Committee. The committee received submissions from 166 different areas—a broad cross-section of the Australian community—including business people, community and volunteer workers, and representatives from a wide range of professions.

Many submissions described sudden, exorbitant increases in premiums, regardless of claims history. The committee was told of community events being cancelled, volunteer groups disbanding and professionals finding themselves unable to practise their professions. In addition, it was a matter of concern that many were going uninsured. Groups were concerned not only with the level of increase in premiums but also with the reduction in the level of coverage being offered and the difficulty of finding insurance in a shrinking market.

Health professionals have also been hard-hit, particularly in obstetrics and midwifery. According to submissions, the number of doctors in rural areas who are prepared to undertake surgical procedures is declining rapidly, as their earnings do not cover the cost of medical indemnity insurance. Unfortunately there is no indication that these problems will soon abate.

The tabling statement deals with a broad range of recommendations from the committee's report, and I will highlight just a few of those in the few moments I have. The report recommends that the Trade Practices Act should be amended so that the ACCC can take enforcement action to ensure that insurance companies pass on to consumers any savings from current law reforms which aim to reduce insurance claim costs. The Commonwealth government has asked the ACCC to continue monitoring insurance premiums, but at present the ACCC has no power to ensure that savings are passed on. It will not be good enough if savings for current tort law reform end up in the pockets of insurance companies in the current sellers' market. The Commonwealth has taken a role in response to the insurance crisis but there is a community expectation that the current initiatives will bring concrete results to insurance buyers. The Commonwealth will need to follow through to ensure that this is achieved. What is needed is strong national leadership.

The committee considers that the ACCC should have powers to control price exploitation in the public liability and professional indemnity insurance market. The amendments made to the Trade Practices Act in connection with the introduction of the GST could be used as a good precedent. The committee's report also shows serious gaps in consumer protection schemes set up under the Financial Services Reform Act and the insurance industry's general code of practice. The dispute resolution provisions of the Financial Services Reform Act 2001 apply only to individuals and small businesses and only to certain listed classes of insurance. The provisions do not apply to nonprofit groups and do not include public liability or professional indemnity insurance. It is unclear whether a complaint about price exploitation in a proposed policy renewal is within scope. The insurance industry's code of practice has similar limitations. The committee sees no good reason for these limitations. It has recommended that the relevant provisions should be amended to include nonprofit bodies, public liability and professional indemnity insurance. The committee regrets that at present these provisions are of no use to nonprofit groups, who have been the worst affected by this insurance crisis.

Other recommendations concern the notice that the insurers have to give at the time of a policy renewal. The report recommends that the legal requirements relating to notice of renewal should be strengthened. The committee is concerned by evidence of exploitative conduct by insurers, particularly in relation to last minute offers of policy renewal or exorbitant terms. The committee considers that at least insurers should be obliged to give 14 days notice of either proposed terms of renewal or proposed refusal to renew a policy.

I must conclude by placing a caveat on my previous references to the committee in regard to this inquiry. I regret to inform the Senate that on this—as I would regard it—rare occasion the government has gone missing. The committee report has been agreed to by Labor and Democrats senators. Unfortunately, the printed copy of the report leaves some confusion about whether the Democrats' contribution is a minority report or just some additional remarks; I can say quite clearly that this is a report by Labor and Democrats senators. With respect to the government, Senator Brandis abstained from voting on the report and has provided no separate comments. Senator Chapman—who I should acknowledge is currently Acting Deputy President—can be excused, as he was overseas for much of the relevant period. But Senator Brandis, despite having a month's extension on reporting, sought no amendments and no additions to this references committee report; rather, he had a concerning attitude that this was one of the opposition dominated committees and so no effort was warranted.

This is in stark contrast with government senators' behaviour in the many broad policy inquiries that I have chaired. Listing them briefly before, I highlighted about seven or eight in the last few years, some of which were references instigated by government senators. This is a most concerning attitude if Senate references inquiries are going to continue on their traditional path of looking at broad policy issues and advising government in a cross-party fashion. Senator Brandis's attitude on this occasion was worse than the growing trend of poor attendance highlighted by Senator Ray last Tuesday regarding the Joint Standing Committee on Electoral Matters; Senator Brandis, for instance—and he was not the only one—managed to attend only two out of 20 meetings. On this occasion the government has, as I said, undermined the traditional approach of Senate references committees to attempt to provide to government cross-party views or advice on broad policy references. In Senator Ray's words of last Tuesday:

When the hard, solid work is there to be done, some of them go missing.

I should acknowledge that in my past year's involvement in Senate references committees Senator Ferguson, Senator Tierney and Senator Chapman have had a very different approach and attitude. Senator Brandis has become known instead for his hysterical performances. From my experience in the `kids overboard' inquiry, his cross-examination of Navy officers, for instance, caused the suggestion—which was later retracted—by former Chief of Navy Admiral Sir Richard Peek that he should be shot. We had complaints about both his and—perhaps encouraged by Senator Brandis—Senator Mason's treatment of Amnesty witnesses.


The ACTING DEPUTY PRESIDENT (Senator Chapman)—Order! Senator Collins, it is not appropriate for you to stray into the business of another committee. If you could confine your remarks to the work and the report of the committee which you are chairing, that would be more appropriate.


Senator JACINTA COLLINS —In the less than one minute I have left, I would only have mentioned by way of comparison the contribution last week on the ASIO bill—but I will conclude. Had the committee been pre-advised of this approach, it is likely that the report would have reflected a far more critical view on the lack of national leadership on this insurance crisis. This lack of national leadership has been demonstrated by Senator Brandis's lack of interest in this report.