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Tuesday, 16 November 1976

Mr JACOBI (Hawker) -In supporting the legislation I think I ought to traverse its history in some short form because I had a lot to do with it in 1973. The Insurance (Deposits) Act itself deals with insurance other than life assurance or State insurance within the confines of a State. The Act covers the fields of general insurance, fire, accident and motor vehicle insurance, and I suppose that its basic facet is that all insurers, including brokers, sending premiums overseas must lodge deposits with the Treasurer in the form of approved securities. Each company's deposit is wholly charged in favour of the owners of the policies that the company issues. The Treasurer may use the deposit to satisfy a final judgment obtained against the insurer in respect of a claim under a policy, and in the event of insolvency of the insurer the deposit must be applied towards settlement of the unpaid claim on the policy. However, regrettably the Act does not empower the Australian Government to inquire into the internal affairs of insurance companies or to intervene in disputes between policy owners and insurance companies. After all, the reason for legislating to supervise insurance is to protect policy owners from the insolvency of companies, and we have had a spate of that. The 1973 Act was structured to achieve that end. It requires companies to comply with mimimum standards of financial soundness.

As I understand it, the Australian constitutional power extends not only to supervision, which is the purpose of the 1973 Act, but could also extend to regulatory powers and to control. For instance, the Marine Insurance Act regulates the terms of insurance contracts. One purpose of my long struggle has now been agreed to by the Tory Attorney-General (Mr Ellicott) and I am grateful that in respect of insurance contracts at law many of the existing abuses will be obliterated. I have struggled without success for 5 years with both governments, and I will continue my struggle in respect of control. The United Kingdom legislation, for instance, goes part of the way in the sense that a company cannot direct what it will or will not invest in the first 5 years following its authorisation. That ensures that an inexperienced company does not invest its funds in a foolish investment, and if we had had that sort of provision in an Act prior to 1 969 we would not have had the proliferation of collapses to which this country was subject up until 1 973. In a number of European countries investment is strictly controlled for economic reasons, and that ought to be provided for in our Act. Insurance laws around the world are becoming more and more standardised. The industry might not like it, but that is a fact of life. Of necessity, governments are being forced to supervise, to regulate and to control the insurance industry.

The cornerstone of the insurance law is the section prescribing solvency. I will not go into the 4 areas into which various countries in the world structure for solvency. I think that the Australian system has served a really good purpose. As I understand it, this legislation is to allow refunds of deposits made under the Act to companies which have already been granted authority to underwrite insurance in accordance with the Insurance Act 1973. As the requirements of the Act are far more strict than the old deposits system, there is in fact no need for companies with an authority either to lodge or maintain the deposit, as the honourable member for Adelaide (Mr Hurford) said. However, I am pleased to note that deposits from companies not granted an authority to underwrite insurance can be used to pay off policy owners with claims against the company if such a company gets into financial difficulty. In these days of rapid changes in the value of money, legislation of the type contained in the Act rapidly becomes outdated and if it is to have any effect it must be updated annually. The only protection afforded under such legislation is when a company goes bankrupt, and frankly it has never been good enough. The whole purpose and the structure of the Insurance Act 1973 is to ensure that insurance companies do not get into financial difficulty which leads ultimately to liquidation or bankruptcy.

The Insurance (Deposits) Act is rapidly being superseded by early warning mechanisms or the devices for surveillance contained in the Insurance Act 1973. This Bill, which the Opposition welcomes, is but another step towards the updating of the Insurance Act 1973. It ought to be acknowledged that the type of deposit provisions contained in that Act are rapidly being phased out and repealed in many overseas countries in favour of the early warning surveillance system. I sound this note of warning. There does not anywhere in the world seem to be any insurance legislation, no matter how strict, which can guarantee that there will be no failures whatsoever of insurance companies. The United

States perhaps is the best example. It has perhaps the strictest regulatory legislation but there are still insurance company failures through mismanagement, fraud or other forms of manipulation and incompetence.

I wish to take only a few minutes more on this issue to put a point constructively to the Attorney-General. It is a pity that the Treasurer (Mr Lynch) is not here. The one aspect of the insurance field today which is worrying me is the premium price cutting in fire and industrial insurance which is causing concern both in the United Kingdom and in the United States. Established and reputable companies cannot or will not compete, and that situation is occurring throughout Australia at the moment. It will lead inevitably to an escalation in the fire catastrophe rate of reinsurance on the international market. A premium pool is required by reinsurers to calculate a reasonable charge level, and so far as catastrophe insurance is concerned, if premiums are cut or are insufficient then the reinsurer has no option but to escalate charges to cover the excess risk or gap. Inevitably, this will mean that ultimately a greater charge will have to be borne by the policy holders. It ought to be realised that in the wash-up it will be the Australian companiesI repeat, the Australian companieswhich will suffer most from the price cutting war. The large overseas companies, mainly in the United Kingdom, have more than sufficient fat to survive the cold when it comes, and I am deeply concerned at the effect this price cutting will have on small Australian companies. Such companies will go to the wall, and in turn it will be the policy holders who will suffer most. That problem was indicated only last month by the General Manager of Q.B.E. Insurance Ltd.

I warn the Minister and in turn warn the Commissioner that this matter ought to be thoroughly examined immediately. A major disaster results in a major loss, particularly when there is insufficient premium income to make up the deficiency. I have been warning people since 1969 of the dangers and the sufferings that they could face if an insurance company goes into liquidation or bankruptcy and cannot face up to its policy obligations. While I support this amendment, I warn the House and I advise policy holders throughout the length and breadth of this country that there is only one way to ensure maximum benefit and maximum coverage, and that is to ensure that legislation covering this important area is not only supervisory in structure but, equally importantly, contains provisions which are also regulatory and offer a constructive measure of control. This Act lacks it; the

Insurance Act lacks it; and the Life Insurance Act lacks it. In so many cases insurance companies collapse through sheer incompetence or fraudulent manipulation. As I said earlier, I think it is time that the Insurance Commissioner in particular made a thorough immediate investigation into the price cutting war that is going on in the field of general insurance in this country at the moment. I support the amendment.

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