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Australian Government Insurance Office - Establishment - Report of Interdepartmental Committee, 4 February 1975


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THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

1975—Parliamentary Paper No. 138

ESTABLISHMENT OF THE AUSTRALIAN GOVERNMENT INSURANCE OFFICE

INTERDEPARTMENTAL COMMITTEE REPORT

Presented by Command 23 April 1975 Ordered to be printed 29 May 1975

THE GOVERNMENT PRINTER OF AUSTRALIA CANBERRA 1976

Printed by Kerton Bros (S.A.) Pty Ltd, Edwardstown. S.A.

CONTENTS

Summary of report pages 1-5 paragraph

Section I Introduction ........................................................... ... 1.1-1.2

Formation of the Interdepartmental C o m m itte e ................1.3-1.4

Section 2 General approach to an AGIO ........................................... 2.1-2.10

Section 3 The insurance industry .......................................................3.1-3.9

Recent d ev elo p m en ts...........................................................3.10-3.12

Section 4 Schemes relating to insurance ........................................... 4.1

The Australian health insurance program ...........................................................................4.2-4.3

National Compensation Scheme ....................................... 4.4-4.8

National Superannuation Scheme ................................... 4.9

Natural disaster insurance Natural disaster property c o v e r ................................... 4.10-4.11

Natural disaster crop and livestock insurance . . . . 4.12-4.13 Implications for the AGIO Health Insurance P ro g ra m ........................................... 4.14

Woodhouse proposals ............................................... 4.15-4.18

Natural disaster in s u ra n c e ........................................... 4.19

Conclusion ...................................................................4.20

Section 5 Scope for an AGIO Amalgamation of existing government insurance services ...........................................................5.1

Defence Service Homes .......................................................5.2-5.4

Commonwealth Banking Corporation ............................... 5.5-5.6

Housing Loans Insurance C o rp o ratio n ............................... 5.7-5.9

Export Finance and Insurance C o rp o ratio n ...................................................................... 5.10-5.11

Coal Mines Insurance Pty Ltd ........................................... 5.12-5.15

Providing insurance services for government instrumentalities ....................................... 5.16-5.17

Extension of insurance facilities to the public generally .............................................................. 5.18-5.24

Purchase of other insurance organisations by A G I O .......................................................................... 5.25-5.28

Section 6 Structure and p o w e r s .......................................................... 6.1-6.6

Administration .................................................................. 6.7-6.8

Powers and f u n c tio n s .......................................................... 6.9-6.10

National interest insurance ...............................................6.11-6.16

S t a f f ...................................................................................... 6.17

Finance .............................................................................. 6.18-6.29

page

Appendix I A. General Insurance 23

B. Life Insurance 29

Addenda 33

Attachments A. State Government Insurance Offices 36

B. Defence Service Homes Insurance Scheme 40

C. Commonwealth Banking Corporation 46

D. The Housing Loans Insurance Corporation 49

E. Export Payments Insurance Corporation 54

F. Social Security—Private Health Insurance 57

G. Australian Fire, Marine and General Insurance Statistics 1972-73 59

Appendix II National Compensation Scheme 64

SUMMARY OF IDC REPORT ON ESTABLISHMENT OF THE AUSTRALIAN GOVERNMENT INSURANCE OFFICE

INTERDEPARTMENTAL COMMITTEE

In May 1974 the Prime Minister set up an interdepartmental committee chaired by an officer of the Prime Minister’s Department (subsequently by the Department of Repatriation and Compensation) to consider the steps necessary towards establishing an Australian Government Insurance Office. He envisaged that this committee in its report might include comments on the structure and operations of the proposed office

including:

(a) the financial and economic basis on which the office is to operate; (b) the extent to which the present insurance activities of the Australian Government may need to be rationalised; (c) the priorities to be adopted in the provision of insurance services.

The interdepartmental committee comprised representatives of Capital Territory, Housing and Construction, Northern Territory, Overseas Trade, Prime Minister and Cabinet, Priorities Review Staff, Public service Board, Repatriation and Compensation, Social Security and Treasury.

GENERAL APPROACH It is proposed that, in line with Australian Government enterprises competing with private businesses such as the Commonwealth Banking Corporation and TAA, AGIO should be placed as far as possible on the same competitive footing as private

and State insurers. This also would be broadly in line with the approach adopted by State Governments in the case of their insurance offices and it would be in accord with the principle of avoiding general subsidisation in the provision of public services. The Committee recognised, however, that there may be instances where the

Government may wish to provide a particular insurance service on a non-commercial basis. It is recommended therefore that, subject to certain procedures being adopted, there should be scope for AGIO to undertake ‘national interest’ insurance, on a non­ commercial basis, as agent for the Government.

THE EXISTING INSURANCE INDUSTRY AND PROPOSED GOVERNMENT SCHEMES

The Committee noted that, apart from certain particular insurance services pro­ vided by the Australian Government, a substantial portion of the general insurance market is held by State Government insurance offices. Most sections of the general insurance industry have recently been experiencing poor financial results and, with

the more stringent provisions of the Insurance Act 1973, there is likely to be a reduction in the number of insurance companies and a good deal of reorganisation within the industry. The life and general insurance industry will also be significantly- affected by implementation of government proposals to establish National Compen­

sation and National Superannuation schemes.

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Against the background of these latter proposals, the Committee considered that AGIO should avoid personal injury and sickness insurance, and life insurance, until it is clear what implications the proposed schemes have for the insurance industry.

SCOPE FOR AN AGIO The Committee considered that, in the case of existing Australian Government insurance services, there should be no attempt to absorb the Export Payments Insurance Corporation, the house insurance scheme operated by the Commonwealth Banking Corporation or Coal Mines Insurance Pty Ltd. The Housing Loans Insurance Corporation could, however, be usefully absorbed and also the Defence Service Homes insurance scheme (on an agency basis) thereby providing a foundation, giving emphasis in the early stages to housing insurance. In the case of the latter scheme, special provision would need to be made if it is to continue to operate on the same basis as at present.

The Committee also recommended that the Treasurer take up with the Common­ wealth Banking Corporation the possibility of the Corporation acting as agent for AGIO for insurance other than house insurance. In due course, the AGIO may be able to meet the insurance needs of the Australian Government and its authorities. However, there should not at this stage be any requirement to place government business with AGIO.

The Government will shortly be considering certain proposals relating to natural disaster property insurance and AGIO’s role in this area could be determined in the light of the outcome of that consideration. In addition to housing insurance, AGIO might give emphasis to other forms of insurance for private citizens rather than for companies. AGIO might also examine the possibility of insuring risks at present placed overseas, including reinsurance.

AGIO should be empowered to purchase other insurance businesses, subject to the agreement of such businesses and to the approval of the Minister and the Treasurer. There could be opportunities in the period ahead to undertake such a purchase at moderate cost and this could provide the means of an early start on a reasonable scale of operation.

STRUCTURE AND POWERS The Committee recommends that:

(1) AGIO should be established as a statutory authority with a large degree of autonomy. In particular, it should have independent staffing powers and power to determine terms and conditions of employment, subject to the approval of the Public Service Board. (2) AGIO should not be subject to direction as regards the setting of premium

rates or in regard to entering a particular insurance contract. (3) AGIO should be controlled by a Board which should include management representation. (4) AGIO should have power to carry on all forms of insurance business. It

should, however, be required to obtain the Minister’s approval to the classes of insurance business to be undertaken (similar to section 11 of the Export Finance and Insurance Corporation Act).

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(5) Subject to (6) AGIO should be required to conduct its operations on a commercial basis and to pay all taxes and charges normally paid by State and private insurers. It should also be required to comply with the provisions of the insurance legislation and to follow sound insurance practices. (6) AGIO should be authorised to undertake ‘national interest’ insurance on a

non-commercial basis, acting as agent for the Government. National interest insurance programs should be subject to examination by a National Interest Committee and to approval by Parliament. (7) AGIO should not be subject to direction in regard to its investments, but it

should be required to invest having regard to the best interest of policy holders and to the development of Australia’s resources. (8) As with the Commonwealth Banking Corporation, EFIC and HLIC, the pay­ ment of all moneys due by AGIO should be guaranteed by the Government.

(9) AGIO should be provided with a capital of $800 000, plus $200 000 if HLIC is absorbed, as well as an advance of $1 million to serve as a reserve. AGIO should be required to pay interest, at a rate commensurate with the long-term bond rate, on the advance of $1 million (and any additional advances made).

Provision should also be made for a dividend to be payable on capital and, for this purpose, the Minister should have the power to decide with the con­ currence of the Treasurer on the proportion of profits to be paid by way of divi­ dend. The Treasurer should have power to determine amounts put aside for

general reserves before arriving at the profit.

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REPORT OF INTERDEPARTMENTAL COMMITTEE ON ESTABLISHMENT OF THE AUSTRALIAN GOVERNMENT INSURANCE OFFICE

Section 1—Introduction 1.1 The Prime Minister, in his policy speech of 29 April 1974 prior to the May elections, announced that the Government proposed the establishment of an Aus­ tralian Government Insurance Office which would compete actively in all forms of insurance and which, in particular, would provide the widest possible cover for homes at the lowest possible premiums. 1.2 Following the elections, the Governor-General’s Speech to the Parliament on 9 July 1974, on the Government’s policy for the ensuing term, reaffirmed the intention to establish an Australian Government Insurance Office.

F o r m a t io n o f t h e In t e r d e p a r t m e n t a l C o m m it t e e

1.3 In may 1974 the Prime Minister proposed the formation of an interdepart­ mental committee chaired by an officer of Department of Prime Minister and Cabinet to consider the necessary steps towards establishing an Australian Government Insurance Office. He suggested that this committee in its report should include comments on the structure and operations of the proposed office including:

(a) financial and economic basis on which the office is to operate; (b) extent to which the present insurance activities of the Australian Government may need to be rationalised; (c) priorities to be adopted in the provision of insurance services.

The Interdepartmental Committee comprises representatives of Capital Territory, Housing and Construction, Northern Territory, Overseas Trade, Prime Minister and Cabinet, Priorities Review Staff, Public Service Board, Repatriation and Com­ pensation, Social Security and Treasury. 1.4 In December 1974 the Prime Minister wrote to the Minister for Repatriation and Compensation about the chairmanship of the IDC and this was subsequently assumed by the Department of Repatriation and Compensation. This followed the decision by the Government in June 1974 that responsibility for the development of an AGIO would lie with the Department of Repatriation and Compensation.

Section 2— General Approach to an AGIO

2.1 The Committee based its approach on the Prime Minister’s statement in May 1974 that AGIO would compete actively in all forms of insurance and, in particular, would provide the widest possible cover for homes at the lowest possible premiums. 2.2 The Committee agreed that this should be taken to mean that, in line with other government enterprises competing with private businesses, such as the Common­ wealth Bank and TAA, AGIO should be placed as far as possible on the same competitive footing as private and State insurers. The establishment of an AGIO would help to ensure the maintenance of competition. It should aim to give the community confidence that it is getting satisfactory services in those classes of

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insurance conducted by the AGIO. It would be empowered to engage in all forms of general and life insurance, but it would pay particular attention, at least in the initial stages, to housing insurance (including contents).

2.3 State Governments, in establishing their insurance offices, have indicated objectives and methods of operation which might be taken as a general guide. For example, the Premier of South Australia, when introducing the State Government

Insurance Commission Bill on 29 July 1970, said:

The object of this Bill is to establish a State Government Insurance Commission with power to carry on the general business of insurance other than the business of life insurance. The Bill implements an important part of the policy of the Australian Labor Party. The insurance field is one which all other States in Australia have entered with

two main objects in view, namely: (a) to keep premiums at reasonable levels; and (b) to ensure by competition that adequate service is given to the public. Adequate service does not merely relate to rates of insurance but to conditions of policies, the ways in which claims against insurance companies are dealt with, and the ways in which insurance companies alter their liabilities unilaterally.

2.4 The methods of achieving equal competition with other insurers by the State offices are broadly the same. South Australia was able to draw on the experience of the other States and the South Australian State Government Insurance Commission Act, 1970 includes a number of provisions designed to place the Commission on the

same competitive footing as other insurers. The Commission is required to carry on its insurance business according to the practice, usage, form and procedure followed by other insurers, unless other methods and procedures are considered necessary and desirable. The Commission is also required to pay the State Treasurer amounts equi­ valent to the income tax which would be payable by an insurance company, to pay

stamp duties, fire brigade levies and other charges payable by insurers, to pay interest on any advances made to it out of Consolidated Revenue and to pay profits into Consolidated Revenue after making provision for reserves. A similar approach might be taken in establishing an AGIO.

2.5 In addition the Australian Insurance Act 1973 has since been enacted. The Act establishes minimum solvency standards for general insurers throughout Australia. The Committee proposes that AGIO should also follow the main principles of that Act so that, for example, in assessing the reserves it should hold and the provisions

against contingencies which it should make, the standards laid down under the Act would be applied. Similarly, if AGIO were to enter into life insurance business, it should follow the same principles as life offices are required to follow under the Life Insurance Act 1945-1973.

2.6 The reasons for this approach would not simply be to avoid complaints from State and private insurers of unfair competition. Without such arrangements, the price of insurance would be subsidised in one way or another, through loss of public revenue if AGIO did not show a return on its funds or was free of taxes and charges, or through calls on Consolidated Revenue if it did not hold reserves and make

provisions for contingencies. In this connection the Committee noted the comments on policies for public investment on pages 26 and 17 of the Review o f Continuing Expenditure Policies of the Previous Government, June 1973 (Coombs Task Force), which pointed out that if public services are underpriced in relation to cost (including

capital) of providing them, resources may need to be diverted from other purposes to

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satisfy the demand for them. The Review went on to point out that services provided at less than cost represent subsidies for particular sections of the community at the cost of taxpayers generally and that subsidies can have adverse social effects by tending to favour those who are already well off. In the case of insurance, subsidised

premium rates would favour those with large insurance requirements over those whose insurance needs are small. 2.7 The Committee recognises that circumstances may arise in which the Govern­ ment would want AGIO to serve a particular national objective, such as undertaking insurance which is too large or too riskv to be insurable under normal principles. The Committee proposes that a national interest division be created in AGIO similar in concept to the national interest provisions relating to the insurance business of EPIC.

Under such provisions, AGIO could be authorised to undertake specific national interest insurance business of a ‘non-commercial’ nature. AGIO would keep that business separate from its commercial business and the Government would carry the net liabilities arising from the national interest insurance. Details of the proposal are set out in Section 6, including suggestions as to the circumstances in which the national interest provisions might be used and the safeguards that might need to be written into the legislation.

2.8 In order to compete effectively with private and State insurers, AGIO will need to be of sufficient size and strength. The Committee considers that AGIO should be in a position to offer a range of insurance services wide enough to provide a viable basis for its business and that it should be provided with staff and financial resources

adequate for its scale of operations. The administration of AGIO will need to be of a high order of competence and to be vigorous, enterprising and imaginative. The Committee considers that the administration should have a large measure of indepen­ dence in the conduct of AGIO’s business. AGIO could soon become insolvent or uncompetitive if it were obliged to enter into excessively risky insurance proposals at low premiums or to invest its funds in unprofitable ways. The achievement of an appropriate measure of independence will, in the Committee’s view, require careful definition of the relationship between AGIO and the Government. 2.9 The Committee draws attention to the fact that, although AGIO should be empowered by its legislation to undertake all forms of insurance, it would not be practicable from the outset to expect it to offer a complete range of insurance facilities. It would take time to set up a complete insurer with a staff competent and equipped to deal with all kinds of insurance proposals. The Committee envisages that AGIO would specialise in a particular class or classes of insurance in its early years, but that it would aim to expand its operations later as it gained experience.

2.10 The operations and structure of AGIO are discussed in greater detail in Sections 5 and 6 of this report in the light of the general approach outlined above. Before proceeding to that discussion, Sections 3 and 4 provide some background material on the insurance industry in Australia as it exists at present and on certain other initiatives in the insurance field which are being taken by the Government.

Section 3—The Insurance Industry 3.1 Information on insurance in Australia is contained in Appendix I of this report. The information is in two parts—general insurance and life insurance. Genera!

insurance covers all classes of insurance, including reinsurance, other than life

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insurance and life reinsurance, health insurance conducted by organisations registered and controlled under the National Health Act and certain other insurance such as friendly society and trade union benefit schemes.

3.2 Insurance is carried on in Australia by private insurers and by government authorities. In general insurance, the private insurers are relatively large in number, many of them are small and none of them has a large share of the Australian market. It is estimated that 45 per cent of general insurance business is carried on by overseas-

controlled companies, which include subsidiaries, branches or representatives of many of the world’s largest insurers, and 35 per cent is held by Australian-controlled companies, several of which carry on insurance business in other countries. The State Government insurance offices hold about 20 per cent of the Australian market. They

operate within their own States and have a significant share of business in their States, particularly in Queensland where the SGIO has about 41 per cent of Queensland premiums and in N.S.W. where the GIG has 24 per cent of N.S.W. premiums.

3.3 In addition to the State Government insurance offices, certain other government authorities operate in specialised fields. Defence Service Homes and the Common­ wealth Banking Corporation insure houses on which they have made loans, the Housing Loans Insurance Corporation insures housing loans, the Export Finance and

Insurance Corporation insures export payments and overseas investments, the Joint Coal Board carries on workers compensation insurance for the New South Wales coal mining industry and several State savings banks insure houses on which they have made loans. In Western Australia, motor vehicle compulsory third party insurance is conducted by the Motor Vehicle Insurance Trust in which private insurers and the

SGIO participate. Details about the State Government insurance offices, the Defence Service Homes and Commonwealth Banking Corporation housing insurance schemes, HLIC and EPIC are contained in attachments to Appendix I together with a paper on private health insurance. 3.4 Life insurance business is carried on by 49 companies registered under the Life Insurance Act 1945-1973 and, in N.S.W. and Queensland, by the State Government

insurance offices, which are not subject to the Act and which are the only SGIOs empowered to carry on all forms of insurance. The market is dominated by six Australian-controlled companies which write about 70 per cent of life insurance business in Australia. Six other Australian-controlled companies write less than 3 per

cent and 37 overseas-controlled companies write about 27 per cent of the business. These percentages do not include the life insurance business of the two State Govern­ ment insurance offices, but the life insurance business of those two offices is currently as large as the business of the six smaller Australian-controlled companies combined.

3.5 Over the past 15 to 20 years there has been an expansion in the number of composite businesses carrying on both general and life insurance. The major Australian-controlled life insurance offices began moving into general insurance in the late 1950s and most of the overseas-controlled companies which have entered into

life insurance business since then have been affiliates of companies already carrying on general insurance business in Australia. 3.6 A life insurance company can only charge rates of premium that are approved by an actuary as suitable for the class of policy being issued. In the current competitive situation in the industry, the rates of returns to policy holders of an Aus-

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tralian Government Insurance Office would have to be comparable with those avail- j able from other life insurance companies. j

3.7 The amount of insurance business carried on in Australia is indicated by the ■ following statistics published by the Bureau of Statistics of premiums received by j private and State insurers for general insurance business and life insurance business

by classes of business in recent years.

GENERAL INSURANCE BUSINESS IN AUSTRALIA PREMIUMS: PRINCIPAL CLASSES OF BUSINESS

1970-71 Sm

1971-72 Sm

1972-73 $m

Fire 125.9 143.6 152.1

Householders comprehensive 72.2 85.0 102.3

Workers compensation 181.8 236.6 291.3

Motor vehicle— Compulsory third party 157.8 171.7 183.0

Other 252.2 300.3 329.9

Marine 48.2 50.6 53.3

Other risks 163.0 195.9 210.8

T otal 1001.1 1183.7 1322.7

LIFE INSURANCE BUSINESS IN AUSTRALIA PREMIUMS RECEIVED: CLASSES OF BUSINESS

1970-71 Sm

1971-72 Sm

1972-73 Sm

1973-74 $m

Ordinary 504.6 579.1 649.8 694.5

Industrial 48.8 50.1 54.8 56.7

Superannuation 242.8 304.3 350.7 395.7

Total 796.2 933.5 1055.3 1146.9

3.8 The assets in Australia of the insurance offices have been estimated by the Reserve Bank in its flow-of-funds estimates to total $9818 million at the end of June 1972 representing 20.9 per cent of the estimated total assets of financial institutions in Australia at that date. Life office assets accounted for $6725 million or 14.3 per cent of total assets of financial institutions and non-life office assets $3093 million or 6.6 per cent of total assets of financial institutions. The insurance offices are thus important channels of funds for investment in Australia. Details of the composition of assets in Appendix I indicate that the assets of life insurance offices have been invested mainly in government and semi-government securities, fixed assets (mainly property), company shares, mortgages and debentures, notes and deposits, while the assets of non-life offices have been invested mainly in debentures, notes and deposits, company shares, government and semi-government securities, mortgages and fixed assets. The differences between the distribution of assets of life and non-life offices reflect essential differences between life insurance, which is long term in nature, and general insurance, which is short term in nature, which affect all aspects of the conduct of those businesses.

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3.9 Reinsurance is very important in general insurance business as a means of spreading risks widely. Until fairly recent times reinsurance on Australian general insurance risks was placed overseas mainly with Lloyd’s and large companies in Britain, Switzerland and Germany. In recent times professional reinsurers overseas

have established locally incorporated companies in Australia and have introduced the expertise necessary for this kind of business, so that a proportion of Australian risks is now being reinsured within Australia and Australian insurers are participating in the reinsurance of risks overseas. Reinsurance is less important in life insurance business.

R e c e n t D e v e l o pm e n t s

3.10 Statistics on general insurance are not yet available later than those contained in Appendix I but it is clear from published reports that general insurers have been experiencing a difficult period since mid 1973. Among the State Government Insurance Offices, it is noted in Appendix I Attachment A that the operational results of those offices in 1972-73 were affected adversely by losses arising chiefly from motor

vehicle third party and workers compensation insurance business. The N.S.W. GIO reported a further deterioration in the financial results of its non-life business in 1973­ 74, with a net underwriting deficiency of $25.8 million compared with $11.4 million in 1972-73 and a net surplus of $2.2 million compared with $9.5 million in 1972-73. The

downturn on non-life account was attributed to unprecedented losses from storm damage, a $9 million loss on motor vehicle third party insurance and heavy losses from motor vehicle comprehensive insurance.

3.11 Private insurers appear to have had similar experiences. The main reasons given for company losses or reductions in profits have been heavy claims arising from storm damage and the impact of inflation. Further substantial losses were incurred by

general insurers as a result of the Darwin cyclone. The increased rate of inflation is reported to have increased the cost of claims beyond expectations, requiring some companies to draw on reserves and to make increased provisions for outstanding claims, and the operational expenses of companies have also risen substantially.

Towards the end of 1974, companies wishing to continue to carry on business under the Insurance Act 1973 submitted their applications to the Insurance Commissioner. The applications are being examined and it is expected that the process of bringing general insurance companies under the legislation will result in a substantial

reduction in the number of general insurance companies in Australia and a good deal of reorganisation within the industry.

3.12 Life insurance statistics to November 1974 show a continuation of the main trends noted in the 1973 statistics and referred to in Appendix I paragraph 33. In ordinary business, the number of new policies issued continued to decline and a decreasing trend continued in the annual rate of increase of new sums insured, while

in superannuation business a further large increase occurred in new sums insured. For example one major company which conducts over 30 per cent of life insurance business in Australia reported increases of 3.7 per cent in new sums insured in its ordinary business and 46 per cent in new sums insured in its superannuation business

in 1974 compared with 1973.

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Section 4—Schemes relating to insurance 4.1 In addition to the decision to establish AGIO, the Government has taken several other initiatives in the insurance field. The main such initiatives are the Australian Health Insurance Program, the National Compensation Scheme (Woodhouse Committee Report) and a National Superannuation Scheme. Proposals relating to natural disaster insurance are also being examined. The Committee looked at these from the point of view of their implications for AGIO.

T h e A u s t r a l ia n H e a l t h In s u r a n c e P r o g r a m

4.2 The Health Insurance Act 1973 which provides the legislative support for the Australian health insurance program was given Royal assent on 8 August 1974. The aim of the Australian health insurance program is to ensure that all people, irrespective of their means, have access to a high standard of health care and that an individual’s contribution to the cost of health services is based on his capacity to pay. The Program is due to be introduced on 1 July 1975. 4.3 The principal Act although passed by the Parliament was to be coupled with a number of supporting enactments. The proposed method of financing the scheme was included in the provisions of this additional legislation which was rejected in the

Senate. The scheme is now proceeding, but will be funded from Consolidated Revenue.

Na t io n a l Co m p e n s a t io n Sc h e m e

4.4 The National Compensation Bill 1974 providing the legislative framework for the compensation aspects of the Report of the National Committee for Inquiry into Compensation and Rehabilitation in Australia (The Woodhouse Committee Report) was introduced in the House of Representatives on 3 October 1974. It provides for

earnings related compensation to all people incapacitated as a result of injury or sickness and to dependants of deceased persons. 4.5 The Bill provides for benefits at the rate of 85 per cent of earnings up to $500 per week, for any person incapacitated by injury or sickness. Compensation will be payable to non-earners, e.g. housewives and others who are not members of the work­ force for whom the benefits payable will be based on a notional income of $50 per week. 4.6 Payments for injuries arising from work will cover the first week of incapacity.

Payment for other injuries will be made from the second week of incapacity in the case of earners and from the fourth week of incapacity in the case of injury or sickness to non-earners. 4.7 The Bill provides for the compensation scheme to be introduced in four stages, the first stage on 1 July 1976, the remainder at dates to be proclaimed. No decision has yet been taken on the funding of the scheme. 4.8 Additional details of the main features of the Scheme are provided in Appendix

II.

Na t io n a l S u p e r a n n u a t io n Sc h e m e

4.9 The Government reconstituted the National Superannuation Committee of Inquiry in March 1973 to make recommendations to the Government on a suitable

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national superannuation scheme. An interim report was published in June 1974 as a basis for further discussion and submissions were invited from the public. It will be some time yet before the Committee’s recommendations become available. In the meantime it is not possible to predict the implications for life insurance business, which would depend upon the nature of the scheme adopted. As superannuation business represents over one-third of new sums insured by life insurance companies and a good deal of ordinary life insurance is taken out to provide funds on retirement, the implications could be substantial.

Na t u r a l D is a s t e r In s u r a n c e

Natural disaster property cover

4.10 Following the major flood of January 1974 in the Brisbane-Ipswich area, the Treasurer was authorised to pursue the offer of the Australian Insurance Association to discuss the inclusion of cover for natural disasters in housing insurance policies. 4.11 Discussions have been held between insurance industry representatives and Treasury officials on the subject and the Insurance Conference Committee, a widely representative group of insurers, recently submitted a report to the Treasurer on a natural disasters insurance scheme to cover flood and earthquake. Treasury advises that the report raises a number of issues but the Department expects to report to the

Treasurer on it, soon after the receipt of an addendum on cyclones which the Insurance Conference Committee has indicated it proposes to submit.

Natural disaster crop and livestock insurance

4.12 The Government has decided against the establishment of a natural disaster crop and livestock insurance fund. It has directed that the AGIO, when established, be invited to consider participation in the provision of crop insurance against natural disaster. It has noted that AGIO when established may also wish to examine the

question of the provision of livestock insurance against natural disaster. 4.13 The Government has also directed that the Insurance Industry Conference be asked to examine the feasibility of establishing an insurance pool for increasing the availability of crop insurance against natural disaster.

Im p l ic a t io n s f o r t h e AGIO

Health insurance program 4.14 Provision will be made with the total health insurance program to provide additional insurance to cover needs above those provided by the scheme. It is unlikely that there will be any opportunity for AGIO involvement in the administration of the health insurance program but there could be scope for it to offer health insurance not

covered by the program.

Woodhouse proposals

4.15 With the introduction of the Woodhouse proposals the existing basis for workers compensation and compulsory third party insurance will disappear. The scheme will not, however, provide total cover and to this extent some scope may exist for insurance services to meet the shortfall.

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4.16 The AGIO could provide cover for the 15 per cent differential which will result where the scheme pays a benefit of 85 per cent of earnings (calculated on earnings up to $500 per week). Where earnings exceed $500, AGIO could provide cover for the excess. Some industrial awards already provide for full accident pay and employees are unlikely to forgo this benefit once the national compensation scheme comes into operation. Also in those cases where benefits paid under the scheme do not become payable until after the expiration of a specified time, cover could be provided for the intervening period.

4.17 The introduction of the scheme may lead to difficulties being experienced by the insurance industry in financing the run-off of claims under existing policies. Should it prove necessary for the Government to take action in this area, the AGIO could have an administrative role to play. However, until this aspect receives further examination in the context of the Consultative Committees on Insurance recently established by the Treasurer, it is not possible to assess whether there is likely to be such a role.

4.18 As the legislation for the proposals has not been cleared through Parliament and will not have application before I July 1976, implications of the scheme for the AGIO remain tentative.

Natural disaster insurance 4.19 The report submitted to the Government by the insurance industry on natural disaster property cover is still under examination. As mentioned above the AGIO when it is established is to be invited to consider participation in the provision of

natural disaster crop insurance and may also wish to examine the question of provision of natural disaster livestock insurance.

Conclusion 4.20 There seems no likelihood of AGIO being needed in the administration of the health insurance program, or at present the national compensation scheme. Against the background of the government proposals to introduce a national compensation

and a national superannuation scheme, it would seem advisable for the AGIO to avoid personal injury and sickness insurance and life insurance until it is clear what ‘gaps’ are left to be covered by insurance. The Government will shortly be considering certain proposals relating to natural disaster insurance and AGIO’s role in this area could be determined in the light of that consideration.

Section 5—Scope for an AGIO

A m a l g a m a t io n o f e x ist in g G o v e r n m e n t I n s u r a n c e Se r v ic e s

5.1 In considering the scope for AGIO, the Committee first looked at the possibility of AGIO taking over and operating the existing insurance services provided by Aus­ tralian Government authorities. The following authorities provide insurance services:

• Director, Defence Service Homes e Commonwealth Banking Corporation • Housing Loans Insurance Corporation • Export Finance and Insurance Corporation

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• Coal Mines Insurance Pty Ltd (wholly owned by the Joint Coal Board, a joint Australia/N.S.W. authority)

D e f e n c e Se r v ic e H o m e s

5.2 The Defence Service Homes insurance scheme is a non-profit scheme, financed from inception by premiums paid by Defence Service Homes purchasers and borrowers. The scheme provides cover for fire, flood, and other risks and some

200 000 houses have been insured for an amount in excess of $2000 million. It is an integral part of the low cost housing policy for ex-servicemen and dependants under the Defence Service Homes A ct 1918-1974.

5.3 There are approximately 380 officers wholly or partly employed in all States and several large provincial cities in the administration of the Defence Service Homes insurance scheme. Because of the selection of risks through the process of granting

DSH loans and the intergrated administration of loans with insurance services the premiums charged are lower than premiums charged by private insurers for similar risks. Other reasons for the lower premiums are:

(a) a non-profit operation; (b) no commission payable; (c) normal costs including stamp duty associated with the issuing of policies are not incurred.

Comment

5.4 The Committee considered that the DSH insurance scheme could be taken over by the AGIO as a nucleus for the AGIO’s business. However, the resources of the DSH taken over would continue to be engaged substantially in the DSH insurance scheme (i.e. limited resources only would be available for other AGIO activities) while

there would be advantages in economic administration if the existing basis for managing the scheme in conjunction with DSH loans were maintained. The economies of linking administration of the DSH insurance scheme with the DSH loan scheme results (along with the factors mentioned in 5.3) in low premiums for ex­

servicemen and their dependants; this would be lost in part if the AGIO took over the independent running of the insurance scheme. Accordingly the Committee recommends that the Director, DSH, continues the separate accounts and fund

currently maintained for the insurance scheme but as agent for the AGIO.

C o m m o n w e a l t h Ba n k in g C o r p o r a t io n

5.5 The Corporation introduced a scheme in 1974 for insuring houses held as security for housing loans by the Commonwealth Trading Bank and the Commonwealth Savings Bank. The scheme was introduced to provide an additional service to customers by offering housing borrowers low premium rates with the

convenience of paying premiums monthly with housing loan instalments. It reduces the administrative costs previously incurred by the two banks in recording and supervising insurance arranged by borrowers with outside insurers and the service enhances the competitiveness of the banks. This scheme is intended to operate on a

fully commercial basis.

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Comment 5.6 There would appear to be economies in the Corporation’s insurance scheme which could be lost if the AGIO .were to take it over. Further, the Treasurer approved the Corporation operating the scheme on the basis that it would help improve the

Corporation’s competitive position—an aim of government policy. It would seem inadvisable, therefore, to seek to alter the present arrangements. It is possible, however, that the Corporation would be prepared to act as an agent for AGIO for insurance other than house insurance for its own customers and the Committee recommends that the Treasurer take this matter up with the Corporation.

H o u s in g Lo a n s I n s u r a n c e Co r p o r a t io n

5.7 The Corporation insures approved lenders against the whole or any part of any loss in respect of an insurable loan made or proposed to be made for housing, and secured by a mortgage over the land. 5.8 The Corporation was established by the Housing Loans Insurance Act 1965, and is the leading mortgage insurer in Australia. It is controlled by five members, two of whom (Chairman and the Deputy Chairman) are full time. There is a staff of approxi­ mately 42 manning offices in all capital cities and Launceston.

Comment 5.9 It would seem that HLIC could usefully be absorbed into an AGIO. Owing to HLIC’s relatively small staff and office facilities, its usefulness as a means of starting a business could be limited and the Committee also noted the possibility that some transfer of business could occur to HLIC’s competitors.

E x p o r t F in a n c e a n d In su r a n c e Co r p o r a t io n

5.10 The Corporation was established by the Export Finance and Insurance Act 1974 to provide loans for export financing, and insurance and guarantee facilities against risks not normally insured with commercial insurers. As agent for the Govern­ ment it also offers insurance cover on certain kinds of Australian investment in overseas countries. EFIC may also undertake ‘national interest’ propositions when

authorised by the Government. Branches have been established in all States (except Tasmania, which is covered by Victoria).

Comment 5.11 The Export Finance and Insurance Corporation provides a specialised range of export financing, insurance and guarantee facilities which are closely related to each other. The Committee considered that EFIC’s insurance functions should not be taken over by AGIO.

Co a l M in es In su r a n c e P ty Lt d

5.12 Coal Mines Insurance Pty Ltd, which is wholly owned by the Joint Coal Board, provides workers compensation, common law indemnity and accident pay cover in the N.S.W. coal mining industry. 5.13 The National Compensation Scheme will see the disappearance of most of the company’s insurance business except for some aspects such as accident pay cover.

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Comment

5.14 The Committee sees no grounds for AGIO taking over Coal Mines Insurance Pty Ltd.

Conclusion 5.15 The Committee concluded that the insurance services of EPIC, Coal Mines Insurance Pty Ltd and the house insurance scheme operated by the Commonwealth Banking Corporation be left undisturbed. It considered that AGIO should absorb HLIC and that the DSH insurance service should continue to be operated by the Director, Defence Service Homes but as an agent for the AGIO. The Treasurer should be asked to take up with the Commonwealth Banking Corporation the possibility of the Corporation acting as an agent for AGIO for insurance other than housing

insurance for its own customers.

P r o v id in g In s u r a n c e Se r v ic e s f o r G o v e r n m e n t In s t r u m e n t a l it ie s

5.16 In principle it would be reasonable for AGIO to expect to include in its busi­ ness the insurance of any government property presently insured with outside insurers. The insurance requirements of the major government instrumentalities are,

however, large and complex, particularly instrumentalities engaged in commercial transportation. Qantas, TAA and ANL require cover involving many millions of dollars which is provided principally from international sources, only a small portion being placed on the Australian market.

5.17 The Committee felt that it would be some time before the AGIO could acquire the expertise and develop the resources and industry connections enabling it to participate in the provision of cover and to act for these authorities in obtaining placement for the balance of cover they required. In the short term, however, the

Committee saw the AGIO developing and providing advisory services to Government and instrumentalities on the needs and availability of insurance services and making these services available on a gradually increasing scale.

E x t e n sio n o f In su r a n c e F a c il it ie s t o t h e P u b l ic G e n er a lly

5.18 If AGIO takes over HLIC and acts as principal in DSH insurance as has been suggested, it would have a portfolio of 165 000 mortgage insurance policies and over 200 000 DSH insurances on dwellings to form the nucleus of the business. It would also have the branch representation of HLIC offices in all State capitals and

Launceston and access to DSH facilities in Canberra, Darwin, the State capitals and major provincial cities. It should not be a large step for AGIO to be in a position to offer a comprehensive mortgage and housing insurance service to the public generally.

5.19 Beyond the provision of mortgage and housing insurance the Committee is not in a position to give firm views. Detailed surveys would need to be made and the Committee envisages that it would be for the administration of AGIO to carry out

such studies and to reach decisions on the further development of AGIO. In view of the lack of claims statistics and other statistical information, the new Office will have

15

little option but to base a substantial portion of its initial premium schedules on those used by private insurers. AGIO will not readily attract substantial business away from large overseas insurance groups and State offices which have operated in Australia for many years and which can offer a well-known reputation, a long record of expertise

and service to customers, and an undoubted ability to insure every risk offered at competitive rates. It will be necessary to demonstrate in the market-place that the new Office can match the established insurers. The new Office will, therefore, have to obtain business on its merits, not on cheap premium rates. Substantial capital will have to be provided which can be invested to earn interest and, in the early stages, provide an income from which portions of expenses can be met. In addition, a substantia] development reserve will be essential.

5.20 There are, however, some general comments that can be made on directions in which AGIO might go. As mentioned in paragraph 4.12, AGIO is to be asked when it is established to consider participation in the provision of crop insurance against natural disaster and it may wish also to examine the question of the provision of live­

stock insurance against natural disaster. AGIO’s examination of these subjects could lead it into a review of insurance services available generally in rural areas to see whether there are deficiencies which AGIO might fill.

5.21 As mentioned in paragraphs 4.15 and 4.16, it is expected that there will be some ‘gaps’ left by the national compensation scheme which could be filled by insurance. In due course, AGIO should be well placed to draw up personal injury insurance policies which are in harmony with the national compensation scheme but it is suggested that, initially, AGIO should avoid personal injury insurance.

5.22 The Committee notes the possibility of an emphasis emerging in AGIO’s activities on personal rather than industrial insurance, i.e. in providing insurance services for private citizens rather than for companies. An emphasis of this kind would flow naturally from AGIO’s initial interest in housing insurance and could lead AGIO into the insurance of personal property other than houses. At the same time, it is not suggested that AGIO should be prevented in any way from carrying on any kind of insurance business if that assisted in its development.

5.23 As indicated, the proposal to establish a national superannuation scheme suggests that, at least initially, AGIO might avoid life insurance. Further, the capital outlay for establishing a life insurance fund would be considerably larger than for entering into general insurance business, as indicated in paragraphs 6.23 and 6.24.

Also, there are considerable differences between life insurance business and general insurance business, which would require different managerial staffing, accounting, investing and other administrative arrangements, so that to engage in life insurance at an early stage would delay the development of AGIO’s general insurance business.

5.24 An area which AGIO might examine at an early opportunity is general insur­ ance business which is placed overseas. As mentioned in paragraph 16 of Appendix I, large Australian risks and certain special risks are usually insured partly or wholly overseas. It u'ould be useful for AGIO to examine this aspect critically, to see whether

it could lead the way in retaining more of this business in Australia. This could in turn cause AGIO to look at reinsurance business. Reinsurance is a specialised business, but it appears normally to be a profitable one.

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P u r c h a s e o f o t h e r I n s u r a n c e O r g a n isa t io n s by t h e AGIO

5.25 Introduction of national compensation and the bringing into force of the legis­ lation for the supervision of general insurance companies could create situations in which some State Governments and private general insurance companies may wish to enter into negotiations for the sale of their businesses to AGIO. At the same time, the

Committee noted that inclusion in the enabling legislation of power to acquire an existing insurer might give rise to criticism that AGIO could be used to dominate the insurance industry unless the power was drafted carefully and included appropriate

safeguards. The Committee recommends, in particular, that AGIO’s power to acquire interests in existing business should be limited in the same way as AIDC's power is limited. The power should be limited to situations where existing businesses are agreeable to AGIO purchasing an interest. Purchases should also be subject to the

approval of the Minister and the Treasurer.

5.26 The acquisition of an existing general insurance organisation could provide a means of obtaining a portion of the insurance market for a range of insurance services together with an existing portfolio of policies. It would thus provide the opportunity for an earlier start than could be achieved by other methods. A suitable acquisition

would also gather in the benefits of experience and expertise from trained staff.

5.27 The question of the effects on the insurance industry, including the SGIOs, of the introduction of the national compensation scheme is under separate consideration. From the point of view of the establishment of an AGIO, purchase of SGIOs with substantial liabilities in respect of workers compensation and motor

vehicle third party policies would not be attractive. However, the Committee felt that given the requisite powers in its enabling legislation the AGIO would be in a position to examine each opportunity on its merits if the occasion arose.

5.28 Opportunities to purchase an existing private general insurer could arise in the near future, because there may be some private insurers unable to meet the solvency standards of the Insurance Act and looking for an opportunity to sell their businesses. It might not require a large capital outlay to purchase such a company, because it

would probably be a company whose assets do not exceed its liabilities by a substantial margin. However, acquisition of an existing insurer would involve AGIO accepting liability for the company’s liabilities and it might be difficult to find a company whose business was suitable for AGIO and consistent with AGIO’s plans for

development.

Section 6—Structure and Powers 6.1 In considering a possible structure for the AGIO the Committee examined the following options. These were establishment of:

• a separate statutory authority; • a new department or use of an existing department.

6.2 The Committee thought that a separate statutory authority could be organised to provide flexibility in management and financing and this would be preferable to a departmental structure when operating commercially and competitively.

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6.3 The Committee also noted that there are many government organisations of the | statutory authority type carrying out a wide range of commercial activities and that I the State Governments had preferred this type of structure for their insurance services. .

6.4 It was recognised that if the authority were to operate efficiently it needed a ; large degree of autonomy. However, this need not give rise to problems of communi­ cation and remoteness if the relationships between the authority and the Government are clearly and specifically defined. 6.5 Accordingly the Committee recommends establishment of a statutory authority would provide the most effective structure for the AGIO. 6.6 The Committee envisages that the legislation authorising the establishment of AGIO would provide for its administration; endow the administration with the powers needed to carry out its functions; make provision for national interest insurance; and lay down staff and financial provisions.

A d m in is t r a t io n

6.7 In view of the wide range of insurance business in which AGIO could become engaged, the Committee suggests that AGIO should be controlled by a Board rather than by a single Commissioner. The Committee also suggests that the management of

AGIO should be represented on the board as with similar commercial-type statutory authorities. 6.8 As has been suggested earlier in this report, the relation between the corporation and the Minister will need to be defined carefully to secure the right balance between the Minister’s responsibilities and the need for the corporation to have independence to run AGIO efficiently. It is suggested that the Board be required to keep the

Minister informed of its policy decisions and to seek his approval to the classes of insurance business to be undertaken. The Committee considered that a provision similar to section 11 of the Export Finance and Insurance Corporation Act be incorporated into the AGIO legislation. As with EFIC and HLIC, it should be made clear in the legislation that premium rates are to be determined by AGIO and are not subject to ministerial approval and that AGIO may not be directed to enter into a particular insurance contract, other than under the national interest provisions.

P o w e r s a n d F u n c t io n s

6.9 AGIO should be empowered to carry on all forms of insurance business including reinsurance and should have all the necessary powers to enable this to be done including any powers that may be needed subject to appropriate safeguards to enable purchase of an existing insurance business. 6.10 The Committee suggests that the legislation establishing the corporation should contain provisions on the policies to be followed by the AGIO in the conduct of its business. In particular, reference should be made in the legislation to the basic objective of developing and expanding AGIO’s business with the aim of ensuring that the Australian public has adequate and satisfactory insurance facilities. AGIO should

be directed to follow sound insurance practices, but it should not be inhibited from introducing new types of policies if it has good reasons for doing so. The corporation should also be required to comply with the provisions of the appropriate Insurance

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Acts in the conduct of the AGIO’s insurance business other than national interest insurance and also to have regard to other legislation affecting insurers such as the Trade Practices Act.

N a tio n a l In t e r e s t In su r a n c e

6.11 The Committee proposes that the legislation should provide that the Minister may in certain circumstances authorise the corporation to enter into an insurance contract where he considers that it is in the national interest for AGIO to do so. The types of cases in which the Committee envisaged the national interest provisions

might be employed are: (a) insurance of risks which are not insurable under normal insurance principles; and (b) insurance for welfare reasons of classes of persons who cannot reasonably be

expected to pay commercial premium rates.

6.12 The Committee appreciates that use of the proposed national interest provisions could present a number of practical problems. For example, under the first category it could be difficult to identify an uninsurable risk. Some risks may be too large to be insurable on the purely Australian market, but are insurable on the inter­

national insurance market, or they may be uninsurable today but become insurable later. 6.13 Under the second category, use of the national interest provisions for welfare purposes could present other problems. As has been mentioned earlier, the provision of particular insurance services on a preferential basis may tend to benefit the

relatively well off more than the needy. Proposals to assist particular categories could also pose difficulties; for example, the provision of house insurance at reduced rates to pensioners would benefit only those pensioners who own their own houses. 6.14 The Committee accordingly considers that the circumstances in which the

national interest provisions could be invoked would need careful definition and that it would be necessary to include certain safeguards in the legislation. It is suggested that the criteria for use of the national interest provisions should be as follows:

(a) that the insurance would be against risks that are not normally accepted by private insurers or that the insurance would be offered to a limited class of persons as part of a recognised social security program; and

(b) that the insurance would impose a liability on AGIO which AGIO would not undertake in the ordinary course of business.

6.15 The legislation would lay down detailed procedures to be followed in the use of the national interest provisions, providing in effect that AGIO act as agent for the Government. AGIO would keep a separate account of receipts and disbursements attributable to the national interest insurance business, including expenses calculated

on a basis approved by the Treasurer, and would periodically pay into Consolidated Revenue any surplus in the account and would be reimbursed for any deficiency in the account. As the business would normally represent a contingent liability against the Consolidated Revenue, it would be desirable to include a requirement corresponding to a provision in the Australian Industry Development Corporation Act 1975 that

AGIO could not be authorised to enter into national interest insurance programs unless details of the proposal had received the approval of both Houses of Parliament.

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As with the AIDC it would also be desirable to provide for the formation of a National Interest Committee to assist the Minister in the consideration of national interest insurance proposals.

6.16 With regard to the Defence Service Homes insurance scheme, if it is intended that it should continue to operate on its present basis, but as agent for the AGIO, it is suggested that a special provision should be included to ensure the separation of this function from the commercial operations of AGIO with existing accounting arrange­ ments. The Defence Service Homes Act would need to be amended to permit AGIO to

administer the insurance provisions of that Act. 6.17 As with comparable commercial statutory authorities the majority view of the Committee is that the AGIO should have independent staffing powers. Terms and conditions of employment should, however, be subject to the approval of the Public Service Board. The corporation should also have power, subject to the approval of the Public Service Board, to make arrangements with persons for the provision of services of a specialist nature. .

F in a n c e

6.18 The Committee suggests that the financial provisions should guarantee the payment of all money due by the AGIO. While this would appear to be conferring on AGIO a competitive advantage over private insurers, the State Government insurance offices are guaranteed by their respective governments. The Commonwealth Bank, EPIC and HLIC also have government guarantees. 6.19 Given a government guarantee, AGIO could function without its own capital. It has not been the practice in the States to provide the State Government insurance offices with capital. The Committee considers, however, that it would be desirable for AGIO to have its own capital and such other initial financial resources as may be necessary to give it an opportunity to develop its business without recourse to the government guarantee. The Committee noted that EPIC and HLIC were provided with capital when they were established which gave them a source of income from their inception and reserve against contingencies and which also gave them a measure of financial independence. Furthermore, the Insurance Act requires a private general insurance company to have a capital of at least $200 000 and an applicant for registration under the Life Insurance Act is required to have financial resources large enough to support the expected scale of business. 6.20 The amount of capital that might be provided for AGIO would depend on the nature and size of its business. The considerations for general insurance business are different from those for fife insurance business. 6.21 AGIO would not require any capital in respect of national interest insurance, nor for Defence Service Homes insurance if that insurance is to continue on the basis recommended by the Committee. If AGIO takes over HLIC, it will acquire assets valued in the 30 June 1974 balance sheet at $15.5 million, representing a capital advance of $200 000, a general reserve of $7.4 million and provision for unearned premium income and other current liabilities of $7.9 million. 6.22 To assist in estimating additional funds that might be provided for AGIO to enter into general insurance business, the Insurance Commissioner examined the accounts of 18 locally incorporated companies whose premium income is derived mainly from housing and fire insurance. The capitalisation practices and the ratios of

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shareholders’ funds to premium income and assets vary widely among these companies and do not provide a very useful guide. It was noted, however, that none of them had a paid-up capital in excess of $2 million and only three had paid-up capital in excess of $1 million. The Committee suggests that AGIO be provided with an

advance in the nature of capital of $800 000 which, together with the HLIC advance of $200 000, would give AGIO a capital of $1 million and would put it high up among insurers in a comparable field of business.

6.23 This advance would provide AGIO with an income to supplement its premium income, but in its formative period AGIO is likely to have substantial expenses in the development of its business. AGIO will also be incurring risks under its insurance contracts and, although housing insurance is regarded as among the less risky classes of business, AGIO should always be in a position to pay claims. The Committee

suggests that AGIO also be provided with an advance of $1 million in the nature of a reserve.

6.24 In the case of life insurance, the Life Insurance Commissioner has made an estimate of the amount which would be required for AGIO to establish a life insurance fund to enter into life insurance business. The estimate is based on the objective of writing in Australia 1 per cent of new Ordinary sums insured in the seventh year of business and not less than 1 per cent per annum of new Ordinary sums insured each year thereafter. He estimates that, including development expenditure of

$500 000 over the first five years, the present value of the amount required by the life insurance fund over the first ten years of operation is $18 million. A new life company applying for registration under the Life Insurance Act would be required to have this amount available on commencing business.

6.25 If, as suggested in this report, AGIO concentrates initially on general insurance, particularly housing insurance, the Committee considers that the advances referred to above for general insurance should be adequate to begin with. As AGIO’s business grows, AGIO may need additional funds, particularly if it moves into life insurance, but that can be considered later in the light of performance. The Committee suggests that the proposed advance in the nature of a reserve of $1 million be regarded as a borrowing and that AGIO should pay interest on it at a rate commensurate with the long-term bond rate.

6.26 With regard to the proposed advance in the nature of capital, however, AGIO may not be in a position to show a return on its capital in the first few years. It is accordingly considered that no interest should be payable on that advance. However,

provision should be made for a dividend to be payable on capital. For this purpose, the Treasurer should have power to determine the amounts put aside for general reserves before arriving at profits and the Minister should have power to determine, with the concurrence of the Treasurer, the proportion of profits to be paid by way of

dividend.

6.27 It would be necessary to include various supporting provisions in the legislation, which the Committee suggests should be on standard lines, such as a power for the Treasurer to make advances to AGIO out of moneys appropriated by Parliament on such terms and conditions as he determines. AGIO would also be

required to keep proper accounts, subject to audit by the Auditor-General, and to present annual reports.

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6.28 With regard to taxation, the Committee suggests that provisions should be included in the legislation which would have the effect of placing AGIO in its commercial business in the same taxation position as State and private insurers. This would mean in particular that stamp duty would be payable on policies issued by

AGIO and contributions would be made by AGIO to fire brigade services on the same basis as other insurers. Income tax would also be paid by AGIO. 6.29 The financial provisions should also include an investment power. The Committee considers that it would be very difficult for AGIO to remain competitive if the corporation did not have flexibility in investment policy comparable to that of other insurers. The Committee accordingly considers that the primary objective in the investment of AGIO’s funds should be to serve the interest of policy holders, i.e. to be in a position to provide them with the best possible insurance services consistent with ensuring AGIO’s financial solvency without recourse to the government guarantee.

Subject to the overriding consideration of the security of policy holder benefits the corporation should, however, invest in a responsible way as a public authority and the Committee suggests that it should also be required in its investment policy to have regard to the development of Australia’s resources.

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APPENDIX I

INSURANCE IN AUSTRALIA

A. General Insurance

There are 392 private insurers who have lodged deposits under the Insurance (Deposits) Act 1932-1973 which entitle them to carry on general insurance business in Australia. General insurance covers all classes of insurance, including reinsurance, other than life insurance and life reinsurance, health insurance conducted by organis­

ations registered and controlled under the National Health Act, and certain other insurance such as friendly society and trade union benefit schemes. About one-third of those who have lodged deposits are relatively small businesses with annual

premium incomes of less that $750 000. The others vary greatly in size and in the range of insurance facilities which they offer. The total is expected to be reduced considerably when applications for authorities to carry on business under the Insurance Act 1973 have been dealt with, owing to withdrawal from business or

amalgamation or reconstruction of those who cannot meet the minimum financial standards set by the Act.

2. In addition to private insurers, general insurance business is also carried on by Governments and government instrumentalities. The six State Governments have established insurance offices which conduct about 20 per cent of Australia’s general insurance business and several State saving banks insure houses on which they have made loans. In Western Australia, motor vehicle compulsory third party insurance is conducted by the Motor Vehicle Insurance Trust of Western Australia in which

private insurers and the SGIO participate. In the Federal sphere Defence Service Homes insures houses which it finances, the Export Payments Insurance Corporation insures export payments and overseas investments, the Housing Loans Insurance Corporation insures housing loans and the Commonwealth Trading Bank and the

Commonwealth Savings Bank insure houses on which they have made loans. The Joint Coal Board, a joint authority with N.S.W., carries on workers compensation insurance for the N.S.W. coal mining industry through its subsidiary Coal Mines Insurance Pty Ltd.

3. A full analysis of general insurance business in Australia is not practicable at present owing to the absence of detailed statistics. This deficiency will be overcome when insurers provide statistics under the Insurance Act, but it will be some years before comprehensive statistical information becomes available.

4. The Reserve Bank publishes in its flow-of-funds estimates an estimated aggregate balance sheet for non-life insurance offices based on a sample of 60 non-life insurers. The assets of non-life offices at 30 June 1972 are estimated to have totalled $3093 million representing 6.6 per cent of the estimated total assets of financial institutions in Australia.

5. The Reserve Bank’s estimates for non-life insurance must be treated with caution owing to technical difficulties in collecting the figures and making the estimates, so that too much reliance should not be placed on the absolute figures. However, the aggregate balance sheet serves to indicate some features of the financing of general

insurance. The main items are shown in the following table.

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NON-LIFE INSURANCE OFFICES ESTIMATED AGGREGATE BALANCE SHEET, 30 JUNE 1972

Assets $ million Per cent

Fixed Assets 355.0 11.5

Cash and Bank 64.9 2.1

Other Advances Loans to building societies 50.0 1.6

Loans to subsidiaries 74.6 2.4

Other 274.7 8.9

Mortgages 433.1 14.0

Australian Government securities 246.3 8.0

Local and semi-government securities 207.1 6.7

Shares in subsidiaries 90.7 2.9

Shares in other companies 469.9 15.2

Debentures, notes and deposits 512.8 16.6

Sundry debtors 304.1 9.8

Net assets abroad 9.5 0.3

T otal 3092.7 100.0

Liabilities

Ordinary and preference shares 81.5 2.6

Reserves and overseas funds n.e.i. Sundry creditors—

1066.1 34.5

outstanding claims 1199.3 38.8

unexpired risks 537.3 17.4

other 138.3 4.5

Other liabilities 70.2 2.2

Total 3092.7 100.0

6. The principal liabilities are share capital and reserves and the provisions shown under ‘Sundry Creditors’ for outstanding claims and provisions for unexpired risks. The provisions for outstanding claims relate to claims which have not been settled in full by the balancing date, some of which may not yet have been notified, and the provisions for unexpired risks relate to the risks arising from policies which have not

expired at the balancing date. 7. Share capital can be relatively small, ordinary and preference shares on issue in the table above being less than 3 per cent of total assets. Reserves, however, are usually relatively large; including overseas funds n.e.i. which are believed to be principally indebtedness of Australian branches to overseas head offices, they exceed­ ed 34 per cent of total assets. These reserves have been built up over many years and permit companies to underwrite risks which companies with small reserves could not contemplate. 8. The provisions against outstanding claims and unexpired risks represented 56 per cent of total assets. They are calculated by applying formulae evolved within the industry to estimates of future liabilities and are subject to many uncertainties. This is partly because of the absence of adequate general insurance statistics in Australia, but primarily it is due to the nature of general insurance risks which are much less predictable than life insurance risks. There is reason to believe that the provisions made by the industry as a whole have been seriously inadequate in recent years particularly for workers compensation and motor vehicle third party insurance. A

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recent estimate suggested that the shortfall in provisions for outstanding workers compensation claims alone could be of the order of $150 million. 9. It is difficult to generalise about the investment policies of general insurers because they vary considerably between companies according to the nature of their businesses. One common characteristic, however, is that the assets should have a reasonably high degree of liquidity and a fairly short-term perspective owing to the short-term nature of general insurance. It will be noted that the largest single item in the table above is debentures, notes and deposits and that the assets are spread fairly widely among the main types of investment.

10. The Bureau of Statistics publishes figures collected from private insurers and State Government insurance offices showing, under 24 classes of general insurance business, premiums received or receivable in respect of policies issued or renewed in a

year, claims paid during a year adjusted for changes over the year in estimated claims outstanding, and certain selected items of revenue and expenditure other than premiums and claims. The Bureau points out that the figures for premiums are not adjusted for premiums unearned at the end of the year and in the circumstances of

recent years the figures shown in the tables are greater than the premiums earned by insurers. Also, as mentioned above, it is probable that the figures for claims under­ state the real liabilities of insurers. It is thus likely that the official statistics overstate

premium income and understate the real cost of claims and thus understate the ratios of claims to premiums and reduce their value as an indicator or underwriting experience. This needs to be kept in mind in looking at the official statistics. 11. A copy of the latest statistical bulletin is attached (Attachment G). Subject to their limitations, the statistics give the following broad indication of general insurance operations in recent years.

12. Premiums received and receivable amounted to $1322.7 million in 1972-73. Over the five years to 1972-73, this total increased by $606.1 million, giving an annual rate of growth of 16.9 per cent. Claims paid adjusted for claims outstanding amounted to

$903.5 million in 1972-73, an increase of $432.6 million over the previous five years and an annual rate of growth of 18.4 per cent. 13. The main classes of general insurance in 1972-73 in terms of premiums were motor vehicle insurance (38.8 per cent of total premiums, made up of comprehensive 25 per cent and compulsory third party 13.8 per cent), workers compensation (22 per cent), fire (11.5 per cent), householders comprehensive (7.7 per cent) and marine (4

per cent).

PRINCIPAL CLASSES OF BUSINESS

Premiums 1972-73 ($ million) Per cent

of total

Fire 152.1 11.5

Householders comprehensive 102.3 7.7

Workers compensation 291.3 22.0

Motor Vehicle—C.T.P. 183.0 13.8

Other 329.9 25.0

Marine 53.3 4.0

Other risks 210.8 16.0

T otal 1322.7 100.0

25

Fire insurance in the statistics relates mainly to insurance against fire of industrial and commercial properties. Householders comprehensive consists mainly of insurance of private dwellings and their contents and associated risks such as public liability. The ‘other risks’ group was made up of the following classes of business:

Premiums 1972-73 ($ million)

Personal accident 45.5

Public risk third party 33.7

Loss of profits 25.1

Burglary 19.5

All risks 13.8

Aviation 11.1

Contractors all risks 10.0

Boiler 5.0

Plate glass 4.3

Hailstone 4.2

Guarantee 3.0

General property 2.9

Livestock 2.6

Other 30.1

T otal 210.8

14. The ratio of claims to premiums varies considerably between the main classes of business. In 1972-73 the ratio for all classes was 68.3 per cent but in the case of motor vehicle compulsory third party insurance claims exceeded premiums with a ratio of 114.3 per cent, and the ratio was substantially higher for workers compensation (84.1 per cent) and motor vehicle comprehensive (67.7 per cent) than for the other main classes, where the ratios ranged between 39.6 per cent and 47.6 per cent.

RATIO OF CLAIMS TO PREMIUMS, 1972-1973

Per cent

Fire 47.6

Householders comprehensive 39.6

Workers compensation 84.1

Motor Vehicle—C.T.P. 114.3

Other 67.7

Marine 47.0

Other risks 41.8

T otal 6 8.3

These ratios are of limited value as indicators of relative profitability among classes of general insurance business, for the reasons mentioned in paragraph 10 and in the absence of statistics of other expenses incurred in respect of each class of business. There seems little doubt, however, that motor vehicle compulsory third party insurance has become the least profitable class of business and it may be unprofitable in most States. Private insurers have tended to move out of the business and more than half of it is conducted by State Government insurance offices. The annual

26

reports of those offices record in most cases unsatisfactory underwriting results for motor vehicle compulsory third party insurance and also to some extent for workers compensation, in which they write about a quarter of the business. 15. No aggregate statistics are available as yet on the profitability of general

insurance as a whole. A paper by Dr G. Pursell in The Australian Capital Market published this year contained the following information about profits earned in 1971 by some Australian and New Zealand non-life insurance companies. The companies range in size from the Commercial Union of Australia which had 6 per cent of the Australian market in 1971 to T. & G. Fire and General which had 0.4 per cent of the market in that year.

Profit after tax as percentage o f shareholders ' funds

Queensland 7.7

Mercantile Mutual 8.5

United 8.9

Victoria 1.2

Bankers and Traders 7.5

Commercial Union of Australia 9.8

South British 10.0

New Zealand 12.5

N.R.M.A. Insurance 10.2

Manufacturers’ Mutual 10.7

Chamber of Manufacturers 14.0

Federation 10.7

V.A.C.C. 6.6

Co-operative 7.1

National General 8.7

Transport and General 11.1

A.F.G.Insurances —7.4

Ajax 14.7

A.M.P. Fire and General 8.0

T. & G. Fire and General 13.3

M.L.C. Fire and General —29.8

National Mutual Fire —29.8

16. Most classes of general insurance can be obtained from insurers operating in Australia, but large risks and certain special risks are usually insured partly or wholly overseas. It is understood that such risks include oil and gas drilling rigs, large marine hulls, aircraft hulls, transmission of money, large third party public risks, large

construction risks, professional indemnity, musical instruments and flood cover for housing. There are at present no recorded statistics of insurance business placed directly overseas, but it is understood that some Australian marketing authorities with offices in the United Kingdom insure in London, mainly with Lloyd’s, and that

some large overseas-owned companies operating in Australia take out world-wide policies abroad which include cover for Australian risks. 17. Until fairly recent years reinsurance on Australian risks was placed overseas mainly with Lloyd's and large companies in Britain, Switzerland and Germany. In recent times professional reinsurers overseas have established locally incorporated

companies in Australia and have introduced the expertise necessary for this kind of

27

business, so that a proportion of reinsurance is now carried on within Australia and Australian insurers are participating in reinsurance overseas. 18. Estimates of overseas ownership and control of general insurance companies in Australia vary. The most recently published estimate, by Dr G. Pursell in the paper referred to earlier, was that 41 per cent of the market in 1971 was held by overseas- controlled insurers and brokers for overseas insurers, 39 per cent by Australian- controlled companies and 20 per cent by State Government insurance offices. Several Australian-owned insurers carry on business in other countries. 19. Further details about the insurance activities of Governments and government instrumentalities in Australia are contained in the following attachments.

A. State Government insurance offices B. Defence Service Homes Insurance C. Commonwealth Bank housing insurance D. Housing Loans Insurance Corporation E. Export Payments Insurance Corporation F. Private health insurance

G e n e r a l In s u r a n c e Le g is l a t io n

20. The legislation for the supervision of general insurance in Australia, which was enacted in 1973, is now being put into force. The legislation takes the place of the old Insurance Act which has been renamed the Insurance (Deposits) Act 1932-1973 and which is confined to requiring insurers to lodge deposits with the Treasurer. The Act provides for the repeal of the deposit requirement two to five years after the commencement of section 21 of the Insurance A ct 1973. 21. Under the Insurance A ct 1973, applicants for authorities to carry on general insurance business will be required to be bodies corporate with paid-up capital of at least $200 000, to satisfy a solvency test, to have adequate reinsurance arrangements and to be capable of meeting their financial obligations. The Act also authorises Lloyd’s underwriters to continue to carry on business in Australia subject to certain

undertakings, and it contains some transitional provisions for existing insurers. 22. The solvency test requires insurers to have a margin of assets over liabilities equal to at least 15 per cent of the previous year’s premium income. In practice this means having a margin normally well in excess of 15 per cent to guard against sudden fluctuations. For the purposes of the solvency test assets exclude items such as goodwill, loans to directors and mortgaged assets and assets are to be valued conser­

vatively, while liabilities must include provisions for all contingencies such as claims not yet notified which could arise in the future. 23. The only State with legislation requiring insurers to obtain licences to carry on insurance business generally is Queensland. The licensing provisions of the Queens­ land Act will be phased out over a period of two years as the Insurance Act takes effect. All States have legislation for the registration or licensing of insurers to carry on motor vehicle compulsory third party and workers compensation business and the

Insurance Act provides for those arrangements to continue in force. The Insurance Act also safeguards many other kinds of State legislation bearing directly or indirectly on insurance, such as stamp duties, contributions for fire brigades and other purposes

and housing and hire-purchase laws which contain insurance provisions.

28

B. Life Insurance 24. Life insurance business in Australia is carried on by 49 companies registered under the Life Insurance Act 1945-1973. In addition the State Government insurance offices of New South Wales and Queensland, which are exempt from registration under the Act, transact life insurance business within their States and new sums

insured by them amounted to $215 million in 1973. 25. Among the registered life insurance companies, six Australian-controlled companies have dominated the market and wrote 71 per cent of new sums insured in 1972 and also in 1973. Five of those companies are mutuals owned by their policy holders and the sixth is a company limited by shares. The remaining business is written by six other Australian-controlled companies and by 37 overseas-controlled

companies.

REGISTERED LIFE INSURANCE COMPANIES BUSINESS IN AUSTRALIA- NEW SUMS INSURED, 1972

$ million

Per cent o f total

Australasian T. & G. 495.1 5.6

Australian Mutual Provident 2835.5 32.2

City Mutual 185.0 2.1

Colonial Mutual 527.5 6.0

Mutual Life & Citizens 944.9 10.8

National Mutual 1224.3 13.9

621 2 .3 70.6

Other Australian-controlled 205.1 2.4

Overseas-controlled 2378.8 27.0

T otal 879 6 .2 100.0

N ote. The figures are for company financial years, the majority of which ended on 31 December 1972.

26. Up to the mid-1950s the number of life insurance companies during the post­ war years had been fairly stable, but between 1956 and 1961 the number increased rapidly from 23 to 40 and continued to increase in subsequent years at a slower rate to the present figure. The entry of overseas-controlled companies which caused the

increase was due to various reasons, such as the long-term economic prospects of Australia and the presence in Australia of migrants familiar with the overseas companies. It was also stimulated by the movement of Australian life insurance companies into general insurance and the development in Australia of composite companies transacting all forms of insurance. Most of the new entrants urere affiliates of overseas-controlled companies already carrying on general insurance business in

Australia.

27. The rapid increase in the number of life insurance companies has had a significant impact on life insurance business. It has produced a rapid growth in the amount of new sums insured written in Australia over the past 10 years. It has created some pressures, such as those arising from an increased demand for qualified office

and field staff and for managerial and actuarial services. It has also led to increased

29

competition, which has caused companies to review and improve their procedures and practices, to introduce new methods of operation and to offer a wider range of policies.

28. Statistics of life insurance business are much more reliable than statistics of general insurance owing to the furnishing of returns by registered companies for many years under the Life Insurance Act. The Reserve Bank’s flow-of-funds statistics show assets of life insurance offices at 30 June 1972 amounting to $6725 million or

14.3 per cent of estimated total assets of all financial institutions in Australia.

29. The Reserve Bank’s statistics differ in several respects from the figures published by the Life Insurance Commissioner in his annual reports recording the assets of the statutory funds of the registered life insurance companies. Under the Act, each company is required to maintain one or more statutory funds in respect of its life insurance business, into which must be placed premiums received and income from the investment of the assets of the fund and which may be drawn upon only to meet liabilities and expenses attributable to the life insurance business. Surpluses found in the funds by an actuarial investigation may be applied only in accordance with the Act, which means in general that amounts paid out of a fund for the benefit of shareholders or for transfer to another fund are limited to 25 per cent of any surplus allocated to policy owners. The Life Insurance Commissioner’s annual report for the year ended 31 December 1973 shows the total assets of the statutory funds at company balancing dates, mainly 31 December 1972, to be $8672.9 million and the assets of those funds held in Australia at the same dates to be $7018.6 million. The Commissioner also provides a table of selected assets in Australia of life insurance statutory funds which indicates the distribution of those assets by class of assets. The following table is a summary of the information as at 31 December 1973.

SELECTED ASSETS IN AUSTRALIA OF LIFE INSURANCE STATUTORY FUNDS AT 31 DECEMBER 1973

$ million Per cent

Fixed assets 1370.6 18.4

Mortgages 1236.8 16.6

Loans on policies 256.3 3.4

Other loans 59.3 0.8

Government securities 1759.0 23.6

Local government securities 649.2 8.7

Debentures, notes and deposits 775.8 10.4

Ordinary and preference shares 1293.6 17.3

Cash 5.5 0.1

Other assets 57.8 0.7

T otal 7457.9 100.0

30. The distribution of assets has altered in recent years. The main changes have been a decline in the proportion of assets invested in mortgages and increases in the proportion invested in fixed assets, mainly property, and in company shares. Since 1961 life insurance companies have been eligible for taxation concessions for compli­ ance with the 30/20 rule and their aggregate holdings of public securities have been maintained somewhat above the required proportions.

30

31. The major Australian life insurance companies also transact life insurance busi­ ness overseas in a number of countries, particularly in the United Kingdom and New Zealand. In some cases the business is on a substantial scale. New ordinary business written overseas by registered companies amounted to $1557 million in 1972-73. These companies follow a policy of aiming to match their liabilities in each country with assets in that country, thus insulating themselves from the effects of changes in exchange rates or restrictions on the transfer of money. 32. Three classes of life insurance business are transacted in Australia:

(a) superannuation business, which relates to policies providing benefits for employees or self-employed persons on retirement, death or injury; (b) industrial business, which relates to policies in respect of which premiums are payable at intervals of less than two months and are usually collected by

collectors; (c) ordinary business, which is business not included under the other classifications.

33. The growth in life insurance business in recent years and trends in the three classes are indicated in the following table of new sums insured by registered companies in the calendar years 1969 to 1973.

LIFE INSURANCE BUSINESS IN AUSTRALIA NEW SUMS INSURED ($ million)

Year Ordinary Superannuation Industrial Total

1969 3091.1 1629.3 165.5 4 885.9

1970 3919.4 2290.4 200.5 6 410.2

1971 4803.3 2794.2 232.8 7 830.3

1972 5567.1 2919.2 257.8 8 746.1

1973 6281.2 3741.0 253.8 10 276.0

Ordinary business has grown substantially, but the Life Insurance Commissioner commented in his last annual report that in 1973 the number of new policies issued fell for the first time since 1961 and the annual rate of increase of new sums insured continued the decreasing trend started in 1971. In superannuation business, however,

new sums insured increased in 1973 at an annual rate which represented a reversal of the decline in the growth rate for this class of business which had been evident during the period 1970 to 1972. In industrial business, the rate of increase in new sums insured has been declining for a number of years and in 1973 new sums insured were

less than new sums insured in 1972; only five companies continue to write this business. 34. The three main types of policy in ordinary business are:

(a) whole of life—insurance payable on death; (b) endowment—insurance payable on survival to the maturity date or on prior death; (c) term (or temporary)—insurance payable on death within a specified period.

31

35. In 1972 whole of life policies amounted to 57.7 per cent of new ordinary business, endowment policies 9.3 per cent and term policies 31.7 per cent. Whole of life business has been fairly constant in recent years as a proportion of the total, but term insurance has been rising and endowment insurance falling in proportion to the total. 36. The average net rates of interest earned by life insurance companies on their Australian business have been edging upwards in recent years and were calculated to be 6.29 per cent in 1972 compared with 6.14 per cent in 1970 and 5.96 per cent in

1968. The net rates are net of income tax and the Life Insurance Commissioner mentioned in his last annual report that company reports indicate that net rates of interest are expected to show some reduction in the near future following the recent increases in income tax payable by life insurance companies. The earned rates of interest in 1972 were as follows:

Per cent

Ordinary 6.23

Superannuation 6.50

Industrial 6.11

All classes 6.29

37. The calculation of expense rates for life insurance companies is complicated by the general practice in Australia of paying agency commission at the commencement and not over the duration of a policy and by the relatively substantial expenses incurred at the time of issue of a policy. The Life Insurance Commissioner has commented that the expense rate is likely to rise if a substantial increase in new business is obtained, but that despite these and other technical problems, a review of the expense rates incurred by the industry in successive years is of considerable value in the broad assessment of cost trends. In recent years the expense rates for ordinary and industrial business have been rising, but the expense rate for superannuation business has tended to decline. The expense rates of Australian business for all companies in 1972 have been calculated as follows:

Per cent

Ordinary 28.4

Superannuation 11.2

Industrial 37.2

Lif e In su r a n c e Le g is l a t io n

38. Life insurance in Australia is regulated by the Life Insurance Act 1945-1973 which restricts the business to corporate bodies registered by the Life Insurance Com­ missioner. A high standard of entry is maintained. Applicants for registration must show that they can conduct a self-contained, well-organised operation in Australia with experienced management and with adequate financial resources for develop­

ment. Registered companies are required to establish one or more statutory life insurance funds to secure policy liabilities and to lodge with the Commissioner audited accounts and balance sheets, actuarial abstracts and other returns, by means of which the Commissioner can supervise the companies and protect the interests of policy owners. Most of the returns are available for public information. No life insurance policy may be issued unless the premium rates for its class have been certified as adequate by an actuary and each company is required to have an actuarial

32

valuation made of its policy liabilities regularly on a basis which is at least as strong as the minimum basis prescribed under the legislation. No person may act as an auditor until approved by the Commissioner. Companies are also required to lodge deposits with the Treasurer on similar terms to those applying to general insurance business.

The Commissioner is required to make an annual report to the Treasurer for tabling in Parliament. 39. The Commissioner may demand information from a company, authorise inspections of companies upon sufficient cause, issue directions subject to a right of appeal to the High Court, petition the Court for judicial management or liquidation

and be heard by the Court in any application for transfer or amalgamation. He may also direct the amendment or withdrawal of any proposal, policy or canvassing matter if misleading or not in compliance with the Act. No new capital may be raised from the public unless the prospectus is approved by the Commissioner. 40. Life insurance companies which lodge returns under the Life Insurance Act are

exempt from presenting company accounts under the Companies Act. They are subject to State stamp duty legislation. Under Federal taxation laws special provisions apply for life insurance companies and in the 1973-74 and 1974-75 Budgets changes were made in the taxation provisions, including reductions in allowable deductions and a requirement to pay income tax at the public company rate of AlVi per cent instead of the previous concessional rate of 421/2 per cent. As has been

mentioned earlier, life insurance companies are eligible for taxation concessions if they comply with the 30/20 rule and maintain at least 30 per cent of their assets in public securities, including 20 per cent in Australian Government securities. It is understood that discussions have been taking place between representatives of the life

offices and the Australian Industry Development Corporation regarding investment by those offices in the AIDC.

3 October 1974

Addenda

(1) Foreign Ownership and Control o f Insurance Business In December 1974 and January 1975 the Bureau of Statistics published summaries of the results of its studies of foreign ownership and control of general insurance business in Australia in 1972-73 and foreign ownership and control of life insurance business in Australia in 1973. The main results of the studies were as follows.

The level of foreign ownership of general insurance business in 1972-73 was 45.7 per cent, of which 41.4 per cent was direct foreign ownership and 4.3 per cent was other identified foreign ownership. The level of foreign control was 45.0 per cent and Australian control 55.0 per cent. Australian control comprised 20.4 per cent on

account of government insurance enterprises and 34.6 per cent on account of private insurance enterprises. The level of foreign control varied widely for different types of general insurance business, from 16.3 per cent for motor vehicle compulsory third party insurance to 77.7 per cent for marine insurance.

The level of foreign ownership of life insurance business in 1973 was 36.8 per cent, of which 18.8 per cent was direct foreign ownership and 18.0 per cent other identified foreign ownership. The level of foreign control was 19.4 per cent and Australian

33

control 80.6 per cent. Australian control comprised 63.3 per cent on account of mutual life insurance enterprises and 17.3 per cent on account of other life insurance enterprises.

(2) Export Finance and Insurance Corporation

The Export Payments Insurance Corporation has become the Export Finance and Insurance Corporation following the entry into force on 1 February 1975 of the Export Finance and Insurance Corporation A ct 1974.

34

ATTACHMENTS

A. State Government Insurance Offices (prepared by Department of the Treasury) B. Defence Service Homes Insurance Scheme (prepared by Department of Housing and Construction) C. Commonwealth Bank Housing Insurance

(prepared by Department of the Treasury) D. Housing Loans Insurance Corporation (prepared by the Department of Repatriation and Compensation) E. Export Payments Insurance Corporation

(prepared by Department of Overseas Trade) F. Private Health Insurance (prepared by the Department of Social Security) G. Australian Fire, Marine and General Insurance Statistics

(Bureau of Statistics Bulletin June 1974)

35

Attachment A

STATE GOVERNMENT INSURANCE OFFICES

The information which follows about the State Government insurance offices is based on published information and has not been checked with State authorities.

2. The State Government insurance offices differ from State to State in their origins and operations and it is difficult to generalise about them. Most of them were established many years ago, but the South Australian State Government Insurance Commission began business as recently as January 1972. The years of establishment of the State Government Insurance Offices and the insurance business which they are empowered to conduct are as follows:

SGIO

New South Wales Victoria— Accident I.O. Motor Car I.O.

Queensland Western Australia

South Australia Tasmania

Esta-lished Powers

1926 General and life

1914 Employers liability 1941 Motor vehicle 1916 General and life 1926 Employers liability,

motor vehicle, students accident, local authority and government insurance 1971 General 1919 General and health

3. In Victoria the two offices were set up under separate legislation, but they are both administered by the State Insurance Commissioner and he publishes a con­ solidated balance sheet. The Victorian Public Accounts Committee recently completed an inquiry on the two offices and recommended in its report dated 25 July

1974 that they be amalgamated and that the franchise of the new office should be extended to cover all fields of insurance appropriate for it to offer a complete general insurance service to the public. In Western Australia a Royal Commission has been inquiring into the question of extending the charter of the State Government Insurance Office. At present it conducts in its own right only employers liability, motor vehicle, students accident and local authority insurance and it acts as agent for the Treasury in the insurance of government property and the Government's workers compensation liability. The Tasmanian Office operates hospital and medical benefits insurance as a registered organisation under the National Health Act. The South

Australian Government introduced a Bill in February 1974 to provide for the extension of the operations of the Insurance Commission into life insurance, but it was not passed by the Legislative Council.

4. The reasons for setting up State Government insurance offices have varied, but the following factors seem to have been present to some degree in most cases.

a. To make sure that insurance facilities are always available for statutory insurance, i.e. workers compensation and motor vehicle compulsory third party insurance. In Queensland the SGIO has a statutory monopoly of workers

36

compensation insurance, and in all States the SGIOs have a significant share of statutory insurance business. b. To compete with private insurers in order to keep premiums at reasonable levels and insurance services at adequate standards.

c. To assist the State Governments in various ways, such as insuring government property, lending to public authorities, paying surpluses into public revenue or for specified public purposes and managing special insurance schemes on the Government’s behalf. 5. The relative sizes of the State Government insurance offices are indicated by the following figures of earned premium income in 1972-73 and assets at 30.6.1973.

Earned Premium Income, 1972-73 ($ million)

Assets at 30 June 1973 ($ million)

New South Wales Life 14.0 99.4

General 114.0 381.7

Queensland Life 17.6 150.5

General 35.5 135.6

Victoria 42.5 97.9

Western Australia 11.0(0 20.5(ii)

South Australia 3.3 3.5

Tasmania 3.3 8.9

(i) excluding government insurance premiums and share of premiums as a member of the W.A. Motor Vehicle Insurance Trust. (ii) excluding $5 million assets arising from government insurance.

6. Each office operates within its own State, except that the GIO of N.S.W. has a general insurance branch in the A.C.T. The percentage shares of general insurance business by classes of insurance in 1970-71 held by State Government insurance offices other than the South Australian Insurance Commission are indicated in the

following table.

STATE GOVERNMENT INSURANCE OFFICES PERCENTAGE SHARES OF STATE AND AUSTRALIAN PREMIUMS BY PRINCIPAL CLASSES, 1970-71

N.S.W. Vic. Qld W.A. Tas. Aust.

Fire & related lines 8.5 25.4 4.4 11.0 7.2

Marine Motor vehicle—

0.8 29.3 6.2 11.9 3.7

Comprehensive 13.4 7.7 29.9 25.6 9.6(a) 13.4

Third Party 95.0 36.5 46.9 35.4 19.2(a) 58.6

Workers Compensation 15.3 16.8 100.0 44.5 13.9(a) 24.2

Other 3.3 — 36.7 6.9 7.4(a) 4.7

Total 23.8 10.6 40.8 22.9 11.4 19.4

Notes. Published in a paper on Non-Life Insurance by Dr Pursell in T h e A u stra lia n C apital M a r k e t 1974; includes information supplied by the offices themselves.

(a) Premiums not available. 1959 market shares assumed.

37

7. In South Australia the Insurance Commission obtained 4.1 per cent of South Australian premiums in 1972-73, its first full year of business. Most of the premiums were for motor vehicle insurance in which it had 8 per cent of South Australian premiums. The remaining premiums were for workers compensation, fire, accident and marine insurance, all of which were fairly small. 8. The New South Wales and Queensland offices participate in reinsurance business, including some inwards reinsurance from overseas. They are the only State Government insurance offices authorised to conduct life insurance business and in the financial year 1972-73 new sums insured by the New South Wales Office

amounted to $69 million and by the Queensland Office to $146 million. 9. Other activities of State Government insurance offices include administering local government insurance schemes (N.S.W. and W.A.), managing funds for the payment of statutory insurance liabilities of insurance companies in liquidation (N.S.W. and Victoria), hospital and medical benefits insurance (Tasmania), apple and pear crop insurance and hail insurance (Tasmania), and housing loan schemes (N.S.W., Queensland and W.A.). 10. The financial arrangements under which the State Government insurance offices operate vary in detail, but the following is a summary of the arrangements for the South Australian Insurance Commission, which was able to draw on experience in other States in its establishment and whose financial arrangements seem to have the same main features as the other Offices. 11. The State Government Insurance Act, 1970 confers a State Government guarantee on every insurance contract entered into under the Act and provides that

any amounts advanced to the Commission in settlement of liabilities will be a charge on the Commission’s funds to be recovered when funds are available. The Premier stated during the debate in Committee that the Commission would be charged interest on any advance made to it. 12. Separate funds must be established for each class of business into which premiums must be paid; payments in respect of insurance contracts must be made from the proper fund. Management expenses must be apportioned between the funds in proportions determined from time to time. Until there is sufficient money in the several funds to meet the expenses, the Treasurer may make advances to the Commission on such terms and conditions as he thinks fit. It is understood that the Commission received an advance of $60 000 in June 1971 and by March 1972 had sufficient funds to repay the advance with interest. 13. The Commission may invest money in the funds in trustee securities, in temporary deposits with the Treasurer and in real property with the Treasurer’s

approval. Practically all its funds at 30 June 1973 were invested in interest-bearing deposits, but it had also invested $150 000 in debentures of the Natural Gas Pipeline Authority and $100 000 in the Festival Centre Trust debentures. 14. The Commission must pay the Treasurer amounts equivalent to the income tax which an insurance company would be liable to pay. The Commission is subject to stamp duty and to fire brigade and other similar levies on insurers. 15. At the end of each financial year the Chairman, the Under-Treasurer and the Auditor-General will determine what portion of profit shall be carried to reserve and any balance will be paid into Consolidated Revenue. The Commission’s books are subject to audit by the Auditor-General.

38

16. The Commission is required by the Act to carry on its general insurance business ‘according to the practice, usage, form and procedure which is for the time being followed by other persons engaged in the like business, or to undertake and carry on such business in such manner and form and according to such procedure as may be

considered necessary or desirable’. In its annual report for 1973 the Commission records that ‘provision for unearned premiums was calculated in respect of premium income according to the formula which has been proposed as obligatory in projected Commonwealth legislation for the control of insurance companies. Provision for out­

standing claims was made with due regard for current inflationary trends’. 17. In recent years the operational results of the State Government insurance offices have been affected considerably by losses arising from statutory insurance business. In 1972-73 the N.S.W. Office had an underwriting surplus of $10.9 million on its non­ life business other than motor vehicle third party insurance, but showed an under­ writing loss of $13.9 million on its motor vehicle third party business. Expenses

totalled $8.4 million, giving a net underwriting deficiency of $11.4 million which was covered by investment income of $23.2 million. The accumulated loss on motor vehicle third party business at 30 June 1973 was $19.7 million, which reduced the general insurance reserves from $44.5 million to $24.8 million. The Victorian Motor

Car Insurance Office increased its provision for outstanding claims by $12.5 million at 30 June 1973 and showed a trading loss for the year of $10.6 million. The Victorian Accident Insurance Office showed a small trading loss of $274 000 after increasing its

provision for outstanding claims by $5.7 million. The consolidated accounts showed a net loss of $6.5 million after allowing for $4.3 million income from other sources and an accumulated loss of $28.7 million in respect of the Motor Car Insurance Office. 18. The Queensland Office appears to have been less affected in these ways than the

N.S.W. and Victorian Offices and recorded an underwriting surplus of $5.9 million in 1972-73 on its general insurance business. The annual report referred, however, to a state of imbalance in the workers compensation claims ratio and noted that claim

payments for workers compensation insurance had increased by more than the increase in premiums over the year. The Western Australian Office showed surpluses in 1972-73 in its lines of business other than employers liability, but a deficit of $800 000 in that business, and the Tasmanian Office reported an overall underwriting

loss of $393 000 in 1972-73 due to unsatisfactory results from motor vehicle third party and workers compensation insurance.

3 October 1974

39

Attachment B

DEFENCE SERVICE HOMES INSURANCE SCHEME

The Administrative Arrangements Order approved by the Governor-General of 12 June 1974 provides, inter alia, that the Defence Service Homes Act 1918-1973, insofar as it relates to the insurance of dwelling-houses, shall be administered by the Minister for Repatriation and Compensation and that government insurance and other enactments administered by the Minister shall be dealt with by the Department of

Repatriation and Compensation. 2. In considering the arrangements to be made for the future operation of this Insurance Scheme, it is necessary to keep in mind the objects, purpose and intention of the Scheme. The attached paper, ‘Defence Service Homes Insurance Scheme’, outlines the background history of the Insurance Scheme and provides details of its operation. However, it has to be appreciated that the Insurance Scheme is ancillary to and, in a general sense, forms a lesser part of the overall Scheme for the provision of homes for Australian soldiers and female dependants of Australian soldiers as contained in the Defence Service Homes Act 1918-1973. 3. The provisions relating to the administration of the Defence Service Homes Act are set out in sections 5-14A of Part II of the Act. Section 5(4) provides for the incorporation of a body corporate under the name of the Director of Defence Service Homes and that the person from time to time occupying the office of Director of j Defence Service Homes constitutes this statutory corporation. Section 5 (2) of the Act j provides that the Director is, subject to the directions of the Minister, responsible for the execution of the Act. 4. The Insurance Scheme is tied to and forms an integral part of the building and j lending operations of the Defence Service Homes Scheme. As well as providing j insurance for purchasers and borrowers under the loan Scheme the legislation j provides that any property in which the Director has an interest shall be deemed to be insured in pursuance of the Act for the benefit of the Director. In this context |

‘property’ includes building materials as well as dwelling-houses. These provisions | recognise the paramount need for public moneys represented by the Director’s equity in properties to be fully protected at all times during the currency of the outstanding home loans.

5. There are approximately 380 officers in the Department employed partly or wholly in the administration of the Insurance Scheme. The majority of these are only partly employed in the administration of the Scheme, e.g. accounts officers employed in the processing of claims and works supervisors engaged in the inspection and valuation of properties for insurance purposes including duties as loss assessors. There is also considerable involvement of technical and professional officers in work associated with the execution of insurance repairs where these are undertaken by the Director. 6. From the above, it will be apparent that any future arrangements for the conduct of the Insurance Scheme would always need to provide that the Director’s interests in such properties shall automatically be protected by adequate insurance cover. Separation of the insurance function from the Director’s other operations would require an amendment to the Defence Service Homes Act and the enactment of special legislative provision to protect the Director’s interest. .

40

Historical Background

Since its inception in 1919 the Defence Service Homes Act has made provision for a Defence Service Homes Insurance Scheme. Under section 5 of the Act responsibility for the execution of the provisions of the Act (including the insurance provisions) is vested in the Director, subject to the directions of the Minister. 2. Section 38 (1) provides that every dwelling-house in which the Director has an

interest and building material on the site of and for use in the erection of a dwelling- house in which the Director will have an interest shall be insured as prescribed against fire and prescribed risks. Under Defence Service Homes Regulation 68 all property in which the Director has an interest is deemed to be insured for the benefit of the

Director and the insurance therefore covers his interest as well as the interest of the purchaser or borrower. 3. Section 38 (1A) which was inserted in the Act in 1948 enables purchasers or borrowers who have discharged their liability but have retained their home to

continue the insurance of the home under the Scheme. 4. Section 40 of the Act provides for an Insurance Trust Account to which shall be credited all moneys paid to the Director as an insurer under the Act and to which shall be debited all insurance expenditure.

5. All costs of administration are debited to the Trust Account and in conformity with the practice of other insurers contributions, to the extent determined by fire brigade boards, are made towards the cost of fire-fighting services. 6. The Defence Service Homes Insurance Scheme is a co-operative scheme, financed

from inception completely by premiums paid by Defence Service Homes purchasers and borrowers without any financial assistance whatsoever from the Commonwealth. At 30 June 1973 insurance cover to the value of $2 238 278 971 was provided in respect to 200 213 homes, including 14 472 homes where the former purchasers or

borrowers had repaid their loans but had elected to continue to insure their homes under the scheme. 7. At 28 February 1974 the balance in the Defence Service Homes Insurance Trust Account to meet existing and contingent liabilities amount to $2 249 503. 8. Section 38 (2) empowers the making of regulations to provide for insurance in

pursuance of the Act, including the risks insured against, the amounts for which insurance shall be effected and the premiums payable for insurances. Insurance under the Act is dealt with in Regulation 19 and Regulations 45 to 74.

Risks Insured Against 9. The risks for which properties are insured against are fire and the risks pres­ cribed in Regulation 19 of the Defence Service Homes Regulations. 10. The risks covered are generally comparable with those covered by private insurers in a comprehensive houseowners and householders policy. The differences

are summarised below. 11. The Defence Service Homes Insurance Scheme covers the following risks which are not covered by private insurers under their normal houseowners policy:

• flood;

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• depredation by borers and white ants in the first two years after the Director acquired an interest in the dwelling-house; • sonic boom; • damage to gates and fences caused by storm or tempest.

Moreover, in the case of earthquake damage private insurers require the assured to pay the first $100 of the cost of restoration work, whereas no such contribution is required under the Defence Service Homes Insurance Scheme. 12. The Defence Service Homes Insurance Scheme does not provide cover for the following risks which are covered by private insurers:

• Accidental or malicious breakage of glass and theft. • Fusion of household electrical equipment and apparatus forming part of the dwelling-house. However, where there is a fire resulting from fusion a claim would be admitted. • Liability to pay any claim up to $50 000, as owner of the building, for

compensation as a result of an accident in or about the building. There is no power in the Act to provide this cover as it does not constitute insurance of the dwelling-house. 13. Cover under the Defence Service Homes Insurance Scheme in respect of the following risks is subject to certain conditions under which the cover is marginally more limited than that provided by private insurers:

• Tempest damage—claims are not admitted unless the damage has been caused by a breach being made in the dwelling-house by the tempest. This excludes damage to the exterior of the dwelling-house, such as pitting or denting by hail where an actual breach has not occurred. • Impact damage by road vehicles etc. • Damage to the building caused by the collapse of TV antennae or masts. Such

damage is not covered under the Defence Service Homes Insurance Scheme unless caused by tempest.

There is also some difference in relation to the cover provided for loss of rent during any period when the property is rendered uninhabitable by a prescribed risk. The difference is mainly in relation to the assessment of the premium payable for such cover.

A m o u n t o f In s u r a n c e

14. Regulation 50 empowers the Director to determine the amount for which any property shall be insured. This determination is made following the initial inspection and valuation of the property when determining whether a loan may be granted and is reviewed at six-yearly intervals following a further inspection and valuation of the property or following a request by the applicant for a variation in the sum insured. In this respect the scheme differs from that of private insurers who insure for the amount

requested by the applicant on the basis of the applicant warranting that this amount is not less than the full value of the property to be insured. 15. The Defence Service Homes Insurance Scheme is an indemnity scheme and the amount of insurance is based on the market value of the improvements which takes account of such factors as depreciation and obsolescence. In other words if a dwelling

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built in 1920 is completely destroyed by fire a claim would be admitted for the value of the dwelling immediately before the fire. The assured would not be entitled to have the dwelling replaced with a new home. Some insurance companies will provide replacement insurance cover if such cover is specifically requested by a client. This

cover is not available under the Defence Service Homes Insurance Scheme but applicants may take out additional cover with an outside insurance company if they wish to insure their properties for replacement cost.

Premiums

16. Regulation 50 empowers the Director to determine the premiums payable for insurance under the Act. These are assessed each year, after consultation with the Government Actuary, having regard to the costs of administration, the costs of claims

and the position of the general reserve which is held to cover catastrophes and bad years and to provide a general backing for the scheme.

17. The present premium rating system introduced on 1 July 1968 is entirely different to that of private insurers. It was adopted after a thorough investigation and analysis of insurance costs.

18. Prior to 1968 premiums payable for insurance, while lower than the premiums charged by private insurers, were based on similar principles to those adopted by private insurers in determining premiums. Under these principles premiums were

assessed as a percentage of the sum insured and reflected what was traditionally con­ sidered to be the relative fire risk of each property. Accordingly the premium rating structure provided for different rates for properties located within certain areas classified in accordance with the fire-fighting facilities available and different rates for various types of construction. Because a timber home was considered to be a greater fire risk than a brick home it attracted a premium rate twice that applicable to

a brick home.

19. The investigations established that there was no sound basis for many of the variations made in the schedule of premium rates and that there were many inequities as between various classes of insured properties.

20. Premiums are now compiled on the basis of:

(a) A fixed amount to cover administrative expenses. (This is presently $4.50 but is reviewed and adjusted each year having regard to anticipated administration costs in the next premium income year.) (b) A fixed claims charge to cover small claims (presently $2.60). (c) A claims charge for each $2000 of cover to provide for larger claims (presently

$0.27).

(d) A reserve component for each $2000 of cover (presently $0.20).

The Defence Service Homes insurance premium charges are therefore $7.57 for the first $2000 of cover plus 47c for each subsequent $2000 of cover or part thereof.

21. As from 1 July 1974 premiums will be increased to the following amounts:

Fixed administrative charge $6.30

Fixed claims charge $6.80

Claims charge for each $2000 of cover $0.32 Reserve component $0.20

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In effect premium charges will be increased to $13.62 for the first $2000 of cover and $0.52 for each subsequent $2000 of cover or part thereof. It has been necessary to increase premiums for the following reasons:

(a) To meet increased administration costs expected in 1974-75. (b) To meet increased claims cost arising out of an extension of the risks insured against to include, among other additional risks, breakage of glass and sanitary fixtures and theft.

(c) To recover over 6 years’ severe losses arising out of the Queensland flood disaster.

22. Attached hereto is a statement which compares the premiums payable as from 1 July 1974 for sums insured of $15 000 and $20 000 under the Defence Service Homes Insurance Scheme with the premiums charged by other major insurers as at 12 March

COMPARISON OF PROPOSED NEW PREMIUMS FOR SUMS INSURED OF $15 (XX) AND $20 000 WITH THE PREMIUMS (EXCLUDING STAMP DUTY) CHARGED BY OTHER MAIOR INSURERS AS AT 12 MARCH 1974

S u m I n s u r e d — $15 0 00 S u m In s u r e d — $ 20 0 00

S ta te I n s u r e r B r ic k /

B .V .

F ib r e A .C .

T im b e r B r i c k /

B .V .

F ibro A .C .

T im b e r

N.S.W. SGIO(l) $20.00 $35.00 $50.00 $26.67 $46.67 $66.67

Tariff Co. $30.00 $52.50 $75.00 $40.00 $70.00 $100.00

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

N.R.M.A. $29.55 $46.50 $68.40 $39.40 $62.00 $91.20

D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

Victoria SGIO no home insurance

Tariff Co. $30.00 $56.25 $75.00 $40.00 $75.00 $100.00

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

State Savings Bank of Vic. $18.50 $31.25 $41.00 $24.00 $41.00 $54.00 D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

Queensland SGIO (2) $29.49 $33.73 $47.75 $39.33 $44.96 $63.66

Tariff Co. $47.19 $53.96 $76.40 $62.92 $71.94 $101.86

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

Clubsure (R.A.C.Q.) same as tariff co. rates D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

South Australia SGIO $22.49 $36.55 $44.97 $29.98 $48.74 $59.96

Tariff Co. $30.00 $48.75 $60.00 $40.00 $65.00 $80.00

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

State Bank of S.A. $21.00 $33.00 $43.56 $28.08 $44.04 $58.08 D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

Western Australia SGIO $21.00 $39.45 $50.10 $28.00 $52.00 $66.80

Tariff Co. $30.00 $56.25 $75.00 $40.00 $75.00 $100.00

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

Homeguard (R.A.C.) $27.55 $39.56 $48.60 $36.07 $52.08 $64.11 D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

Tasmania SGIO $30.00 $37.50 $45.00 $40.00 $50.00 $60.00

Tariff Co. $30.00 $37.50 $45.00 $40.00 $50.00 $60.00

Cwlth Bank $18.00 $31.50 $45.00 $24.00 $42.00 $60.00

D.S.H. $17.26 $17.26 $17.26 $18.30 $18.30 $18.30

(1) Allows for 33 per cent reduction on premium after first year. (2) Allows for 37l/2 per cent reduction on premium after first year.

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1974. The premium rates shown do not include stamp duty but include Fire Brigade charges where applicable. 23. Premium rates payable under the Defence Service Homes Scheme are lower than premium rates charged by private insurers, for the following reasons:

• There is no profit element in the Defence Service Homes Insurance premium rate. • Insurance under the Defence Service Homes Insurance Scheme is compulsory for all purchasers and borrowers. Therefore there is no commission

payable—it is understood that this amounts to 20 per cent of premium income in the case of private insurers. • Expenses are lower, particularly as there is no policy writing. • There is no obligation to pay taxation or stamp duty. • Because of the compulsory nature of the Scheme it is possible to operate with a

smaller general reserve than might be necessary in the case of private insurers. In a major catastrophe premium rates may be increased to re-establish reserves. In the case of private insurance the assured may elect to take his insurance elsewhere or not insure his property if there were any substantial

increase in premiums.

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Attachment C

COMMONWEALTH BANKING CORPORATION—INSURANCE SCHEME FOR HOUSING LOAN SECURITIES In February 1974 the Commonwealth Banking Corporation introduced a scheme for insuring house properties held as security for housing loans arranged by the

Commonwealth Savings Bank and the Commonwealth Trading Bank. The scheme is mandatory for new borrowers from the Commonwealth Savings Bank, but existing Savings Bank borrowers and borrowers from the Commonwealth Trading Bank may participate on a voluntary basis. 2. The major objectives of the scheme are as follows:

(a) to provide an additional service to customers by offering housing borrowers insurance on their houses at low premium rates with the convenience of paying premiums monthly with their housing loan instalments; (b) to reduce administrative costs previously incurred in recording and supervising

insurance arranged by borrowers with insurance companies; (c) to enhance the Bank’s competitiveness—two State savings banks already had similar services. 3. Section 68 of the Commonwealth Banks Act 1959-1973 provides the legal basis for the insurance scheme. It empowers the Commonwealth Trading Bank and the Commonwealth Savings Bank to insure homes which have been financed by them through loans to individuals on credit fonder terms—i.e. loans secured by mortgage

and repaid by instalments. The legislation does not permit the banks to extend the cover of the scheme to include the contents of the home, or to provide cover after the loan has been repaid by the homeowner. 4. In planning the scheme the Corporation received advice from the Defence Service Homes Division and also engaged a leading firm of insurance brokers, Price, Forbes, Leslie, Sedgwick Pty Ltd, to advise in the basic planning. The brokers were subsequently appointed as consultants to the Corporation to provide expert know­

ledge when required. With this assistance it was possible to launch and administer the scheme without recruitment of outside staff. 5. Details of the scope of the scheme are given later. Generally speaking the risks covered are equivalent to those included in similar policies available throughout the t insurance industry. It will be noted that flood damage is specifically excluded. An 3 important innovation is the classification of risks by type of construction of the dwelling only, and not by geographical location. In almost all other insurance policies || offering equivalent cover, premiums are determined by both type of construction and ; geographical location. The simpler classification was adopted by the Corporation ;j because 88 per cent of its housing loans are arranged in low risk city and suburban I areas and an examination of damage to CSB securities in country areas did not i suggest they are a greater insurance risk, so it was decided that the loss of income ; would be largely offset by the administrative benefits of having only three scales. 6. The premium rates for the three types of construction throughout Australia, before adding stamp duty, are as follows:

Brick and brick veneer — 12c per $100

Asbestos cement (fibro) — 21c per $100 Timber — 30c per $100

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I

7. When the scheme was introduced, the premium rates were set at about 40 per cent below New South Wales tariff rates. For country borrowers the rates were more than 40 per cent lower. Since then, however, non-tariff companies such as N.R.M.A. Insurance Ltd have been quoting premium rates below the tariff and the tariff rates have become advisory rather than binding, so that it is difficult to make comparisons with rates now available from private insurers. 8. Based on the experience of the Defence Service Homes Division and the State

Savings Bank of Victoria, both of which offer similar cover for a similar standard of dwelling, the Corporation expects the annual ratio of claims to premiums to approxi­ mate 28 per cent. Even if it were to reach 38 per cent, the scheme should result in a profit for the banks after four years of operation.

Conditions of Cover and Basic Principles of the Scheme

9.1. Under the scheme the insured is indemnified against loss or damage to dwell­ ings, including garages and fences, arising from the following prescribed risks:

e fire

• explosion • lightning • thunderbolt • earthquake

• burglary, housebreaking or attempt thereat • aircraft or articles dropped therefrom .

• riots, civil commotions and labour disturbances • malicious damage • storm and tempest and water damage caused thereby • cost of removal of debris consequent upon the foregoing

• bursting, leaking or overflowing of water tanks, apparatus or waterpipes • leaking of oil from fixed heating apparatus • breakage of fixed internal or external glass • rent during the period the premises are untenantable following loss (period not

exceeding 12 months) • public liability up to maximum $50 000 in respect of any one accident or occurrence • impact by road vehicle or animal including insured’s own vehicle

• damage to dwelling by breaking or collapse of television or wireless aerials or masts

9.2. Specific Exclusions Damage occasioned by:

• any consequence of war, invasion, civil war • confiscation by order of Government • process involving application of heat

• sea, tidal wave, high water, flood, erosion, subsidence or landslide e radiation, radioactivity, nuclear fuel or waste and nuclear weapons • wear, tear, rust, corrosion, vermin or insects

• the wilful act of the insured or any other person with his knowledge or connivance.

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9.3. Insurance of contents not to be undertaken. 9.4. Strata title securities to be insured but insurance by bodies corporate over whole buildings not to be carried. 9.5. Insurable value will approximate bank valuation plus 10 per cent (margin being provided to cover cost of demolition and site restoration).

9.6. Risks to be rated according to type of construction only. 9.7. State Government levies for fire fighting services to be a charge against pre­ mium income. 9.8. State stamp duty to be collected from the insured in addition to premiums.

26 August 1974

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Attachment D

THE HOUSING LOANS INSURANCE CORPORATION

Housing Loans Insurance Corporation was established by the Housing Loans Insurance A ct 1965-1973 which came into operation on 4 May 1965, The Corporation commenced insurance operations on 26 November 1965. It is a non-profit body with exemption from income tax but not sales tax, payroll tax or other levies and State

stamp duty. The Corporation is guaranteed by the Australian Government and, apart from an advance of $200 000 from the Treasurer, is self-financing.

2. The affairs of the Corporation are controlled by five members. Of these, the Chairman and Deputy Chairman are full-time Members. The Chairman is also Managing Director of the Corporation.

3. The Corporation itself does not make loans; its primary function is to insure loans made by approved lenders.

4. To be approved, a lender must fall within a class approved by the Minister for Repatriation and Compensation. Currently, classes of approved lenders include building societies, banks, life assurance and general insurance companies, mortgage management companies, friendly societies, solicitors, trustee companies, super­

annuation funds and credit unions. Approved lenders at 30 June 1973 numbered 531.

5. Through the offer of insurance against the risk of loss arising from default by a borrower, lenders are encouraged to satisfy the needs of individual borrowers by making a single loan to a high percentage of valuation of a home and so remove the need for home-seekers to obtain more expensive second mortgage loans.

6. The Act provides for the making of regulations to prescribe classes of insurable loans and empowers the Minister to specify from time to time the classes of loans that the Corporation may insure. It requires the Corporation to determine, with the con­

currence of the Minister, the maximum loan amount, the maximum permissible period for repayment and the maximum ratio of loan amount to valuation that will apply to each prescribed class of insurable loans. The Corporation is solely responsible for fixing premium charges. It is required, however, to pursue a financial policy by which it will, in the long run, neither make a profit nor incur a loss.

7. The Corporation will insure a loan made to enable a borrower who is to occupy the dwelling to buy or build a house, to buy a home unit, or to discharge an existing mortgage. A loan for a dwelling consisting of two units of accommodation is insurable if one of the units is to be occupied by the borrower. Loans for alterations and

extensions and loans to meet expenses of providing or improving lighting, sew-erage, drainage, fences, roads, etc. are also insurable. An insurable loan normally must be secured by a first mortgage over the property concerned, but a second mortgage may be an acceptable security for a loan for such purposes as minor alterations or

improvements to the property.

8. The Corporation insures loans of up to $40 000 for the purchase or construction of a house or home unit. A loan must not exceed 95 per cent of the valuation. In the case of a two-unit dwelling, the maximum insurable loan is $25 000 per unit and the maximum loan to valuation is 90 per cent.

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9. The insurance limits current at 1 July 1974 were:

(i) Reducible Loans

Maximum Maximum Maximum loan percentage Term

amount of valuation ($) (per cent) (years)

(per unit)

Loans for houses 40 000 95 40

Loans for home units 40 000 95 35

Loans for two-unit dwellings 25 000 90 35

Maximum interest rate 12% p.a.

(ii) Fixed Terms Loans Maximum loan amounts are the same as apply to reducible loans. The maximum percentage of valuation varies according to the term, viz.

• when the term of the loan is 3 years or less—the amount of the loan (including the premium) must not exceed 90 per cent of valuation; e when the term of the loan exceeds 3 years but does not exceed 6 years—the amount of the loan (including the premium) must not exceed 85 per cent of

valuation.

Maximum interest rate 12% p.a. !

A once and for all premium of 1.4 per cent of the amount of the loan is charged by the Corporation on loans comprising 94-95 per cent of the valuation of a home. On loans less than 94-95 per cent valuation, the insurance premium falls progressively down to 0.25 per cent on loans comprising less than 76 per cent of valuation. The premium is payable by the borrower but lenders may agree to add it to the amount of the loan for repayment by the borrower over the period of the loan. The maximum

rate of interest that may be charged on insured loans is 12 per cent per annum and the maximum period for repayment is forty years for houses and thirty-five years for home units and two-unit dwellings. The maximum rate of interest is kept under review and may be varied by the Corporation with the concurrence of the Minister.

Since its inception premium rates have been reduced by the HLIC on three occasions and the rates now charged are on the average less than half those originally applying. Present charges and refund rates read as follows:

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Schedule of Premiums and Refund Rates for Loans Insured from 14 September 1973

(i) Reducible Loans

Premium Rates

Loans of 94%-95% of valuation Loans of 92%-93% of valuation Loans of 90%-91% of valuation Loans of 88%-89% of valuation

Loans of 86%-87% of valuation Loans of 85% of valuation Loans of 84% of valuation Loans of 83% of valuation

Loans of 82% of valuation Loans of 81% of valuation Loans of 76%-80% of valuation

Loans of less than 76% of valuation

Standard insurance Renewable (i.e.full term 5-year

o f loan) insurance*

(per cent) (per cent)

1.4 1.00

1.3 0.85

1.2 0.80

1.1 0.75

1.0 0.65

0.9 0.60

0.8 0.55

0.7 0.50

0.6 0.45

0.5 0.40

0.4 0.32

0.25 0.20

* Lenders are free to renew a 5-year insurance contract on its expiry. The renewal premium, which covers the loan for the remainder of its term, is the difference between the special 5-year premium already paid and the premium that would have been payable had the loan been insured for its full term at the outset.

Premium Refund Rates

Loan repaid within 1 year Loan repaid within 1 to 2 years Loan repaid within 2 to 3 years Loan repaid within 3 to 4 years

Loan repaid within 4 to 5 years Loan repaid within 5 to 6 years Loan repaid within 6 to 7 years Loan repaid within 7 to 8 years

Loan repaid after 8 years

Standard insurance Renewable (i.e.fiill term 5-year

o f loan) insurance

(per cent) (per cent)

75 65

60 45

45 20

35 10

25 Nil

20 Nil

15 Nil

10 Nil

Nil Nil

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(ii) Fixed Term Loans Ratio o f amount o f basic Premium rate per year

or part o f a year to maturity date o f loan (per cent)

loan to valuation

86% and above but less than 91% 81% and above but less than 86% 76% and above but less than 81% Less than 76%

0.5 0.4 0.3 0.2

Refunds covering fixed term loans

Minimum premium payable—$15

Scale o f Refund A refund equivalent to that part of the premium which was charged for each complete year of the unused cover.

No refund will be made if the amount payable is less than $10.

During the financial year 1972-73 the Corporation insured 43 727 loans compared with 26 121 in 1971-72. Total value of business insured in 1972-1973 was $586 million, double that of 1971-72 which itself had been 50 per cent higher than in the previous year. Business reflected the somewhat tight money market in 1973-74 when the number of loans insured levelled off at 26 092, at a total value of $410 million. It is of note to compare this result with the 1971-72 figures (26 121 and $294 million). The number of loans insured is approximately the same in each year but the difference in total value insured illustrates the marked increase in property values in the inter­ vening two years. The Corporation has insured 157 664 loans since 1965, and with

adjustments for cancellations, the number of contracts in force at 30 June 1974 was 124 985 for $1538 million.

The Nature of Mortgage Insurance

In general terms, mortgage insurance refers to insurance against loss on loans made against the security of a mortgage. Most mortgage insurance relates to loans made for housing, but in some countries loans made for commercial purposes, e.g. factory construction, office accommodation, etc., may be insured (in Australia by private insurers only). Loans not secured by mortgage but made for purposes connected with housing may also be insured against loss in some countries. These loans include those made for repairs and extensions to the home (home improvement loans) and loans for the purchase of factory-produced housing (mobile home loans).

2. The loss on a mortgage loan against which the lender is insured generally covers all amounts which the lender is entitled to recover under the mortgage. These can include unpaid principal, accrued interest, costs of repair, unpaid municipal rates and, in those cases where the property is sold prior to claim, the costs of selling the property. A loss arises from the failure of the borrower to meet his obligations under

52

the debt. Normally there are no exclusions in this regard—failure of the borrower to repay the loan may be for any reason whatsoever. In Australia and in some overseas countries, the normal sequence of events when this occurs is that the lender as mortgagee sells the property to which the insured loan relates and claims on the insurer for all or part of any short fall on sale. In other circumstances, the property can be transferred to the insurer who first pays out the lender and then seeks to dispose of the property. The extent of cover provided by insurers varies from a proportion of the loan (commonly the top 20 per cent of the debt outstanding) to the full amount of the loan.

3. Generally, premiums are charged on a once-and-for-all basis at the commence­ ment of the loan. In some countries, notably the United States of America, premiums may be charged on an annual basis. Premiums are ultimately borne by the borrower but they are usually paid by the lender in the first instance and then added to the

amount of the loan and repaid by the borrower over the life of the loan. Premiums may vary according to the ratio the loan bears to the value of the property, with the highest rates applying to the higher ratios. Maximum rates of premium vary world­ wide from less than 1 per cent of the amount of the loan to upwards of 4 per cent on

some commercial loans. 4. Insurers normally do business only with lenders who have been formally approved by them. It is usually a condition of the contract of insurance that administration of the loan continue with the original lender or another lender who has been approved by the insurer. This is aimed at ensuring that the loan is subject to prudent management throughout its term. Insurance is usually extended over the full term of the loan and this mortgage insurance differs from most other forms of insurance in that it involves the parties entering into long-term contracts—up to 40 years in some cases. 5. A particular distinction should be drawn between mortgage insurance and what

is commonly known as mortgage protection insurance. This latter refers to a form of life assurance in which the sum assured reduces continuously and is payable on death of the insured. Usually, the sum assured diminishes pari passu with the mortgage debt so as to provide a debt-free property in the event of death of the borrower.

6. A notable characteristic of mortgage insurance is that in virtually all countries where it applies insurance is provided by government authorities, either as sole insurers or as the major operators with complementary services provided by private insurers.

Possible Future Trends 7. Some of the areas into which mortgage insurance might move are indicated by overseas developments. These include the insurance of loans for large-scale rental projects, broad-acre land development, home improvements, special purpose housing

(aged people, students, etc.) housing associated with mineral development in remote areas, and in the non-housing field, farm and equipment loans, tourist accom­ modation, etc. In addition, the development of a market in insured mortgages

whereby mortgages are traded in much the same way as other commercial paper may be envisaged. In most of these areas abroad the scale of operations is such that the programs come within the exclusive province of government or its agencies.

October 1974

53

Attachment E

EXPORT PAYMENTS INSURANCE CORPORATION The Export Payments Insurance Corporation was established in 1956 as an indepen­ dent statutory authority to provide exporters with insurance facilities which were not normally obtainable from commercial insurers to cover risks of non-payment by overseas buyers. The Corporation’s statutory powers have since been progressively extended, and include the authority to provide guarantees to commercial lending institutions supplying finance for deferred payment export transactions. 2. In addition to performing these export payments insurance and guarantee functions, the Corporation also acts as agent for the Australian Government in the administration of the overseas investment insurance scheme. 3. In the performance of its functions, the Corporation is required to operate on a commercial basis and to pursue a policy directed towards securing sufficient revenue to meet all its expenditure properly chargeable to revenue. The Corporation is fully guaranteed by the Australian Government. 4. On its establishment, EPIC was provided with capital of $1 million and the maximum liability it could accept was limited to $100 million. In subsequent years, as the growth of EPIC’s business warranted it, both capital and maximum liability have been progressively increased to the present levels of $8 million and $750 million respectively. 5. The Government has announced that it proposes to amend the charter of the Corporation to enable it to operate as an Export Bank to provide finance for exports of machinery and capital equipment sold on medium- and long-term credit and to establish lines of credit, especially to developing countries and to state trading organisations. The Government has also announced that it proposed to broaden the eligibility criteria of the overseas investment insurance scheme and to extend the scheme to cover new eligible investments in Papua New Guinea. The amending legis­ lation to give effect to these decisions is currently being drafted for introduction during the 1974 Budget sittings of Parliament.

Payments Insurance and Guarantee Facilities 6. Payments insurance is provided through a number of different types of policies to meet the varying needs of exporters, and range from cover on the export of goods and services to cover on overseas construction projects and leasing arrangements.

7. The main risks covered include insolvency of the buyer; protracted default; buyer’s failure or refusal to accept the goods in circumstances outside the exporter’s control; blockage of funds or exchange transfer difficulties, import restrictions; and war and insurrection. 8. Usual cover is 90 per cent of any loss which might arise. 9. Unconditional repayment guarantees given by EPIC to Australian lending institutions assist exporters in obtaining finance for overseas sales on credit terms. Guarantees are given in conjunction with a payments insurance policy and may guarantee repayment of up to 100 per cent of any amount advanced to the exporter.

10. Buyer credit guarantees are given by EPIC to Australian lenders for the repay­ ment of loans made to overseas buyers/borrowers for the financing of purchases of Australian capital goods on medium- or long-term credit.

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11. As at 30 June 1974, the face value of policies underwritten by EPIC amounted to $881 million with contingent liabilities of $579 million.

National Interest

12. The charter of EPIC was amended in 1961 to introduce ‘national interest’ pro­ visions. In brief, the Corporation may refer to the Minister for Overseas Trade for national interest consideration export insurance contracts that would impose a liability on the Corporation which it is not authorised to undertake, or would not take in the ordinary course of business. If the Minister decides that the contract would be in the national interest, he may authorise the Corporation to enter into it and the Australian Government then accepts the liability.

13. As at 30 June 1974, the Government’s contingent liabilities in respect of national interest transactions amounted to $133 million.

Overseas Investment Insurance

14. The overseas investment insurance scheme was established by amendment to the Export Payments Insurance Corporation Act in 1965. The scheme is administered for the Government by EPIC to provide a measure of encouragement for Australian direct investments overseas, particularly in developing countries, by the provision of

insurance against the non-commercial risks involved in such investment. The specific risks covered are expropriation, the inability to transfer profits to Australia or to repatriate capital, and damage or destruction due to war, insurrection or civil

disturbance. Each risk is covered under a separate policy which provides indemnity of up to 90 per cent of an insured loss. The minimum and maximum periods for which policies may be issued are 5 years and 15 years respectively. 15. At 30 June 1974 a total of 40 investment transactions had received cover in res­

pect of investment projects in Columbia, India, Indonesia, Iran, Cambodia, Malaysia, New Caledonia, Peru, Singapore, South Africa, Taiwan, Thailand, Hong Kong and Japan. 16. At present the eligibility criteria of the scheme restrict insurance cover to those

investments which assist in the production or marketing of goods in the overseas country and which have the effect of creating, preserving or expanding in the overseas country a market for goods produced in Australia. Also, investments in Papua New Guinea are presently excluded from the scheme.

17. As mentioned earlier, it is proposed to broaden the eligibility criteria to provide that all new worthwhile direct investments which can assist in the economic and social development of an overseas country will be eligible for insurance cover, and to extend

the scope of the scheme to cover new eligible investments in Papua New Guinea.

Export Bank Function

18. The main functions of the Export Bank will be: (i) to provide finance on suitable terms and conditions to facilitate the export of machinery and capital equipment and associated services involving medium- and long-term credit;

55

(ii) in fulfilling (i) above, lend to exporters or to overseas buyers/borrowers, particularly for business with developing countries and state trading organisations; (iii) act as agent for the Government in cases involving the ‘national interest’.

19. In deciding to extend the functions of EPIC to cover the activities of an Export Bank, the Government took into account the following considerations:

(a) Extended credit terms involve increased commercial and political risks of non­ payment. The assessment of such risks in overseas markets is a function in which EPIC possesses the necessary expertise and experience. (b) The terms and conditions on which export finance is made available to support

capital goods transactions is, to an important degree, determined by inter­ national understandings and through the exchange of information among counterpart export credit insurance and export banking institutions. EPIC has direct access to these institutions and subscribes to the international under­ standings. These contacts also enable EPIC to ascertain the interest rates currently being applied with government support by competitor countries. (c) EPIC is involved in the detailed consideration and processing of applications

for extended credit from those sectors for which the proposed new Export Bank facilities are designed. For example, EPIC determines the nature of the securities (i.e. third party undertakings etc.) and in the case of buyer credit operations prepares the loan documentation and accepts the responsibility of

recovery action in the case of defaults. In this way EPIC is combining to some extent the functions of insurer and banker. (d) Since its inception in 1956, EPIC, has had a continuing relationship not only with a wide range of individual exporters, but also with the numerous trade

associations and specialised industry organisations which represent them. Through these contacts and through its continuing liaison with the Department of Overseas Trade and the Trade Commissioner Service, it is particularly well qualified to identify the appropriate areas for export bank

activity, particularly in relation to establishing lines of credit with developing countries and state trading organisations. Ί

(e) ‘National interest’ business, whether insurance guarantees or loans, could be i undertaken within the one institution, both with regard to dealings with the jj exporter and the Government. I'j

(f) An agency other than EPIC would either need to reply on an EPIC insurance f policy or 100 per cent guarantee or carry its own credit risk; the latter would j involve duplication of resources and facilities. j

October 1974 \

!

56

Attachment F

DEPARTMENT OF SOCIAL SEC U R ITY - FUNCTIONS AND RESPONSIBILITIES IN RESPECT OF PRIVATE HEALTH INSURANCE

(a) Existing Functions

Part VI of the National Health Act provides for substantial Australian Govern­ ment regulation of the private health insurance industry. The Act requires that any organisation wishing to offer insurance against hospital or medical expenses must first seek registration with the Director-General of Social Security. For approval to be given for registration, an organisation must comply with various conditions, including

a ‘non-profit’ requirement, which the Minister may vary at any time. The operations of health benefits organisations are also subject to control in such matters as:

— premium rates — rates of benefits payable — levels of management expenses — provision of information (accounts, yearly reports, etc.) 2. Benefits organisations must comply with Ministerial directions, must submit for his approval any proposed alterations to their constitutions or rules, and may be penalised or deregistered for non-compliance.

3. As at 30 June 1973 there were 81 registered medical and 90 registered hospital benefits organisations, with an estimated population coverage of 10.5m, about 80 per cent of the Australian population. Total contribution income during 1972-73 was $315.7m (total of both hospital and medical funds), with total fund benefits pay-out of

$348.8m. 4. Fund benefit reimbursement amounts to about 35 per cent of medical expenses incurred, where charges are raised in accordance with the scheduled fees. A patient moiety of 15 per cent is usually applicable with a limit of $5 for any one service or group of services. The remaining 50 per cent of expenses incurred by insured patients is reimbursed by the Australian Government in the form of medical benefits. In respect of hospital expenses, the Australian Government benefit component is

limited, for insured patients, to $2 a day. Both these types of Australian Government benefits are paid through the private health benefits organisations, in combination with any fund benefit payable. Total Australian Government expenditure on medical and hospital benefits paid through health benefits organisations amounted to

$237.2m in 1972-73. 5. Contribution rates to private health benefits organisations are determined by the Australian Government and are calculated according to the community rating principle. The family contribution rate is double that applicable to a single person,

regardless of the size of the family. The Australian Government accepts financial liability for certain types of bad-risk patients, who would otherwise be denied benefits due to the application of exclusion rules by organisations.

(b) Proposed Functions 6. In November 1973, the Government published a White Paper on the Australian health insurance program, outlining comprehensive changes to the existing hospital

57

and medical benefits arrangements. Insofar as insurance against health expenses is concerned, the new program will involve:

(i) A compulsory levy of 1.35 per cent on personal taxable income, to partly finance payment by the Australian Government of medical and hospital benefits as follows:

— 85 per cent reimbursement of medical expenses incurred, where charges j are raised in accordance with scheduled fees; — payment of $16 a day in respect of non-standard hospital accommodation; — free accommodation and medical treatment in standard wards of public

hospitals.

(ii) The continuation of private medical insurance with a reduced role. Private insurance organisations will be able to offer insurance against the ‘gap’ ■ ■ between Australian Government medical fees. (iii) The continuation of private insurance against hospital expenses incurred for

accommodation in non-standard beds of public hospitals and in private hospitals. (iv) The Australian Government entering the private health insurance field as an , active competitor with private organisations. This would be undertaken by the

Health Insurance Commission, which would offer insurance against the hospital expenses stated in (iii) above. (v) Existing private insurance organisations being offered ‘agency’ arrangements for a specified transitional period, during which they would process claims for

Australian Government payments as well as conduct their own business. (vi) Expansion of the present regulatory powers available to the Government is oversighting the activities of the private insurance industry. !

(vii) Termination of the existing arrangements under which private health benefits organisations pay benefits in respect of nursing home treatment. All nursing home benefits to be paid by the Australian Government. j|

7. It is intended that enabling legislation for the Australian health insurance program be introduced into Parliament during the next Session.

October 1974

58

Attachment G

Reference No. 5.16

AUSTRALIAN FIRE, MARINE AND GENERAL INSURANCE STATISTICS 1972-73

The information in this bulletin covering fire, marine and general insurance business within Australia for the year 1972-73 and earlier periods has been compiled from returns submitted by the offices transacting business in Australia. State Government insurance offices are included.

2. The returns do not relate to uniform periods, but to the financial years of the offices which ended during the years shown.

3. In cases where business is underwritten in one State and the risk is situated in another State, the business is classified under the State in which the policy is issued. Expenses of the Australian Control Office of each company are allocated as manage­ ment expenses proportionally between the States on the basis of premiums receivable in each State. Investment income, including interest on Commonwealth Government

Securities, is allocated to the State in which the investments are made.

4. The statistics should be interpreted in accordance with the following definitions:

(a) Premiums represent the full amount receivable in respect of policies issued or renewed during the year, less returns, rebates and bonuses paid or credited to policy holders during the year. They are not adjusted to provide for premiums unearned at the end of the year, and consequently the amounts differ from

‘earned premium income’ appropriate to the year. In recent years, as the volume of premiums receivable has been increasing, the figures shown in the tables are greater than the premiums earned by insurers. (b) Claims comprise payments made during the year, plus the estimated amount

of outstanding claims at the end of the year, less the estimated amount of outstanding claims at the beginning of the year. Salvage and other amounts recoverable have been deducted. (c) Contributions to fire brigades, commission, agents’ charges and expenses of

management are mainly charges paid during the year. (d) Taxation is mainly payments made during the year and includes income tax, pay-roll tax, licence fees, stamp duty (where paid by the company), etc. Income tax paid during the year is based on the income of earlier years.

5. In this bulletin, some revisions have been made to figures published in previous bulletins in this series.

6. Any discrepancies between totals and sums of components in tables are due to rounding.

Note. The tables in this bulletin should not be interpreted as ‘Profit and Loss' statements or ‘Revenue Accounts’ because they contain only selected items of statistics.

59

TABLE 1—SELECTED ITEMS OF REVENUE: CLASS OF BUSINESS, 1972-73 ( $ ’000)

N e w S o u th W a le s V ic toria Q u e e n s ­

la n d

S o u th W e ste rn

A u s tr a lia A u s tr a lia T a sm a n ia T o ta l

PREMIUMS Fire 52 061 47163 25 781 10 582 11 962 4 525 152 073

Householders comprehensive 40 930 31 0 00 11 714 8 545 6 990 3 070 102 249

Sprinkler leakage 122 106 12 12 10 4 267

Loss of profits 9 428 9 883 2 525 1487 1 101 691 25 115

Hailstone 1 737 952 218 181 1089 4 178

Marine 22 357 17179 5 458 3 204 3 632 1 502 53 332

Motor vehicle (other than motor cycles) 129 632 92 752 45 450 26 972 23 223 8 779 326 808

Motor cycles 1 766 590 279 299 136 54 3 124

Compulsory third party (motor vehicles) 72 700 56 208 20 630 15 469 15 862 2157 183 026

Workers compensation (a) 130 069 97 728 25 436 18 639 12 877 6 499 291 248

Personal accident 17 254 12 992 5 620 4 256 4 238 1 195 45 556

Public risk third party 15 226 10 003 3 354 2 357 2 128 601 33 669

General property 848 1 060 399 215 218 135 2 875

Plate glass 1 599 1 399 448 335 377 127 4 284

Boiler 2 713 1 075 825 110 197 120 5 041

Livestock 815 617 574 233 297 45 2 581

Burglary 8 615 7 028 1 399 1 112 1 046 338 19 537

Guarantee 1411 805 280 221 221 33 2 971

Pluvius 140 55 24 24 12 14 270

Aviation 7 444 2 298 666 281 416 72 11 177

All risks 5 728 5 064 1 265 888 664 234 13 843

Contractors all risks (b) 4 805 3 258 685 410 834 52 10 043

Television 70 31 33 4 31 2 170

Other 9 969 11 106 4 243 1 518 1 859 529 29 223

T o ta l p r e m iu m s 5 3 7 4 4 0 4 10 3 5 3 1 5 7 3 15 9 7 3 5 2 89 4 20 3 0 780 1 3 2 2 661

INTEREST, DIVIDENDS, RENTS, ETC. (net of expenses) 53 097 29 235 7 524 1 326 2 885 660 94 727

T otal 5 9 0 5 37 439 5 88 164 839 9 8 678 92 305 31 440 1 417 388

(a) Excludes workers compensation insurance in coal mining industry, (b) Includes material damage and public liability. N o te . The tables in this bulletin should not be interpreted as ‘Profit and Loss' statements or ‘Revenue Accounts’ because they contain only selected items of statistics.

TABLE 2—SELECTED ITEMS OF EXPENDITURE: CLASS OF BUSINESS, 1972-73 ( $ ’000)

N e w South W a les V ic to ria Q u e e n s ­

la n d

S o u th W e ste r n

A u s tr a lia A u s tr a lia T a sm a n ia T o ta l

CLAIMS Fire 29 931 17 882 15 763 3 173 3 813 1 791 72 352

Householders comprehensive 16 377 11 441 6 145 2 982 2 283 1 221 40 449

Sprinkler leakage 179 104 21 5 1 309

Loss of profits 3 750 3 360 861 185 175 325 8 656

Hailstone 1 109 348 144 33 777 2 411

Marine 10 151 8 143 2 690 1 538 1 755 773 25 049

Motor vehicle (other than motor cycles) 92 125 59 713 30 614 17 595 15 805 5 943 221 795

Motor cycles 937 189 188 148 86 21 1 569

Compulsory third party (motor vehicles) 85 472 73 813 16 242 17 239 13 914 2 542 209 223

Workers compensation (a) 102 880 77 996 28 351 19 059 12 558 4 166 245 008

Personal accident 7 522 5 437 2 650 1 835 1 513 458 19 415

Public risk third party 6 323 6 234 1 351 931 937 166 15 942

General property 415 390 269 180 52 48 1 354

Plate glass 976 978 311 263 237 87 2 852

Boiler 395 448 390 30 108 55 1 426

Livestock 429 372 293 79 114 30 1 317

Burglary 3 478 3 899 859 682 676 147 9 740

Guarantee 346 77 54 13 28 (b>—2 516

Pluvius 33 24 6 9 2 1 76

Aviation 1 891 768 287 197 253 31 3 428

All risks 2 997 2 425 1 018 444 276 94 7 255

Contractors all risks (c) 2 872 1 601 342 123 475 24 5 436

Television 26 4 23 2 8 1 63

Other 2 630 3 032 952 424 490 320 7 849

T o ta l C la im s 373 245 2 78 6 77 109 823 6 7 168 56 335 18 241 903 489

OTHER EXPENSES Contributions to fire brigades (d) 11 915 10 433 6 866 1 752 2 816 979 34 761

Commission and agents’ charges 42 891 33 603 9 393 9 776 6 765 2 999 105 427

Expenses of management 83 131 63 477 29 398 18 685 15 764 6 364 216 820

Taxation 14 279 15 936 3 322 1 839 2 014 780 38 170

T otal 525 461 4 02 127 158 803 99 221 83 694 29 3 62 1 298 667

(a) Excludes workers compensation insurance in coal mining industry. (b) Negative figure caused by amount of outstanding claims at beginning of year being over-estimated (see definition of claims in paragraph 4(b) of this bulletin). (c) Includes material damage and public liability. (d) Includes some contributions to Workers Compensation Commission.

N ote. The tables in this bulletin should not be interpreted as ‘Profit and Loss’ statements or ‘Revenue Accounts’ because they contain only selected items of statistics.

61

TABLE 3—PREMIUMS AND CLAIMS, STATES ( $ ’000)

N e w S o u th W ales V ic to ria

Q u e e n s ­ la n d

S o u th A u s tr a lia Western A u s tr a lia T a s m a n ia T o ta l

PREMIUMS

1968-69 321 262 247 124 90 613 64 351 56 863 19 380 799 593

1969-70 356 995 275 014 100 747 69 762 68 019 20 813 891 351

1970-71 396 254 316 808 111442 75 186 78 195 23 248 1 001 134

1971-72 474 755 374 327 132 325 88 043 86 283 27 952 1 183 686

1972-73 537 440 410 353 157 315 97 352 89 420 30 780 1 322 661

CLAIMS

1968-69 221 338 155001 57 567 35 228 38 952 10 865 518 951

1969-70 253 788 185 219 65 983 39 269 43 734 12 285 600 278

1970-71 286 438 184 567 73 490 40 491 48 705 13 214 646 905

1971-72 319 747 235 988 95 301 53 978 54 021 15 279 774 314

1972-73 373 245 278 677 109 823 67 168 56 335 18 241 903 489

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TABLE 4—PREMIUMS AND CLAIMS PRINCIPAL CLASSES OF BUSINESS, AUSTRALIA ( $ ’000)

1968-69 1969-70 1970-71 1971-72 1972-73

PREMIUMS

Fire 106 045 115 332 125 912 143 598 152 073

Householders comprehensive 54 619 63 036 72 198 85 006 102 249

Loss of profits 13 691 15 206 18 939 22 612 25 115

Hailstone 7 455 5 242 4 531 4 420 4 178

Workers compensation (a) 149 197 164 574 181 792 236 546 291 248

Motor vehicle— Compulsory third party 127 593 143 903 157 814 171 740 183 026

Other (including motor cycles) 205 171 226 819 252 225 300 342 329 932

Marine 34 059 40 317 48 172 50 580 53 332

Personal accident 28 465 32 080 36 559 42 638 45 556

Burglary 13 586 14 995 16 382 18 726 19 537

All other risks . 59 713 69 845 86 610 107 477 116 414

T otal 7 9 9 593 891 351 1 001 134 1 183 686 1 3 22 661

CLAIMS

Fire 48 769 54 498 58 559 68 722 72 352

Householders comprehensive 19 871 21 159 24 060 33 996 40 449

Loss of profits 5 397 4 488 5 040 3 968 8 656

Hailstone 2 531 5 635 3 510 4 514 2 411

Workers compensation (a) 106 618 117435 126 850 165 021 245 008

Motor vehicle— Compulsory third party 119 015 148 281 152 909 182 865 209 223

Other (including motor cycles) 148 810 172 031 186 673 217 932 223 364

Marine 21 323 23 008 25 238 25 333 25 049

Personal accident 11 757 13 376 15 224 16 705 19 415

Burglary 7 460 8 121 8 844 10 618 9 740

All other risks 27 400 32 244 39 999 44 639 47 822

T otal 518 951 60 0 278 6 46 905 7 74 314 903 489

(a) Excludes workers compensation insurance in coal mining industry in New South Wales. N ote. The tables in this bulletin should be not interpreted as ‘Profit and Loss’ statements or ‘Revenue Accounts' because they contain only selected items of statistics.

J. G. Miller

Acting Commonwealth Statistician

Australian Bureau of Statistics Canberra, A.C.T. 2600

63

APPENDIX II

NATIONAL COMPENSATION SCHEME

The National Compensation Scheme is designed to provide earnings-related compen­ sation to all Australians incapacitated as a result of injury or sickness and to the dependants of deceased persons. The compensation will be at levels sufficient to allow customary standards of living to be maintained.

Coverage 2. Earners, including self-employed persons, as well as non-earners, including housewives and children, will be covered during the whole 24 hours of each day and benefits will be payable irrespective of the circumstances in which the injury, sickness or death took place. 3. Australians temporarily abroad will be fully covered, while visitors to Australia

will be covered in respect of injury.

Eligibility

4. All benefits, with minor exceptions, will be payable periodically and will be auto­ matically adjusted at quarterly intervals to reflect increases in living costs and productivity. Benefits will normally commence at the age of full-time employment or

18 years of age, whichever is the earlier, and cease at 65 years of age except in the case of injury occurring after age 61 years, where benefits will be paid for a further four years. Reasonable funeral expenses will be met.

Staging 5. The Scheme will be introduced in stages. Stage 1, which will extend to personal injury and congenital disability occurring on or after 1 luly 1976, will come into operation on that date. Stage 2, which will extend to personal injury and congenital disability occurring before 1 July 1976, will come into operation on a date to be pro­ claimed. Stage 3 will extend to sickness occurring on or after the proclaimed date, and will come into operation on a date to be proclaimed, but no earlier than 1 July 1979. Stage 4, which will extend to sickness occurring before the date proclaimed for Stage 3, will come into operation on a date to be proclaimed.

Total Incapacity 6. During periods of total incapacity, benefits will be payable at the rate of 85 per cent of the person’s pre-incapacity earnings, including overtime, up to $500 a week. If the incapacity is permanent, those aged between 15 and 31 years at the date of

incapacity are entitled to have potential earnings taken into account. These earnings will be reassessed at ages 21, 26 and 31 years. Non-earners will have their benefit assessed against a notional figure, currently $50 a week. 7. If the benefit payable to a person in full-time employment at the date of incapa­ city is less than the minimum wage, then the minimum wage or the person’s actual wage is payable, whichever is the less. 8. The full cost of any necessary full-time or part-time attendant will also be paid.

64

Temporary Partial Incapacity 9. During periods of temporary partial incapacity, persons who were employed at the date of incapacity will be entitled to a benefit for a period of up to 18 months of up to 50 per cent of their pre-incapacity weekly earnings.

Permanent partial Incapacity

10. In the case of permanent partial incapacity, the benefit payable in the case of earners will be related to 85 per cent of Average Weekly Earnings, and 60 per cent in the case of non-earners. This amount will then be multiplied by the percentage of the person’s impairment as assessed by a medical practitioner by reference to the ‘Guides to the Evaluation of Permanent Impairment’ produced by the Americam Medical

Association. Incapacities assessed at less than 15 per cent will not attract a periodic benefit but may be compensated with a lump sum payment. Incapacities assessed at 85 per cent or more will be treated as total incapacity. 11. Where the above benefits do not match lost earnings, a benefit based on 85 per

cent of a person’s lost earning capacity may be paid. Once the benefit has been determined, whether based on Average Weekly Earnings or the person’s lost earning capacity, it can never be reduced or discontinued.

Death Benefits

12. A deceased person’s widow who is pregnant, maintaining a family home for a child, caring for an aged relative, unable to work or is more than 55 years of age at the date of the husband’s death is entitled to a Class A widows benefit. All other widows

receive Class B widows benefits. 13. The Class A benefit is 60 per cent of the benefit that would have been payable to the husband if he had been totally incapacitated, but would be at least $50 a week. A

benefit at the same rate is payable to the Class B widow for a period of 12 months. In addition, both widows will be entitled to a lump sum payment of $1000. De facto wives will be treated as widows. 14. Dependent children, including illegitimate children, will be entitled to 15 per cent of the benefit that would have been payable to the father if he had been totally

incapacitated, and dependent relatives will also be eligible for certain benefits. The total weekly benefit payable to a family may not exceed the benefit which would have been payable to the deceased person if he had been totally incapacitated.

Waiting Periods

15. Periodic benefits will be payable from the date of incapacity to persons who would have been entitled to workers compensation. There will be a waiting period of 7 days applied to other earners in respect of injury. All other periodic benefits will be payable after 21 days, except death benefits which will be payable immediately.

L u m p Sum s

16. In addition to the lump sums for certain minor incapacities, a benefit (except a child’s benefit) which if commuted would be less than $3000 will be paid in a lump sum. Other benefits can be commuted if it is determined that it is in the best interest

of the beneficiary. An additional lump sum of up to $10 000 will be payable for severe facial or bodily disfigurement.

65

Assessment and Appeals 17. Claims will be dealt with speedily. If it seems likely that any determination will not be in the applicant’s favour, the applicant must be given the opportunity of being heard in person and of presenting further evidence. The claim must then be reconsidered by the Department. In respect of any claim which is not decided wholly in his favour, the applicant will receive reasons in writing explaining the decision. In the event of any unfavourable determination or decision, there will be a right of

appeal to an independent tribunal, which can receive further evidence and order that the applicant’s reasonable costs of appeal be paid. The applicant is entitled to access to any information which may be referred to in the making of a determination on his claim.

Safety 18. A National Safety Office is being proposed to co-ordinate safety efforts and pro­ vide a much needed impetus in the whole safety area. The implementation of the scheme will allow the compilation of comprehensive statistical information con­ cerning accidents, and will permit a new and positive approach to the problem of safety.

Rehabilitation 19. An integral part of the total approach to injury and sickness will be the development of a complete range of rehabilitation services to ensure the earliest and fullest possible rehabilitation.

4 February 1975