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Thursday, 9 December 1971
Page: 4455


Mr SNEDDEN (Bruce) (Treasurer) - by leave - I wish to inform honourable members of the provisions which the. Government is considering including in the legislation being prepared for the supervision of general insurance companies in Australia. As I have stated previously in the House, it is not possible to introduce the proposed legislation in this session. A vast amount of ground has been covered, but a number of details have yet to be settled. In the meantime it will be helpful to all concerned if I outline in some detail the scheme of legislation which the Government has in mind.

The essential elements can be summarised quite briefly. General insurance companies would be brought under supervision by requiring them to obtain authorities to carry on general insurance business. By 'general insurance' I mean all classes of insurance other than life insurance, which is subject to the Life Insurance Act. To obtain an authority, a company would be required to satisfy standards of financial soundness prescribed in the legislation. After receiving an authority, the company would be obliged to maintain the prescribed standards and would be subject to continuous supervision to ensure that it did so. An authorised insurer who failed to maintain the standards, or who appeared to be in danger -of falling below the standards, could be subject to inquiry and investigation, which could lead to the company being issued with such directions as were necessary to deal with the situation and, if those measures were unsuccessful, to the withdrawal of the authority. These are the basic features of the proposed scheme of legislation as it would apply permanently to companies wishing to begin insurance business after the commencement date. Existing insurers carrying on business at present would be brought under the same system of supervision by means of transitional provisions in the legislation.

Before describing the proposed system of supervision in more detail, I have some comments to make on the purpose and scope of the scheme.

Purpose

Honourable members will recall that the Government's decision to legislate for the supervision of general insurance companies was prompted by the failure of some insurance companies from mid-1970 onwards, following many years of stability in the insurance industry. The companies which failed were relatively small and of recent origin, but their failure caused some apprehension that other companies may not be financially sound.

The scheme of legislation proposes to tackle the problem by establishing the minimum standards of financial soundness to which I have referred and by providing a means of identifying and investigating companies which do not measure up to the standards. With a view to their reorganisation or orderly withdrawal from insurance business. In the longer term the scheme aims to prevent weak, inefficient companies from entering the business and by continuing supervision to keep the industry in a healthy condition.

It must be emphasised that the introduction of legislation could nol transform the financial condition of insurance companies overnight. It would lake time for companies which fell below the new requirements to be identified and for their situations to be rectified. The proposals however, open the way for a permanent solution of the problem. Furthermore, regulatory legislation of this kind cannot guarantee that no insolvencies will ever occur. It thus cannot guarantee that claims on insurance companies will always be met in full. If, however, financial stability of general insurance companies is established as a result of the legislation, the public will be given substantial protection in their insurance transactions.

In the preparation of the scheme of legislation, consideration was given to the possibility of establishing a fidelity or guarantee fund, to which insurers would contribute and which would be available to meet deficiencies arising from liquidations of insurance companies. However, this proposal would present difficulties, at least in present circumstances in Australia. It would require sound insurers to pay for the mistakes of weak insurers and it could be held to be unreasonable to compel sound insurers to do this at the present time, while doubts continue about the financial soundness of some companies. Furthermore, the creation of such a fund in present circumstances could tend to perpetuate weaknesses in the industry, by underwriting the activities of companies engaged in risky insurance practices.

It must be remembered that general insurance business in Australia is conducted for the most part by companies which are sound and efficiently managed. Only a very small percentage of the business is carried on by companies which could be regarded as financially doubtful. In considering ways pf supervising general insurance companies, the Government wants to avoid giving an impression that many insurance companies are weak and also does not wish to bring down legislation which is so restrictive that it would stultify the business of the great majority of insurance companies.

Scope of (he Legislation

The Government's decision, as announced, was that the Commonwealth should legislate for the supervision of general insurance companies. The scheme of legislation which has been prepared accordingly concentrates on setting up a system of supervision and does not enter into other fields, such as the issue of policies, premium rates, the payment of claims and other contractual relationships between insurance companies and policy owners.

Insurance Business

Turning now to the details of the scheme of legislation, insurance business- would be defined as at present in section 3 of the Insurance Act 1932-1966 and would continue to exclude the types of business at present excluded, namely, life insurance business and accident insurance business undertaken solely in connection with life insurance business; benefits provided by a friendly society or a trade union for its members or their dependants; employer and employee superannuation schemes; funeral benefits schemes; and the business of insuring exclusively the property of a religious organisation. In addition, business carried on by medical and hospital benefits organisations registered under the National Health Act would be excluded and also self-insurers at present exempt under section 15 of the Insurance Act.

Administration

The legislation would provide for the appointment of a commissioner, who would be responsible for the administration, subject to the directions of the Treasurer.

Authorisation of Insurers

The legislation would prohibit the carrying on of insurance business other than by a company authorised to carry on that business under the Act. Applications would be made to the Commissioner, supported by information about the company and its financial position and prospects. The Treasurer would be empowered to grant or refuse to grant an authority and to attach conditions to an authority, but an authority would not be granted where the Treasurer, on receipt of a report from the Commissioner, was nol satisfied as to the applicant's financial soundness as determined by the criteria for financial soundness spelt out in the legislation. Companies would be required to satisfy the following main requirements: A minimum paid-up capital of the order of $200,000, or the equivalent in capital funds in the case of a company not limited by shares; a solvency margin of assets over all liabilities excluding liabilities to shareholders, equal to 15 per cent of annual premium income or a money amount equal to half the minimum paid-up capital requirements whichever is the greater; a margin of assets in Australia over liabilities in Australia, excluding liabilities to shareholders, calculated in accordance with the solvency formula; satisfactory arrangements for reinsurance; reputable and efficient ownership and management; and capacity to meet obligations.

With regard to the solvency requirement, I should mention that this is a test commonly used in insurance legislation overseas. Its effectiveness depends largely on the assets of the company being valued on a conservative basis and its liabilities being accounted for fully. For this reason, it is proposed that there should be a number of supporting provisions relating to assets and liabilities. It is not proposed that the investment policies of insurance companies should be controlled, but certain assets would be excluded for the purposes of the margin of solvency calculations and provisions in respect of underwriting liabilities would be placed under close supervision.

Transitional Arrangements

The transitional arrangements would provide for all insurers who are carrying on business as at the date of this statement and who made application to be authorised to continue to carry on business. Tt is expected that the majority would be able to comply with the financial requirements which I have outlined, but special arrangements would be necessary to deal with those which could not do so. It is envisaged that an exemption would be provided for companies which could not meet the minimum paid-up capital requirement, but could meet the other requirements. Companies which could not meet the other requirements at the time of application, but which demonstrated a capacity to meet the requirements within 2 years would be given time to comply. In the remaining cases, action would be taken to investigate their affairs, under the inquiry and investigation provisions of the legislation. Where appropriate, directions might be issued for the reorganisation of a company, but if no alternative could be found, steps would be put in train to terminate the business.

Continuous Supervision

The effectiveness of the proposed system of supervision would depend to a large extent on the range and reliability of the information received by the administration. The information should not only enable the insurer's compliance with the financial standards to be policed, but also provide an early warning of any tendency for a company's financial position to weaken. It is proposed that all authorised insurers should be required to furnish annually in respect of their Australian business a balance sheet, a solvency statement, an underwriting account and a profit and loss and appropriation account, all of which would need to be audited by approved auditors. They would also be required to furnish annually statistical returns showing, by class of business, premiums earned, provisions for outstanding claims, claims incurred, underwriting results and reinsurance arrangements, together with a return showing the run-off of claims for selected classes of business. In addition, there would be quarterly returns of selected assets and liabilities and monthly returns of premiums, claims and expenses.

The Commissioner would be empowered to require explanations of items in any of the accounts and returns and, if not satisfied, to give directions for variation. Members of the public would have access on request to copies of an authorised insurer's balance sheet, underwriting account, profit and loss and appropriation account as submitted to the Commissioner, either at his office or at the principal office of the company. All other returns would be regarded as confidential. It is proposed, however, that selected information from the returns should be processed and published as aggregates for general statistical purposes. This would be an important by-product of the legislation, providing information which would be valuable to insurers in managing their businesses, as well as being of importance generally within the community.

Inquiry and Investigation

The scheme of legislation proposes that, if it appeared to the Commissioner that there was cause for concern about a company's financial position, he would be empowered to demand additional information about the position. If it appeared that there was a risk of the company not being able to comply with its obligations under the legislation the Commissioner would be empowered to serve a notice on the company to show cause why the company should not be investigated. The possibility is that, on receipt of such a notice, the company would take action lo correct the situation. If the company failed to show cause to the Commissioner's satisfaction, an investigation could be made.

Following an investigation, the Commissioner would be required to give the company a summary of the conclusions and he could issue to the company such directions as to its insurance business as he thought necessary and proper to deal with the situation disclosed, including a direction that the company should not issue policies in respect of all or part of its insurance business. The intention would be that every effort should be made to avoid failure. Directions given by the Commossioner would be subject to appeal, but it is proposed that, for the protection of the public, a direction not to issue policies should be effective immediately pending completion of the hearing.

Cancellation of Authority

Provision would be made for the cancellation of authorities in particular circumstances, including a voluntary termination of an insurance business as well as a termination following an investigation.

Appeals lt is proposed that a special administrative tribunal should be established under the legislation, with a judge as chairman and with 2 members experienced in insurance, but not a director, officer or employee of a company or organisation actively engaged in insurance business. The tribunal would hear appeals on administrative decisions under the legislation which would be largely of a technical nature. Provision would be made for appeal to a court of appropriate jurisdiction on matters involving questions of law in the legislation. The outline I have given summarises in broad terms the provisions which the Government has in mind in respect of the authorisation and continuous supervision of general insurance companies. There arc, however, many other matters that would need to be provided for.

Deposit Requirement

The deposit requirement is not expected to serve a useful purpose after the proposed system of supervision has become fully established and insurance companies come under continuous observation. Increases in deposits which were large enough to give policy owners a high degree of protection in the event of a company's failure could put some companies out of business, including some small, but sound companies. A large deposit requirement could have the effect of weakening a company's financial position by limiting the availability of its assets for use in its business. Under the proposed new system of supervision there would be no need for large deposits to keep excessively small companies from entering into insurance business. That would be done by the minimum paid-up capital requirement and the solvency margin. It is accordingly proposed that the deposit requirement would carry on under the Insurance Act 1932-1966 until the new system is fully established and that the deposits would be released 2 years after the commencement of the new legislation, or such later date as may be proclaimed. The Insurance Act 1932-1966 contains no provision for a release of deposits of this kind and a legislative amendment would be necessary to implement the proposal.

Lloyd's Underwriters

The system of supervision which I have outlined relates to companies incorporated in the usual way. Lloyd's of London, who have carried on insurance business in Australia for many years, do not fit easily into that kind of legislation, because Lloyd's underwriters are individuals with unlimited personal liability who form syndicates of varying numbers to undertake insurance transactions in many parts of the world. Discussions are in progress with Lloyd's through the general counsel in Australia for Lloyd's on ways in which Lloyd's underwriters could be brought within the scope of the proposed legislation.

State and Territory Legislation

There is a wide variety of legislation relating to general insurance in the States and the Commonwealth Territories. Some of it is of a supervisory kind, under which licences are issued for companies to carry on general insurance business, or certain classes of general insurance business. The remainder is for various purposes, such as payment of stamp duties and fire brigade levies, and the insurance provisions in a variety of laws on subjects such as hirepurchase, housing and local government. With regard to the supervisory legislation, such as the Queensland Insurance Act, which exercises control over the whole field of general insurance, and legislation in the States and Territories for the supervision of companies carrying on workers' compensation and compulsory third party insurance, the State governments are anxious to keep their controls in being for a period after the proposed Commonwealth legislation came into force.

External Territories lt is proposed that the legislation should be capable of extension to the external Territories of the Commonwealth by proclamation, but that provision would he made for exemption, on the advice of the Minister for External Territories, of substantially indigenous insurers in the Territory of Papua New Guinea, undertaking insurance business only in the Territory, from some or all of the provisions of the legislation. This is reasonable, because it would take time for the Commonwealth administration to identify companies which are financially unsound and to take whatever action might be needed to rectify matters. The scheme of legislation envisages appropriate provisions being made to safeguard the supervisory legislation in the States and Territories for an interim period. Provisions would also be included to safeguard the remaining State legislation on general insurance. Similar exemption would also be allowed for certain insurance schemes involving some administration sponsorship.

Stale Insurance insurance business conducted by State governments and their instrumentalities falls largely outside the Commonwealth's constitutional powers, and in any event there is no question of the financial soundness of the State Government Insurance Offices. However, those Offices form a large part - about 20 per cent - of the Australian insurance market. Discussions are going on with the State governments as to the extent to which they would be prepared to cooperate voluntarily in the spirit of the legislation, particularly in matters such as the furnishing of information without which Austraiian insurance statistics would be seriously incomplete.

Insurance Brokers

Following representations on the need to bring insurance brokers under supervision, it is proposed that the Commonwealth should legislate for that purpose. As honourable members know, the role of brokers in insurance transactions is to advise members of the public and to negotiate on their behalf with insurance companies. Many complaints have been received of abuses of this function and a broad measure of agreement exists that brokers should be brought under supervision. There is also wide support among the State governments, the insurance companies and representatives of insurance brokers that the supervision should be conducted by the Commonwealth. The main essentials of a system of licensing insurance brokers, on the basis of prescribed standards of character, education, experience and financial trustworthiness, are already fairly clear from investigations and discussions which have been going on during the year. The Government will be pressing on with the completion of this work in conjunction with the completion of the proposed legislation for the supervision of the general insurance companies.

Conclusion

I should like to conclude by thanking all the representatives of the State governments and members of the insurance industry who have assisted in various ways in the development of the proposals which I have outlined. It would not have been possible to reach the present stage without the information and advice which they have freely provided, lt is a good example of co-operation between government and industry towards a common objective of raising the financial standards of all engaged in the large and important business of general insurance. It will be evident to honourable members from the summary I have given of the main provisions which are under consideration that the preparation of this legislation is a substantial task. We shall be going ahead with the work with all possible speed and I hope that the legislation will be ready for introduction early in the next session. I present the following: paper-

Proposed legislation on general insurance - Ministerial statement, 9th December 1971.

Motion (by Mr Fairbairn) proposed:

That the House take note of the paper.







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