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Thursday, 24 May 2001
Page: 27046


Mr HOCKEY (Minister for Financial Services and Regulation) (3:53 PM) —If you take out for a moment the traditional political rhetoric that we often hear during an MPI, the member for Wills has raised some legitimate questions about the role of individuals and auditors and various other people involved in HIH. That is precisely why we have given ASIC, the Australian Securities and Investments Commission, some additional resources on top of what they already have to pursue answers to some of the questions—and a whole lot more—that the member for Wills has raised.

The first thing to note is that obviously the collapse of HIH is not a collapse of any government's—not state or federal government's—doing. It is a private sector company with private shareholders, private directors, private executives and private auditors, and as such this is not an issue that we have had any great control over. Even now, after more than two months, since the company went into provisional liquidation, we and the Australian people have still not been given definitive figures about the size of the potential losses. As the provisional liquidator, with all the resources available to him as an agent of the Supreme Court of New South Wales, has not been able to obtain information about the actual size of the losses, it has also been very difficult to find out exactly who have been affected, how they have been affected and the extent to which any support measures can be put in place.

I point out to the House that the government is putting in place a package to support those people who are enduring hardship. It is not a bailout for shareholders, directors or auditors. It is not a bailout for those people who may suffer losses as the result of the collapse of HIH. It is an attempt by the government to help those people most in need. I think any caring individual, whether Labor, Liberal, National or Callithumpian, would sympathise with the tremendous losses and suffering that some people have endured as a result of this collapse. We are very determined to get to the bottom of this. It has been no easy task committing more than half a billion dollars of taxpayers' money, but we have done it because we believe all Australians would recognise that we must, particularly when you see some of the terrible cases such as a rugby footballer who broke his neck and was going to get some support through HIH public liability insurance. I met a gentleman in Brisbane who took out salary continuance insurance. He has just turned 40 and he has a bone degenerative disease. He was receiving around $30,000 a year in salary continuance and, of course, that stopped with the collapse.

As the member for Wills pointed out, there are very significant hazards in any government stepping in to assist people after the collapse of a private sector company. In the United States, 500 to 600 insurance companies collapse every year. In the United States, about the same number of banks—about 500 to 600—collapse every year. The same ratios apply in Europe. There are huge and often significant financial collapses. In those cases there are different types of schemes. There are some policyholder protection schemes. There are various measures that are put in place, all of them funded by a levy on policies. Certainly, as far as I am aware, when the Wallis legislation went through this place there was no suggestion from the opposition of having a policyholder protection fund. In fact, we too went over the Hansards of the debate about the establishment of APRA and ASIC, and I quote the shadow Treasurer, the Hon. Gareth Evans, who said in Melbourne on 19 August 1997:

We see the creation of a single national prudential regulator in this form as desirable.

In fact, the member for Wills himself indicated his support `for the initiative of creating two super-regulatory bodies, one overseeing the prudential requirements of the financial services market and the other overseeing the consumer protection aspects'. The member for Wills further stated in this House on 23 June 1998:

It is the opposition's view that it is a change worth making. We have been supportive of this legislation ...

The member for Hotham said in this House on 29 March 1999:

... we consider them—

that is, legislation furthering Wallis—

to be important in establishing regulatory and prudential arrangements, and we welcome and support that direction.

He went on to say:

As the recent crises in Asian economies stand testament to, sound financial management and prudential regulation are important protections for every national economy. Many of the recommendations implemented from the Wallis report have contributed to the establishment of a sound prudential system that has served Australia well to date.

He then went on to say:

A single prudential regulator promotes consistency in regulation across the sector, adding certainty to the industry and encouraging development.

That is what the member for Hotham said. Without getting into the finger-pointing game, which is very tempting for everyone—I can tell you there are very few people who are more angry about this than I—the primary focus of what the government has done is to help those people who have endured times of extreme hardship as a result of the collapse of HIH. This has not happened before in Australia, so there was no insurance company in the basement of Parliament House that the federal government could wheel out to process tens of thousands of claims overnight on behalf of individuals. We have had to rebuild a structure provided by the second largest general insurer in Australia to be able to process claims for individuals who may be enduring hardship and who are looking for support from a caring government.

The member for Wills raised the question: why should the industry pay? Maybe that is a legitimate question to ask. Michael Egan, the Treasurer of New South Wales, has decided to tax the industry in New South Wales for the shortfall he has in his compulsory third party scheme. His taxing the industry is going to go straight through to policyholders. Policyholders are going to pay a higher price—there is no doubt about that. That is how they do it. Companies have an obligation to make a profit. There is only one thing worse than financial services companies, banks or insurance companies making excessive profits, and that is when they make a loss. We have seen what the ramifications are if, like HIH, they actually go off the end of the table, and those ramifications are very significant.

The Labor Party never sent in a bailout package to help those people who were disadvantaged—in some cases, severely—by the collapse of Compass Airlines I and II, nor should they have done that. Obviously, some people were significantly disadvantaged by the collapse, but the government did not go to Qantas and Ansett and say, `Please transport these people back from their travel destinations,' and quite rightly so.


Mr Kelvin Thomson —Private companies are different from financial institutions.


Mr HOCKEY —Private companies are private companies, and that is the important part. The insurance industry has significant reinsurance agreements. Some Australian companies were reinsuring some of the risk of HIH, and their potential losses have not yet been quantified. That is another reason why we need to be very careful about putting on top of the current insurance industry in Australia a new tax in New South Wales, major recapitalisation requirements in relation to the new legislation going through the parliament and, on top of that, potential reinsurance losses for some companies. I understand that those losses are limited but, for some companies, that may also affect their bottom line.

Michael Egan went out the other day and announced that he was going to tax the industry. He said, `Last year the industry in Australia made a $1.8 billion profit.' What Mr Egan did not understand is that the brackets around the bottom-line figure actually mean a loss.


Mr Ronaldson —You're winding us up.


Mr HOCKEY —He did not understand that it meant a loss. He went public and he said, `We're going to tax this industry that made a $1.8 billion profit,' and someone forgot to explain to him that the brackets around the bottom figure meant that it had made a loss. The industry made a loss in Australia last year, and it made a loss because of reinsurance. One of the aspects of our major legislative reform package is that insurance companies will now have to properly make provision for individual lines of insurance.

The last time there was any attempt to reform—not even significantly—the Insurance Act 1973 was in 1992, after the collapse of Regal and Occidental. In 1992 Treasurer Keating said that minimum solvency would be increased to $2 million, and an additional solvency test of 15 per cent on outstanding claims was introduced. That was the last time that there was any change, and in that case it was after the collapse of an organisation. Even then, one of the provisions that Paul Keating put in place was exactly the same as existed before. No-one had moved to reform the Insurance Act until we came along and went to the industry and said: `These capitalisation requirements are outrageous. They're unacceptable. You've got to change them. We know it means that you are going to have to readjust billions and billions of dollars in capital adequacy requirements, but we're going to work with you through that process. There is a potential enormous downside, but the longer term benefit to the industry is a stronger and healthier industry.' Those requirements will affect some of the smallest general insurers. Most Australians know the names QBE, NRMA, Alliance and so on, but there is a whole raft of smaller insurers out there that are going to be struggling to comply with the new capital requirements. But they are going to have to, because insurance is a very risky business. It is all about risk and it is all about placing a value on a risk.

The member for Wills also raised the question of bipartisanship. As he knows, after the collapse of HIH, I offered and provided a briefing.


Mr Kelvin Thomson —I sought a briefing.


Mr HOCKEY —You sought a briefing and I was happy to give it to you and arrange for it to come at that stage. I spoke to Michael Egan—I rang Michael Egan on two occasions and said, `Let's talk about this.' He said, `Yes, we will organise a meeting.' I am still waiting to hear. The Treasurer of Queensland wrote to me saying, `Let's have a meeting.' I have offered to go up to Queensland to meet with him and he has rejected it. I am going to Brisbane tomorrow and he said that he did not want to have a meeting with me. And I offered to have a meeting with Lyn Kosky in Melbourne and she was not available. The bottom line in all of this is that roundtables are meaningless if people out there are still suffering hardship. Out there the people want to know who was responsible and they want the problem fixed. That is what we are doing. We are fixing the problem—giving hardship relief to those people most in need—and we are going to ensure that we get full and complete answers to the questions about who was responsible for this collapse.