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Standing Committee on Economics
31/07/2018
Impediments to business investment

ANNING, Mr John, General Manager, Regulation, Insurance Council of Australia

[15:14]

CHAIR: Welcome. Although the committee does not require you to give evidence on oath, I should advise you that these hearings are legal proceedings of the parliament and, therefore, have the same standing as proceedings of the respective houses. The giving of false or misleading evidence is a serious matter and may be regarded as contempt of parliament. I'd now like to invite you to make an opening statement.

Mr Anning : Thank you for the opportunity to appear today before the committee. When this inquiry was announced, the Insurance Council members were very keen to put the views of the general insurance industry on the impact of regulation on investment. This is not because we want to bring attention to a particular piece of red or green tape, but to highlight a widespread propensity on the part of governments in Australia to address public concern about an issue with a new piece of regulation or regulatory action, such as a review, regardless of whether it is necessary or the most appropriate policy response. This is despite a general commitment by Australian jurisdictions to principles of best regulatory practice, which require a disciplined approach to identifying whether regulation is the most effective means of addressing a problem. On behalf of the Insurance Council and its members, I would like to make clear upfront that we recognise the right of all levels of government to exercise their powers as they see fit to serve the best interests of Australians. Indeed, part of the strength of the Australian insurance industry is the rigorous regulatory regime within which it operates; however, there are consequences.

The customer experience with general insurance is currently changing greatly, with growing customer empowerment driven by widespread use of the internet, interactive digital technology and social networks. These developments hold out great promise for better customer outcomes. However, our members tell us that the greatest impediment to investment in innovation is the increasing need over recent years to devote resources to regulatory compliance. This is in the broad sense of handling regulatory interactions, not just complying with applicable laws. While it is difficult to obtain hard estimates of the increased burden of regulation, over the 10 years that I've dealt with regulatory policy at the Insurance Council, the number of staff devoted to these issues has more than doubled and we have reports from individual members of ours that their staff dealing with regulatory matters has tripled.

On the burden of government regulation, the World Economic Forum ranks Australia 80th out of 137 countries. By comparison, Singapore comes first, New Zealand 21st and the Russian Federation 79th. It may not, therefore, be a coincidence that business investment for the Australian financial and insurance services industry has fallen as a share of GDP from one per cent in 2000-01 to 0.6 per cent in 2016-17. The Intergovernmental review of business investment highlighted:

There was almost universal feedback that uncertainty has been elevated for the past decade and that this is impacting firm behaviour—both business strategy and investment decisions.

It also said:

… the focus for governments should be on reducing their contribution to uncertainty.

The World Economic Forum ranks policy instability as the fourth-most problematic factor of doing business in Australia.

In recent years, the general insurance industry has participated in a substantial number of reviews and inquiries. The attachment to the Insurance Council's submission listed more than 25 major reviews over the past 10 years, and this didn't include the usual round of consultations on everyday regulatory change. The large number of reviews inevitably requires resourcing by industry, either individually or collectively through the Insurance Council; however, this would at least be productive if the outcomes were duly considered and acted upon. Unfortunately, good policy outcomes have apparently not been the priority. The impact of natural disasters on the pricing of insurance in northern Australia has been looked at numerous times, but it appears easier to initiate another inquiry by a different regulator than tackle questions about appropriate land use and mitigation in the face of disaster risks. It is difficult to see that new insurers would be willing to invest in offering insurance in northern Australia when the regulatory regime may be dramatically altered with the introduction of a government backed reinsurance pool or mutual insurer. Similarly, numerous inquiries have recommended the removal of state stamp duties on insurance because it makes little sense to deter consumers from adequately protecting themselves from financial loss. However, it is only the ACT which has completely abolished its stamp duty, and in New South Wales removal of the emergency services levy imposed in addition to stamp duty was reversed in the middle of 2017, a matter of weeks before reform was complete.

A more considered approach to the introduction of new reviews and inquiries would be beneficial, whereby attention is given to inquiries already conducted, their outcomes, the outcomes of any recently introduced reform, any pending reforms and industry self-regulatory initiatives. A more collaborative approach between industry and government to policy reform is more likely to result in effective solutions and outcomes which address the questions identified. Over recent years, the Insurance Council has led an industry project to better understand the drivers of consumer decision-making and how information can be improved to help consumers make decisions about insurance needs. We have worked with Treasury and ASIC in undertaking research, and we will be undertaking further consumer testing to drive important industry initiatives. We hope this collaboration can continue rather than government moving to impose change for the sake of appearing in charge of the policy agenda.

Some years ago there were efforts to identify and tackle the problem of unnecessary regulatory burden. In 2007 the Productivity Commission was asked to review all Australian government regulations separately every five years. As part of this work, the commission drew attention to unnecessary regulation, making recommendations to reduce the regulatory burden as well as for the better design and development of regulatory frameworks affecting the sector. The Insurance Council does not know why, but this cycle of reviews was terminated in 2012.

Similarly, the Australian government had requested the Productivity Commission to undertake a benchmarking study into regulatory impact analysis, and we understand that this report, which concluded in November 2012, was particularly useful in comparing processes and identifying leading practices so that jurisdictions might learn from the experiences of others. However, this also has been discontinued. The Insurance Council suggests that the committee consider recommending that these work streams be revisited, to ensure ongoing attention to effective regulation continues.

CHAIR: Thank you very much. I note your concern about the many reviews into the insurance industry and your criticism that good policy outcomes are not a priority. But can I say that what's a priority for government is that the insurers act properly and that they treat consumers, primarily, justly. You referred to natural disasters, including in northern Australia. I was deeply involved in a natural disaster in my electorate, the Wye River bushfires, where one insurer in particular, AAMI insurance, acted appallingly. It took the insured householders more than 12 months to resolve their issues, because AAMI deliberately tried to undercut what they were owed. I make the observation that perhaps this realm of regulatory difficulty that the Insurance Council of Australia finds itself in is because in many instances its members have not acted appropriately, have not been proactive about addressing their own conduct and addressing their own shortfalls with their policies.

Mr Anning : You could argue whether the many instances are in fact representative of the experience of consumers with the general insurance industry. Our members pay more than 97 per cent of claims. That is not to deny that there may be examples, particularly in the Wye River aftermath, that shouldn't have occurred, but that's an issue that can be addressed separately. It can be looked into, and I understand that these matters are likely to be raised in the royal commission. I think there will be a policy process after the royal commission looking into powers around claims handling, regarding the issue of the pricing of insurance in the northern part of Australia, where it is not an issue around the consumer experience but whether the pricing is justified or not, and we've had repeated inquiries giving the same answer. But, because it's politically unpalatable to deal with the need for probably significantly increased expenditure on mitigation, we are working our way through the range of Australian regulators who've got jurisdiction in this area.

CHAIR: Clearly, for many consumers, it's not just a matter of having the payout; it's also the quantum, the fairness and the difficulty and grief that consumers have to endure. I've got another case of someone who's come to me—a local constituent—who's raised very significant concerns about the conduct of another insurer, which is really alarming. And so I just say, while I accept what you're saying in terms of the impact that this has on business, I would like to see the Insurance Council of Australia being more proactive in addressing the conduct of its members—many of the unjust decisions, some of the faulty products, including the Complete Replacement Cover, and of course many of the flawed claims decisions and also processes that are inflicted on Australian consumers. Can I suggest that, if the ICA were more proactive in that respect, perhaps there wouldn't be such a great need to regulate, as there has been.

Mr Anning : Thank you for the comments. We're always willing to talk to members about improving their performance, but there are existing processes for pursuing those concerns—not to say that that's enough, but we're also halfway through a very comprehensive review of our code of practice, which is looking to address any issues that are raised with us, where there's scope for improvement.

CHAIR: Well, I greatly appreciate you having a look at AAMI's Complete Replacement Cover policy as but one example. Thank you very much.

Mr THISTLETHWAITE: You mentioned earlier, Mr Anning, in respect of northern Australia, an unwillingness to look at the costs of mitigation. Can you elaborate on what you meant by that.

Mr Anning : There are very complex issues around land use—whether there's been appropriate zoning, whether there have been appropriate funding and mitigation works, particularly in northern Queensland. The government, while endorsing mitigation as the ultimate solution, is reticent to commit the resources that we believe need to be spent to bring the risks down and therefore bring the premiums down as well. We understand there's no magic pudding, but a worthwhile start could be begun to—

CHAIR: Mr Anning, just to explain, I'm going to hand over now to my deputy chair to complete today's inquiry, so thank you very much.

Mr Anning : No problems, thank you.

ACTING CHAIR ( Mr Thistlethwaite ): Does that include looking at mitigating climate change?

Mr Anning : There are those wider issues as well in terms of helping the residents of northern Australia adjust to the climate risks that they may face now. The Queensland government made an initiative just recently about helping people with houses older than 1984 improve the resilience, which is very welcome, but we think there should be a more systematic approach to bringing those risks down.

ACTING CHAIR: All the work I read of economists and climate scientists says that the risk of climate change is increasing; we're going to see more and more extreme weather events, and that's going to result in increasing costs for all Australians, and for all people throughout the world, through insurance premiums. Is that the case? What work is the Insurance Council doing to try and force government to actually take a bit of action on climate change to reduce those costs?

Mr Anning : The Insurance Council itself focuses more on the here and now. With general insurance, the risks are priced annually, so we're looking very much at climate risks in the short term. But our members, as a body, as the global general insurance industry, are very conscious of the impact of climate change, and more and more insurers are adopting policies that they believe will mitigate those longer-term effects.

ACTING CHAIR: Thank you, Mr Anning. We have no other questions. Thank you for your attendance today.If you've been asked to provide additional material, can you please forward it to the secretariat. A copy of your transcript of evidence will be sent to you for you to make corrections of grammar and fact. That now concludes our public hearing. I thank all of the witnesses who gave evidence today.I now declare the public hearing closed. I thank everyone for their time and I thank the secretariat.

Resolved that these proceedings be published.

Committee adjourned at 15:30