Australian insurers and
Australian insurance policies are largely regulated by Commonwealth law under the constitutional power relating to insurance. The sources of liability among citizens are largely regulated by State and Territory laws. Although in some circumstances Commonwealth law may be relevant that is in relation to the provision of services or goods to which the Trade Practices Act might apply.
The law determining whether one party is liable to another and for how much one has tended over the last 30 years to expand situations in which liability will be found to exist. This has occurred by statutory provisions at both State and Commonwealth levels. In addition to this trend, the common law and in particular the law of negligence has developed so that there is a greater likelihood of recovery today than there would have been 30 or 50 years ago.
Insurance Industry In Australia
There were 156 private sector insurers in Australia at 30 June 2001. Among them 102 were direct underwriters dealing with the public or through agents and brokers. To support the direct underwriters there are 28 reinsures. The Australian market comprises companies that are Australian based, as well as many international insurers from the USA, Japan, Europe and the United Kingdom. General insurance industry employs 25,000 people.
For the financial year to 30 June 2001, figures show that the gross revenue of the industry was $17.25B. The total assets were $50.9B against total liabilities of $38.35B. Insurers incurred an underwriting loss in the period of $810M and after investment income produced a profit equal to a total return on shareholders funds of 8%.
In recent years the returns on shareholders funds were as follows:
| 2000 | -2% |
| 1999 | 4% |
| 1998 | 1% |
| 1997 | 4% |
| 1996 | 3% |
| 1995 | 0% |
| 1994 | 2% |
| 1993 | 2% |
Regulations The general insurance industry is licensed and regulated by the Australian Prudential Regulatory Authority. The Australian Securities Investment Commission has authority over the conduct of insurers through the Insurance Contracts Act. (1984). In addition to this Act there are the Insurance (Agents and Brokers) Act 1984, Insurance Act (1973), Privacy Act (1988) the Financial Services Reform Act and the General Insurance Reform Act.
Self-Regulation To assist policyholders Insurance Enquiries and Complaints (IEC) commenced in 1991. IEC is a successful independent industry organization created to implement a speedy, economical and efficient alternative dispute resolution service for insurers and policyholders and is responsible for administration of:
- General Insurance Enquiries and Complaints Scheme
- General Insurance Code of Practice, and
- General Insurance Information Privacy Code.
The Scheme is fully funded by the general insurance industry and is free of charge to policyholders.
Commercial Liability Insurers In Australia
There are a number of underwriting agencies, which provide cover on liability insurance. The underwriting agencies obtain their insurance capacity from Lloyd's, Australian licensed insurers, other overseas markets or reinsures. In most instances these are niche underwriters and they often handle the hard to place liability insurance.
Some liability insurances are placed overseas with insurance companies not licensed in Australia. In such cases the insured cannot rely on the protection of Commonwealth Government legislation governing the conduct of insurers.
There have been changes in the market recently as a number of insurers have been sold, withdrawn from the liability market, or restricted the cover they are prepared to provide. Recent examples of companies that have ceased writing primary liability insurance are St. Paul and AIG. Two major general insurers in AMP and GIO (NSW) were taken over by Suncorp.
Reserving for Claims In Australia
Authorized insurers in Australia are required to maintain an excess of assets over liabilities, which currently is 20% of the prior year's premium or 15% of the outstanding claims provision of the insurer. This prudential requirement is to be replaced at 1 July 2002 with a totally different prudential regime introduced under the General Insurance Reform Act 2001.
So obviously these additional requirements will increase the costs for insurers and that increased cost could be reflected in premiums. The changes also recognise explicitly the different risks associated with long tail and short tail business providing for higher capital charges for long tail business.
When an insurer is advised of a claim it immediately raises an estimate, based on the known information at the time. A provision account for any unreported claims is made based on a recommendation of an actuary.