The Australian Prudential Regulation Authority (APRA) welcomed the Governments announcement today of reforms aimed at underpinning the security and continuity of medical indemnity insurance in Australia.

APRA General Manager, Dr Darryl Roberts said the reforms announced by the Prime Minister should stabilise the long-term trend in medical malpractice claims, allowing insurers to assess risks more accurately, price premiums more commercially and set provisions more prudently.

"Without comprehensive change, including nationwide tort law reform, the medical indemnity industry was destined to lurch from crisis to crisis as medical defence organisations (MDOs) struggled to get a grip on the funding implications of volatile claims trends, expensive litigation costs and escalating court awards," Dr Roberts said.

"The great benefit flowing from the Governments measures, for patients and doctors alike, will be a medical indemnity industry that is fully-funded and sustainable in the long term. This means that the community can have confidence that doctors will continue practising and injured patients will be fairly compensated," he said.

Of particular relevance to APRA is prudential reform of the medical indemnity provided by MDOs. These mutual aid schemes have no contractual terms and conditions governing the payment of claims and therefore avoid supervision under the Insurance Act and by APRA. Claims are paid only at the discretion of the scheme and if sufficient funds are available at the time. While MDOs may have significant backing, competent management and good intentions, they risk becoming dangerously under-funded and ultimately unsustainable in an environment of escalating and volatile claims trends.

"The Governments decision to bring all medical indemnity insurance under the protection of the Insurance Act and the supervision by APRA is highly desirable," Dr Roberts added.

"In future, all medical indemnity in Australia will have to take the form of insurance contracts between individual doctors and APRA-regulated insurance companies. MDOs will have to cease writing insurance on their own account or convert to a licensed insurance company. Either way, the traditional and outmoded practice of discretionary medical insurance will cease."

APRA prudential requirements include risk-based capital reserving, strong corporate governance standards, suitability tests for directors and whistle-blowing responsibilities for auditors and actuaries.

The move will involve a considerable transition period to allow for the run-off of legacy liabilities and an orderly re-capitalisation of the industry.

APRA is the prudential regulator of the financial services industry including banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, friendly societies, and most members of the superannuation industry. It currently regulates $1.5 trillion in assets for 20 million Australians.