Speaking at the Institute of International Affairs in London today (GMT), Executive General Manager of the Australian Prudential Regulation Authority (APRA), Mr Charles Littrell, said contrary to academic opinion, the Australian experience had shown that insurance failures do present systemic risk which, like bank failures, could pose a threat to the community's financial position.

Referring to the collapse of HIH and the near failure of United Medical Protection, he said: "Insurance supervisors need to watch for companies with large market shares in key sectors. In the Australian case, it was home builder's warranty and medical indemnity insurance."

In describing the general insurance environment in Australia prior to 2001, Mr Littrell said that the industry was characterised by an unsatisfactory culture of reluctant regulatory compliance, even by some large entities.

"As an integrated supervisor, APRA is in a position to observe the managerial differences between our regulated entities. In Australia, many insurance companies were run by salesmen who often viewed regulation as something to be avoided."

Mr Littrell noted that compounding this issue is the opaque accounting applied to insurance, weak corporate governance and management, and the willingness by some international reinsurers to facilitate transactions that promote regulatory arbitrage, and in the worst cases, regulatory or financial reporting obfuscation.

Under the reforms to the insurance act introduced into Australia in mid-2002, APRA re-licensed the entire industry under tighter provisioning and capital rules, and a fit and proper regime for industry management, auditors and actuaries.

APRA's model for effective supervision now aims for a low failure rate at an acceptable operating and efficiency cost through four work streams: good data and analysis, experienced and confident supervisors, effective statutes and prudential standards, and proactive supervision and enforcement actions.

A copy of Mr Littrell's speech is available on the APRA website at www.apra.gov.au/Speeches/

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.