Worth the risk: Finding a better balance in general insurance
It’s a pleasure to speak for the first time at the ICA Annual Conference since my appointment almost a year ago as the APRA Member with responsibility for insurance.
As my predecessor in this role, Helen Rowell, wrapped up her speech to last year’s event, she made the following remark:
“Achieving an appropriate balance between the financial health of insurers and access to affordable and well-designed insurance for policyholders is not simple – but it is of great importance for the Australian community. So, we all need to do our bit and work together to achieve it.”
Where Helen concluded, I’d like to commence today because that comment, which presciently reflects the theme of this year’s conference, sums up the challenge the general insurance industry, governments, regulators and policyholders are facing.
Over the past 12 months, policyholders – already battling cost-of-living pressures – have been stung with sharp premium rises across multiple retail and commercial lines. And yet, perversely, general insurers have faced profitability challenges over recent years. In particular, some key business lines are struggling, including public liability and commercial motor insurance, while household insurance has actually lost money for the past four years.
As a prudential regulator, APRA wants the insurance industry to be strong. In line with our mandate, we need to ensure that insurers can meet their obligations in the wake of disasters like last year’s flooding in Northern New South Wales and Queensland, which cost the industry $6 billion. But we’re also conscious that, like any businesses, insurers will withdraw products or exit the market altogether if they believe the benefits are not worth the risk. We’re already seeing signs of this in higher-risk parts of Australia where many smaller insurers simply refuse to offer cover, thereby reducing consumer choice and the benefits of competition. This also has the potential of increasing the risk of adverse selection for those insurers that remain.
Our focus on financial stability, however, sees us increasingly uncomfortable with the widening insurance gap being created by declining availability and affordability. Insurance enables Australians to take financial risks, whether it be buying a house, or investing money to start or expand a new venture. If a growing number of households and businesses are underinsuring, self-insuring, or not insuring at all, it undermines economic growth as well as the community’s ability to bounce back from catastrophes.
The factors contributing to the current dilemma are complex and multifaceted, ranging from the impacts of climate related events to inflation and higher reinsurance costs. Not only has the price of reinsurance gone up, but so have attachment points, increasing earnings volatility for primary insurers. This additional “skin in the game” for primary insurers is an added incentive for the industry to come together with a collective voice to influence change, which brings me back to Helen’s parting words to the ICA last year. In addition to outlining the problem, she also pointed towards the solution – working together.
Working together isn’t a novel concept: insurers cooperate through bodies such as the ICA and the National Insurance Brokers Association, while APRA and ASIC have long worked with Government, Treasury, peer agencies and insurers to seek better community outcomes. But there is more we can do, especially when it comes to sharing data and insights, which can help to ensure insurers are adequately prepared to respond promptly and efficiently to claims, catastrophes and emerging trends.
A good example of where this is happening is the Hazards Insurance Partnership (HIP). The aim of the HIP is to bring the public and private sectors together to help direct efforts to improve the resilience of our country in the face of increasing natural disasters. This will require mitigating risks to our built environment, whether by building flood levees, or making buildings more fire and storm resistant. It will also mean getting better at avoiding the risk altogether by ensuring we do not continue to build homes in harm’s way.
The HIP also aims create a national insurance data asset. As an observer on the HIP alongside ASIC, APRA is contributing to the strategic discussions. We are also active participants on the HIP’s Technical Working Group that is exploring existing sources of industry data that can be leveraged to build an interim or short-term data asset that can help better understand insurance and risk.
While most of the focus on access to insurance has centred on natural disasters, there have also been capacity challenges in some commercial lines, especially in public liability, and this has significant implications for the wider economy. We have seen examples of this in the amusement sector, with some caravan parks and live music venues struggling to find affordable insurance cover. Without insurance, these businesses can’t operate, which creates credit risk for the banking sector, and in many cases destroys the livelihoods of everyday Australians. It is therefore important to understand the drivers and possible responses: in some cases, insurance premiums may serve as a price signal of risk and the response should be improving risk management standards, while in other cases there may need to be a legislative response to achieve risk reduction.
APRA is also working to enhance our own strategic data collections through our Insurance Data Transformation program. We envisage the types of regulatory insights from the strategic collections will include how insurers are responding to affordability and availability issues, understanding which policyholders are affected and the drivers of these issues, including claims outcomes. Whilst meeting the needs of both APRA and ASIC, these strategic collections will also contribute to the centralised data asset to support the work on insurance affordability and availability being progressed by the HIP. We look forward to the industry providing the data to these important initiatives to help us respond to the current and future challenges we face.
One such challenge relates to the physical and financial risks of climate change, which insurers need to face head-on given the increasing frequency of extreme weather events. To better understand the potential impact on both insurers and policyholders, we have commenced a new Climate Vulnerability Assessment for general insurance. Unlike the inaugural banking version, this Climate Vulnerability Assessment is looking specifically at the potential price response of Australia’s largest insurers under different climate scenarios to 2050. Its purpose is to understand the long-term impacts of physical and transition climate change on the affordability of household insurance in the community, which will help predict the magnitude and concentration of climate-driven cost changes. It will also enable us to understand how insurers and reinsurers might respond to this challenge. By modelling the majority of the country, we will also be able to derive insights on how the availability of insurance changes by regions, over time and under different climate scenarios.
APRA has been working with the ICA and major insurers and we are pleased with the partnership with the ICA and the collaboration with industry in co-designing this important exercise. The ICA has been very collaborative in this process so far.
While effectively tackling the thorny issue of affordability and accessibility requires collaboration, insurers are solely responsible for how they manage their own businesses. Insurers need to be at their best to ensure the industry is supported to thrive. We are facing into an evolving operating environment with technological innovation at the core of some of the most significant developments. For insurers, artificial intelligence and telematics have the potential to be game-changing in terms of managing risk, gaining efficiencies and – hopefully – passing savings to policyholders. But with innovation comes risk, and those risks aren’t always apparent until after the fact.
This thinking partly informs APRA’s new prudential standard on operational resilience CPS 230, which was released in July. Entities are required to comply by July 2025 – a 12-month extension aimed at helping entities to prepare. Its purpose is to build heightened capability to proactively manage the risks that arise from operating a business, including risks that may compromise their ability to provide services to the customers who depend on them. For insurers specifically, this will include a consideration of their underwriting agents, claims managements services and insurance brokers, as material service providers that should have commensurate governance in place.
Although claims handling and customer service sit more in my ASIC colleague’s domain, both feed into trust and reputation. And as we’ve seen in banking and superannuation, losing these can have significant detrimental financial impacts – something that is very much in APRA’s bailiwick.
We intend to undertake targeted engagement with insurers as we approach the new standard’s commencement date. The scale of the potential challenge can be seen when we look at how the financial sector has complied – or not – with our prudential standard on information security. Recent analysis shows that many entities are struggling to meet their minimum requirements. Given the prevalence of cyber risk, this is not something we are prepared to tolerate any longer, with additional capital requirements of the kind imposed on Medibank a possible outcome.
Another area where APRA will be engaging with industry is on the Financial Accountability Regime (FAR), which finally received Royal Assent last month. This milestone provides definitive dates for the commencement of the regime: on 15 March next year for the banking sector and exactly a year later for insurers and superannuation funds.
a Joint Administration Agreement outlining the high-level principles by which the Regulators will jointly administer the regime; and
an Information Paper and associated guidance designed to assist banks transition from the Banking Executive Accountability Regime (BEAR) to the FAR.
APRA and ASIC will release further information and guidance packages over the rest of this year and early next year that will have more specific content for the insurance and superannuation industries. Finally, the regulators are also planning to engage with the ICA on the FAR shortly and will host some industry based FAR webinars from late 2023.
Strong, sustainable insurance businesses are central to a thriving economy. Essential to this is the availability of affordable, appropriate cover to every household and business that needs protection along with confidence to take financial risks. Getting everyone on the same page and finding solutions to the myriad of issues I have outlined won’t be easy. I’m sure there will be mis-steps and we may not always agree. But if we are truly going to insure the future together, working together to leverage our strengths and harness the collective wisdom is definitely worth the risk.
The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, mutuals, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding around $9 trillion in assets for Australian depositors, policyholders and superannuation fund members.
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