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Opening statements

Opening Statement

Tuesday 31 May 2011

John Laker, Chairman - Senate Standing Committee on Economics, Canberra

You will recall, Madam Chair, that our last appearance in February took place in the immediate aftermath of a spate of natural disasters in Australia and New Zealand. I provided the Committee then with some preliminary indications of the impact of these natural disasters on the general insurance and deposit‑taking industries regulated by APRA. Since then, the world has witnessed the catastrophe of the Japanese earthquake and natural disasters in other regions.

In my opening remarks tonight, I would like to give the Committee an update on the impact of recent natural disasters on these industries. We now have a more accurate picture, in particular, of the size of insured claims on the general insurance industry.

In February, preliminary indications put the gross insured claims from the natural disasters in Australia at around $3 billion. That figure has risen to just over $5.3 billion. Of this total, $2.8 billion relates to the Brisbane flooding, a little less than $1 billion to the flooding elsewhere in Queensland and a little less than $500 million to the Victorian floods. A further $1.1 billion relates to Tropical Cyclone Yasi and around $35 million for the Perth bushfires. These are insured claims only; the actual economic and financial losses sustained by the Australian community from these events are, of course, much larger.

Though the total is sizeable, a large amount of the claims are reinsured. Reinsurance recoverables are just over $3.4 billion, leaving net incurred claims of $1.9 billion to be met from the direct resources of APRA-regulated insurers themselves.

In New Zealand, losses from the Christchurch earthquake placed additional strain on some of our insurers. Since access to the damaged city is still limited, claims estimates are tentative. At this point, gross insured claims on APRA-regulated insurers are estimated at around $6.3 billion, of which around $5 billion is reinsured. I would add that only some APRA-regulated insurers underwrite business in New Zealand and that much of the earthquake cover was provided by a range of non-Australian entities. Our review of insurers affected by the Christchurch earthquake has been targeted primarily at ensuring that adequate claims provisions have been raised (based on the limited knowledge to date) and that appropriate reinsurance cover remains in place.

The Japanese earthquake has not raised any immediate concerns for our insurers. Some low-value incidental property claims are likely, but the larger exposure will be downstream claims from corporate clients related to shortages of parts, the need to find alternative markets and, possibly, trade credit exposures. The nature of these claims means that a longer timeframe will be needed before accurate quantification is possible.

The spate of natural disasters in Australia and New Zealand has, as I have illustrated, been felt most by the global reinsurance sector. To date, we have not observed any signs that reinsurers are withdrawing cover from Australian insurers. However, we are beginning to see signs of higher reinsurance costs being passed on to insurers and some changes in the structure of reinsurance programs, including increased retention of risk by the insurers themselves. Our immediate aim after recent events is to ensure that appropriate reinsurance reinstatements, and additional reinsurance where necessary, are in place so that insurers can withstand further major losses for the remainder of the year, should such events materialise.

The updated claims information does not change the broad assessment I provided to the Committee in February. To repeat that assessment, APRA does not expect that any general insurer it regulates will have difficulty continuing to operate in the face of the potential losses from recent natural disasters. We remain confident in the capacity of the general insurance industry in Australia, which holds around $30 billion in shareholders’ equity, to meet all of its claims obligations.

I would also mention that APRA has been providing input, from a prudential perspective, to the work of the Natural Disaster Industry Review Panel, which is chaired by the former APRA Executive Member, John Trowbridge.

APRA has also continued to monitor the impact of recent natural disasters on authorised deposit-taking institutions (ADIs) with activities and/or credit exposures in the affected areas. Clearly, the disasters created severe financial stresses for some customers and ADIs have responded with various hardship packages, designed to provide customers who need it with breathing space. These stresses are now showing up in a pick-up in arrears on residential loan portfolios in Queensland. A number of ADIs have taken the prudent step of establishing provisions for potential loan losses and APRA is monitoring these estimates closely; to date, there have been no significant losses crystallising in ADI loan portfolios.

APRA has also been spending some time with ADIs on operational issues that emerged during the natural disasters. Overall, disaster planning and protocols worked well, but there are always useful lessons to be learned.

The New Zealand earthquake has not, to this point, had a significant impact on the loan portfolios of Australian ADIs operating in that country, in part because of the different disaster insurance arrangements in force there.

One final point, on prudential policy matters. Last week, APRA delivered one of the elements of the global reform agenda to strengthen bank capital regulation, being driven by the Basel Committee on Banking Supervision. APRA released a package of enhancements to the Basel II Framework that, inter alia, increased capital requirements for higher-risk trading activities. These enhancements are expected to have only a limited impact on ADIs in Australia, which largely shunned these activities. More fundamental reforms to strengthen capital and liquidity buffers, known as Basel III, will be the subject of consultation papers that APRA will release over coming months.

We are now happy to take the Committee’s questions.

The Australian Prudential Regulation Authority (APRA) is the prudential regulator of the financial services industry. It oversees banks, credit unions, building societies, general insurance and reinsurance companies, life insurance, private health insurers, friendly societies, and most members of the superannuation industry. APRA currently supervises institutions holding $6 trillion in assets for Australian depositors, policyholders and superannuation fund members.