Peter Costello

Speeches

Address to the Insurance Council of Australia Conference

ADDRESS
INSURANCE COUNCIL OF AUSTRALIA CONFERENCE

GREAT HALL, PARLIAMENT HOUSE, CANBERRA

THURSDAY, 12 AUGUST 2004
8.45 AM

Thank you, Mike, to Alan, to the members of the Insurance Council of Australia, I’m delighted to be here and to give the opening address at your 2004 conference this morning.

I hardly need to tell you of the importance that the insurance industry plays in Australia’s economic life. Australia represents about twoper cent of the world insurance market, about double the size of our proportion of gross domestic product on a global basis.

During the year 2002-03, the insurance sector contributed about $13.6 billion to the Australian economy, 1.8 per cent of GDP. But quoting those figures doesn’t pay due deference to the real importance of insurance to economic life. If it didn’t exist, a large proportion of the remaining economy would be affected – we learnt that, did we not - during the HIH saga. The flow on or the knock on or the systemic effects, of trouble in the insurance industry.

Insurance provides the vital market function of allocating and pricing risk. This is an essential element of a high performing economy. The efficient pricing of risk and its transfer to those best equipped to handle it contributes significantly to resource allocation and economic growth. And without a reliable mechanism for pooling and transferring that risk, much economic activity just simply wouldn’t take place. And neither would a lot of social activity  we learnt that too during the public liability crisis.

Many of the sectors of the Australian economy are hugely reliant on insurance, shipping, aviation, health, legal, accounting, auditing and increasingly banking, through credit risk transfers.

Given the importance of the insurance industry in the economy, the Government values a strong relationship with the insurance sector and its organsations. The Government has been very actively involved, in some cases unwillingly, with the insurance industry recently, such as working through the outcome of the HIH crisis.

We believe that pricing and allocating risk is best performed by the private sector. However, we recognise that the Government has an important role that ensuring a prudential arrangement which will base a strong industry. The Government may also have a role where there is market failure. We recently stepped in with the Australian Reinsurance Pool Corporation to respond to the market failure in relation to terrorism insurance.

APRA

Following the HIH Royal Commission we revamped quite comprehensively, the Government’s arrangements through the Australian Prudential Regulation Authority. We have put a strong team in place in that authority equipped to carry out the regulatory mandate. Like all prudential and regulatory regimes, our regime has been evolving over time, and it has been a constant process of getting to where we now are. The passage of the General Insurance Reform Act 2001, was, what we call Stage One, of our reforms.

It required minimum higher entry level capital of $5 million rather than $2 million, and new minimum capital requirements now more closely linked to the risk profile of individual insurers.

We also introduced a compulsory Risk Management Standard as an important part of Stage One. This enhances an insurer’s risk management and monitoring through access to appropriate independent expertise and systems. And it requires the Board and senior management of an insurer to be subject to a ‘fit and proper’ test.

You all know that APRA is now currently considering Stage Two, to strengthen corporate governance, as well as requiring the disclosure of additional general insurance information. Several of the proposals flow from the HIH Royal Commission. Some of the proposals have been criticised by the insurance industry. And I think it is important that a dialogue be maintained between the industry and APRA to ensure that our Stage Two reforms do enhance accountability without over-regulating in the area or subjecting the industry to unnecessary complexity.

The long experience in the insurance industry of members of the APRA team, and I see Stephen Somogyi here today, will further assist in ensuring the active consultation and effectiveness of these arrangements.

Smash Repairers

Let me come to another issue that has been of recent discussion in the insurance industry, the smash repair business. Smash repairers have expressed concern about insurance companies calculating hourly rates for work undertaken on behalf of consumers without reference to the real costs involved in providing the service.

They have expressed concerns about the transparency of preferred smash repairer (PSR) schemes. Specifically, they say they are unsure how to obtain PSR status and how businesses losePSR status.

Some smash repairers claim they are forced to use substandard parts or engage in ‘cutting corners’ to try and compensate for being squeezed excessively over labour charges. The Government’s point of view obviously, this would concern us, if it led to dangerous repairs or repairs which were not accurate for consumers.

We have met with representatives of both the smash repair industry and insurance companies to discuss these issues. We look forward to a meaningful response from the industry in the very near future. We would prefer this matter to be worked out by a mutually agreed Code between the industry and the smash repair businesses.

A related reform would be the Government’s response to the Dawson Inquiry into the Trade Practices Act. That will allow easier notification of processes for collective bargaining. We would expect that that would enable the smash repair businesses if they choose to take up those provisions, to collectively bargain with the insurance industry.

The introduction of the notification process should improve the accessability and the effectiveness of the Act, particularly for small business, and will also allow for third parties to make a collective bargaining notification on behalf of a group of small businesses.

Profitability of industry and passing on benefits to consumers

Let me come now to the profitability of the industry. I am pleased to see that the industry is showing recovery from the turmoil of recent years. The industry is recovering, succeeding in offsetting falling investment incomes and public liability disclosure. Companies are now rebuilding their capital as a result of better underwriting performance.

According to APRA data, after-tax profit for the general insurance industry increased from $740 million in 2002-03, to $3.017 billion in 2003. That was an increase of after tax profit of over 300 per cent.

Now it is important for insurers to maintain credibility with the insuring public, it is also important for them to appropriately balance the entitlement of shareholders to return with fair prices for policy holders. The industry would be aware we have tasked the Australian Competition and Consumer Commission to monitor costs, premiums and profitability for public liability and professional indemnity insurance on a six-monthly basis over two years.

The most recent report from the ACCC, which the Government will be releasing shortly, confirms that profitability in both public liability and professional indemnity insurance has increased. The report also indicated that the rate of increase in the average premium for both professional indemnity and public liability insurance in 2003 was around half of that in 2002. This is an encouraging initial signal, that the Government and consumers will expect to see the benefits of recent insurance reforms continuing to flow through to premiums.

The ACCC has indicated that it will continue to monitor the progress of reforms through its regular pricing monitoring reports. If the evidence indicates that insurers are not passing on the benefits of reform, the ACCC will consider seeking further powers to effectively monitor premium prices.

BANK SECRECY

Let me now come to an issue which may be of considerable interest to the insurance industry. The insurance industry, I am sure, would have shown considerable interest in a fire at the Alpine Offset Printing Press and the subsequent developments in relation to that fire. Subsequent developments in relation to that fire have indicated the possibility for people to use Swiss secrecy laws to avoid disclosure to corporate regulators in Australia.

It is only when Swiss regulators became concerned as to the observance of their own corporate laws that new and material information came to light. Swiss secrecy laws can also be used to establish tax havens where Australian or other taxpayers seek to opt out of paying their fair share of tax in this country. Tax havens undermine the revenue base, tax havens are not fair. And ordinary law-abiding taxpayers are rightfully outraged by the use of off-shore tax havens to avoid paying Australian tax. This is why action against tax havens has been one of my top international priorities for many years.

In June of 2000 when I was the Chairman of the OECD, we approved a strategy for advancing what was then called the Harmful Tax Practice Initiative against tax havens.

Shortly after, in a meeting with my counterparts in Montreal comprising 20 major countries important to the financial system and reserve bank governance, I urged action by all members to strengthen efforts to combat financial abuse.

In November 2001, after the terrible events of September 11, Finance Ministers in Ottawa added to the agenda measures that should be taken to combat the financing of terrorism.

The financial system is in some respects like the aviation system. Just as a terrorist will look for the weakest link in the international aviation system to get inside the system where they can then travel, so too, do money launderers, financiers and terrorists or those that seek to use tax havens, look for the weakest link to get inside the world financial system so they can achieve their objectives.

It is only through coordinated activity by all countries that the weaknesses in the system can be closed. Whilst there is one country which provides an easy entry, those that want to hide their financial dealings can access the international financial system.

Unfortunately, in September of 2003, Switzerland and three other OECD countries did not agree to the OECD agenda to remove bank secrecy laws. At the time I made this statement; “If you want to have a look at a weakness in the enforcement of taxation law we know where it stands: the secrecy of Swiss bank accounts.”

I took this issue up again in Mexico in October 2003 at a meeting of the G-20. The meeting unanimously reaffirmed the commitment to cooperate in the fight against abuses of financial systems, particularly in relation to bank secrecy laws. We called on all countries - especially those OECD countries that do not allow access to bank information - to join us in that fight.

The actions of the Swiss and others, have caused delay. But we cannot let this important international campaign be derailed.

At my instruction, Treasury officials are attempting now to reinvigorate this work. We are asking for three commitments. One, we are asking countries to commit to making their tax systems more transparent. Two, we are asking for a commitment for the repeal of bank secrecy laws. And three, we are asking countries to enter into agreements for the exchange of information on tax matters.

The effort can only be successful if key financial centres including Switzerland and Singapore make these commitments.

The tax treaty we have with Switzerland is currently due to be renegotiated. Australia has made it clear that we will regard the effective exchange of information as critical for these negotiations with Switzerland.

At my instigation, Australia has entered into negotiations with Antigua-Barbuda, Jersey, Guernsey, the Isle of Man and Bermuda on tax information agreements. By entering into those discussions, those countries have demonstrated their commitment and I applaud their courage and their leadership.

I want to also say that this matter was discussed at the Pacific Islands Forum Economic Ministers Meeting in Rotorua recently, where again the Pacific countries have reaffirmed their commitment to join international action against harmful tax practices, money laundering and financial abuse.

Australia will continue to work in international fora to encourage countries to commit to these processes. We will work in the IMF, in the OECD, in the G-20, in the Commonwealth and in the Pacific Island Forum for these ends.

I call upon those countries which have not yet made those commitments to do so. Whilst there is one weak link in the international financial system, those that wish to use it will be able to enter that system and will have confidence that they will be free and protected against regulatory activity.

The reason why I raise this here is that this is not just a tax issue. As you have learnt in your industry, it is also a matter of corporate governance with direct effects on ancillary industries such as your own. Your industry should have been entitled to know information which it did not at the time of certain events. And your industry, like so many other industries, and like the tax paying public of Australia, has the right to know that in their efforts, whether they be corporate regulators, or whether they be tax investigators, that they will not be hindered by some countries’ secrecy laws in the enforcement of their duty.

Ladies and Gentlemen, I want to thank the insurance industry for the work that it has done and its contribution to Australian economic life. I hope that this is a productive conference and I look forward to continuing to work with the Insurance Council of Australia and I thank you all very much for your time.

12 Aug 2004

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