The insurance industry faces a storm of regulation coming from abroad, along with local pressure from governments over the affordability of cover and discrimination based on risk.

The Insurance Council of Australia’s regulatory update seminar last week heard the industry can do little to prevent being swept up in a wave of global financial regulation, even though most of it is a response to the activities of foreign banks in the global financial crisis.

The legislative load will mean more work for insurers, and many of the speakers at the seminar could see little benefit to consumers from the extra complexity being introduced.

Bernie Ripoll and Mathias Cormann, representing the financial services portfolios on both sides of Federal Parliament, urged the industry to talk to them about solutions to affordability – a message that Deloitte Access Economics partner Ian Harper warned can’t be ignored.

“The politicians must do what the people press them to do, and it is your job to explain clearly how to make the product work for people and be affordable for people when the underlying risks you are trying to manage are some of the least predictable and most costly we have seen in our lifetimes,” Professor Harper said.

John Morgan, a partner at law firm Allens, told the seminar that “we are in the age of regulation – and that’s not just legislation but all those softer forms of regulation in the forms of codes of practice, policy statements and regulatory guides”.

He says the Insurance Contracts Act is nearly 30 years old, is largely unamended and has proven to be a resilient piece of legislation.

“If we are going to have more regulation then can we please have the careful processes that gave us very good outcomes like the Insurance Contracts Act and not have regulation generated by deal-making, which unfortunately is how I see the FOFA (Future of Financial Advice) legislation.”

Many of the speakers noted the local market will be affected by what foreign regulatory bodies do, with Australia mostly being influenced by trends in the UK.

Mr Morgan says fairness is becoming more prevalent in regulatory debates, with comment based on ideas of reciprocity, impartiality and equality.

“Affordability is part of that fairness debate.”

He says there is considerable discussion in the UK about treating customers fairly, which raises questions about product design and whether insurers should pay greater regard to the group the product is going to be marketed to.

“This idea of product governance is getting traction in some places,” Mr Morgan said. “Ideas of fairness and product suitability are not going to go away and we need to be careful about how that develops.”

IAG CEO Direct Insurance Andy Cornish compared UK and Australian regulation, noting there is potential to add complexity with questionable gains to the consumer, such as adding unfair contracts terms to insurance contracts here.

“Consumers already have strong regulatory protection against unfair terms and unfair conduct in insurance contracts, and the unfair contract terms are ill-suited to the insurance context as currently drafted,” he told the seminar.

He says the view of price differentiation in insurance as unfair discrimination “seems to be one that is gaining momentum”, and warned against anti-discrimination provisions that reduce insurers’ ability to price for risk.

“The ability to discriminate based on an individual’s specific circumstances and characteristics is integral to the assessment of risk and our ability to accurately price it,” he said, noting there is plenty of evidence from floods and bushfires that consumers do not want to cross-subsidise people who live in high-risk areas or who do not buy insurance.

Mr Cornish says this has become the case under the EU Gender Directive, which prevents insurers offering different prices to men and women, and effectively means lower-risk female drivers are subsidising men, who have more accidents.

He says female first-time drivers’ premiums have risen 104% while male first-time drivers have gained through a 27% decrease.

Professor Harper says there is a danger that insurance will be deliberately underpriced to meet an affordability objective, and the industry needs to start talking with the Government as soon as it can to avoid that possibility and the market instability that would result.