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State of the industry: Enthoven outlines the key challenges

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Insurance Council of Australia (ICA) President Richard Enthoven’s “state of the industry” speech at the National Insurance Brokers Association (NIBA) Convention on the Gold Coast last week was brutally honest on the trials heading the industry’s way. But it also contained plenty of hope, pride – and new information.

The address included revelations about a $100,000 deterrent contained within the new General Insurance Code of Practice, an acceptance that climate change could make parts of the country uninsurable, and a warning to regulators on handling the raft of upcoming reforms.

Here are the key sections of the speech:

“As someone who has served as the CEO of a single insurer, The Hollard Insurance Company, for the past 20 years…I have had the pleasure of leading a start-up insurer, a medium sized insurer, and now, a large insurer.

“And I have watched the industry change and evolve for two decades. I have also served as the President of ICA for the past two years – a period which coincided with the financial services royal commission. And, with it, the most remarkable and comprehensive review of our industry’s legislative and regulatory environment.

“A period of flux [has been] further complicated by changing community standards and expectations. All this, as well as a raft of issues that directly impact our industry such as climate change, the new International Financial Reporting Standard IFRS 17, cyber risks, disruptive technologies like AI and the ‘Internet of Things’, driverless cars, and interest rates falling to zero – or, heaven forbid, negative – to name a few, means that the “State of the Industry” is busy. Very busy.

“We have a lot on our plate. All stakeholders will need to work closely together if we are to navigate these challenges to ensure positive outcomes for our customers, for the many thousands of Australians that work in the industry and for the broader community.

“We are staring into a period of unprecedented change that could turn the industry on its head – creating winners and losers on, potentially, an unprecedented scale. It truly is, by equal measure, both a challenging and exciting time to be in the insurance game.”

Mr Enthoven also pointed out that despite the focus on challenges, it is worthwhile to also reflect on the things that are working well.

“Firstly, our general insurance industry is well regulated. I realise that this may not be a fashionable opinion, but I believe that the facts speak for themselves. Since the collapse of HIH and the appointment of APRA as the prudential regulator for general insurance, there has not been a single meaningful insolvency in the Australian general insurance industry.

“Indeed, for two decades, which saw both the Global Financial Crisis and the remarkable period in 2011 when the weather tested us in an unprecedented way, Australian insurance companies have reliably been there to pay claims.

“We also have a competitive market with regular new market entrants, a number of so-called “challenger brands” and major international insurers all competing actively in the market and taking market share each year.

“Australia also continues to be one of the strongest global markets for Lloyd’s – punching well above its weight. Indeed, the global insurance industry has long considered Australia an important jurisdiction in which to deploy capital.”

Mr Enthoven did not shy away from the industry’s shortcomings, noting that the “deep dive into misconduct” by the Hayne royal commission exposed “conduct below customer expectations”.

“Most key industry participants have also undertaken an internal review of their governance, accountability, culture and management of non-financial risks. These reviews have uncovered areas where we, as individual companies and a collective, can and must do better.

“Let’s acknowledge these shortcomings and accept that there is much work to be done. However, it is also very important to remember that Commissioner Hayne, after conducting arguably the most thorough review of misconduct in the financial services sector’s history, found “no systemic misconduct” in the general insurance industry. I wonder how many other industries could say that.

“So what can the industry do to address changing community expectations? ICA has for a number of years been engaging with key regulatory and consumer stakeholders about the development of a revised General Insurance Code of Practice. We believe it will go a long way to addressing community expectations as well as demonstrating the efficacy of self-regulation.

“The ICA board will meet on October 31 with a view to approving the new code. [It] focuses on vulnerable customers. It includes important new provisions focusing on mental health and, importantly, a requirement for insurers to implement a domestic family violence policy.

“Our industry can rightly be proud to play a role in addressing these two national crises.

The new code will become mandatory following ICA board approval and a likely 12-month transition period commencing on January 1 2020.

“The only exception to this will be the provision requiring members to implement a “family Violence Policy” for customers, which will have a six-month transition period.

This earlier implementation time is another strong message from the ICA board about the importance to the industry in prioritising our collective response to domestic family violence.

“The new code will, for the first time, include a community benefit payable by members of up to $100,000 as a sanction for significant breaches – a strong message from the ICA Board that industry self-regulation should have meaningful sanctions.”

Mr Enthoven also noted that for the first time ASIC’s approval of the new code will be sought. This will follow industry-first reviews of the Government’s still-pending enforceable code provisions legislation, which is expected to be released by June 30 next year.

He says ICA has been in active discussions with Treasury to facilitate the industry’s response “to the tsunami of new legislation and regulations coming our way in response to Commissioner Hayne’s recommendations”.

The reforms are designed to address adverse customer outcomes including:

  • Design and distribution obligations and product intervention powers
  • The extension of “Unfair Contract Terms” to general insurance
  • Regulation of claims handling as a “financial service”
  • A deferred sales model for value-added products.

“Let me be clear – our industry is completely in support of the Government’s efforts to implement all these regulatory changes,” Mr Enthoven said.

“However, we will be voicing a clear view that they must be introduced in a considered and thoughtful way which does not impose greater costs on the community than the benefits they are intended to achieve.

“But it is not just regulation that is keeping us busy. A changing statutory landscape is merely one of our challenges. Let’s consider some others. The economy is clearly stuck in first gear despite record low interest rates.

Low growth means fewer people buying homes and cars and starting businesses which, in turn, means fewer assets for us all to insure. This creates a growth challenge for our industry that will require product innovation or cost cutting to maintain margins. Cost-cutting seems to be in vogue.”

He also highlighted the role of climate change, noting the issue is “sensitive politically” in Australia despite the fact that “robust industry data on the impact of weather losses is aligning with climate science”.

“Evidence abounds in support of claims our planet is warming because of increased carbon emissions.

“Climate change creates complexity for insurers because, to some extent, it reduces the reliability of our past data on claims as a tool for predicting future losses. And changing weather systems may well make certain regions more exposed to storm, flood or bushfire thereby potentially making parts of Australia uninsurable.

“For this reason, ICA has supported the findings of the Productivity Commission which recommended the Commonwealth invest at least $200 million a year (matched by state and territory governments) on infrastructure to make our communities more resilient.”

Mr Enthoven says that despite the challenges ahead, he is optimistic about the future.

“It won’t be easy. Stakeholders will need to work together, and we’ll need to push hard to bring and keep the best possible talent, especially female talent, into the industry if we are to successfully face the challenges ahead.

“My optimism is based on the human truth that we all want to do something meaningful in our lives. And, we see thousands of professionals in our insurance community do that every single day. Our day job is to rebuild our customers’ lives when they need us the most and, in doing so, make communities across our wonderful country more resilient.

“In the past 12 months alone, the industry has poured $2.5 billion dollars of claims payments into the catastrophe affected areas of NSW and Northern Queensland. We have employed thousands of local tradespeople and local businesses, allowing devastated communities to get back on their feet.

“To be able to do something that matters, to help people and communities every day – that is a huge privilege.”