The insurance industry in Australia has been caught before in regulatory whirlpools that were intended for its cousins in banking and funds management. As the global financial crisis storm moves on, the danger of new reactive regulations – designed to clamp tighter controls on the banking and investment sectors – could once again see the blameless risk insurance sector being caught up and swallowed.

The regulators are warning financial services companies not to get too comfortable in the belief that the regulation pendulum has now swung past, leaving them free to get on with business as usual. Bankers, investment chiefs, grossly overpaid CEOs and insurance industry leaders, take note: it’s probably going to get much tougher, because now governments believe they must be far more stringent in their oversight.

The regulators and their political masters, who now work closely through strong global networks, know the only way to avoid future financial crises brought on by imprudent behaviour and greed is by setting tough rules and enforcing them.

Adair Turner, Chairman of the UK’s Financial Services Authority, warned last week that while the UK banking system is now stable and growth looks good for the next three years, it can’t be forgotten that the world has just experienced the worst crisis for 70 years.

“Real disaster – a new Great Depression – was only averted by quite exceptional policy measures,” Lord Turner said. “Despite these measures major economic harm has occurred… because of an economic crisis whose origins lay in the financial system.

“We cannot go back to ‘business as usual’ and accept the risk that a similar crisis occurs again in 10 or 20 years’ time. We need radical change. Regulators must design radically changed regulations and supervisory approaches, but we also need to challenge our entire past philosophy of regulation.”

The former Head of the World Bank, James Wolfensohn, told a Lloyd’s city dinner in London earlier this month that despite a restored sense of confidence among the financial sectors of the developed world, government leaders are doing their best to try to balance things.

“As leaders in the financial community, we need to be not only thinking in terms of our businesses but thinking in terms of shaping the world for the next generation and creating opportunities,” he said.

In Australia, uncompromising regulation of the financial services industry has been applauded for helping the industry withstand the global financial crisis.

But there’s no sign of the regulators here breathing a sigh of relief and relaxing. On the contrary. With the 2001 collapse of HIH still a sharp reminder of how lax it once was, the Australian Prudential Regulation Authority (APRA) won’t make the same mistake twice. A spokesman told insuranceNEWS.com.au that supervision of the financial services industry will continue to be stringent.

And there are plenty of issues yet to confront. APRA Chairman John Laker says the financial crisis provides no shortage of issues for policymakers determined not to repeat the mistakes of history.

Before markets plunged late last year, the financial services industry was extraordinarily confident about where the market was heading.

As Mr Wolfensohn points out, the central bank governors of the world were very optimistic about rates when they met in August last year – they thought the financial world was in great shape. A month later it was a very different story.

Dr Laker agrees. He says risks can materialise very rapidly and substantially, yet the speed at which problems showed up in financial institutions seemed to take markets and policymakers by surprise.

“Buoyant times – and they will return – can dull the collective senses in risk management,” he said. “The lesson here is straightforward. When the basic business purpose of an activity or product is difficult to fathom, boards and management need to be very wary.”

He says there are a number of initiatives already under way by market participants and regulators to revive and improve the markets.

These initiatives are aimed at reducing the complexity of products, strengthening transparency and improving the use of ratings.

The local risk insurance industry, which over the past 10 years has absorbed a remarkable number of new regulations in sales, consumer relations and business practices, isn’t immune from the impacts of what Dr Laker is talking about. They will continue to face pressure for change in concert with the other financial services sectors.

As the regulators have highlighted, they are in for a barrage of new checks and balances on their methods and activities in coming months.

In many ways the risk insurance industry is very different from, say, banking and investment services. But insurance tends not to be seen as different when the regulators sit down to discuss new checks and balances. Two recent examples are the Government’s reluctance to let general insurance retain its own consumer code rather than be brought into new consumer laws, and the amazing efforts needed to make the impact of money-laundering regulations on premium funding clear to regulators with little knowledge of how insurance works.

That’s why the industry must continue to track regulatory trends and ensure its unique nature is understood and supported in the corridors of power. Without this sometimes onerous and often thankless work, the industry runs the risk of being included in regulatory moves it neither needs nor deserves.

As Benjamin Franklin noted, the price of freedom is eternal vigilance. It’s a precept that rings true for the risk insurance industry as well.