The Insurance Council of Australia has backed the Coalition’s pre-election pledge to ease the industry’s capital requirements and compliance costs.

“Insurers support effective regulation to protect consumers and enhance trust in the insurance sector, adopting best practice and focusing on consumer outcomes,” the council said last week after shadow treasurer Angus Taylor outlined the plans.

“However, the rapid pace of regulatory reforms over the past decade has strained industry resources and added to cost pressures that are ultimately borne by customers.”

ICA backs moves to “improve productivity and reduce costs for consumers by adjusting capital liquidity rules for insurers.

“This would be a significant change and one insurers have been calling for for some time.”

Mr Taylor said: “Increasingly, Australians are underinsured, underadvised. Overzealous regulators ... and unintended consequences of well-meaning regulation have seen those arteries clogged.

“Compliance costs in the financial services industry now exceed $1 billion.”

On Australian Prudential Regulation Authority capital rules for insurers, he said: “We will reset APRA’s statement of expectations, balancing its primary focus on financial system stability with internationally competitive access to finance for Australian households and businesses.

“In particular, we will focus on … avoiding overcapitalisation of insurers to better reflect the underlying risks of their portfolios, lowering costs for consumers and freeing up capital for investment. Financial stability will still be paramount, but we need to facilitate investment and innovation, not hinder it.”

Taylor Fry actuary Scott Duncan says the key issues facing home insurance are the impacts of natural disasters and building material cost inflation.

“The amount of capital insurers need to hold and the return required on that capital is probably what I’d refer to as a secondary factor,” he told insuranceNEWS.com.au.

He says current prudential requirements are “calibrated to ensure that insurers hold enough capital against a one in 200-year event ... They do allow insurers to invest in higher-return/higher-risk investments – equities, for example. 

“What the current regulatory framework does is, it looks at the relationship between the assets that an insurer holds and the profile of its liabilities, and the idea is that if they are perfectly matched ... you don’t need to hold significant amounts of capital.

“That’s all wrapped up in what is called the asset risk charge under prudential requirements ... and I think what the [Global Financial Crisis] shows in particular is that things can change very quickly when it comes to financial markets.

“The catastrophic events we have seen over the past 10 years show that liabilities can also change very quickly, so those large events can have a material impact.”

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