Insurance affordability and an onslaught of international regulation are key challenges for the industry, according to Ian Harper of Deloitte Access Economics.

Speaking at the Insurance Council of Australia (ICA) regulatory update seminar in Sydney last week, he said the industry must “read the signs of the times” and work with the Government on affordability or face being regulated in a way that damages competitiveness and innovation.

Responding to calls from Parliamentary Secretary Bernie Ripoll and Shadow Financial Services Minister Mathias Cormann for the industry to help find a solution, Professor Harper told the ICA seminar that when politicians ask for dialogue, it means they are under pressure from the electorate.

“They are saying, ‘We need you to help us to come up with reasonable responses to the demands of the people’,” he said.

Professor Harper warns if the industry does not respond, it risks placing itself in the position of health insurance funds, which have to apply to the Health Minister once a year for premium increases.

“If the political pressure builds, governments respond in ways that often even they understand are sub-optimal.”

Professor Harper says the industry should avoid a “public dogfight” with the Government and work with it on affordability.

“Last week’s statement on [disaster] mitigation is welcome but $50 million a year spent on mitigation is hardly anything,” he said.

“The general public have no idea whether $50 million a year is enough or not – to most people it sounds like a lot of money.”

He says regulation is “right at the top of the list of things you need to worry about over the next 12 to 18 months, two years perhaps; the fact this is an election year makes it even more intense”.

Increased international regulation stemming from the global financial crisis will arrive here, enveloping insurance in laws designed for banking.

“The concept of systemic risk is being applied to an industry where traditionally systemic risk was not present,” Professor Harper said.

“Your industry needs to be absolutely vigilant that the types of regulations you are asked to accede to are not informed by an understanding of your industry that is essentially biased by the experience of insurance industries elsewhere in the world.”

He says local insurers that could be considered globally systemically important are likely to face higher capital requirements – even though capital adequacy was not an issue for them during the crisis – and this will affect smaller domestic insurers.

While Australian regulators are aware how inappropriate it is to apply international standards here, and are trying to hold the line against it, the country needs to import capital for its development and must be seen to be compliant with international laws.

“This rising tide of regulation you are facing is coming not necessarily because [the Australian Prudential Regulation Authority] wants to do this, but because our international circumstances are such that we have no alternative,” Professor Harper said.