FINANCIAL SECTOR LEGISLATION AMENDMENT BILL (NO. 1) 2002: Second Reading
Mr CADMAN (Mitchell) (1.30 p.m.) —The Financial Sector Legislation Amendment Bill (No. 1) 2002 before the House today comprises a whole range of minor amendments to a range of legislation, including the Financial Institutions Supervisory Levies Collection Act, the Financial Sector (Transfers of Business) Act, the General Insurance Reform Act, the Insurance Acquisitions and Takeovers Act, the Life Insurance Act, the Reserve Bank Act, the Superannuation Industry (Supervision) Act and the Superannuation Supervisory Levy Imposition Act.
This is broad ranging and significant legislation, some of which will have a significant impact on Australians. Some of it deals with issues that are in the public arena, without coming to grips with the actual cause of some of the problems in the insurance industry.
The government is proceeding in a measured and careful way to resolve the insurance industry problems that have emerged over the last few months. There is no doubt that the impact of September 11 is significant as far as world insurance is concerned; nobody appreciated that companies like QBE would be seriously affected by insurance holdings offshore. Nobody would have predicted that such an occurrence, linked with the failure of HIH, could have such a widespread on impact things such as the Country Women's Association and pony clubs. There is hardly a community group that has not been affected by massive increases in their premiums due to these factors.
I want to go back over the last 10 years and look at what the insurance industry have been doing. A careful track through their figures indicates that they have taken a short-term, year-on-year, profit approach. The long-term projections by more prudent insurance companies, which are now available to us, indicate that the high-flyers—the so-called golden companies—of the insurance industry made calculations without adequate reserves and without an assessment of what their payouts would lead to. They made assessments based on cutting premiums and on writing more business purely on the basis of cash flow rather than what they might ultimately have to account for.
If one looks at the year-to-year accounts over the last 10 years, one can see that over the last two years insurance companies have faced a squeeze because they have not had enough income to cover their payouts year by year. However, an actuarial study based on a longer term view, and which is available to members and to the Assistant Treasurer, has been undertaken by a number of companies. It indicates that this trend was predictable as far back as 1997 and 1998 and that the ratio of long-term costs for insurance companies was clearly demonstrable. Any wise manager would have seen the escalating claims, the escalating payouts and the declining margins available to insurance companies three to four years ago. But, during that time, companies such as HIH continued to write unprofitable insurance and continued to buy unprofitable companies. They had what I regard as a very cavalier approach to the strong, deep and abiding trust placed in insurance companies by the public. Cavalier conduct is not what the Australian community expects from an insurance company.
This is equivalent to the conduct of some of the banking fraternity in the early 1990s, when they seemed to think that any bright scheme dreamed up in Western Australia or anywhere else was worth backing with lots of money. The crash came, and those lost funds had to be recovered in many instances from small business corporations. The public now have a growing disenchantment with the way insurance companies operate, and rightly so. They have seen that the willingness to write unprofitable insurance translated into crashes and failures. There was a sudden realisation that there could have been increased premiums over a longer period of time to cover the real cost of insurance. But nobody took those actions and suddenly the public—the small individual—has been lobbed with huge claims and huge premiums. Of course, that is not the whole story: the litigious nature of our society—which, I am told, is second only to the Californian community—is also to blame. When one compares the figures from the various states, New South Wales is the state where the largest claims are paid out. Does that mean that people take more risks or do more damage to themselves in New South Wales than elsewhere? No, it does not. It means that the judges that make these decisions have a far different attitude from those in Tasmania, where similar claims will earn a fraction of the damages claim. [start page 3279]
In New South Wales I think there is an entrepreneurial attitude in the community as well as careless administration at the state level. A cavalier approach by some members of the judiciary has created a situation whereby extraordinary claims have been met on the basis of sympathy rather than fact, and there is an attitude that wealthy insurance companies can afford to pay. Predictably, the figures were there three to four years ago.
I guess what I really want to know in this situation is: where was the Insurance and Superannuation Commission and where was APRA in this process? I understand that the Commissioner for Insurance and Superannuation was notified in 1991 of the difficulties that where being faced by HIH, and I believe that there was correspondence at that time between the commission, the commissioner and the insurance company. The agreed process, over a period of a few months in 1991, was that HIH would trade their way out of it. Ten years later, they are still trading their way out of it by buying companies like FAI—some supervision, some control, some management! I know that the royal commission will turn up these factors, but I cannot believe that Insurance and Superannuation Commission personnel were all dumped with the formation of APRA, that none of them got a job in the new organisation and that none of them carried forward any knowledge or understanding of the insurance industry, their responsibilities or the responsibilities of the role of the new supervisory body.
It is a matter of real concern because the fact is that we will shortly see legislation which will restrict the activity of general insurance companies. It will require certain funding and a certain holding of funds. Some of the smaller companies have been very successful companies; they have operated without threat or problem. But what we will see in the future as one way of fixing this problem is not a better commitment to better supervision and not a willingness to understand why there was a failure of the supervisory body 11 years ago to put in place a plan to have HIH take control of its circumstances and then to watch over it diligently to see that that actually occurred. That is not the plan. The plan is to knock out some of the smaller operators to see whether that fixes the problem. The only shortfall I see with that approach is that HIH was the largest company of its type operating in Australia. There is nothing in this process that would seek to deal with the problems exposed by HIH with regard to supervisory roles but, instead, there is a wish to knock out some of the smaller companies because they may be at risk. I know that the government is working through these problems.
I want to put on the record my concern about the lack of supervision and the lack of knowledge being carried forward from the Insurance and Superannuation Commission into APRA and the failure of APRA to continue a plan of supervision of HIH—a plan that was known about and should have been implemented. I make another passing comment about APRA when I note that the Auditor-General was not happy with the way in which they kept their accounts and gave a qualified audit opinion. That is hardly the sort of thing that you would expect to apply to a regulator of finance in Australia. A qualified audit opinion by APRA—who would believe it? I do not think they are at all impressed. A great deal more needs to be done to demonstrate to the community at large that this organisation is worthy of holding a position of supervision of financial institutions.
The Australian National Audit Office stated in its report in 2001, when it investigated APRA, that the policy adopted also represents a departure from Australian accounting standards. Can you imagine that—the organisation charged with upholding accounting standards ignoring them as part of its processing? The Audit Office said:
The policy adopted also represents a departure from Australian Accounting Standard AAS15-Revenue, which requires that revenues be recognised when, and only when, the entity has gained control of the revenue or the right to receive the revenue.
I hope, in the wash-up of the royal commission, that some of these things are noted and dealt with. In the view of ANAO, the effect of APRA's reporting approach was that the net off-rating deficit was understated by $799,000—that is, three-quarters of a million dollars out, simply by not following an Australian accounting standard. No doubt, since that time there have been many explanations. I do not know where the opposition have been while these things have been disclosed, but they certainly have not targeted a need for better strength in a supervisory role.
I want to deal briefly now with some of the problems created in the insurance industry with the changes that have occurred. First of all, I want to look at the medical insurance fund, the chairman of which said, I believe in the month of March, that all doctors should be very happy with their self-managed fund and they should keep backing it. Then, a month later, they called in a liquidator. I do not believe that that is very responsible management either because that fund, which is not supervised by APRA—I cannot blame them for this problem—and the chairman of such an organisation was, I believe, either misled or is being misleading and should, in fact, have been able to inform his members, some of whom are the most hardworking and brilliant Australians, who are responsible for their follow citizens' health. It is not possible for surgeons, neurosurgeons and obstetricians—people charged with serious and long-term responsibility for health—to continue to operate. So the end of the year, when the government's program starts to peter out, is an important deadline for us to examine the way in which medical insurance will be established. [start page 3280]
I do not believe people need have any worries at this point. Most of the members of the medical fraternity with whom I have discussed this seem /files/includes/content.css at last with what the government has done. The AMA was not particularly helpful because in every instance that something was proposed there appeared—reading between the lines—a private agreement between the head of the AMA and the government and then a press conference immediately after that denied some of the things that appeared to be settled. Either the representation is out of touch with the requirements of the medical fraternity or it is prepared to negotiate away their requirements but disclaim that in a public statement. It will be interesting to see that the government can move through and satisfy the highly skilled specialists who need to have a particularly stringent coverage.
One has only to speculate briefly to realise that an obstetrician attending a birth is liable for negligence claims against them for as long as 26 or 27 years following that birth, during which time it is possible for a person to sue the obstetrician for any matter they feel may relate to a difficulty caused by that person at the birth of a child. That is a very long bow, but judges have listened to those arguments. The same thing applies to neurosurgeons, where an operation performed of a delicate type on nerves or brain can be claimed against in the indefinite future. This has to be limited. We cannot forever hold a person responsible for their actions when their intention—their whole commitment—is one of remedy and healing. We are only looking at what is inadvertent or negligent, and that is the way the insurance needs to be drafted and drawn.
I want to talk about public liability and the role of sedentary organisations—organisations that meet on a monthly basis, discuss business, write letters and try to get improvements in our community. They have a very difficult job in confronting their budget in the coming year when they find how much their insurance has increased. Their public liability claims are not great because they do not get into dangerous activities. A Country Women's Association street store is hardly equivalent to a pony club or a sporting club activity from an insurance point of view. But both are equally significant from the community's perspective and need support and need to be able to continue. All of these groups fill most important roles in our society. To say that they should cease meeting or cease continuing simply because of the cost of insurance would be a criminal and dreadful thing to do. It would irrevocably change the nature of the Australian community.
We have just celebrated the Year of the Volunteer. Many of those volunteers who received awards during that year received them for jobs they had done in a voluntary group of a small and local nature. They are the ones who are going to be hit, not the tourist operators talked about by the opposition. I do not know when the opposition are going to get it into their head that real Aussies do not go on wild adventure holidays. Real Aussies belong to their local groups, in which they perform services day by day, year by year, to their community. These are the ones that are of greatest concern in continuing public liability insurance.
I refer to the self-fulfilling nature of the requirement to insure at a higher figure become claims are high. I remember when we needed to insure for a public liability of $1 million. Within a couple of years we needed to insure for $5 million. Now the figure is $10 million. A community organisation insures for public liability for $10 million. This needs to stop. Pony clubs, sporting groups, the Country Women's Association, P&C associations—all of those groups—need to have the assurance that they are safe to continue their activities and safe to continue a voluntary effort in the community. They need an assurance that they are safe to continue to service the community and receive a sense of fulfilment and sense of purpose by doing so. I am looking forward to the resolution of these problems. The government is moving, as are state governments. I hope that they are sensible in formulating the outcome. (Time expired)
Author: Alan Cadman MP
Source: House Hansard - 19th June 2002
Release Date: 2 Jul 2002