Right Size Regulation

Appropriate regulation is necessary to protect the financial system and consumers. However regulatory complexity can increase the cost of doing business and so increase costs for customers, hinder innovation, and disproportionately impact smaller market participants and new market entrants.

Impact on innovation

Australia’s insurance market is mature, competitive, and sophisticated which creates incentives for insurers to continuously innovate on product and pricing. However, the cumulative regulatory burden can limit the flexibility required to efficiently innovate.

Impact on affordability

Cumulative regulation imposes significant operating costs on the insurance industry which are ultimately passed onto customers through higher premiums. Similarly, industry funded regulatory schemes create business costs which are reflected in premiums. These schemes are necessary but must be done in the most efficient and balanced way in order to properly balance appropriate guardrails with consumers costs.

Current challenges

• Reactive policy development: The regulatory policy process in Australia is often reactive, rather than geared towards a longer-term consideration of consumer needs and market development.
• Insufficient consumer testing: Significant reforms rarely include robust consumer testing to ensure they meet intended goals.
• Limited industry consultation: Inadequate input from insurers leads to ineffective regulations that fail to address practical challenges.
• Disproportionate impact on smaller institutions: Complex regulations place a heavier burden on smaller insurers, potentially reducing market competitiveness.
• Resource constraints: The rapid pace of regulatory reforms over the past decade has strained industry resources.
• Unclear reform pipeline: A lack of visibility on upcoming changes hampers insurers’ ability to plan effectively and allocate resources.

Recommendations

To improve the efficiency, fairness, and predictability of Australia’s regulatory environment, the Insurance Council of Australia recommends government and regulators proceed with:

• Regulatory transparency initiative: In line with the ICA’s long-term advocacy and the Federal Government’s announcement in March 2024, Australia will benefit from a financial sector regulatory initiatives grid, similar to that in the UK, providing a clear and transparent roadmap for upcoming regulatory changes.
• Improved consultation: Implement a minimum two-month consultation period for financial services legislation.
• Policy principles: Develop clear principles for financial services regulation with input from the financial sector and the Council of Financial Regulators.
• Post-implementation reviews: Undertake comprehensive reviews of regulatory changes to evaluate their impact and identify outdated or ineffective regulations.
• Support competition: Include the Australian Competition and Consumer Commission in the Council of Financial Regulators to introduce a stronger competition focus.
• Data-driven strategies: In consultation with financial services sectors, create clear data strategies for regulators and policymakers, aligned with the Government’s framework.
• AFCA consultation: Ensure the Australian Financial Complaints Authority consults with the industry during its 2026 review.
• Legislate a uniform definition of family violence and consider its implications in new regulations.

About the proposed new regulatory initiatives framework

In March 2024, the Australian Government announced plans to introduce a regulatory initiatives framework for financial services, similar to the UK’s Financial Services Regulatory Initiatives Forum (FSRIF). In the UK, the FSRIF brings together financial regulators to set a 24-month regulatory pipeline, giving financial services sectors and stakeholders clarity on upcoming initiatives with significant operational impact. This pipeline is published as the Regulatory Initiatives Grid.

A similar approach in Australia will provide clear benefits for financial services stakeholders, including insurers, by offering greater predictability and enabling better planning in response to regulatory changes. This is especially important for insurers, who must navigate an increasingly volatile business environment due to frequent extreme weather events.

The introduction of this framework is a positive step toward improving efficiency, transparency, and coordination across Australia’s financial services regulatory landscape.