Thursday, 8 June 2023
Good evening, ladies and gentlemen.
It’s my great pleasure to welcome you to the Insurance Council of Australia's Annual Dinner.
I join Andrew in welcoming:
- The Hon. Jenny McAllister, Assistant Minister for ClimateChange and Energy who will speak to us shortly
- The Hon. Courtney Houssos, NSW Minister for Finance
- ASIC Chair Joe Longo, ASIC Deputy Chair Karen Chester,APRA Deputy Chair Helen Rowell and other representativesof AFCA, APRA, the ACCC and Treasury
- President of the National Insurance Brokers AssociationGary Okely
- Co-Chair of the Council of Australian Life Insurers BrettClark
Welcome also, my fellow Board members, of course.
And members and friends.
I begin by acknowledging the traditional owners of the land on which we gather, the Gadigal people of the Eora nation.
I pay my respects to elders past, present and emerging.
Let me say at the outset how proud I am of our industry and what it does for Australia.
Every day, 60,000 of us work in our industry help Australians reduce their risk and recover from the unexpected.
It is an extraordinary workforce – with so many parts of it represented here tonight.
When Australians are hit with the worst, when the phones and electricity have been knocked out, and where their only clothes are the ones on their backs, our people – the people of this industry – go above and beyond.
In those days, when our customers don’t know if their home is still standing, or if their business is still operating, or if all of their family and friends are accounted for, our people demonstrate the skills, judgment, patience and stamina, to help our customers get through it.
Over the past few years, Australians have faced eleven insurance catastrophes – bushfires that blanketed the continent in smoke, floods that devastated some regions not once but twice, a cyclone, and even a couple of earthquakes.
As you know, last year’s flooding in South-East Queensland and Northern NSW was the biggest insurance event in Australia’s history – resulting in 241,000 claims at a cost of nearly $6 billion.
To give it a global perspective, according to MunichRe the February and March floods were the second costliest insurance event in the world in 2022.
So I start with a thank you to you – the members of the Insurance Council of Australia – and of course, all your teams.
Insurance as an economic enabler
As an industry, we often see our work as helping Australian households and businesses manage risk and recover from the unexpected.
And we do that, every day.
But we also do something for the country that is as powerful, but not as obvious.
We give people the confidence to make decisions that without insurance they would not have been able to make – to invest in their future, in their homes and in their businesses.
In this way, we are powerful economic enablers in this country.
That’s because our products allow Australians at home and in their businesses to get on with life with all the risks that life brings –and we give them the confidence to do so.
This is so vital in a time when Australians are feeling more at risk, more exposed and more vulnerable.
We are also a shock absorber for the country, for government and the financial system, and for families and households.
A good shock absorber you don’t ever notice.
We’ve been absorbing shocks in these times of change.
Last year we paid out almost 5 million claims totaling more than $36 billion.
The way we absorb shocks is by managing supply and demand when it comes to pricing risk. We have demand from consumers, and supply comes from our capital providers – particularly reinsurers here in Australia.
As the risk dynamics of Australia, and indeed the world, change, this matching of supply and demand for our products is going to become more challenging for all of us.
I don’t believe we will have a demand problem for our products in the future. On the contrary, demand for what we do is growing.
People value what we do.
And they understand the growing volatility in our world – the acceleration of climate related perils, the challenges of cyber attacks, geopolitical uncertainty, the possibility of another pandemic.
The need for our industry is growing and will continue to grow because volatility is growing.
This increase in volatility also brings new challenges for supply of our capital, particularly reinsurance.
For many years, Australia has been a solid location for the global capital pool of reinsurance.
Our foundations are solid.
We run on robust economic frameworks, we have a well-run market structure, we operate within systems of strong corporate governance and under democratic and open governments.
Insurers have strong management capability and are proven and trusted partners for our reinsurers.
Trust and confidence is what turns the tap on supply. No trust, no supply.
Traditionally, we have been an attractive place to put capital, and an attractive place to diversify.
However, we are witnessing increasingly expensive reinsurance markets for our country because of what we have experienced in recent years, and what we can expect in coming years because of climate change.
As well, we have to be mindful of emerging risks which stand apart from the traditional way reinsurers look at global diversification.
The threat of cyber attacks, for example, is an area where businesses are being challenged around the world.
It can happen to anyone, at any time. It is not geographically bound like a storm, or a flood, or fires, so when it comes to cyber there is no diversification benefit from being global.
So we will have a big job managing these cross currents of supply and demand in coming years.
And this is already putting pressure on the Australian reinsurance market, which as you all know is putting pressure on what customers pay.
Affordability and availability
This issue – insurance affordability and, in its most extreme form, availability – is, I believe, the number one concern for our industry.
If we don’t help solve this with our stakeholders we will have solutions imposed upon us.
Fundamentally, addressing insurance affordability means addressing risk.
We need to keep setting out the risk problem and the possible risk-reduction solutions – because unfortunately there is not just one.
We need to be able to deliver this in a proactive way to our stakeholders, often governments and local communities.
We must firmly set out the case against any policy responses that only add to cost and drive up prices, exacerbating the very problem we’re trying to solve.
We have to enhance the vibrant and competitive insurance market in Australia.
But we also need to look at our own products, systems, and arrangements to ensure we are doing everything we can to keep insurance within the reach of all Australian households and businesses.
Because as the regulators and other government stakeholders in this room are telling us – we can do better.
That is why we have commissioned Deloitte to report by October this year on our industry’s response to last year’s floods.
The 2022 floods were the most comprehensive stress testing of our industry in history, and I believe there are lessons for us all.
We can do better on both claims and customer communication.
We have been undertaking research to identify areas where there are gaps between insurers and the community.
For many, insurance policies still remain complex, and consumers aren’t always sure what is and isn’t covered.
And of course we had challenges in managing the scale of this event, and the way we were communicating and engaging with customers. We want to learn and do better.
Drivers and responses
We know we need to adapt because the things we cannot control are only going to get more difficult.
Which means our role for households and businesses is only going to be more important.
We know that extreme weather events are worsening because of climate change.
Governments and policymakers in Australia are implementing policies that respond to this.
And insurers ourselves, through the Insurance Council, have mapped out a pathway to Net Zero by 2050 – with a focus on substantial emission reductions this decade.
But according to SwissRe, it’s not just the increasingly destructive force of climate-driven disasters themselves that are currently driving higher losses for insurers globally and putting pressure on the Australian reinsurance market.
It’s growing asset values, urbanisation and rising populations – often in the most high-risk areas.
However, while climate change is a global problem that requires global co-operation to address, many of the policy levers to address affordability and availability remain onshore.
We know what these are:
- Greater investment in public infrastructure that protects communities from flood and sea surge
- Programs that assist householders to make their homes stronger against the ravages of water, wind and fire
- Buybacks in the most risk-exposed locations, moving people out of harms’ way
- Changes to planning laws so we’re no longer building on floodplains or at the top of a wooded ridge
- Changes to the construction code to make future buildings more resilient
- And getting rid of unfair and distorting state taxes
There is no more crucial time for making these changes as Australia experiences record population growth.
This record increase will put continued pressure on the housing market and, if nothing changes in the way state governments administer planning laws, force more and more people to live in harm’s way.
A new approach nationally
We should be proud that governments are listening to our advocacy on these issues.
The Prime Minister has asked state and territory planning ministers to review land use planning arrangements.
And the decision by the Albanese Government to commit $200 million per annum for the Disaster Ready Fund, matched by the states and territories with the first projects announced yesterday, is very welcome.
But this can only be the start. We need to build on this risk-mindset with a national approach that is seriously forward looking.
In government, we know who the chief executive officer is, and we know who the chief financial officer is, we know the head of security, but we don’t have a chief risk officer – should we?
We have world class financial governance infrastructure in this country – Treasury, the Department of Finance, the Productivity Commission, the ACCC, ASIC, and APRA.
With a deep understanding of bond markets, share markets, and superannuation fund management. As we’d expect them to.
But as a country, do we look across the economy and across society, to understand how ultimately the coverage gap is met by the balance sheet of the nation?
Insurance isn’t a sexy financial services product. It’s been around in some form or another for more than 400 years.
We need to do a better job of ensuring governments understand and recognise it as a vitally important asset.
Insurance risk transfers protect an estimated $1 trillion of Australia’s property wealth each and every year.
Governments are increasingly on the hook for the shortfall of what is covered by the private market, and this is even more the case now there is a Government-backed cyclone reinsurance pool.
It’s in our national interest that we gain a deeper understanding of our baked-in risks and the true future costs to our economy – especially if the Commonwealth and State balance sheets are becoming increasingly exposed.
I was alarmed to hear last week that in California, an economy with striking similarities and risks to our own, two of America’s largest insurers have ceased offering new home and contents insurance due to the challenges of pricing for risk.
This is an extreme situation, but undoubtedly brought about by the unsustainable economic losses being experienced.
We can’t let that happen here.
I would love to see a stronger interest in insurance and reinsurance markets – in how they work, in what moves them, in how they cushion the banking system, and how we insulate governments by managing the risk that citizens carry.
And I would love to see that discussion about risk at the national cabinet table as we do around the executive team in our businesses.
We need to make sure we connect the financial costs of risk directly with the infrastructure and investment required to mitigate against it.
Ensuring we have a uniform approach across the nation, recognising that disasters do not respect state borders.
This is an important time for our industry.
It is a time when risk is being realigned.
It is a time when we need to aggressively engage in policies that de-risk our country.
These are the big strategic challenges.
But I want to assure you that along with this work, our industry through the Insurance Council, continues to engage in the immediate and pressing issues.
From corporation law to consumer regulation.
From natural disasters mitigation to cyber security.
From supply chain disruption to skills shortages.
And from state taxes to states-based insurance schemes.
This is an important time for our industry and for our country.
But I have great confidence in our industry.
We are a strong, resilient and sophisticated industry that is focused on the future.
A future where we will play a vital role in helping our country mitigate its risks – so that it can continue to grow and prosper.