Wednesday, 13 October 2021

I want to thank them all for taking the time to engage with our industry today and over the very busy last couple of years when we have had so much on our shared agenda.

We have a very constructive relationship with APRA and ASIC – along with treasury, AFCA and the ACCC – which has meant we have been able to engage in a collaborative and open-minded way on the many big issues that confront the general insurance sector.

Because as you know, our sector continues to face many significant issues and challenges.

I’m pleased to say that in every respect we are responding to those issues and rising to those challenges, while continuing to play our crucial role of supporting families, businesses, and communities to get back on their feet as quickly as possible after an unexpected event.

The general insurance sector is a critical part of the Australian economy, acting as a shock absorber against the ongoing climate events that challenge our geography.

Industry profitability over the last two years bears this out.

Although APRA’s most recent numbers show a stabilisation in returns and underwriting results, we have a long way to go to get back to pre-COVID levels.

Viewed in this context, we should be heartened by the results of APRA’s stress testing activities on insurers, which show that we are well-positioned to withstand a very severe economic downturn, while still meeting commitments to policyholders.

We have, as I mentioned, a number of very significant changes and challenges on the Insurance Council’s agenda, some of which I want to touch on today.

Climate Change

The COP26 conference commences in a little over two weeks in Glasgow, Scotland.

The main goals of COP26 are to encourage countries to finalise their emission reduction targets for 2030, discuss adaptation measures, increase climate finance, and finalise the detailed rules around the Paris Agreement.

We will be watching the outcomes of the Conference with interest, both as citizens and as insurers.

Because we know that as the climate changes extreme weather events are becoming more frequent and more intense across Australia.

These intense weather events are causing increasing damage to and loss of Australian property. 

At present no region in Australia is uninsurable, but it is possible some regions may become difficult to insure in the future unless governments invest in appropriate physical mitigation and adaptation strategies.

Climate change presents not only risks but also opportunities for the insurance sector.

The insurance industry plays a critical role in the management of climate-related risks, and we are uniquely qualified to understand the pricing of risks.

Through risk-based pricing, we provide critical economic signals regarding the changing risk environment.

There is growing recognition that climate change and climate-related risks are a source of financial risk^[1], having an impact on the resilience of individual financial institutions, including insurers, as well as on financial stability.

In April this year APRA released its draft Prudential Practice Guide on Climate Change Financial Risks^[2].

The draft provides prudential guidance on the management of financial risks arising from climate change in areas such as governance, risk management and disclosure.

The guidance sends a clear message to prudentially regulated entities that climate risk is financial risk to be managed like any other risk, in line with existing prudential risk management standards.

Similarly, ASIC has provided regulatory guidance for listed companies that recommends the disclosure of meaningful and useful climate-risk-related information to investors.

In 2018, ASIC reported that most large Australian listed companies considered climate risks to some extent, but they found that climate risk disclosure was often too fragmented, general, or not comprehensive enough to be useful for investors^[3].

ASIC has highlighted climate-related risk as a systemic risk in Australia’s financial market that has the potential to significantly impact companies, investors and consumers.

The Council of Financial Regulators agencies continue to undertake a range of activities to understand climate risks and to promote understanding and management of those risks by regulated financial entities.

The tone of regulators to industry is clear. Regulated entities must take steps to better understand and disclose climate related risks. 

Catastrophe policy environment

Late last year the Insurance Council set out its new purpose to be the voice for a resilient Australia.

In the short time since, resilience has become even more salient as a policy goal as communities, policymakers, NGOs, insurers, and other business sectors unite on the urgent need to improve the resilience of Australian communities in the face of a climate changed future.

The Insurance Catastrophe Resilience Report, released by the ICA last month, outlines the significant impact of natural disasters on communities across Australia.

Importantly, the report also articulates the policy responses required by governments and the operational adjustments required by the insurance sector to better meet the challenge of natural disasters in the future.

Just last week, the Australian Business Roundtable for Disaster Resilience and Safer Communities – which is chaired by ICA Board member and IAG CEO Nick Hawkins – estimated that natural disasters will cost Australia $73 billion by 2060, even under a low emissions scenario.

This is significantly higher than the $39 billion by 2050 the Roundtable reported in 2017.

The Insurance Council has long supported the call for all levels of government to increase investment in mitigation and resilience efforts.

Some states have also begun to step up their investment in this area – most notably New South Wales and Victoria – while others are now slipping behind.

The tax system should encourage, not hinder, insurance coverage, but state taxes and levies continue to discourage adequate insurance coverage.

It’s estimated that abolition of all state taxes on insurance would lead to a 13 percent increase in annual household expenditure on homes and contents cover across Australia. 

This could help close the gap on under-insurance in many key areas and help with affordability issues for the financially vulnerable.

We welcome Tasmania’s review into its Fire Services Levy and have called on the new New South Wales Premier Dominic Perrottet to follow other states and use his plan to abolish stamp duty on housing to also get rid of stamp duty on insurance, as well as the emergency services levy.

Given the positive policy outcome that would result in such a reform, the Federal Government should consider incentivising states and territories to undertake this important reform, as the Howard Government did for the removal of various state taxes and charges with the introduction of the GST.

Covid and borders

While over the last 18 months the Australian community has been focused on the pandemic, since the devastating Black Summer bushfires we have also endured two major flood events, a category 3 cyclone, two destructive hailstorms, a bushfire in the Perth Hills, and of course an earthquake just last month.

The Bureau of Meteorology says widespread flooding, coastal flooding and erosion, tropical cyclones, and marine heatwave are all more likely in coming months.

Insurance is a key component of any economy, but especially in a country like Australia where natural disasters are a regular reminder of the challenges we face to protect our communities, assets and our livelihoods.

The last three years have driven home just how devastating natural disasters can be. Insurers have paid out more than $8.9 billion in natural disaster claims over that period, with more than $6.1 billion paid out since the 2019-20 bushfires.

As we move into the warmer months and the threat of extreme weather increases, insurers are very concerned about the impact of state border restrictions on our ability to support our customers following a natural disaster.

Border restrictions have been put in place in response to the Delta strain for sound public health reasons, but as we enter the period where natural disasters are more likely, new arrangements are required.

Insurers have been urgently calling on Australian governments to agree to the adoption of a Protocol that provides exemptions from border restrictions for essential insurance catastrophe responders.

The reasoning is very clear.

As an industry we collectively deploy up to 500 essential catastrophe responders following a natural disaster – immediately and in the weeks and months following.

But states and territory border arrangements are restricting the ability of insurers to provide help following a natural disaster.

Border restrictions differ between jurisdiction, are not always followed in practice, and take time to work through which delays placing our people on the ground.

Insurers need immediate and streamlined access following a natural disaster and in the period after an event, and with the construction economy at full capacity we need labour mobility to fulfil our obligations to our customers.

Without access to interstate resources customers’ claims are likely to be delayed, increasing cost to repair and placing further stress on customers. 

We know that every day of delay in processing a claim – particularly following a natural disaster – just compounds the impact of that event.

And it’s not just monetary impacts.

The Black Dog Institute has found that post-disaster stressors, including challenges rebuilding, can contribute to mental health problems for those recovering from a natural disaster which can sometimes last years.

The potential impacts of ongoing border restrictions are too grave for us just to cross our fingers and hope we get through this coming natural disaster season without impacts on our customers that could have been avoided with a little bit of coordination and goodwill.

Reinsurance Pool

Queensland has been Australia’s most disaster-prone state over the past decade, incurring an average total economic cost of $11 billion per year – 60 per cent of the national cost.

Availability and affordability for certain groups of insurance customers in high-risk areas remains a concern, particularly around cyclones in northern Australia.

Cyclones alone have cost approximately $5 billion in damages across northern Australia over the last 10 years.

The recent commitment to establishing a reinsurance pool for northern Australian cyclone risk shows the Government understands the scale of the problem in one of the regions most exposed to natural disaster risk.

The Insurance Council continues to work closely with the Treasury-led Taskforce in the design and creation of the pool, with the aim of improving the accessibility and affordability of insurance in cyclone-prone areas.

We support the Government’s intent behind the pool and its stated objectives for short- and medium-term premium relief. 

But the industry has long held the position that the only way to effect lasting improvements to natural disaster exposure in Australia is through a transparent and evidenced-based program of investment in public and private mitigation projects, improving building standards and quality, and making informed land use planning decisions.

We can see from experiences overseas that a reinsurance pool without mitigation and better land use planning just creates a growing drain on public resources while doing nothing to reduce risk.

Mitigation investment that addresses the underlying risk is also the only way to provide sustainable and significant premium reductions.

To that end, the $600 million for new disaster preparation and mitigation programs and $40 million to make strata buildings in northern Australia more resilient were welcome commitments.

The establishment of the National Recovery and Resilience Agency should bring a national focus to building infrastructure, homes and communities that can better withstand the bushfires, storms, floods, and cyclones that are unfortunately a part of Australian life.

We need to capitalise on this investment and this renewed focus on resilience.

To look back in ten years and see that we have done nothing to reduce the underlying risk of cyclone-related damage would be a tragedy given the opportunity that is before us.

BI test case

As we meet today we can see the legal process around business interruption and Covid-19 soon reaching its conclusion.

The industry has long maintained that premiums were not collected by insurers to reflect the cost of cover for pandemics, reinsurance was generally not available for pandemic cover, nor were reserves established for pandemic-related claims.

While we understand the frustration of policyholders who may be waiting for a determination of their claim, these matters are not clear cut and there has been a need to clarify the legal principles used to resolve any disputes.

We appreciate the role that AFCA in particular played in agreeing to the test cases and facilitating the cases to test.

The judgment handed down last Friday by the Federal Court in the second test case largely recognised the arguments of insurers, upholding our position in eight of the nine matters. 

The Court also concluded that even where insuring clauses do apply, business interruption-related losses should be reduced by Jobkeeper payments and other forms of financial relief.

Given the importance of these issues, and the desire to have authoritative guidance from an appellate Court, it is expected that aspects of the judgment will be appealed either by policyholders or insurers to the Full Bench of the Federal Court. 

The Court has indicated that any appeals will be heard in the second week of November 2021, with notices of appeal filed by next Wednesday.

Once the outcome of any appeals are known – which is likely before the end of the year – insurers will ensure eligible claims are prioritised and settled as quickly as possible.

Commercial Lines work

A major focus of the Insurance Council in 2021 has been the work you heard about this morning to improve the affordability and availability of commercial lines of insurance for particular sectors and in particular locations.

This has not been an easy issue for us to work through, but I have to say I have been incredibly impressed at the open-minded way in which insurers have approached this.

While it might have been easy for us to look at this issue solely from the perspective of our own businesses, instead it’s been the broader community and economic impact of these problems and the strategic opportunities they provide which has driven our approach.

I want to publicly thank John Trowbridge for his work on this issue, which has, I know, started many discussions within our industry and across business and government sectors.

Regulatory reforms

Industry continues to rise to the challenges presented by the current economic environment as well as the fastest pace of regulatory reform seen in decades.

Because of our work with ASIC and Treasury as the Hayne reforms were implemented over the last few years – and the preparedness of insurance businesses which have made sweeping changes to systems and processes – we have been able to manage the introduction earlier this month of the most significant of these reforms with relative ease.

The Insurance Council has played a key role in this, and will be working closely with members monitoring the implementation of the regulations as they are rolled out.

Code of Practice

In the area of consumer outcomes, the new Code of Practice for general insurance, introduced on 1 July this year, sets clear obligations for insurers with independent enforcement through the Code Governance Committee and greater sanctions for significant breaches.

It includes strengthened customer protections in line with community expectations and was developed by insurers in consultation with a range of stakeholders including consumer groups.

The new Code underscores the industry’s commitment to openness, fairness and honesty in all dealings with customers. 

The ICA will next week commence an information campaign to raise awareness of the new Code, signalling our industry’s commitment to openness and fair dealings with consumers. 

Strategic ambition

I know the Board of the ICA has the highest level of ambition for the organisation.

The success of the ICA is the success of all our industry, and we all need to be invested in that.

The updated strategic focus for the ICA for 2022 will include the issues I’ve spoken about today under the Council’s two strategic pillars of economy and climate.  Key strategic priorities include:

• A modern & efficient regulatory environment
• Underinsurance
• Our response to the market cycle [commercial lines work]
• Better consumer outcomes
• Improving the resilience of the built environment and mitigation
• The pathway to net zero, and
• Catastrophe management

It’s been a very busy year, dealing with new and emerging challenges under often difficult circumstances.

We have had to be particularly agile and adapt to meet the needs of disaster-impacted customers in a COVID-19 pandemic environment.

We’ve managed a very significant legal process to determine the applicability of business interruption cover to the COVD-19 pandemic

We have been working to influence and affect changes to support community resilience and adaption to climate change.

We continue to press policymakers on a cross-border movement agreement for insurance disaster specialists so we can respond quickly and effortlessly during the next catastrophe season.

We have prioritised our engagement with small business stakeholders on identifying solutions for key cohorts where availability and affordability is a concern.

We have engaged closely with regulators on the implementation of the most significant of the Hayne reforms.

We introduced a new Code of Practice.

We’re looking at how we best confront emerging areas of focus such as cyber, and ESG expectations.

The theme of today’s event is ‘Insurance in uncertain times’, but I hope you can see that while the times might be uncertain, our approach to these times is anything but.

I want to thank Andrew Hall and his team at the ICA for the enormous amount of work that they have carried out over the course of the year during times of significant change and challenge.

We have greatly appreciated Andrew’s leadership in driving the agenda and raising the voice of our industry in the community. 

I would also like to thank his leadership team and in particular:

• Kylie Macfarlane for the work on resetting our strategy, disaster management, and data uplift
• Fiona Cameron for the tireless work on the Code of Practice
• Adrian Dolin for his efforts supporting the work of the Board during this period of change and transition
• I acknowledge the retirement of John Anning, and the appointment of Aparna Reddy to lead Regulatory Affairs, which has been through an intense period of leading the industry reforms
• And Anne Knight for her excellent support and wise counsel through the Business Interruption Test Cases.
• And thanks to Mat Jones and his public affairs team, who have successfully rebranded and uplifted the ICA’s presence and done a great job in pulling together today’s online forum.

I hope we can all be together in person this time next year. 

I know I speak on behalf of the Board in thanking all of you for your commitment, energy and focus during challenging times.

We’re excited about Assistant Treasurer Sukkar joining us in a few moments, and with that I’ll hand back to Ellen.

Thank you.

[1] NGFS (2019), First comprehensive report: A call for action, Climate change as a source of financial risk;

[2] https://www.apra.gov.au/news-and-publications/apra-releases-guidance-on-managing-financial-risks-of-climate-change

[3] https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-593-climate-risk-disclosure-by-australia-s-listed-companies/