Taking Out Insurance
Sydney Morning Herald
Friday June 15, 2001
The runaway cost of insurance premiums is starting to bring home the long-term effects of the HIH collapse. Amid reports that over the past month personal sickness and accident premiums have risen 70 per cent, car insurance doubled and home and contents insurance increased by 20 per cent, the chairman of the Australian Competition and Consumer Commission, Professor Allan Fels, has asked insurers to justify such massive increases. His request comes at a time when public confidence in the insurance industry has been damaged by the $4 billion collapse of the HIH insurance group.
These latest premium rises seem, at first glance, an industry attempt to offset the costs involved in joining with State and Federal governments to offer rescue packages to HIH victims. Australians could have expected increased insurance premiums as part of the community burden in shouldering the bail-out, but surely not at the level the industry has seen fit to impose. There is more to the story.
These latest rises continue a trend. Australian Bureau of Statistics' figures show house and car insurance rose more than 30 per cent in 1999-2000. But despite the popular belief that commercial prudence is an extremely profitable business, the Australian insurance industry has not been doing well. According to the Insurance Council of Australia, insurance companies had a combined net loss after tax of $292 million last financial year. This loss figure also includes HIH's ``declared" profit at June 30 last. Had the real HIH losses been included, the picture would have been even more dismal. The HIH collapse aside, insurance companies blame the need for increases on the combined effects of the GST, the falling Australian dollar especially its impact on such items as car spare parts when meeting accident claims and the residual effects of Sydney's 1999 hailstorm that cost insurers some $1.7 billion. In addition, reinsurance premiums have risen on a global basis as a result of a number of worldwide catastrophes.
While these factors cannot be ignored, it is at least as significant that Australian insurance premiums had been kept artificially low by HIH and the other large insurer, the pre-demutualised NRMA. HIH had a reputation as a price-cutter and a more willing underwriter of risk than some of its competitors. This put pressure on its competitors to match its lower premiums. As well, the NRMA, before demutualisation and its accompanying focus on higher profits and shareholder value, was better able to keep rates low. The change to the NRMA and the disappearance of HIH removed the brake on premium charges. Companies now appear to be scrambling to make up lost ground by jacking up premiums.
The insurance industry might have a case for increased charges. Clearly, premium costs have been kept too low. But the industry should not be allowed to use the HIH collapse as an excuse to profiteer. It must justify such sharp rises in premiums, in a clear response to the ACCC.
Among the causes of the HIH crash was price-cutting. The lack of corporate governance and the failure of the Australian Prudential Regulation Authority to act also appear to have been contributing factors. Whatever the ACCC decides, the sharp rise in premiums since the HIH collapse carries a lesson. There is an enormous cost which, one way or another, will be borne by all Australians. The industry regulators can never again allow a cut-price operator to continue doing business, for so long, when all signs point to disaster.
© 2001 Sydney Morning Herald
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