Chapter 2 The general insurance industry in Australia
This chapter provides first a description of the general insurance
industry in Australia. It then details the complex regulatory framework within
which the industry operates.
Background to the general insurance industry
Australia has a large, profitable and long-established general insurance
market. Statistics from 2011 show that the private sector insurance industry generates
gross premiums of $34.9 billion per annum and has total assets of $113.9
billion. The industry employs
approximately 60 000 people and on average pays out $95 million per working day
in claims costs.
In 2011, the insurance industry in Australia earned $42.1 billion in
revenue with $5.6 billion constituting profit. Suncorp, Insurance Australia
Group (IAG), QBE Insurance Group Ltd and Allianz Australia Ltd are the main
players in this market. The industry is characterised by high revenue
volatility and high levels of competition.
The Global Financial Crisis greatly reduced the profitability of the
insurance industry. A series of consecutive severe disaster events during 2010–2011,
occurring over several regions, further exacerbated this problem.
There were floods and cyclones in Queensland, floods and storms in Victoria and
bushfires in Western Australia, as well as earthquakes in New Zealand. It was
Undoubtedly the most significant contributing factor to the
overall increase in general insurance claims during this year has been
Australia’s extreme weather events.
The combination of these disaster events increased workload as well as
stretching the resources of insurers and related external experts. Compared
with 2008–09, the number of insurance claims lodged in 2009–10 across all
classes of business rose seven per cent. The Insurance Council of Australia subsequently
Delays in processing claims are inevitable ... when extreme
demand is placed upon supply infrastructure, skills and labour availability
within Australia and internationally.
The insurance industry stated that it incurred unusually high financial
costs as a result of these events. The Insurance Council of Australia noted
that as at 24 June 2011, the industry had received for the extreme weather
events an unprecedented number of 180 410 claims with an insurable cost of
Industry research by IBISWorld estimated that the Queensland floods alone set
insurers back $500 million, with Suncorp and IAG being especially
affected. However, much of the risk
was distributed amongst global reinsurers such as Swiss Re and Munich Re.
Most people purchase insurance directly through the insurer. A survey by
legal aid groups showed that 63.55 per cent of respondents purchased their
insurance by phone. A minority of people
purchase insurance through brokers and agents.
An important distinction must be made between brokers and agents of
insurance. Brokers are independent while agents have loyalty to the insurer. Insurance
brokers arrange insurance on behalf of their clients. The National Insurance
Brokers Association of Australia, described the role of the broker:
... to discuss with the client the nature of their risks,
give some advice where appropriate on the management and mitigation of those
risks, work with the client to identify appropriate insurance coverage for
those risks and ultimately negotiate coverage to the market. [If] a claim has
to be pursued, the broker then assists the client with the pursuit of that
claim to the insurer and the resolution of the claim.
Evidence showed that there is confusion among some consumers as to
whether they approach the broker or the insurer directly if they have a
dispute. The Committee received evidence that some insurers refused to deal
with consumers who had engaged a broker. Legal Aid Queensland
reported that some of their clients who had engaged a broker had trouble obtaining
a copy of their policies from the insurers themselves.
Insurers must comply with general contract law and a statute which deals
with insurance contracts specifically.
Australian Government bodies are responsible for some elements of
regulation, such as oversight of consumer protection and licensing, and by
extension, internal and external dispute resolution. Insurers must adhere to
capital adequacy laws.
However, the industry is self regulated with regard to the specifics of
claims processing. The Insurance Council of Australia, as the peak body for
insurers, and the Financial Ombudsman’s Service, as the main provider of
external dispute resolution for insurers, play vital roles.
The following provides a simplified overview of the regulatory framework
and oversight bodies.
A contract of insurance protects against the adverse consequences of
future events by transferring the risk of economic loss which might flow from
the insured to the insurer. Australia has adopted and applied English laws
relating to insurance.
The Insurance Contracts Act 1984 (Cth) (Insurance
Contracts Act) is the main legislation governing insurance contracts and came
into effect in 1986.
Under an insurance contract, parties must act with utmost good faith
towards each other. This means that each party must voluntarily disclose to the
other during pre-contractual negotiations, any fact of which he or she is aware
which would be ‘material’ to the negotiations. A fact is ‘material’ if it would
have affected the mind of a prudent insurer in determining whether to accept
the insurance, on what terms and at what premiums.
The intent of the Insurance Contracts Act is to:
… improve the flow of
information from the insurer to the insured so that the insured can make an
informed choice as to the contract of insurance he enters into and is fully
aware of the terms and limitations of the policy; and to provide a uniform and
fair set of rules to govern the relationship between the insurer and insured.
However, the Insurance Contracts Act does not codify the law relating to
The Insurance Contracts Act, like much legislation, has regulations
which clarify its operation. The relevant regulation is the Insurance Contracts
Regulations 1985 (Cth). For an insurance policy to provide ‘standard cover’, it
must satisfy certain requirements set out in these regulations. However, under
section 35(2) of the Insurance Contracts Act, insurers can provide cover which
deviates from the standard if they inform the consumer of this fact.
The government agency with a key responsibility for regulating insurers
is the Australian Securities and Investments Commission (ASIC), an independent
Commonwealth Government body. ASIC is Australia’s corporate, markets and
financial services regulator. Its remit therefore includes insurers.
There are two laws pertaining to ASIC, the Australian Securities and
Investments Act 2001 (Cth) (ASIC Act), and the Corporations Act 2001
(Cth) (Corporations Act). The ASIC Act provides consumer protection, while
the Corporations Act provides for a licensing system for financial services
providers. The licensing system includes a requirement for internal dispute
resolution and external dispute resolution schemes.
With regard to the ASIC Act, ASIC told the Committee that:
The ASIC Act is that part of Australian Consumer Law that
applies to financial services, and it has broad prohibitions, including
prohibitions on misleading and deceptive conduct and unconscionable conduct.
ASIC’s jurisdiction over consumer protection in relation to claims
handling is limited to its governing Act. This is because although the
Corporations Act contains consumer protection provisions:
The Corporations Regulations exempt claims handling and
settlement from the definition of a financial service. This means that some
Australian financial services licence obligations—for example, the obligation
to ensure that their financial services are provided efficiently, honestly and
fairly—do not apply to the handling of general insurance claims.
In 2010, legislative changes were introduced to the Parliament aiming to
address this gap. However the bill was not
passed before the parliament was prorogued prior to the 2010 federal election.
The bill is discussed further in Chapter 5 in the context of a mechanism to
address consumer protections for the handling of insurance claims.
The Corporations Act established the licensing system for financial
services. The Financial Services Reform Act 2001 (Cth) came into
effect from 2002 with a ‘phase in’ period to 2004. These reforms are primarily
contained in Chapter 7 of the Corporations Act and are relevant to:
n the licensing and
conduct of providers of general insurance products;
n the licensing and
conduct of insurance intermediaries; and
n financial services
and financial product disclosure to retail consumers of general insurance
Australian financial services licensees, including insurers, must have a
complaints dispute resolution system that consists of:
n an internal dispute
resolution process that meets ASIC approved standards; and
n be a member of an
ASIC approved external dispute resolution scheme such as the Financial
Formal regulatory guidance on these matters is contained in ASIC’s Regulatory
Guide 165 (RG 165), which is about the requirements for internal and external
dispute resolution, and Regulatory Guide 139 (RG 139), which sets out guidance
on the approval and oversight of external dispute resolution schemes.
Like insurers, brokers must hold an Australian Financial Service
licence. Thus, brokers are subject to the same legal requirements as general
insurers. Brokers must provide
services efficiently, honestly and fairly, and cannot engage in misleading or
deceptive conduct. An ASIC report also
notes that brokers may have common law fiduciary obligations.
The Australian Prudential Regulation Authority (APRA) was established in
1998 to oversee the financial services industry, including the insurance
industry. It is important to note that the APRA has responsibility only for the
capital adequacy of insurers. This aspect of regulation, while important, is
not the focus of the Committee’s inquiry.
The APRA regulates 130 general insurers which collectively hold $99.2
billion in assets. The APRA is funded largely by the industries it supervises,
with levies from insurance companies constituting around 22 per cent of its
The APRA’s mission is to establish and enforce prudential standards and
practices designed to ensure that, under all reasonable circumstances,
financial promises made by institutions under supervision are met within a
stable, efficient and competitive financial system. The APRA stated:
We are here to help ensure that customers’ interests are
protected and that benefits are delivered as promised. That is fundamental to
what we do ... Our aim is to reduce the probability that a general insurer will
fail so that, in all reasonable circumstances, it will meet its contractual
The APRA administers the following Commonwealth legislation and
n APRA Act 1998;
n APRA Regulations
n Insurance Act 1973;
n Insurance Regulations
n Financial Sector
(Collection of Data) Act 2001.
This regulatory framework gives APRA the authority to issue mandatory
prudential standards, non-enforceable prudential practice guides and reporting
Another government body of some relevance is the Australian Competition
and Consumer Commission (ACCC), which promotes competition and fair trade in
the market place to benefit consumers, businesses and the community. Its
primary responsibility is to ensure that individuals and businesses comply with
the Commonwealth competition, fair trading and consumer protection laws.
However, as mentioned above, ASIC deals with consumer protection issues
relating to financial services.
The operation of the general insurance industry is self regulated and operates
under a voluntary code. The ACCC does not regulate voluntary codes of conduct
and cannot enforce the breach of a voluntary code. The ACCC can only take
action if a mandatory code of conduct is breached.
Consequently, neither the ACCC nor ASIC have jurisdictional oversight for
insurance claims handling. This leaves consumers with few protections.
Insurance Council of Australia
The Insurance Council of Australia (ICA) represents the interests of the
Australian general insurance industry. It was established in 1975 to act as the
peak body for general insurance companies in Australia licensed under the Insurance
Act. The ICA is funded by 53 industry members. One of its objectives is
to ‘encourage improved service standards across the insurance sector and
promote appropriate self-regulation’.
The ICA is governed by a Board of Directors, which develops and has some
responsibility for the General Insurance Code of Practice. This Code is
discussed in greater detail in Chapter 3.
Financial Ombudsman Service
The Financial Ombudsman Service (FOS) is an accredited external
alternative dispute resolution provider under ASIC’s requirements. It is a national,
independent, impartial and non-profit body that takes complaints on a wide
range of financial services.
When deciding disputes, FOS also has the discretion to award remedies
which are not provided for in the Code. Many of its decisions
are based in general law rather than the Code; for example, it can consider
general principles of contractual law and the Insurance
Originally, there existed the Insurance Ombudsman Service, which
assisted in resolving disputes between consumers and participating companies.
The Insurance Ombudsman Service was merged with the Financial Industry
Complaints Service and the Banking and Financial Ombudsman Service to form FOS on
1 July 2008.
Notably, the service is free to consumers. It operates as a user-pays
service, funded by the insurance industry. That is, if a complaint is initiated
against a particular insurance company, that company pays for the dispute to be
resolved, including for any expert reports that are required to be
commissioned. The Ombudsman General
Insurance told the Committee that:
Our aim is to provide consumers with a fast, efficient,
independent and, importantly, free service to resolve disputes as quickly as
possible. Our processes, unlike courts, are inquisitorial rather than
adversarial. We emphasise that we are not a court but an alternative, with our
determinations binding on a financial service provider but not binding on a
consumer ... Our decisions are based on fairness, and our terms of reference
require that we do what is fair in the circumstances, having regard to relevant
legal principles and, in terms of insurance policies, good industry practice
and prior determinations that we may have made, although they do not bind us
Under RG 139, all insurers are required to be members of an external
dispute resolution service. Most insurers use FOS, which has 59 participating insurance
companies as well as 87 cover holders and third party administrators.
As part of ASIC’s approval and continuing oversight of external dispute
resolution schemes, it meets quarterly with representatives of the schemes,
including FOS. At those meetings, the schemes update ASIC on emerging issues
For general insurers, FOS also monitors and enforces the Insurance Code
of Practice, and this role is discussed further in Chapter 3.
RG 139 obliges FOS to identify, seek to resolve and report to ASIC on
complaints, systemic issues and serious misconduct. A ‘systemic issue’ affects
people beyond the parties to the dispute. ‘Serious misconduct’ is
conduct that may be fraudulent, grossly negligent or involves wilful breach of
applicable laws. The FOS reports quarterly
to ASIC on systemic issues and serious misconduct relating to the previous
quarter, with the names of financial services providers involved generally
remaining anonymous. Each quarter FOS also meets with ASIC to discuss
Whereas FOS is expected to address the merits of individual complaints,
ASIC acts only where widespread public detriment is present, but FOS assists
ASIC by sharing information. In this way, the two organisations are intended to
act as a holistic and mutually supporting regulatory check on the insurance