Terms of reference
On 22 November 2016, the Senate referred matters relating to Australia's
general insurance industry to the Senate Economics References Committee for
inquiry and report by 22 June 2017.
On 20 June 2017, the Senate granted an extension to the committee to report by
10 August 2017.
The terms of reference for the inquiry are:
- the increase in the cost of home,
strata and car insurance cover over the past decade in comparison to wage
growth over the same period;
competition in Australia's $28
billion home, strata and car insurance industries;
transparency in Australia's home,
strata and car insurance industries;
the effect in other jurisdictions
of independent home, strata and car insurance comparison services on insurance
the costs and benefits associated
with the establishment of an independent home, strata and car insurance
comparison service in Australia;
legislative and other changes
necessary to facilitate an independent home, strata and car insurance comparison
service in Australia; and
any related matters.
Several submitters to the inquiry highlighted the fact that strata
insurance is a specialised commercial product that is very different to home
insurance and that, as such, some of the inquiry's terms of reference are less
relevant to this form of insurance. Consequently, most of the evidence received
for the inquiry and discussed in this report relates primarily to home and
Conduct of the inquiry
The committee advertised the inquiry on its website and wrote to
relevant stakeholders and other interested parties to draw attention to the
inquiry and invite them to make written submissions.
The committee received 23 submissions as well as additional information
and answers to questions taken on notice, which are listed at Appendix 1.
The committee held two public hearings: Sydney on 12 April 2017
and Melbourne on 13 April 2017. The
names of the witnesses who appeared at the hearings are listed at Appendix 2.
References to the Committee Hansard are to the Proof Hansard and page
numbers may vary between the Proof and Official Hansard transcripts.
The committee thanks all the individuals and organisations who assisted
with the inquiry, especially those who made written submissions and appeared at
Insurance touches many aspects of human activity. Adequate insurance
cover is integral to protecting consumers' most valuable assets and to
maintaining and protecting the living standards of all Australians and the
economy overall. As seen in the wake of a number of natural catastrophes, unsuitable
financial products, including insurance, can have significant and devastating
impacts on people's lives. To that end, accessibility, transparency,
affordability and competition are crucially important features of a
well-functioning general insurance market.
Principles of insurance
Insurance is based on the principles of pooling and spreading risk. Insurance
products allow individuals to shift some or all of their personal risk to
another party, an insurer. A policyholder pays a premium to an insurer to take
on their personal risk relating to certain assets, such as their home or motor
vehicle. In return, that insurer finances the risk by covering the policyholder
for certain losses when an agreed event occurs. Allianz explained the
principles of pooling and spreading risk in their submission:
Insurance is based on the principle of pooling risk. That is,
a large number of policyholders pay a relatively modest premium into a 'pool',
out of which is paid larger amounts of money to a relatively small number of
policyholders that make a claim during the period of insurance, which is
normally 12 months.
A basic, but difficult, task of an insurer is to calculate
the size of the premium pool that will be required. To do this, insurers need
to estimate how many claims might be received (the claims 'frequency') and what
the cost of those claims will be (the claims 'severity').
For 'short tail' insurance, the objective is that, in each
year, the premium 'pool' collected by an insurer (e.g. for car or home
insurance) is sufficient to pay the claims made by customers, as well as to
cover the operational and other costs (e.g. commissions paid to intermediaries)
of running the insurance company, including a fair and reasonable profit (out
of which is paid a return to shareholders).
Insurance is also based on the principle of spreading risk across
policyholders with different risk profiles. Insurers will seek to spread their
risk geographically, for example, so they don't have a concentration of home
insurance policyholders in areas particularly vulnerable to natural perils
(e.g. flood, cyclone or bushfire).
If an insurer is over-represented in an area vulnerable to a
particular natural peril, then it will be more adversely impacted than its
competitors when such an event occurs.
The role of insurance
As explained above, the key role of insurance in an economy is the
mitigation of insurable risk. Through the pooling and efficient allocation of
risk across policyholders, insurance encourages and enables individuals and
businesses to pursue economic activities, expansionary initiatives, and investments
that would otherwise be cost-prohibitive. In other words, by transferring risk
to an insurance provider, insurance cover frees economic resources (including
government taxpayer funded resources) and provides a safety net that allows those
resources to be used more productively with a lower threat of social and
economic harm. Events such as the global financial crisis and natural
catastrophes like that recently seen with Cyclone Debbie emphasise the
importance of a robust and sustainable insurance industry.
Governments play a significant role in insurance by providing efficient
and effective policy or regulatory oversight of the industry. Furthermore,
they can assist by ensuring adequate mitigation strategies are developed and
employed in areas prone to natural catastrophe, thereby alleviating pressure on
insurance premiums. Other forms of intervention include levies, such as the
fire or emergency services levies, designed to cover the risk of those who may
not be fully insured, especially in cases of natural catastrophe. Mitigation is
discussed in more detail in chapter 5.
What is general insurance?
General insurance is broadly defined as insurance policies that provide
cover for events that cause financial losses, property damage or personal injury.
It does not include life or health insurance. Home building and contents and
motor vehicle insurance are some of the most common forms of general insurance,
with these classes accounting for over 40 per cent of the industry's gross
earned premium (GEP)
for the year ending 30 September 2016.
General insurance products may be purchased either directly from an
insurer or through an intermediary, such as an insurance broker, financial
institution or online comparator.
In Australia, most general insurance is sold directly to consumers by insurance
General insurance products, such as home and motor insurance, are types
of 'short tail' insurance, referring to policies where the premiums received
and related claims are generally paid within the same 12 month period.
Home insurance provides cover for financial losses resulting from damage
to an individual's house or personal household belongings. Consumers can choose
to take out home building cover, home contents cover, or both. Home insurance generally
provides cover for damage caused by weather events, vandalism and theft, water
damage, accidental damage and essential temporary repairs.
Motor insurance provides cover for financial losses resulting from
damage to a motor vehicle, and related legal liability. There are varying
levels of motor insurance cover available to consumers. The highest level of
motor cover is comprehensive insurance, which typically includes accidental
damage, fire and theft, as well as damage caused to another person's vehicle or
property. Alternatively, a consumer can choose to take out third party
insurance. This lower cost form of motor insurance covers damage caused to
another person's vehicle or property, but not the policyholder's vehicle.
Strata insurance, also sometimes known as body corporate cover, provides
cover for common property which is under the management of a strata title or
body corporate entity, such as residential apartment buildings or multi-unit townhouses.
Typically, strata insurance covers common or shared property, such as the
building structure, lifts, car parks, pools and gardens. It also provides
public liability cover in the event that a person is injured on common
Strata insurance is a statutory product mandated by each state and
territory's relevant strata legislation. Strata managers or body corporates
generally negotiate strata cover through an insurance broker or specialist
Unlike home and motor insurance, strata insurance is a specialist
commercial insurance product and premiums are tailored to the needs of each
strata property. Owners of strata titles typically share the premium costs of
strata insurance as part of their strata fees and liabilities.
General insurance pricing
An insurance premium is the amount of money that an individual or
business pays for an insurance policy for a set timeframe. Premiums for general
insurance policies are set using a 'risk rating' approach. That is, higher risk
policyholders, such as younger drivers or those living in flood or cyclone-prone
regions, are charged a higher premium than lower risk policyholders. In other
words, policyholders are charged a premium that reflects, and is commensurate
with, their assessed level of risk.
This pricing approach can result in apparently similar people, even those
living on the same suburban street, having very different assessed levels of
risk, and consequently, very different insurance premiums.
When an individual or business applies for a general insurance quote,
insurers collect information in order to assess the applicant's level of risk.
For example, for home insurance policies, insurers will seek information
regarding where a property is located, the size of the property, and what
materials it is built from. Likewise, when assessing an individual's risk for
comprehensive motor insurance, an insurer will ask an applicant about the model
and age of the vehicle, as well as the age and driving history of the drivers.
Components of a premium
For insurance to be sustainable and adequately meet its claims
liabilities, insurers must collect enough shared premium from policyholders to
cover the cost of claims, internal expenses, acquisition costs (including
commissions to intermediaries), reinsurance, profit margins, taxes, levies and
The most significant component of an insurance premium for home, strata and motor
classes is claims costs.
Relevant reviews and inquiries
There have been a range of government and industry reviews carried out
in recent years that are of relevance to this inquiry.
The Financial System Inquiry (FSI) brought renewed attention to the
efficacy of disclosure practices in the general insurance industry, finding
that while disclosure 'plays an important part in establishing the contract
between issuers and consumers', mandated disclosure, in itself, 'is not
sufficient to allow consumers to make informed financial decisions'.
The FSI also found that 'although general insurance has a specific product
disclosure regime, the industry lacks standard practice in describing a policy's
key features and exclusions'.
The Productivity Commission's inquiry into National Disaster Funding
also highlighted the importance of effective information disclosure for
insurance, noting that 'consumers may not make efficient choices with respect
to insurance in the absence of relevant and understandable information'.
The inquiry report also noted the implications that a lack of consumer
understanding about their personal risk and insurance coverage can have with
regard to underinsurance or non-insurance.
In 2015, responding to concerns raised during the FSI that the existing
product disclosure regime was not optimising consumer outcomes, the Insurance Council
of Australia (ICA) established the Effective Disclosure Taskforce (the
Taskforce). The purpose of the Taskforce was to investigate and develop
initiatives for improvement with regard to product disclosure for general insurance.
The Taskforce concluded that 'a major shortcoming in the disclosure
regime to date has been its sole focus on information provision without the
necessary regard for the consumer's ability to make use of that information'.
Commenting on the regulatory trends in product disclosure in recent years, the
Taskforce also acknowledged the shift towards an onus being placed on the
industry for selling insurance products suitable to consumers' needs.
Specifically, the Taskforce noted that 'product issuers should not only be
obliged to make the prescribed disclosures, but should have greater
responsibility for consumer understanding and decision making'.
With the endorsement of the Insurance Council's Board, the ICA is
currently undertaking a two-year work program in order to implement the 16
recommendations made by the Taskforce. The program is due to be completed by
the end of 2017.
Purpose of inquiry
The current inquiry is interested in reviewing competition and
transparency in the home, strata and car insurance markets in Australia. In
particular, the inquiry examines how these broader objectives are performing in
relation to product disclosure and comparability, and how these aspects of
insurance could be improved to maximise consumer outcomes and ensure that
Australians are getting a fair go when it comes to insurance.
Structure of report
This report comprises five chapters, including this introductory chapter:
Chapter 2 provides an overview of the general insurance industry
in Australia, including its regulatory framework, premium trends, and views on
competition in the market.
Chapter 3 focuses on the transparency of the current product
disclosure regime for general insurance and examines potential areas for
Chapter 4 looks at the costs and benefits associated with the
establishment of an independent insurance comparison service in Australia.
Chapter 5 discusses other matters raised during the course of the
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