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Regulations hit insurers

THE worldwide insurance industry prepared itself for a rocky ride in the aftermath of last September’s events in New York and Washington.

Insurance claims resulting from the World Trade Center tragedy were forecast to have a domino effect on insurance companies due to complex inter-linkages.

Twelve months on and the doomsayers have, thus far, been proven wrong.

Domestically, the upheavals felt by some insurance companies have been more the result of a clamp-down by Australian legislators and regulators than any flow-on effect from September 11.

Since July 1, the Australian Prudential Regulation Authority has been policing general insurers under an altered Insurance Act.

Already about 10 per cent of general insurance companies have been weeded out by the new laws, which require the insurers to re-licence their firms as well as meet tough new minimum capital adequacy requirements.

As a result of the process, just 112 of the 137 general insurance companies have been able to continue operating, putting at risk the future job prospects of the 21,000 people employed in the sector.

For 15 firms that did not come up to scratch the answer came in the form of consolidation with other insurers – in some cases with other institutions within the same conglomerate group.

So far just 10 have ‘gone into run-off’, a term coined by APRA chairman Jeffrey Carmichael at a speech last week.

But many of the insurers granted a licence have been given some breathing space to meet the new requirements.

“A number of the 112 active licence holders have plans agreed with APRA to increase their capital over the next couple of years,” Mr Carmichael said.

If they fail, they too will be forced to shut their doors.

Mr Carmichael said the new framework was more flexible for APRA and gave it far stronger powers.

“Whereas the old framework was very legalistic and inflexible, the new one gives APRA considerably greater flexibility and a much more graduated set of powers,” he said.

“In the old framework, all prudential requirements and powers of intervention were circumscribed in black-letter law.”

The new stringent requirements follow several years of difficult trading for insurers. With claims rising faster than premium revenue, insurers have stayed afloat by subsidising their income through reinvesting their premium revenue.

A poorly performing share market since the beginning of 2001 has also eroded the strength of the industry.

Statistics on the performance of the industry for the year ending December 2001 have just been released by APRA and provide a picture of how the industry has been weakened.

During the 2001 calendar year the total insurance industry, including both direct and reinsurance business, had a shortfall of $766 million from its core Australian business. This was an improvement of 18 per cent compared with the underwriting loss of $936 million the previous year.

The overseas insurance business contributed a further $120 million to the losses.

The business bottom line was propped up through interest and dividend payments and other revenue totalling almost $3 billion. The investments gave the insurers a bottom line of approximately $3.3 billion in the black for the year.

Aggregate private sector insurance operating profit after income tax was $861 million, down 43 per cent, or $659, million on the previous year.

Net premium revenue from inside Australia was $13.8 billion during the year after accounting for reinsurance expenses of $5.5 billion, while claims expenses totalled almost $11 billion and underwriting expenses sucked a further $3.7 billion from the insurance industry’s coffers.

Western Australians spent more than $1.5 billion on insurance premiums during the 2001-year, a third of which was spent on employer’s liability insurance. Domestic motor vehicle insurance was the second highest premium revenue earner, with Western Australians spending around $341 million to keep their cars insured during the year. A further $242 mill-ion was spent on household insurance.

The insurance industry is a substantial investor in the Australian economy. Within Australia it has assets of $36 billion, while in overseas markets it has approximately $3 billion invested.

It has more than $500 million invested in land and property, $16 billion in debt securities, about $3 billion in listed shares and more than $6 billion in unlisted companies.

The Australian insurance industry has yet to make any real headway in overseas markets. New Zealand takes the lion’s share of Australian insurance business with $231 million in premiums written up last year out of a total of $439 million.

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