Insurance is the gathering of a "pool" or "fund" by way of premiums collected from all policyholders. The pool must have sufficient funds to pay claims, along with the insurer's operational expenses and profit requirements, to enable them to sustain a viable business.
Australian insurers and Australian insurance policies are largely regulated by Commonwealth law under the constitutional power relating to insurance. The sources of liability among citizens are largely regulated by State and Territory laws. Although in some circumstances Commonwealth law may be relevant that is in relation to the provision of services or goods to which the Trade Practices Act might apply.
The law determining whether one party is liable to another and for how much one has tended over the last 30 years to expand situations in which liability will be found to exist. This has occurred by statutory provisions at both State and Commonwealth levels. In addition to this trend, the common law and in particular the law of negligence has developed so that there is a greater likelihood of recovery today than there would have been 30 or 50 years ago.
Insurance Industry In Australia
There were 156 private sector insurers in Australia at 30 June 2001. Among them 102 were direct underwriters dealing with the public or through agents and brokers. To support the direct underwriters there are 28 reinsures. The Australian market comprises companies that are Australian based, as well as many international insurers from the USA, Japan, Europe and the United Kingdom. General insurance industry employs 25,000 people.
For the financial year to 30 June 2001, figures show that the gross revenue of the industry was $17.25B. The total assets were $50.9B against total liabilities of $38.35B. Insurers incurred an underwriting loss in the period of $810M and after investment income produced a profit equal to a total return on shareholders funds of 8%.
In recent years the returns on shareholders funds were as follows:
2000 -2% 1999 4% 1998 1% 1997 4% 1996 3% 1995 0% 1994 2% 1993 2%
Regulations The general insurance industry is licensed and regulated by the Australian Prudential Regulatory Authority. The Australian Securities Investment Commission has authority over the conduct of insurers through the Insurance Contracts Act. (1984). In addition to this Act there are the Insurance (Agents and Brokers) Act 1984, Insurance Act (1973), Privacy Act (1988) the Financial Services Reform Act and the General Insurance Reform Act.
Self-Regulation To assist policyholders Insurance Enquiries and Complaints (IEC) commenced in 1991. IEC is a successful independent industry organization created to implement a speedy, economical and efficient alternative dispute resolution service for insurers and policyholders and is responsible for administration of:
* General Insurance Enquiries and Complaints Scheme
* General Insurance Code of Practice, and
* General Insurance Information Privacy Code.
The Scheme is fully funded by the general insurance industry and is free of charge to policyholders.
Commercial Liability Insurers In Australia
There are a number of underwriting agencies, which provide cover on liability insurance. The underwriting agencies obtain their insurance capacity from Lloyd's, Australian licensed insurers, other overseas markets or reinsures. In most instances these are niche underwriters and they often handle the hard to place liability insurance.
Some liability insurances are placed overseas with insurance companies not licensed in Australia. In such cases the insured cannot rely on the protection of Commonwealth Government legislation governing the conduct of insurers.
There have been changes in the market recently as a number of insurers have been sold, withdrawn from the liability market, or restricted the cover they are prepared to provide. Recent examples of companies that have ceased writing primary liability insurance are St. Paul and AIG. Two major general insurers in AMP and GIO (NSW) were taken over by Suncorp.
Reserving for Claims In Australia
Authorized insurers in Australia are required to maintain an excess of assets over liabilities, which currently is 20% of the prior year's premium or 15% of the outstanding claims provision of the insurer. This prudential requirement is to be replaced at 1 July 2002 with a totally different prudential regime introduced under the General Insurance Reform Act 2001.
So obviously these additional requirements will increase the costs for insurers and that increased cost could be reflected in premiums. The changes also recognise explicitly the different risks associated with long tail and short tail business providing for higher capital charges for long tail business.
When an insurer is advised of a claim it immediately raises an estimate, based on the known information at the time. A provision account for any unreported claims is made based on a recommendation of an actuary.
This provision is called the "Incurred But Not Reported Claims" (IBNR) reserve.
In addition, insurers must allow in their central reserves for possible errors in the claims reserving process often attributable to lack of information on the extent of injuries when the initial claim reserve is set. This can lead to increased reserves in later years for a claim that was first reserved in an earlier year. This additional reserving factor is known as "Incurred But Not Enough Reported" (IBNER). Premium Rating and Claim Estimating In Australia
However, for pricing purposes insurers rely on their own and/or Insurance Statistics Australia data for determining the rating of various risks. Insurance Statistics Australia collects insurance data from some liability underwriters who have agreed to share this information on a macro basis. This provides subscribing underwriters with a more precise understanding of the performance of their portfolios against the wider market. Insurers are able to review their portfolio in an underwriting year, all premiums and claims received.
Following informations are taken into consideration while developing a premium for a particular account:
* Type of occupation(s);
* Situation(s) (location of risks);
* Previous claims history;
* Risk management adopted;
* Size of business (employees/turnover);
* Contractual obligations;
* Products, import, exports, manufacturer or retail;
* Sum insured;
* Interaction with third parties, third parties on premises; and
* Liability of contractors.
Public liability insurance covers legal liability claims by third parties for death, injury and/or property damage. (The person who allegedly caused the death/injury/damage is the first party and the insurer the second party.)
Insurers first look at two things when setting liability premiums - the previous claims record and estimate of likely future claims. They not only look at the individual policyholder but the particular category to which they belong eg adventure tourism, as the outlook for the whole public liability portfolio. If claims costs rise, the size of the pool has to increase, requiring a contribution from all policyholders. A company or organisation affected by premium increases may not have made a recent claim itself.
Insurance Tax In Australia
Australia has the highest taxes on Insurance in the world.
Taxes and Charges on Insurance StatesRates(s/d rates %) New South Wales10 Victoria10 Queens land8.5 South Australia11 Western Australia8 Tasmania8 Aust.capital territory10 Northen Territory10
Sources: - Deloitte, Touche Tohmatsu 2001
Generally speaking in Australia for every increase of $100 in public liability premiums, a further $20 in government taxes will be added.
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