Insurance forces business to shut
By Brian Woodley, Andrew White
04feb02
AROUND the nation, businesses are being forced to close and legal and political concerns are mounting as problems over insurance cover worsen.
At Muskerry Moto Park near Rochester in northern Victoria, the flags were pulled down last Monday, perhaps never to return after an insurer refused to renew the motocross venue's public liability policy.
In the NSW Supreme Court on Thursday, 27-year-old Lisa Denise Palmer won a record $16 million payout for a 1997 accident that left her paralysed and relying on a respirator to breathe.
All week in Sydney, insurance executives and accountants waited to tell their side of the HIH insurance collapse at the Owen royal commission.
Nearby, Australian Prudential Regulation Authority chief executive Graeme Thompson is overseeing legislation that could result in one in 10 of Australia's 142 insurers closing or being sold by June 30.
In Brisbane, Premier Peter Beattie has formed a taskforce to investigate problems in public liability insurance.
In Melbourne, Australian Competition and Consumer Commission chairman Allan Fels is putting the finishing touches to an inquiry into general insurance premium rises.
In Canberra, the Prime Minister has convened a forum to inquire into medical negligence premiums that have risen so sharply they are forcing doctors to quit.
Federal Small Business Minister Joe Hockey is talking of the need for reforms to curb the jackpot mindset in public liability insurance.
And yesterday, federal Assistant Treasurer Helen Coonan announced a national ministerial meeting to address rising fears of a crisis in the insurance industry. Never has the industry been under such a critical glare.
But is there a crisis? It depends who you ask.
Any customer who has faced premium increases of between 20 per cent and 1000 per cent will tell you there is.
But insurers and the investment markets say no. For the same reasons that consumers are angry, shareholders and insurance executives are quietly confident of a good year.
Insurance stocks are among the most favoured for investors who can see a return to profitability due to the new hard-nosed approach to underwriting insurance risk.
True, there have been some poor results, and the collapse of the giant HIH Insurance. But overall, the industry claims to be doing fairly well.
An industry-wide profit slump from mid-1997 bottomed out with after-tax losses totalling $292 million for the first half of 2000 among about 150 private sector general insurers controlling assets worth $53 billion. Since then, amid a period of consolidation insurers have bounced back and are expected to show profits for 2001 on an asset base assessed by APRA at $59 billion.
Insurance Australia Group, the recently renamed NRMA Insurance and the country's biggest insurer, expects its profit to show the benefits of a $60 million gain from unwinding previously overstated claims provisions, not to mention improvements flowing from premium increases.
But this has come after what Alan Mason, executive director of the Australian Insurance Council, calls the "aberration" of the collapse early last year of HIH, Australia's second-biggest insurer, then in September the "horrible surprise" of the terrorist attacks on the US.
Don Findlater, a 30-year veteran of the industry as senior partner with accounting firm KPMG, says the events of the past year have been "a necessary wake-up call". Slack underwriting practices in recent years – with insurers cutting prices to get business – have come home to roost.
"These companies, instead of looking at the risks, they just followed what other companies were doing with their prices," Mr Findlater says.
Public liability insurance is as good an example as any.
In 2000, insurers collected $883 million in premiums for public and product liability, and paid out $1.18 billion. That's a $299 million loss before taking into account the industry's expenses, but also before counting their returns from investing premiums.
Mr Findlater says the insurance companies are trying to restore their margins so they can cover the business at a profit. "Insurers are in a pretty tough mood," he says. "They are getting themselves back on a sound footing, which is what they need to do."
And there are extra pressures on the insurers.
As well as the size of payouts, the number of claims is going up as more people succumb to what the industry calls a "lotto jackpot" mentality and a "compo culture".
According to APRA, the number of claims has jumped 60 per cent between 1998 and 2000, from 55,000 to 88,000. Peter Nash of insurance agent Sportscover says the number of claims against amateur sporting clubs and events has soared tenfold from 36 in 1994 to 379 in 2000.
"While a claim might be patently ridiculous, the person making it takes it seriously because a lawyer tells him he can get money, and it costs us say $3000 just to investigate the claim against the $175 the insurer got as premium," Mr Nash says.
In addition, they are finding it harder to lay off their risks with reinsurers.
European and US reinsurers are reckoned to be the big losers from the estimated $US70 billion ($139 billion) damages bill from September 11 and they are raising their premiums to recoup losses.
The claims reduce their capacity to write new business, meaning they are not accepting some classes of business. In turn, the insurers will not offer cover on certain risks, or quote prices that stun their customers.
Despite problems with public liability and professional indemnity, and the withdrawal of policies that cover acts of terrorism, insurers expect the wave of regulatory reforms to help sustain growth in the industry.
APRA's new approach to regulation has increased the minimum capital requirement from $2 million to $5 million, and will also put more rigour into the way insurers estimate and set aside funds for claims. The new rules will be in place by mid-year.
With one in 10 licensed insurers expected not to make the grade, there will be fewer, but hopefully stronger, insurers as a result.
Multi-million-dollar damages awards in the courts have also been blamed for driving up premiums, to the point where some specialist professionals, such as obstetricians, have considered abandoning their careers.
Mr Hockey has called for the states to reform common law in this area, but he has backed away from supporting the establishment of a New Zealand-style publicly funded compensation scheme.
Lawyers, stung by claims that their greed has driven litigation to unsustainable levels, blame other factors – the insurance company mergers undermining competition, the HIH collapse – it was the key price-setter on liability insurance – and the world economic downturn.
Mr Mason acknowledges a crisis of confidence among consumers – but insists the perceptions do not match the reality.
"Consumer market research tells us the same thing every year. People who have never had a claim have this expectation they will not get paid and get messed around. For the people who have had a claim, they're fine. The problem we have is that because of the nature of insurance, only a relatively small number of people get to have a claim every year and test the process for themselves."
But he admits: "We know you can't carry on in an environment where a whole range of people are saying, 'We can't actually continue, society can't continue in its daily life any more because of this, that and the other'. Something's got to give somewhere. So we want to be at the table as part of the design of a solution."