Speech by The Hon Lindsay Tanner MP
Minister for Finance and Deregulation
Thursday 7 August 2008
Sydney Convention and Exhibition Centre, Australia
I would like to acknowledge Joan Fitzpatrick, CEO of the Australian and New Zealand Institute of Insurance and Finance, Sivam Subramaniam, Editor-in-Chief of the award founding partner the Asia Insurance Review, and the host, James O’Loughlin.
Insurance plays a central role in any strong economy such as ours. Appropriate allocation of risk maximises the productive capacity of the economy as a whole.
Without a reliable mechanism for pooling and transferring risk, much economic activity would simply not take place. The Australian general insurance industry makes a significant contribution to this endeavour. The Institute has also played an important part in promoting community awareness of insurance and the benefits of risk mitigation.
Insurance contributes over $15 billion per annum to the Australian economy — 1.6 per cent of GDP. In every year since 2000-01 the sector has experienced double-digit growth, and consequently more than doubled in size.
While recent weather events and volatility in the financial markets have had an impact on the industry’s profitability, Australia’s insurers continue to be well capitalised.
The insurance industry dovetails with the Australian Government’s commitment to build a modern Australia to meet the challenges of the future and to transform Australia’s competitiveness in the global economy. Australia’s financial services sector is dynamic and innovative and is the most globally integrated sectors of the economy.
Through extensive domestic reforms and closer integration with the world economy, the financial services sector, makes a substantial contribution to economic activity, contributing directly to Australia’s economic growth, employment growth, and higher living standards.
The recent Summit held here in Sydney brought together for the first time, key leaders in Government, industry and academia in a frank and open environment to discuss the issues affecting Australia establishing itself as a financial services hub.
The Government is committed to ensuring that the ideas discussed at the Summit are taken forward. A dedicated team within Treasury has been established to take charge of the financial services agenda for the Government. The Treasury team will be a single point of contact for the sector and will coordinate the Government’s policy actions.
It will also be important for industry to remain engaged in this issue. Establishing Australia as a key competitive force in the region will require the commitment of all parties. And we will need to remain flexible in light of new and emerging opportunities.
As a leading provider of education, training and professional development services to the insurance and financial services industry in Australia, New Zealand and the Asia Pacific region, the Australian and New Zealand Institute of Insurance and Finance encourages excellence in the Australian and New Zealand insurance sectors and has a key role to play in building Australia’s capabilities.
The Institute’s Certified Insurance Professional membership program and its code of ethics promote best standards of professional practice and the acquisition of up-to-date technical skills and knowledge in what is a fast-moving and increasingly global industry.
Improving the financial literacy of all Australians is critical. From 1 July, the functions of the Financial Literacy Foundation were transferred to ASIC, which will provide financial literacy education through a new Office of Financial Literacy.
Cooperation and coordination are critical to delivering the kind of financial literacy outcomes we all want. So the Institute’s initiatives are very welcome and complement the Government’s efforts. In particular your Why Risk It? financial literacy resource is a valuable tool in developing, both among students and the community, a greater understanding of how insurance works.
The Institute also has a significant role to play in embedding sound corporate governance principles.
Good governance is good for business. If you ever underestimate the importance of corporate governance, you only need to look at HIH. There was a clear causal link between poor corporate governance and mismanagement, which ultimately lead to the collapse of HIH, the effects of which were felt through out the Australian society.
Our regulatory system has been significantly reformed since then, with a particular emphasis on governance and the improved performance of our key financial institutions.
The recent financial market turmoil has focused attention on directors’ conduct and obligations to their companies. While the Government needs to be responsive, it is important that we do not have a knee-jerk reaction to the recent market turmoil. We need to take the long-term view. This is why it is important that we develop a comprehensive, effective, and resilient corporate governance framework that will stand us in good stead in the future.
The aim is increase investor confidence, promote well functioning financial markets, and reduce the cost of capital and facilitate the most efficient use of invested funds.
My Parliamentary colleague, the Hon Nick Sherry, Minister for Superannuation and Corporate Law is examining three areas of corporate governance reform.
The first is reforming corporate offences. Our reforms in these areas will focus on ensuring our corporate laws strike the right balance between promoting integrity and facilitating responsible risk-taking. The particular measures to be taken include, firstly, clarifying the standards required of directors. This will enable them to make decisions with confidence.
Secondly, where directors fail to meet these standards, the law will ensure that the sanctions imposed are credible, flexible and transparent.
Thirdly, the Government believes that it is important to look at the emerging trend for imposing personal liability on directors for corporate fault across Australian law. While this may be appropriate in exceptional cases, it now appears to be the norm.
On a personal note, as part of my chairmanship of COAG’s Business Regulation and Competition Working Group, I have been driving this particular aspect of the Government’s reform agenda with the States and Territories. We are assisting the States and Territories to implement a consistent and principled approach to imposing liability on company officers for the misdeeds of the company.
This is part of a wider reform agenda to streamline regulation. Unfortunately, inconsistent regulation across state borders has lingered well after we finally solved the rail gauge problem. The Commonwealth, State, Territory, and local governments often impose different regulation to address the same policy issue. Indeed, in some of areas of regulation - occupational health and safety is a good example — a national business activity may be subject to nine different regulatory regimes — regulation in each of the eight States and Territories, overlaid by national regulation by the Commonwealth.
In 2007, the Productivity Commission concluded that harmonisation of regulation across jurisdictions could deliver significant economic benefits.
The Productivity Commission estimated that regulatory reforms had the potential to reduce business compliance by up to 20 per cent (or 0.8 per cent of GDP per annum), resulting in a potential resource saving of as much as $8.7 billion in today’s dollars.
To enhance Australia’s growth prospects, the Council of Australian Governments (COAG) has agreed to move towards a seamless national economy through the reform of twenty-seven areas of business and other regulation. The reforms will make it easier for businesses and workers to operate across multiple jurisdictions.
The key reforms include:
I appreciate some of you are sceptics – you have every right to be – especially after all the false starts with achieving nationally consistent or harmonised OH&S arrangements. But at the July COAG meeting, leaders signed an historic agreement to implement uniform legislation, complemented by a consistent approach to compliance and enforcement.
A new Business Names Registration system was also agreed at the July COAG meeting. When the system is operating, businesses operating in more than one State will no longer need to register separately in each jurisdiction. This will lead to significant savings in registration fees and time compliance costs.
APRA released a discussion paper on refinements to the general insurance prudential framework in July and December last year and these were finalised on 23 June this year. The revised prudential standards and revised prudential practice guides are – in some key ways – substantially different to what was initially proposed last year.
The revised prudential framework, as it has been implemented, is clearly more effective, and better targeted, because of the intense and active engagement by industry during the consultation process. The Government expects APRA to apply a robust, risk focused and pragmatic prudential framework to general insurance.
As has been previously announced by the Assistant Treasurer the regulation of direct offshore foreign insurers successfully commenced on the 1st July 2008, bringing direct offshore foreign insurers within the Australian prudential framework.
Eight foreign insurers are applying for authorisation from APRA and a number of foreign insurers were authorised to operate in Australia before the commencement of the regulation.
The regulations also provide in some limited circumstances for insurance risks that cannot be placed with an Australian authorised insurer to be placed offshore.
The Government remains committed to the collection and publication of data on the use of direct offshore foreign insurers, which will provide a greater understanding of the Australian insurance market and the role played by foreign insurers. We are continuing to work with industry to finalise the details of this collection with an expected start date of 1st January 2009.
The Government welcomes APRA's commitment to recalibrate its minimum capital requirements in 2009. The Government is aware of the concerns of some in the industry about the overall levels of regulatory capital. The question of whether regulatory capital is too high, too low or about right is a legitimate one. It is also pleasing to see that APRA is looking to the appropriateness of the overall regulatory capital requirements on insurers.
Of course, a fundamental test of the prudential framework is how it stands up in a changing environment. It is one thing for a prudential framework to work when markets are expanding, investment returns are strong and the claims experience is benign.
The Government is confident that the industry is in good shape to handle the current tough conditions.
The Government is committed to enhancing the stability of the Australian financial system. The Treasurer announced earlier this year a number of reforms to provide as much certainty and protection as possible when a financial institution is in distress.
The financial claims scheme will provide depositors and policyholders with timely access to at least some of their funds in the unlikely event of the failure of a financial institution.
Furthermore the measures that the Government is introducing will enhance the ability of the regulators to act comprehensively and decisively in the event of financial institution failure.
Strong and transparent regulatory architecture is critical in a modern sophisticated economy like Australia’s. So is a healthy, competitive insurance sector. The Australian Government appreciates the depth and strength of the insurance sector. We are committed to delivering a regulatory framework that maximises economic activity and ensures that businesses aren’t burdened with unnecessary regulation.
| Media Contact: |
Website: |
| Nardia Dazkiw -0418 144 690 | www.financeminister.gov.au |
