THE AUSTRALIAN Prudential Regulation Authority’s (APRA’s) recent swathe of new insurance regulation could prompt further consolidation in the industry.
At present, around 85 per cent of premium revenue is earned by the top five insurers, but a leading lawyer has warned that the larger companies’ grip on the market could intensify. In recent months, APRA has released proposed prudential standards on governance, risk/financial management, fitness and propriety and corporate groups.
“Ultimately it will tend towards more consolidation in the insurance industry,” said Fred Hawke, partner specialising in insurance matters at Clayton Utz. “That’s partly what APRA wants. There’s a fundamental tension between regulators here. The ACCC would like to see more diversity in the insurance industry — that’s in conflict with APRA’s role which is made easier with fewer companies to regulate. Obviously APRA’s job is easier if it is supervising six major insurance companies than 100 little players scratching around. But of course there is far less competition with fewer companies.”
Hawke added that the ACCC may be fighting a losing battle given that new entrants to the market now face significant barriers to entry. “The long-term objectives of the ACCC and APRA are in conflict, but there’s not much the ACCC can do to prevent consolidation where there are simply too many players in the market and where APRA is raising significant barriers to entry in the form of prescriptive governance requirements,” Hawke said. “There’s an issue with barrier to entry to insurance in Australia.”
John Hewitt, company secretary and general counsel at Assetinsure, said he believes in the case of companies such as Assetinsure, which is a proprietary limited company 50 per cent owned by a non-listed investment and advisory group, the reforms may ultimately drive insurers offshore.
“Unless APRA revises its proposed standards especially on how they impact on private companies and conglomerates there is the risk that the stage 2 reforms will either create a barrier to market entry or encourage potential entrants to avoid the process altogether and set up offshore,” he said.
The Australian insurance industry has gone through radical change in recent years. Two insurers have vanished — HIH Insurance and FAI — there have been several high profile takeovers — CGU by IAG, AMP/GIO by Suncorp, Lumley by Wesfarmers — and market exits — St Paul’s, Gerling, AXA.
In addition to fears over consolidation, insurers are also concerned that they are being competitively disadvantaged by the lack of regulation for offshore insurers. “Currently unauthorised foreign insurers are the biggest threat to prudential regulation and policyholder protection in this country,” said Hewitt. “Perversely, increased compliance on APRA-regulated insurers may give, or add, a competitive advantage to unauthorised foreign insurers.”
Duncan West, chief executive at Vero Insurance, agreed. “Whatever the form of regulation, it should be consistently applied,” he said. “Offshore insurers should be subject to the same level of regulation as locally licensed insurers. This ensures a level playing field. This should apply to all regulatory requirements, including those set by APRA and ASIC.”
However, the Treasury commissioned a review on the regulation of direct offshore foreign insurers (DOFIs), which reported last year. It is understood that Treasury has considered the findings — which concluded that DOFIs should be subject to APRA-style supervision — and will be publishing discussion papers on the topic.