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Suncorp, the biggest insurer in Queensland, argued that Australia had one of the most well-regulated insurance industries in the world. Photo: Glenn Hunt
Lloyd's of London has thrown its support behind a federal government's decision to allow unregulated foreign insurers to offer cover to Australians – arguing increased competition would only improve affordability and drive down premium prices in some of Australia's most natural disaster-prone areas.
John Nelson, the chairman of one of the world's biggest insurance groups, argued injecting competition into Australia's tightly controlled insurance market would lessen the burden of catastrophe claims costs among local companies and diversify risks to global players.
It comes amid a heated backlash from local companies, who argue that allowing unregulated foreign insurers (UFIs) to target Australians desperate for cover could leave households inthe lurch if companies failed to pay out claims.
"There is an absolute economic sense particularly for catastrophe risk ... to open markets worldwide to international players and competition. The burden on the [Australian] community is reduced," Mr Nelson told The Australian Financial Review on Tuesday.
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"Secondly, it means that if you have a catastrophe, you're pumping funds into the economy from outside the country – again that is hugely restorative to the [Australian] economy," he argued.
Lloyd's, which has a regulated arm in Australia, writes around $2 billion worth of insurance and reinsurance cover locally. Mr Nelson, one of the most powerful chairmen in the global insurance scene, argued global insurers could also encourage local residents and companies to better plan for catastrophe risk. For example, customers seeking cover might have to adhere to stricter building and risk mitigation standards if they wanted to be insured.
"If you have the discipline of sophisticated insurance bearing down on risk, it drives better behaviour. For example, [improved] building standards in New Zealand [after the Christchurch earthquakes]," he said.
UFIs have been the topic of discussions among brokers and insurance companies after the Abbott government began pushing for them to inject competition and provide cover in the troubled North Queensland market. UFI would be insurers that are not regulated by the Australian Prudential Regulation Authority, which ensures they are properly capitalised and able to pay out claims.
Six months ago, finance minister Mathias Cormann unveiled plans to improve the affordability of the disaster-prone North Queensland market by allowing UFIs to write risk in the local market. Senator Cormann said the government was dealing with a situation where too many Australians had no insurance cover due to the cost of insurance.
Data from the Australian Government Actuary found that insurance companies were paying out $1.40 in claims for every $1 in premiums they receive from customers living in cyclone-prone North Queensland. The average loss ratio for insurers – or claims – hit around 140 per cent in 2005 to 2013, and the cost of claims there was 80 per cent higher than those in Brisbane, Sydney and Melbourne.
Brokers would be able to sell policies from foreign insurers from March. It comes after severe catastrophes such as Cyclone Ita, which wreaked $8.4 billion worth of damage in North Queensland, tropical Cyclone Yasi in 2011, and 2009 floods that pummelled affordability in the area.
The decision drew intense criticism and alarm from local insurance companies such as Insurance Australia Group and Suncorp Group. Market share across Australia's general insurance industry is controlled by a few big players such as IAG, Suncorp and QBE Insurance Group.
Mike Wilkins, chief executive of IAG, said in November that the move would put local players at a competitive disadvantage to foreign insurers.
"We've got real trouble with that," Mr Wilkins said. "Premiums are a risk signal, and [north Queensland] is prone to cyclones, tropical storms, storm surge and hail. I think the better approach would be to look at how we mitigate that through better building standards, through other things such as levies."
"They [insurers] are losing money in an unsustainable fashion due to the fact communities in the region are frequently hit by cyclones," Insurance Council of Australia boss Rob Whelan previously noted.
One major insurer warned that the federal government risks leaving Australian households desperate for insurance in the lurch legally if they use brokers to buy cover from foreign insurers, and companies fail to pay out claims. Australians struggling to secure insurance may not be able to sue their brokers if their insurers fail, it warned.
Suncorp, the biggest insurer in Queensland, argued that Australia had one of the most well-regulated insurance industries in the world and "we wouldn't want to jeopardise that".
"I'd prefer to see longer-term solutions to insurance affordability being recommended, such as investment in natural disaster mitigation. When risk is reduced, insurance premiums come down and taxpayers avoid hefty recovery costs," Suncorp boss Patrick Snowball said late last year.
Lloyd's, which is expected to reveal its full year profits in March, also said there was increasing opportunity to provide niche insurance products in Australia, particularly coverholders to small-to-medium companies. The group writes around $2 billion in gross written premium in Australia, which is the third biggest market for the global company.
Mr Nelson called Australia was a "key market" for the group, and is fiercely seeking to expand to developing economies, including India and China.
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