Higher Premiums For Insurance Likely
Sydney Morning Herald
Tuesday June 5, 2001
The accelerated introduction of new insurance guidelines from the industry regulator, the Australian Prudential Regulation Authority, is likely to contribute to further rises in premiums.
Premiums have risen by an average 8 per cent since the demise of general insurer HIH. Analysts also attribute the increase to a turning of the business cycle after a period of low returns.
APRA decided to fast-track a tightening of regulation after HIH collapsed in March.
Under the changes, required capital is expected to increase by about 50 per cent for the industry as a whole. The regulator is moving to a risk-weighted capital adequacy standard that is similar to the requirements for banks.
APRA also has called for the minimum capital required to increase from $2 million to $5 million.
The insurance industry, led by the Insurance Council of Australia, has fought against the changes.
But a report by UBS Warburg says Australia's biggest insurers, including QBE, NRMA and Suncorp Metway, stand to benefit from the proposed changes.
The report predicted market capacity would reduce as smaller insurers, which may have been charging lower premiums to gain market share, went out of business.
It is predicted smaller companies, most of which are unlisted in Australia, will not meet the increase in the minimum capital required.
The ICA, as well as the regulator, believe the acceleration of reform will not leave sufficient time for the companies to raise capital.
The ICA conceded defeat on the minimum capital requirement proposed by APRA when HIH collapsed. But the buffer that insurers will be asked to hold above the requirement in a risk-weighted assessment is still open to negotiation.
The UBS report said the move by APRA was long overdue.
``In our opinion, the current standard for assessing an insurer's solvency based on net tangible assets to premium has been largely ignored by the insurance industry, ratings agencies and investors," UBS analyst Mr Frank Costigan said.
© 2001 Sydney Morning Herald