Ghost Of Hih Is Stalking The Land
Sydney Morning Herald
Friday March 3, 2006
THE spectre of the failed HIH may be rising as insurers use premiums to chase growth, says the financial services chief at one of the largest accountancy firms.
KPMG's head of financial services, Andries Terblanche, congratulated general insurers on a bumper results season that confirmed the end of the crisis caused by HIH. He warned, however, that complacency could allow dangerous old habits to resurface. "General insurers face a fork in the strategic road," Dr Terblanche wrote. "The high road consists of responsible underwriting, expense management, innovative strategies to maintain growth, avoidance of competition on price alone, and remembering and fulfilling the industry's role in the community and society. "The alternative is the low road, with pricing that merely follows the market, a lack of understanding of the cost of the product, pursuit of growth at the expense of underwriting profitability, and an attitude that the lowest prices are the only value proposition the industry has to offer." Dr Terblanche suggested insurers would better serve customers by applying a more diverse definition of value to the services they provided. By dealing with an acknowledged under-insurance epidemic and providing better customer service, insurers could help to stabilise their industry."Adopting the high road will result in benefits to all stakeholders, whereas the low road will bring back memories of a time when competitiveness was based solely on price; a time when underwriting decisions were influenced by, or even driven by, cash-flow pressures, a time when 2 million policy-holders were left without the insurance cover they had paid for, and 35,000 shareholders were left high and dry," Dr Terblanche said, referring to the $5.3 billion collapse of HIH in March 2001.The warning came as the Australian Prudential Regulation Authority released new "fit and proper" standards for banks and for life and general insurance companies. The new standards require APRA-regulated institutions to assess the fitness and propriety of board directors, senior management, and certain auditors and actuaries every year. Premium rates in commercial insurance have been falling for more than a year, a scenario that could signal that insurers are pricing products unrealistically to maintain growth and market share expectations. But JP Morgan analyst Shane Fitzgerald said this was happening while return on capital from commercial insurance remained strong. He said wide insurance margins and good reserves throughout the industry showed that competition could be maintained for the time being. "I think the industry is a lot more disciplined than in the past and it's coming from a position where its balance sheets are very, very strong and very, very well reserved," Mr Fitzgerald said.
© 2006 Sydney Morning Herald