Insurers' Smugness Might Bring Back 'bad Habits'
The Age
Friday March 3, 2006
THE spectre of HIH may be rising as insurers use premiums to chase growth, says the financial services chief at one of the biggest accountancy firms.
KPMG's head of financial services, Andries Terblanche, congratulated general insurers on bumper results that confirmed the end of the crisis caused by HIH's collapse.But Dr Terblanche warned that complacency could allow dangerous habits to resurface."General insurers face a fork in the strategic road," he said. "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 services. By dealing with an acknowledged underinsurance epidemic and providing better service, insurers could help to stabilise their industry after the gouging it received from HIH."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 policyholders were left without the insurance cover they had paid for, and 35,000 shareholders were left high and dry," he said.The warning came as the Australian Prudential Regulation Authority released new standards for banks and for life and general insurance companies.They require APRA-regulated institutions to assess the fitness and propriety of board directors, senior management, auditors and actuaries every year. Premium rates in commercial insurance have been falling for more than a year, which could signal that insurers are pricing products to maintain growth and market-share expectations. JPMorgan analyst Shane Fitzgerald said this was happening while return on capital from commercial insurance was strong. He said wide insurance margins and good reserves throughout the industry showed that competition could be maintained for now."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. A spokesman for the Insurance Council for Australia agreed, saying there was no evidence that the lessons of HIH had been forgotten. "ICA considers the real danger to be direct offshore foreign insurers which are unfettered by local tax, and are not APRA regulated," said ICA spokesman Rod Frail.KEY POINTS ? General insurance faces a fork in the road.? Complacency could allow dangerous habits to resurface.? APRA issues new standards for banking and insurance.
© 2006 The Age