Regulatory issues in Insurance, a year in review

In brief - 2019 has been a milestone year for the regulation of insurance

It has followed the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry (Royal Commission) and the Federal Government election.

Generally, regulatory action has superseded legislative change in the insurance sector.

The bancassurance model is likely doomed after the Royal Commission, as banks seek to offload life insurance arms and class actions hit the banks over the sale of "junk" general insurance.

The product design and intervention power and the introduction of BEAR to insurance will consume a lot of management time (with, in our view, questionable benefit to insurers or the market).

The wave of regulation will likely lead to a highly constrained product environment. Criticism of the PDS regime suggests that the regulator will press the legislature to move away from the disclosure plus freedom of contract/caveat emptor regime. 

The recent Westpac decision on personal advice has raised some eyebrows in the industry, as entrenched distribution models have to be reconsidered.

The product intervention power will allow ASIC to ban products of which it does not approve.

Unfair contract terms legislation will allow courts to retrospectively rewrite policies and, together with the proposed regulation of claims handling as a financial service, will further constrain products.

The net effect will likely be a limited list of uniform retail products, with insurers forced to a corridor loss ratio - too low means the product is not "good value" to ASIC, and too high means that APRA will intervene as the insurer's ability to do business is at stake. 

Uniformity means that insurers can compete on distribution and claims efficiencies alone. The problem here is that ill-thought out piecemeal regulation of these will constrict insurers' ability to devise new models and lead to adverse macro consumer outcomes.

The regulation of claims handling as a financial service will put further friction costs pressure on insurers, with arguably limited consumer benefit.

The flaws in this approach are obvious, but Australia's current consumer climate (following the Royal Commission) appears to prefer quasi-dirigiste complacency and lack of innovation over anything else. 

Just how insurers can operate at acceptable returns on capital in this environment is not entirely clear. We foresee another insurance crunch, not at the level of capacity (unlike in the early 2000s after the HIH collapse) but in terms of a willingness to do business in certain lines as insurers see ROE fall further.

At the more complex end, we expect to see greater ART as the corporate market seeks access to the vast return-chasing post-QE pools of liquidity that are available in the Caribbean and Channel Islands and in OTC markets.

As 2019 draws to a close, we provide a summary of regulatory themes for the insurance sector from 2019 and relevant to the coming year.