The Australian Insurance Industry - Assignment Example

Assignment Name: Number: Course: Code: Lecturer: Date: INTRODUCTION The Australian insurance industry is a well developed and sophisticated insurance market in the world. The industry is characterized by immense growth and provision of quality service to customers. The industry is well governed by laws and legislations[Rub04]. The insurance market can be divided into three major components these are: general insurance life insurance and health insurance. The major players in the industry focus on one of these insurance markets for better provision of the services. However in the recent past the insurance agents and brokers are now venturing into more general financial services due to the stiff competition from banks and financial conglomerates[Rub04]. The production corporation is a critical major component in the monetary service segment within the country. The Broad assurance sector has a worldwide character; it is known for its product development, customer service and participation in financial and regulatory reforms. The general insurance products can be categorized into liability insurance such as motor insurance, business insurance, professional indemnity and worker compensation insurance among others. The other category is the properties insurance which includes travel insurance, comprehensive motor insurance and home and contents insurance[Rub04]. On the other hand life insurance industry has recently been characterized by increased involvement in the delivery of retirement merchandises and amenities. The products in the life insurance include disability income insurance, term life insurance[Tea08]. The insurance industry is governed by laws and statutes enacted by parliament and other regulatory principles and policies. The several laws and regulations which regulate insurance contracts, insurance industry is termed as the Australian insurance law. Under section 51 XIV and XX of the constitution the common wealth parliament is given the authority to enact laws with respect to the insurance industry and insurance[Fed12]. In general the Insurance Act of 1973 and the insurance contracts act of 1984 are the major acts that the Australia insurance law refers to. However other legislations and regulations are enacted by the different states. Private codes and case laws also make up the Australian insurance law[Com11]. Historical perspective. The Australian insurance industry dates back to the late 18th century. During this period the British companies in the country set up rates and insurance policies that were followed though out the country. A federal royal commission was established in 1908 to inquire into the industry, the commission recommended a common wealth regulation of the insurance industry in 1910. However the common wealth governments failed to implement the legislation. The private regulation by the British companies which was known as the ‘tariff ‘, went on until 1974[Com11]. The British regulations ‘tariff’ coexisted with other legislations in the country. The implementation of these legislations was hampered by the World War I and II. The common wealth later in 1973 introduced the solvency regulation to be adopted by all genera insurance companies, legislation s till in place to date. Other legislations and private regulations were still in use and were only abandoned upon establishment of the Trade Practices Act 1974[Fed12] Before 1998 the regulation and supervision of the financial and insurance institutions were based on the status quo rather than on the nature of service the institution is providing. The Wallis committee on financial system inquiry recommended that the regulation and supervision structure be based on the functional basis of the institution. The committee further proposed that for each of the functions identified a body or agency be established and charged with the regulation of the activities in that sector[Com11]. To date many legislations have been enacted and regulations provided to govern the operations in the insurance industry. Industry structure. The insurance industry is categorized into three as earlier discussed. These categories are: general insurance, life insurance and health insurance. Each of these sectors is governed by different acts of parliament, policies and regulations and controlled by different agencies[Tea08]. Initially life insurance companies were mutual companies, in the late 1980s and early 1990s many companies demutualised and many are now owned by banks. Many of the life insurers have become financial service providers. These companies now thrive on superannuation investment products. The general insurance companies have a broader scope of operation and have a diverse ownership structure. The health insurance companies are still predominantly mutual companies, with few exceptions owned by the government of Australia[Tea08]. The life insurance and general insurance are regulated by Australian prudential regulatory authority together with ASIC and ACCC. The health insurance is regulated by the private health insurance administration council (PHIAC)[Fed12]. The main industry bodies include: Financial services council Insurance Council of Australia: this body represents the general insurers. Underwriting Agencies Council. ACORD this is the global standards organization body of the insurance industry. It has the standards for commercial and personal lines, working together with Australian General Insurers the body aim to develop XML standards, standard application for insurance and certificate of currency. Institute of Actuaries of Australia LEGISLATIVE AND REGULATORY FRAMEWORK. Legal framework. The major legislations that control the assurance industry in Australia are the insurance Act of 1973 and insurance (agents and brokers) contracts Act of 1984. The insurance Act 1973; This legislation was enacted with a main objective of protecting the interest of policy holders and prospective policy holders under the insurance policies. The Act provides the guidelines and regulations relating to the insurance firms and companies and how they are formed. It also provides the requirements for formation of such companies with an aim of protecting the interests of the policy holder. it further stipulates the authorization process for the formation of an insurance company, the conditions required to start such company and the liability for breaking this law[Com11]. The act vests the administrative powers for the enforcement of this act to the APRA. the act also provides the preferred conduct of the players in the insurance industry , it explains the offences that can be committed by the insurance brokers, policy holders and the liability and penalties for committing such offences[Com11]. The insurance (Agents and brokers) Act 1984 The purpose of this act is mainly to provide public confidence and stability in the distribution and provision of the insurance policies. The Act defines the relationships that exist between the insurance broker and the insurer[Com11]. The act is administered by the insurance and the superannuation commission (ISC).It was made into law by the Australian government following the acceptance of the Australian law reform commissions recommendation in the report no 16 titled insurance Agents and Brokers that was published in 1980[Com11]. It mainly applies to life and general insurance intermediaries and brokers. It applies to contracts of insurance which are subject the Australian law. The act purposely protects the insurance agents and brokers but in extension also protects the policy holders from engaging in business and contracts that may have negative financial implications to them. Under this Act the policy holder or insurer is solely responsible for the actions of the Agent[Fed12]. Corporations Act 2001. The act role is to regulate the manner in which insurers and insurance agents and brokers conduct business and how they relate with the clients[Fed12]. Regulatory framework. The Australian insurance industry regulatory framework is made of two main agencies: The Australian prudential Regulation Authority This agency is responsible for regulation of life insurance and general insurance. The agency was formed as a consequence of the commendation of the Wallis committee. The committee endorsed that a solitary organization be created to regulate the prudential regulation of monetary establishments. The APRA became operational in 1998[APR11]. The major role of the agency is the prudential supervision of banks, superannuation funds and life and general insurance companies. It is also tasked with supervision of other institutions including credit union, building societies, and friendly societies[APR11]. The Agency is a federal statutory body with powers vested in it by two common wealth acts of parliament, common wealth Authorities and Companies Act 1987 and the Australian Prudential Authority Act of 1998. The agency is headed by well constituted team of executives and is funded by levies from the industry[APR11]. APRA is divided into five major divisions: Diversified institutions. Specialized institutions. Policy. research and consulting; and Corporate services. Before the establishment of the APRA, its role was done by the insurance and superannuation commission. Non financial institutions were regulated by the Australian Institutions commission[Rub04]. The agency’s main role is to regulate the compliance of superannuation funds in line with the prudential regulation and retirement income provisions of the Superannuation Industry (Supervision) Act 1993[Rub04]. The APRA is enabled and empowered by several legislations. As illustrated by the ….. the legislations include: Australian prudential Regulation authority Act 1998. Australian prudential Regulation Authority Regulations 1998. Financial management and Accountability Act 1997 (FMA) Corporate Law Economic Reform Program Act 1999. Financial institutions supervision Levies Collection Act 1998. Insurance Act 1973 Insurance Regulations 2002. Life insurance regulations Life insurance supervisory Levy Imposition Act 1998. Australian Securities and Investments Commission This agency is accountable for market integrity and consumer protection in the financial system including the investment and superannuation products. It is the chief financial and corporate regulator that was established in 1991 by an act of parliament. Unlike the APAR the ASIC is fully funded by the federal government and it is responsible to the federal government and answerable to the parliament, the treasurer and the parliamentary secretary to the treasurer[com11]. Before 1991 the agency operated as the Australian Securities Commission (ASC), this was charged with the implementation of the corporations act, this act applied to corporations and securities. Additional responsibility was given to ASIC in 1998 to regulate financial market products and services[com11]. Additionally the agency is charged with enforcement of a number of legislations relating to financial markets, insurance sector intermediaries and financial products, which include insurance, investments and superannuation activities[Rub04]. ASIC is further responsible for the development of policy and guidance in relation to the laws it administers, it licenses and monitors compliance by participants in the insurance industry and provides accurate and comprehensive information on companies and corporate activity[Com11]. Generally the agency is tasked with registration of companies, company auditors and liquidators, it is authorized to acquire and provide data and information to the public regarding all the companies, it regulates the securities industry, it also exercises market integrity and consumer protection powers relating to financial institutions and insurance agencies; this role was previously played by the Insurance and superannuation commission and the ACCC. ASIC investigates and ensures compliance with regulatory legislations relating to companies and financial sector. The agency provides customer protection by monitoring and assessing the compliance with the relevant laws and regulations and the policies formulated to be used in the insurance and financial institutions[com11]. ASIC is also charged with the implementation of the monetary services Reform Act 2001. This act presented a regulatory environment aimed at market uprightness and consumer security. The Agency has the power to advise the relevant minister on licensing matters, assess the compliance of market and facility licensees with the legislative obligations and the necessary liability for contravening the legislative provisions[com11]. Australian Competition and Consumer Commission This is an independent statutory authority of the common wealth constituted in 1995 whose main purpose is to administer the country’s fair-trading competition and consumer protection laws . the agency is not directly involved with regulation of the industry however it has adequate regulatory authority and powers to regulate competition in the industry[Rub04]. The Agency mainly administers and implements the Trades Practices Act 1974. The act was enacted to promote competition and fair trading and provide customer protection. The act deals with all aspects relating to the market and includes unfair market prices, mergers and acquisitions of companies and price monitoring[Rub04]. Conclusion The Australian insurance industry has been in existence for more than two centuries, it is among the world’s well established insurance industries. The industry is well governed by law and regulated by well structured agency that enforces the legislations for each sector in the insurance industry[Tea08]. The industry works in conjunction with other industries such as the financial sector, the health sector among others in order to provide better services to their clients. This interrelationship is guided by legislations and regulatory agencies to provide an environment favorable to both the insurance provider and the policy holder, thus creating fair trade. References. Rub04: , (Rubenstein & Jong, 2004), Tea08: , (Teale, 2008), Fed12: , (Federal Government of Australia, 2012), Com11: , (Commonwealth of Australia, 2011), APR11: , (APRA, 2011), com11: , (commonwealth of Australia, 2011), Read More