Royal Commission: No systemic risks in insurance sector

  • By Elizabeth Fry

Despite dire predictions that the Hayne royal commission will have a field day with Australia's general insurers, Morgan Stanley’s Daniel Toohey does not expect the probe to uncover any systemic failures in the sector.

The insurance specialist says that's because the compliance requirements for insurance are not as onerous as in banking or super, largely because the asset is simply being insured in the event of loss. 

"This is in stark contrast to the case of super/retirement or banking where the consumer is actually transferring assets or assuming liabilities under a duty of care," said Toohey.

Simply put, insurance is not a major issue if the submissions to the banking royal commission are anything to go by. 

Of the 7,054 submissions received by the end of June, 64 per cent relate to banking, 10 per cent financial advice and 10 per cent superannuation – with general insurance not featuring in the top three. 

General insurers are due to front the commission in the first half of September, although no precise date is scheduled. It is unclear who is going to be called to front the hearings. 

Suncorp, Youi and Allianz were called for Disaster Insurance hearings scheduled for late June, but subsequently delayed to the round 6 hearings in September.

Brand damage

Certainly, claims and poor service are easy targets and Toohey is not ruling out any potential brand or reputational damage if the inquiry exposes customer abuse by Australia's general insurers.

"We think the greatest  potential brand risk that comes from real or perceived mistreatment of customers who have suffered loss at the hand of catastrophes and either did not realise their insurance entitlements or suffered as a result of undue claims process," he added.

However, he argued, this is a well-traveled path with five major reports on the industry in relation to natural disasters from April 2011 to May 2013. 

The analyst noted the few public submissions related to general insurance with just two key areas for discussion highlighted in a Treasury report.

One topic relates to the availability and affordability of natural disaster insurance, the reasons for non-insurance and underinsurance and associated proposals for government subsidisation or other intervention in markets.

The other concerns the conduct of insurers and how well the insurance markets perform.

“This includes matters going to the handling of disaster-related claims and the effectiveness of the industry code of practice, disclosure of and reliance on policy exclusions, and the legitimacy of pricing of natural disaster insurance in some locations."

Hot spots well-known

As Toohey sees it, the key hot spots seem well known. These include Motor Dealer add-on insurance, consumer credit insurance and flood insurance disclosures and coverage.

Although the corporate watchdog’s interest in the Motor Dealer segment was piqued in 2016 - by the extremely low loss ratios and motor dealer conflicts - most insurers have actively managed to reduce exposure following the heavy regulatory scrutiny.

For example, Insurance Australia Group sold its Swann business.

Regarding consumer credit insurance – a product often misunderstood by customers and largely sold via bank relationships - the analyst says dismisses this as an immaterial revenue or profit pool for the insurers. 

Moreover, he went on to say, following the 2011 Queensland flood losses, flood insurance definitions and exclusions as part of general cover were reviewed and tightened.

"That said there are no doubt cases where the insured has suffered hardship as a consequence." 

Toohey claimed  other areas of potential interest include other add-on or point-of-sale insurance with significant commissions - car rental, travel, warranty -  and broker conflicts of interest given they are funded by the manufacturer rather than the client.