Insurance challenges becoming 'quite acute', APRA says

Pressures on the industry are getting “quite acute” particularly around premium affordability and insurance availability, according to Australian Prudential Regulation Authority (APRA) Chairman Wayne Byres.

Sustainability is another area that is testing the industry, he told the House of Representatives Standing Committee on Economics last week.

“Factors creating these pressures differ across products and, in some lines of business, are becoming quite acute,” Mr Byres said. “As a prudential supervisor, we cannot solve these issues ourselves.”

He says APRA is “actively collaborating” with Treasury, the Australian Securities and Investments Commission (ASIC), the industry and other stakeholders to help develop solutions that target the root cause of issues for specific insurance products.

“There is unfortunately no silver bullet,” Mr Byres said. “The drivers impacting affordability of home and commercial building insurance, such as a changing climate, differ from those impacting the availability of public liability or life insurance products.

“Solutions are likely to require coordinated action across all arms of government and with industry.”

My Byres and other senior APRA colleagues, who were appearing before the committee to review the regulator’s 2020/21 annual report, were asked follow-up questions relating to the recent floods and how the industry is adapting its model to address climate change impacts.

Deputy Chair Helen Rowell says the industry is certainly aware of the need to understand the risks and the exposures as well as where they can take direct risks as insurers and businesses.

“And reliance on reinsurance is absolutely critical there,” Ms Rowell said. “At this stage I think the capacity of the insurance industry and the reinsurance industry to provide cover remains.

“But it is under pressure, and there is a clear need for significant investment in mitigation to reduce the risk in some of those most exposed areas to enable insurance to continue to be available and affordable in some of those more exposed regions.”

APRA Executive Director Insurance Division Sean Carmody says the real risk is not so much solvency risk for the insurers themselves but more about access and affordability in a broad range of regions.

“There are parts of Australia where access to and affordability of insurance is already seriously problematic,” Dr Carmody said.

“So, while through one lens we say as a prudential regulator that we want to make sure insurance can meet all the promises to policyholders they’ve already made, if we were to preside collectively over a system that shrinks and where no-one can access insurance, that’s a very poor outcome.

“That’s why we’re very focused on trying to stave off that risk.”