by John L. BaileyNews Weekly
Letter: Insurance failures - who should pay?
, June 30, 2001
While I value Colin Teese's contributions to News Weekly,
I am concerned by some aspects of his article in the June 2 issue.
Writing of the HIH collapse, he appears to be critical of the decisions by market-oriented governments to bail out at least some policyholders. Referring to this aspect of policy he writes, "Insurance policyholders (as with small depositors in banks) were to be regarded as 'innocent' victims of mismanagement and corporate failure and therefore worthy of help.
Shareholders were, however, in a different category. After all, their aim was to make a profit. The logic, let alone the equity, of this distinction escapes at least this writer.
After shopping around, does not the insurance policyholder (or bank depositor) select which of the available enterprises to bless with his or her custom?"
There is clearly room for argument concerning the extent that free market forces should be allowed free rein. However, I suggest that the Coalition Government does not have a policy of turning over economic, financial and/or business matters entirely to "the market".
It supports the operations of the Reserve Bank, which among its other responsibilities, oversees the operation of commercial banks. It also supports (some would say with insufficient funding) the Australian Prudential Regulation Authority, which supposedly oversees insurance companies.
I am surprised that Colin Teese cannot see the logic or equity of bailing out policyholders, but not shareholders. Investors have a wide choice of enterprises and financial instruments in which to place their funds.
For my part, during a long career in investment research, I have steered clear of analysing, or investing in, insurance companies. The outsider cannot judge their soundness from their annual accounts. It is unrealistic of Mr Teese to suggest that policyholders can make well-informed judgements as to which insurance company to deal with. Furthermore, many people who rely on an insurance policy do not know the company that holds the policy. One thinks of persons who deal with professionals, builders and other businesses, or even enter premises, relying on the fact that there is some sort of professional indemnity or public liability insurance to cover the (hopefully rare) eventuality of something going wrong.
We pay a relatively small premium to insurance companies in order to be covered for a very large loss in the unlikely event of an accident, error, crime or other mishap. It is essential that all policyholders, including those who are wealthy, can be confident that their policies, or those on which they rely, are honoured.
For my part, I have been critical of the fact that the Federal Government has been slow to react and appears to have placed some limits on which policyholders it will guarantee will be paid.
I believe that especially because there is a Government body supposedly overseeing the operations of insurance companies, the Government has not only social and political obligations, but also a moral obligation.
I am not much interested in how the payments to policyholders are funded. It seems reasonable that the body of those paying insurance should contribute, by means of increased premiums, to this "insurance of their insurance".
However, there is also a social good in all citizens being assured that "they are covered", even if they are not payers of insurance premiums. We are all potential beneficiaries of insurance policies.
For this reason, it seems reasonable that Governments should also contribute funds that are ultimately levied from all taxpayers.
With hindsight, it can be seen that APRA has had insufficient resources and powers to do its work effectively. Let us hope the Royal Commission will address the question of what needs to be done to reduce the likelihood of insurance company failure.
I believe that it should examine whether HIH wrote its policies with actuarial advice, and whether insurance companies should be subject to an actuarial audit as well as an accounting audit.
Colin Teese is correct in drawing attention to the possibility of superannuation fund failure. Especially now that superannuants are permitted to choose the fund managers for their superannuation, I believe that each member should examine the fund managers' reports.
He or she should be satisfied himself that the investment policies being followed are sound, and that the performance of the fund compares well with that of its competitors. For those who are insufficiently skilled in this field, there are numerous investment consultants available.
I do not agree with Colin Teese's recommendation that Governments should re-enter the fields of insurance and banking, presumably to provide a less risky choice for consumers.
It is not so long ago that the State Savings Bank of Victoria failed. It is preferable that laws be tightened, and be policed.
It is also quite insupportable that company managers and directors should be able to pay themselves huge salaries and bonuses, while divesting themselves of assets so as to avoid responsibility for culpable business failure.John L. Bailey,