Assistant Minister and Minister for Financial Services, Mr Daniel Mulino. Mr Mulino will first make his address and he’ll then be joined by Joyce Moullakis, the Associate Editor of the AFR, for a Q&A session. Once again, please remember to get those questions ready.
Daniel Mulino:
Thanks very much. Can I also begin by acknowledging the traditional owners of the land on which we meet and pay respects to elders past, present and emerging.
Can I acknowledge James Chessell, the editor-in-chief of the AFR, and also acknowledge the AFR’s role in facilitating a number of important public policy debates in my portfolio. Insurance is right at the heart of my portfolio, so it’s great to be here today.
Can I acknowledge Nick and the fact that you’ve co‑sponsored today. I think actually one of the first events I went to – it wasn’t necessarily exactly the same summit – but I think it was a get-together with the AFR, again, co‑sponsored by IAG, talking about affordability issues. So some of these issues are still present in the portfolio and have been constant subjects of our discussions since. But I acknowledge your work, Nick, and also I’m looking forward to reading IAG’s report.
Resilience is a key theme that the government is grappling with within insurance. I attended a delegation to various European insurance centres late last year with a number of people from various major insurers in Australia. And what became clear to me is that the global insurance risks are on the rise. The number of hundred billion dollar‑plus years is now more prevalent. They’re not black swan events; in fact, they’re almost becoming the norm. And that’s playing out in Australia as Nick identified.
And so there are a number of ways in which government is thinking about this. And some beyond my portfolio. There’s obviously the work that we’re undertaking on mitigation. And the DRF is the best single example of that. But that, of course, is supported by the HIP. And the DRF, I think, is now a part of the architecture of governments involvement in understanding and managing risk. And that’s a good thing. I think it now has – I won’t necessarily say bipartisan in the modern Australian political environment – hopefully cross‑partisan support. But I think it is a really important part of the way in which we as a nation deal with risk.
There’s also the ongoing issues around affordability of insurance for those experiencing very high risk. That was what I focused on in my presentation last year, and it’s still something that I am continuing to work on. It was an issue identified in the Budget. And I just say to the industry representatives here and the consumer group representatives and the regulators that this is an area that I will continue to work on. It is a wicked problem. There are a range of approaches that have been adopted in other countries. But it’s also fair to say that most other countries have seen governments lean in in some way because this is an area where markets left to themselves struggle to provide affordable insurance to everybody in the community for basic insurance like home and contents. So just to flag that it’s an area of continuing work.
What I wanted to focus on today was perhaps the more micro end of the market – market dynamism and competition. But in a sense there are a number of ways in which that links to resilience. Firstly, I think it’s critical to understand market dynamics and competition because where there is work that’s undertaken in relation to risk mitigation or resilience, market dynamics are critical in terms of seeing that reduction in risk passed through in ways that are efficient to consumers.
The other dimension, I think, of resilience that I think is impacted by market dynamics is the market dynamics can be a very powerful tool for passing of signals to consumers that might help them navigate resilience at the household level where that is possible. And I think market dynamics are also critical in that in addition to the community level mitigation that we often think about, I think product innovation is a key element to what we need to see moving forward.
So I’m also thinking about mitigation and risk management and risk identification at that macro level constantly, but I did want to focus on some of the more micro issues today, partly so that I didn’t entirely repeat my speech from last time we were together.
I wanted to just start with maybe a reflection on market dynamics in terms of the textbook models, because before going into politics I was teaching the textbook models to reluctant first‑year students at Monash University. And, of course, we tend to think of markets through extremes – perfect competition or monopolies. And they’re benchmarks, in a sense. Perfect competition is that cross diagram we’re all so familiar with. It’s a benchmark that is not realistic. There are basically no perfectly competitive markets, but it’s a useful benchmark.
Firstly, it’s a useful benchmark in that some markets can approach perfect competition even if not all of the strict assumptions hold. But, secondly, I think it’s a useful benchmark for regulators in that it’s a sense of what we should be aiming towards if we’re trying to maximise economic efficiency and consumer welfare. So I think the perfect competition benchmark is a useful one.
And so what I wanted to look at today is a couple of areas where perhaps insurance is different to strict assumptions of perfect competition and look at that from the perspective of a regulator. I’m fully conscious that there are people in this room who understand price dynamics as your day job, but I wanted to give you a sense of my sense of price dynamics from a regulatory perspective and how I and others in government are thinking through these things.
Now, one of the assumptions of perfect competition is that there are infinite firms. Now, at very well‑attended insurance conferences, it may feel like there are infinite firms, but, of course, there aren’t. There’s, you know, a 10 or a dozen firms that have a very high market share. And this is very normal in a lot of Australian industries, both service industries and goods industries. What economics does tell us, though, is that it is possible to have considerable amounts of competition in markets with medium numbers of firms and even small numbers of firms. But I think that what is needed for competition in those contexts is there to be the potential for consumer switching and also a degree of contestability, so firm entry and firm growth.
And so I just wanted to flag that one of the regulatory perspectives on market dynamics is to make sure that regulation is not impeding firm entry, that regulation is facilitating customer switching. And that’s something which I think is well known, but I just wanted to flag that as a key regulatory perspective on market dynamics.
But, of course, insurance has a number of dimensions which make it more complex. There are arguably economies of scale in some aspects of insurance activity. And then there’s also macro prudential considerations which feature in a number of industries in my portfolio. So there’s a tension at times between those.
But I just wanted to flag that the market dynamics are impacted by a combination of market share across a number of firms but also the degree to which consumers feel that they can switch.
The second thing I wanted to look at is the degree to which products or services are simple and comparable. And, again, the simple textbook model assumes an homogenous widget and that’s a useful benchmark as a starting point, but there are many products and services that aren’t like that. And insurance is one of them, but it’s not the only one. I would say many services in my portfolio and beyond are complex and multidimensional. I think you can look at energy, telecommunications, insurance, banking. And this does make it more difficult for consumers to compare on the price dimension.
It’s not just services, though. I was thinking about how this operates in our economy more broadly. There are many goods that are multidimensional where competition does operate pretty well. So we can think of cars, laptops and whitegoods. I was thinking about cars and just how many dimensions people have to compare them on – performance and drive train, including engine/motor specifications, [inaudible] transmission, acceleration, [inaudible], fuel consumption, dimensions, capacity and weight, safety and technology, including ANCAP star rating and costing of service, running cost warranty and service intervals.
Now, I tend to compare cars based on colour and cupholder capacity, but there are many consumers who actually do compare and make trade‑offs along many of these dimensions. So there are goods which are multidimensional, and consumers do often make trade‑offs across those different characteristics, and price is an important signal.
And so the second lesson, if you will, or observation about market dynamics is that where there are multiple characteristics of products, that can lead to situations in which product variety is beneficial for consumers because they can choose products that best fit their particular preferences. And, secondly, where there are multiple characteristics, it can drive innovation in products. And as I just flagged, I think there are a number of markets which do function effectively and very competitively where there are very complex trade offs that consumers have to navigate.
Now, insurance is a market where I believe there are quite complex at times and multi-dimensional products. One of the challenges, I think, both for the market levels and for regulators is that some of the characteristics which consumers are trading off against aren’t always easily observable or easily comprehensible. So, for example, service quality after an event like a national disaster. That is an easily observable experience, but clearly it’s important to consumers.
There are some trade-offs that are difficult to quantify for consumers, for example, scope of coverage versus price or excess or, you know, exclusions versus price. Sometimes these are actually difficult for insurers to quantify, and they end up dealing with that by averaging across a number of [inaudible]. But these are trade-offs that consumers are navigating in their daily choices. And then some trade offs are difficult to identify. For example, there might be different levels of protection for temporary accommodation across policies which consumers aren’t necessarily even aware of when they’re making choices.
So my second observation was that multi-dimensional products offer potential benefits for consumers because they’re able to choose products that fit their needs and it offers the potential for innovation. I suppose my third observation is that where there are challenges in identifying some of the characteristics or judging them – and I think insurance and other services like I think energy and banking are similar in some regards – I think there are challenges at times in how consumers make those trade‑offs.
Disclosure is one response to that from a regulatory perspective that I think is important. I was an adviser when the one‑page [inaudible] fax statement was brought in. And there have been a number of attempts over the years to bolster meaningful disclosure. But I think there are limits to comprehensibility in disclosure. And so I think the other thing that we need to look at is product guardrails. And that’s where I think we’ve got things like the General Insurance Code of Practice as a way of, in a sense, putting a floor under which trade‑offs consumers are faced with. It’s a way of saying, in a sense, that there are all sorts of trade‑offs consumers might want to make, but when it comes to certain dimensions like claims handling or cash settlements or perhaps other dimensions of dispute resolution, there are certain minimum standards below which consumers can’t trade off either inadvertently or unintentionally. Again, when we look at the example of cars, obviously something very similar where regulation will mandate minimum standards for safety, fuel efficiency and emissions.
So I think that the industry codes that we see right across the financial services sector are very important. I did want to acknowledge that the industry is moving towards an ASIC‑approved code and that the industry is moving towards a contractually enforceable code, which I think is going to be a significant step forward. I know that there’s a lot of discussions going on right now which, rightly I’m not involved in. But I’m very conscious of the kinds of issues that are under consideration. And as I flagged earlier, I think that they will set minimum standards on a lot of the key interactions between consumers and insurers, particularly at times when consumers are at their most vulnerable. I think that the codes can set clear signals and expectations around fairness, claims handling, and communication and that this is very important for the way that the industry builds up trust and the way that it interacts with its consumer base.
I know that a lot of work, for example, is also underway in relation to matters beyond the code, for example, areas like post‑disaster staff training and post‑disaster communications. And I had acknowledged publicly that when I was newly in this role and travelled to Taree after the floods there that there had been a material improvement in some of the aspects of post‑disaster consumer engagement. So that work in parallel with the code is really important.
But I think that the work in the code, as Nick identified, is really important and that it be landed over the coming months and it’s going to be a really important way of providing safeguards in the overall market dynamics.
The final thing I wanted to talk about was price transparency. In the budget we received funding and momentum, if you will, for further work on affordability for those high‑risk properties, for standardising certain terms in contracts in parallel with the work that the industry is doing. We also received some funding for price transparency, which I know is an issue that has been under consideration for a long time. And, again, I think price transparency for me in insurance is really important because it can link to these resilience issues at a household level, and price transparency can facilitate price signals, helping people understand ways in which they can build more resilience at household level, but it can also lead to more efficient and fair prices when people have undertaken mitigation.
Price transparency is critical for consumers to understand both price levels, I believe, but also price changes. So this is an area, though, which is subtle and nuanced in insurance. I think at the moment there’s a growing expectation among consumers that there be a breakdown in the key drivers of both price levels and price changes. But I do understand there’s a limit to how much this can be done. And, again, I return to the car analogy – without wanting to overdo it – but if we were to look at a car price, it wouldn’t be a straightforward thing to require that a new car retailer or manufacturer break down the price in terms of characteristics like speed or fuel efficiency or safety, which are some of the characteristics where trade offs are made. That’s not a straightforward thing to lay out in terms of prices.
So within insurance there are some aspects which are arguably similar. It’s not necessarily always easy to pull out reinsurance as an element of each and every policy in an accurate way. Having said that, I imagine there are ways in which it’s possible to at least at a high level identify major hazard risk for each policy in terms of how much it is a driver of that policy. And so I think we as government, as regulators, as industry, as consumer groups, I think we’re all going to need to work together to figure out a way in which we can, in a sense, do a better job of providing a layered understanding for policy holders of what it is that’s driving the level of their policies.
But then, of course, as you well know because you deal with consumers every day, there’s also a growing sense among consumers that they would want that price transparency to also give them a sense of where there’s a material change in their premium, say, more than 10 per cent or whatever the threshold is, I think there’s a sense that consumers feel they should be told at least in a qualitative sense but potentially also in a quantitative sense why that policy is changing.
But as I said, this is not just about transparency and fairness and the relationship with the consumer. I believe it also links to these issues of resilience in that the more price transparency there is, I believe the market becomes better at sending signals to people about their particular risks and where there’s the possibility of managing those risks, the ways in which there could be a mutually beneficial shift in investment on that level.
So price transparency is a shorter term issue in a sense than some of the deeper, bigger picture issues of risk mitigation at the national level, but I think it’s important for us to work in parallel on a lot of these fronts. And, as I said, I think there are a lot of interrelationships.
So to conclude, I would just say that insurance markets, like any markets in my portfolio and beyond, work best when competition is effective, when information is as clear as possible and when consumers have confidence that minimum standards will be met when it matters most. I think the strong insurance, effective insurance and efficient insurance markets are critical as risk‑management tools. But also they’re going to be so effective, I believe, in terms of directing where we as a nation spend our risk mitigation and risk reduction resources, but also in terms of how we manage this need to build more houses and our broader land use patterns. I think that very effective insurance markets as distributors, and information and price signals are going to be an absolutely key determinant of us doing a better job both in terms of using land and also building residential housing in particular in the future in areas which is most suitable to that.
A lot of good work is already underway in a lot of these areas, and I’m happy to work with everybody in this room from right across the sector and beyond at making even further progress. So thank you very much for the chance to be here.
[Applause]
Joyce Moullakis:
Hopefully my microphone is working. Welcome, Minister, and thanks for an insightful speech. I can only imagine you’re glad this isn’t a tax summit. But we won’t go there.
Mulino:
That might come through the QR codes.
Moullakis:
It could well do. Could well do. [Inaudible] 3 questions, just a reminder. But before we touch on resilience, affordability and mitigation, which really are pressing topics for the sector, I wanted to address several points in your speech. You stressed the need for trust and fairness in the insurance sector’s engagement with customers, and I think James Chesell mentioned this earlier – the social licence to operate. Does this all come back to participants having that social licence to operate and respecting that social licence to operate?
Mulino:
Yeah, look, I think that there’s this term that’s sometimes used, and I think it’s a loosely used term – essential service. And sometimes that’s what’s used to say that an industry has certain core social responsibilities. And I think it’s not an un‑useful term, but I think for me general insurance but also other forms of private insurance, so life insurance and private health insurance, they form for me part of the broader risk management ecosystem of which government is a huge part. I mean, our welfare state is a huge insurance mechanism. I think it was Paul Krugman that said that the United States government today is basically an insurance company with an army.
But I think general insurance is an interesting one in that there’s a relationship between the ways in which the private general insurers and government comanaging a lot of risks. And to the extent that the market doesn’t cover certain risks in the community, whether it be residential risk or small business, a lot of that will then come back to expectations on government to fill that gap after a disaster. But then, of course, there’s also the relationship the other way where a lot of the risks that the general insurers are having to manage are affected by government actions.
So I think what insurers provide is such a core service, I would say that there is a social licence question. But if anything, I think that’s a positive thing in that it shows how important these services are to people.
Moullakis:
Do insurers need to be more cognisant of their social licence to operate?
Mulino:
Well, look, I think a lot of these things are a work in progress. And I spoke about the fact that I was at a similar event a year ago and there were some similar issues. I must say, I was an adviser in this space 13 years ago and, you know, one of the things we pushed through there was the standard definition of flood, and now we’re working on standard definitions of other forms of water damage and then, of course, the industry is also working on the standard definitions of, you know, wear and tear and maintenance.
The management of nation‑wide risks was an issue way back then and then before, and it’s still an issue. So, in a sense, these things are works in progress, it’s not like a binary thing. But I would certainly say that, like government should hold itself to a standard of constantly improving, I think the industry needs to be constantly learning lessons. I think the 2022 floods and the parliamentary inquiry, and the inquiry that the insurance industry itself commissioned were an example of needing to learn lessons from what didn’t work well there.
I think that the fact that the code coming out of this process will be ASIC approved and will be contractually enforceable, they’re good steps forward. But I do know that there’s a lot of devil in the detail also to be worked through. So it’s a constant process.
Moullakis:
Several players in the industry are also grappling with the ASIC action against questioning how they’ve applied discounts, et cetera, so that sort of feeds into that point. But just turning to price transparency and the way in which it’s regulated, which you said is a priority, I’m just wondering how that would really work in practice. You said potentially a qualitative or quantitative breakdown. You know would it be a pie chart‑type scenario? How would insurers sort of practically and logistically, more transparently, show their customers how their premiums are increasing and, you know, what proportion is coming from where?
Mulino:
So, when we undertook the parliamentary inquiry, I think that many of the MPs started with a pie chart in mind or a bar chart – some chart with colours with everything broken down. I think the more that we worked through it, I think the more there was a realisation that it’s not straightforward for all aspects. And I identified reinsurance during my comments. I don’t come into this with particularly fixed ideas, but I certainly expected it may not be straightforward for every single residential property to say, ‘Here’s exactly how much is going to reinsurance.’
But I think that what some insurers have already done is that at the very least I think it’s going to be possible to say on a traffic light scale, for example, ‘Here are the 5 major hazards – bushfire, storm, flood, earthquake – you’re green on all of them. Your premium is fairly low.’ Or, ‘You’re green on all of them except flood because you live near a river. It’s fairly high and a decent chunk of you above the average is flood.’
So I think that at the very least is possible. In fact, many insurers are already going down that path. But then the other thing for me is what about when things change? And I think if someone’s premium changes by 20 per cent, I think is it that I’ve gone from amber to red on flood or what’s the reason? And I think a better job needs to be done of that kind of explanation.
And then I did go into this in detail in the notes, but I think the other interesting thing for me about insurance – and I think insurance is almost unique in this – is that particularly for very high‑risk properties – I see this in Maribyrnong in my electorate – when people shop around, high‑risk property might get one quote of $14,000, one at $25,000 and one at $40,000. To some degree I think that reflects either different risk assessment by the insurers or different risk tolerances in that some of them might have a bunch of houses on that street. But in a sense, what’s different in insurance sometimes is that there’s also a difference in price because the insurer themselves might have a different assessment of that property. There’s a lot of overlap in the flood models and flood maps. But there’s also some differences.
So I feel that to some degree greater price transparency might help people shop around. What you wouldn’t want is for somebody to go to 2 people in Maribyrnong, get a $14,000 and a $25,000, and the difference is that the $14,000 has some huge exclusion in the fine print they’re not aware of. So I just think price transparency is going to make things work better in general, but I also feel it’s directly linked to resilience in that one of the recommendations out of the flood inquiry was to extend the bushfire out to flood, which I think the industry is broadly supportive of. But that to me is, again, part of the evolution of price signals making for better overall outcomes.
Moullakis:
And you mentioned resilience there coming back to that. In terms of councils and state governments, you know, New South Wales, we’ve got a parliamentary inquiry underway looking at insurance costs and removing the emergency services levy. In Tasmania they established a statutory authority seeking to lower insurance costs. In Queensland and WA resilience‑related grants for things like cyclone risks. You mentioned the federal Budget earlier. There were measures there around insurance and pledged a billion dollars through the Disaster Ready Fund over 5 years. I’m just wondering, is there really enough urgency, though, and coordination to really address some of these issues?
Mulino:
Look, these are big issues, and they’re getting worse, as Nick identified, in some regards – climate change and other things. I would say we should acknowledge that I think the DRF and the HIP is world leading. It’s been an incredibly important set of initiatives, and it is now, I think, embedded in our system. So that’s a huge achievement. That’s the backbone. And, yes, we’ll be looking at ways of strengthening that over time. But if you go back to where we were 10, 15 years ago, that’s huge. So the DRF and the HIP are very important, and I’ve had feedback from overseas that that is considered world leading.
I think the information piece with councils – so the ways in which they fund flood mapping and flood modelling I think is a really important issue. It’s very inconsistent across the country. In most jurisdictions it’s done by councils. In Victoria I think it’s done by water authorities. But then when it’s done by councils, across different states councils have very different scale and financial capability. So there’s that information that underpins the whole system and the quality of that information which I think is critical. And then there’s the land use piece, which is critical to resilience and risk management. I think there’s a broad acknowledgement we need to stop approving new developments on one in a hundred and possibly houses that are a risk of one in a hundred in 20 or 30 years. But there’s a real debate going on as to whether that’s actually happening –
Moullakis:
Are the states pulling their weight? I think it does seem to be a bit of a hotch‑potch of different approaches?
Mulino:
Well, I’m always conscious when I as a federal politician make recommendations about states. They note those and deal with them –
Moullakis:
Although emergency management is a state responsibility.
Mulino:
Yeah, look, I think there’s a bit of overlap. I think on the land use side, I think states would acknowledge that we need a better approach to continuing to strengthen that. I do feel that we need to strengthen the ways in which people are made aware of risks on properties. I think putting risks on titles possibly is important. I think there needs to be more transparency around new developments. I think the Actuaries Institute’s annual report on risk management is now identifying the degree to which banks have mortgages which basically can’t afford insurance. That’s a growing and large risk. So all these elements come together, but states are a critical part of it.
Moullakis:
There are a lot of questions here, but we’re out of time. I might just take this very quick one from the audience. I’m sure [inaudible] won’t mind. With increasing climate risk and some communities taking premium or reduced coverage, what policy levers are crucial to keep insurance accessible and sustainable?
Mulino:
So, look, I think to Nick’s point, you know, the reduction of risk is key. That is, though, a long‑term process. So we’ve got to, I think, do things in the interim. That is going to take decades. And there are also some areas where mitigation and risk reduction aren’t going to be possible.
Look, the other piece here is the way that government intervenes in markets. On the delegation that I attended with a number of people in this room late last year, there are ways in which governments lean in in different ways. So California has price caps, which I don’t think are particularly effective. Florida, of course, has a pool. There are parametric solutions in some areas, and then in Europe there’s a lot of government interventions through pools in which there are, in a sense, cross‑subsidies.
I think that to make insurance affordable for those at very high risk in parallel with the reduction at community level, we need to think about ways of helping houses with resilience, and that might be house raising, that might be building back differently. But there’s also ways in which pools might need [indistinct].
Moullakis:
Because government intervention and more of that can actually cause distortions, which we’ve seen in some of the markets that you’ve mentioned just now.
Mulino:
Yeah, so that’s where I think, you know, the price caps to me seem – then again, there’s be experts in this room who would know more about the details of that, but my sense is that it’s had unintended consequences in California in at least some regards. I think that if you were to have interventions in markets, I think – and this goes back to what we tried to do with the flood insurance inquiry – you’d want a bunch of criteria where firstly it would be time-limited and operate in parallel with and dovetail with attempts to mitigate. Secondly, I think it would want to send the right price signals so that, you know, you don’t have more development. I think any kind of government intervention is only going to be feasible if we don’t develop more properties. So I think it has to be very tailored, and there’s a risk of unintended consequences.
Moullakis:
Well, we could probably chat all morning, but thanks for joining us today.
Mulino:
Thank, Joyce.
