Australian Prudential Regulation Authority (APRA) executive board member Suzanne Smith addressed the 2024 Insurance Council of Australia (ICA) conference, focusing on the need to strengthen the insurance industry’s foundations to manage future challenges.
Joined by ASIC Commissioner Alan Kirkland, Smith discussed the pressures the sector faces, upcoming regulatory shifts, and the ongoing concerns around affordability and access to insurance.
Smith noted that while the overall number of natural disaster claims has decreased since last year, the rising costs associated with extreme weather events continue to place stress on the system.
She pointed out that consumers have faced multiple years of significant premium hikes, driven by a combination of factors such as:
Insurers, on the other hand, are dealing with increased costs and a backlog of unresolved claims.
Various reviews have been conducted in response to these issues, including the 2022 flood inquiry, which saw substantial participation from insurers, consumers, and other stakeholders. These discussions have resulted in comprehensive reports from groups like the ICA and the Actuaries Institute.
Despite this work, Smith said, the industry continues to face significant challenges in improving the affordability and accessibility of insurance, particularly as the cost of living rises for many Australians.
Smith highlighted some of the progress made, particularly through the Hazard Insurance Partnership, a collaboration between the private sector and government aimed at reducing risk and mitigating disaster impacts. This initiative seeks to relieve some of the pressure on insurance premiums.
She also pointed to APRA’s corporate plan, which aims to work with stakeholders to explore further solutions. This includes enhanced data collection, possible adjustments to the prudential framework, and an assessment of how climate change may impact insurance affordability, particularly through the upcoming Insurance Climate Vulnerability Assessment.
Smith turned her focus to the regulatory changes coming in 2025, stressing the importance of strong core operations as a foundation for the industry’s sustainability.
One major regulatory development is the introduction of the Financial Accountability Regime (FAR), which takes effect in March 2025. FAR is designed to strengthen governance by increasing accountability requirements across the sector.
Additionally, the Prudential Standard CPS 230, set to take effect in July 2025, will focus on improving the management of operational risks, applying to underwriting agencies, claims managers, and insurance brokers, who will need to ensure robust governance frameworks are in place.
Smith also discussed the risks associated with outsourcing underwriting to agencies, a practice used by some insurers to reduce costs or manage challenging risks.
While outsourcing can be effective, she reminded the industry that licensed insurers retain ultimate responsibility for underwriting decisions. Effective governance, clear conflict of interest policies, and strong data protection are essential, especially during periods of crisis when scaling up operations is necessary.
Looking ahead, Smith urged insurers to embrace these regulatory changes to ensure resilience within the sector.
“It is now critical for the industry to take these review findings seriously, act on them, and promptly implement necessary improvements. This will be crucial for a stable, reputable, and trusted insurance landscape – one that protects our communities and helps our economy thrive,” she said.
