Last week, the federal government agreed with all of the recommendations in the independent review of the Reserve Bank of Australia (RBA). The review is the first big shakeup of Australia’s central bank in 40 years. What impact could it have on the insurance industry?
The report makes 51 specific recommendations. According to the executive summary, the recommendations are grouped under five themes:
“Together they will deliver an RBA that is fit for the future,” said the report’s authors.
Insurance Business asked brokers how they see these big upcoming changes to one of the architects of the country’s economic system.
“My first reaction is that a shake-up is a good thing,” said Vishal Kapoor (pictured above), director of McLardy McShane Kapoor. “If you do the same things, you will get the same outcome.”
Melbourne-based Kapoor credited the RBA with competently steering Australia through the COVID-19 pandemic but was critical of its current struggles with interest rates.
“I do believe the recent ‘false promise’ made by the RBA to keep rates on hold was certainly a blotch on their copy book,” he said.
The RBA currently has two boards: a Governance Board and a Payments Systems Board. Kapoor particularly liked the review’s key recommendations that would add a Monetary Policy Board to set interest rates.
“The board split will also create a healthy tension between governance and reality,” he said. “The split also brings a voice of the common person to their table, which can only challenge all parties.”
Kapoor said this division of the board may appear “radical” but said similar central bank board structures in other jurisdictions have had positive benefits.
“It has been received well in many other countries around the world,” he said.
Other jurisdictions that have a central bank with three intersecting board-like structures include the United States and the European Union.
The US central bank has the Federal Reserve Board of Governors, the Federal Reserve Banks and the Federal Open Market Committee (FOMC). According to the Federal Reserve website, these three entities “interact” to run the nation’s monetary policy and help “maintain a stable financial system.”
The European Central Bank (ECB) also has three board-like bodies. According to the ECB’s website, “the main decision-making body” is the Governing Council that includes the governors of the eurozone’s national central banks. There’s also the Executive Board for the day-to-day running of the ECB and a General Council with an advisory and coordination role.
Neil Luddington (pictured below) agreed with Kapoor and praised the creation of a Monetary Policy Board.
“The insurance market, along with most Australians, will welcome the creation of a specialist Monetary Policy Board with a higher level of expertise that is equipped to make better quality policy decisions,” said Hobart-based Luddington, who is account manager with Roberts Insurance Providers.
However, the Tassie broker said the moves towards greater transparency and better communication could be of equal or greater importance. The review, he said, recognised “scope to significantly improve the RBA’s regular communications to improve understanding of its policy decisions and strengthen transparency and accountability mechanisms.”
“With more information available to insurers they will have a greater ability to predict future economic trends and their resultant effect on asset values and insurance premium rates,” Luddington said.
Luddington said he expected this to be good news for consumers.
“This will benefit the consumer by reducing instances of underinsurance, for example, where assets are insured for an outdated dollar value and increasing the insurers’ ability to flag future premium rate increases to consumers in advance,” he said.
The review and its recommendations are nearly 300 pages long and written by three experts: Dr Gordon de Brouwer PSM, Professor Renee Fry-McKibbin and Professor Carolyn A. Wilkins.
These experts interviewed more than 130 people in Australia and globally, including current and former Reserve Bank board and staff members, parliamentarians, academics, business people, unions, public institutions and community groups.
The consultations included more than 200 meetings, six focus groups with current RBA employees and a further six focus groups with community groups. The reviewers received more than 100 submissions.
Treasurer Jim Chalmers has said he will work with the RBA board to agree a new Statement on the Conduct of Monetary Policy before the end of 2023.
What do you think of the RBA Review? Please tell us below
