The Productivity Commission is urging comprehensive reform of the regulatory environment in financial services, and discusses how regulations can contribute to increasing competition in the sector, including insurance.
The report, titled “Competition in the Australian Financial System” says that the benefits of competition to the individuals and businesses for whom the financial system exists are being reduced in the quest for stability. Regulators have focused almost exclusively on prudential stability since the 2008-09 Global Financial Crisis, promoting the concept of an unquestionably strong financial system. In addition, although financial institutions generally have high customer satisfaction levels, customer loyalty is often unrewarded with existing customers kept on high margin products that boost institution profits. For this to persist, channels for provision of information and advice must be failing.
Competition in insurance
The report says that in the insurance sector, because many general insurers provide insurance under multiple brands, this creates the illusion of more competition than actually exists in the general insurance market.
In every general insurance market considered — home insurance, domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance — the largest four firms (which are not always the same four) account for more than 70% of the relevant market.
The domestic motor insurance, travel insurance, lenders mortgage insurance and reinsurance markets are highly concentrated. While the domestic home insurance market is less concentrated, the two largest firms account for more than half the market.
Australian general insurance markets have consolidated over the past 10 years. Despite some new entrants (including from overseas), mergers and restructures and exits have reduced the overall number of providers. Some of the new entrants have since been acquired by other insurers that are pursuing strategies of growth through acquisition. Of those remaining, many have links with banks and other large retailers, and some are niche providers that specialise in particular insurance lines.
The report makes several recommendations including:
- Renewal notices for general insurance products should transparently include the previous year’s premium and the percentage change.
- On the same part of an insurance brand’s website that contains the information about which insurer underwrites their product, a list of any other brands that are underwritten by the same insurer, for that particular form of insurance, should be included. Insurers should provide an up-to-date list of the brands they underwrite to the Australian Securities and Investments Commission (ASIC). ASIC should publish this information as a transparent list on its website.
- Consistent with the Commission’s 2014 Natural Disaster Funding Inquiry, state and territory taxes and levies on general insurance should be phased out. This should commence from mid-2018.
Regulators' role and competition
The report also says that the Australian Prudential Regulation Authority (APRA) is not well placed to balance the cost to competitive behaviour in its regulatory actions. The preponderance in its remit favours system stability, even at a significant cost to competition. The Commission does not propose to alter APRA’s ability to consider competition in making its risk assessments and actions, but it is evident that a debate on the question of whether the public interest is served by restricting competition could be better authorised.
The Council of Financial Regulators is a valuable forum for a rigorous and informed competition debate, says the report. In the absence of such a debate and of a party specifically authorised to take on responsibility for representing competition, consideration of competitive effects inevitably will continue to be subordinate to stability.
To address gaps in the regulatory architecture related to lack of effective consideration of competitive outcomes in financial markets, an existing regulator must be given a mandate to take the lead on matters related to competition in the financial system.
To minimise cost and disruption, this role should be implemented in substantial part through the Council of Financial Regulators (CFR). There would be no change under this recommendation to the current legislated responsibilities of the regulators. Rather, the Australian government should include in its Statement of Expectations for all members of the CFR the practice of reviewing, before they are implemented, regulatory actions that may have material effects on competition. The competition-related functions of the designated Council member would include:
- transparent analysis of competition impacts tabled in advance of measures proposed by regulators
- testing of the impacts of competition and community outcomes of additional provider integration.
The CFR should implement a process of review before its members put in place regulatory interventions that may have a material impact on competition in a product market. There must be a member of the CFR designated to take up the role of assessing planned interventions, to establish possible consequences for competition in financial markets. The assessment of competition impacts should be discussed at the CFR meeting, and the regulator planning the intervention should consider amending its policies to reduce the effects on competition. Competition analyses, as well as the minutes of the CFR meetings, should be made public in a timely manner.
The Commission has presented two possible options for a regulator to advance competition in Australian financial system and ensure robust consideration of competition in the regulatory decision making processes of the CFR:
- Option 1: that ACCC be afforded new proactive functions to supplement its current reactive role in the financial system
- Option 2: that ASIC’s existing financial system focus be expanded beyond participant conduct and consumer outcomes to include the advancement of competition.