Bills

Compulsory Third Party Insurance Regulation Bill

Second Reading

Adjourned debate on second reading.

(Continued from 27 October 2015.)

The Hon. G.A. KANDELAARS (15:26): I rise to support the Compulsory Third Party Insurance Regulation Bill. This bill is about ensuring a fair and equitable compulsory third party (CTP) insurance scheme and consumer protections for motorists and CTP insurance claimants by establishing an industry specific and independent CTP regulator. The bill is the government's preferred option to the establishment of a CTP regulator to govern the private sector CTP insurance market from 1 July 2016.

An independent CTP regulator will ensure a fair and affordable CTP scheme and consumer protections for motorists. The independent CTP regulator will be responsible for the oversight of all insurers, consumer protection, improving the CTP insurance scheme outcomes for injured, and setting CTP premiums. The independence of the CTP regulator is critical to providing the insurance industry with confidence that the governance of the CTP market design will be objective, fair and headed by a financial services specialist with the capacity and experience to engage with insurers and their prudential regulator, the Australian Prudential Regulatory Authority (APRA).

APRA supervises Australian banks, building societies, credit unions, life and general insurance and reinsurance companies, friendly societies, and most super funds. APRA's role is to promote financial stability by requiring these institutions to manage risk prudently so as to minimise the likelihood of financial losses to depositors, policy holders and superannuation fund members.

The crucial requirements for the CTP regulator are to be independent and objective and to have the specialist financial skills required to interact with APRA and APRA regulated insurers. This role is inconsistent with the role of the state's infrastructure regulator, the Essential Services Commission of South Australia (ESCOSA).

I am told that market consultations with insurers have confirmed that there is a risk that insurers would be unwilling to participate in the reformed CTP insurance market if CTP scheme regulation was placed within ESCOSA. If the government were to place the CTP regulator with the Motor Accident Commission, then it would also create actual conflicts and perceived conflicts for MAC, both as manager of the run-off portfolio and also in its role as the nominal defendant.

Establishment of an independent CTP regulator will not increase government administration, as regulation of the current scheme is carried out by the Motor Accident Commission. the Department of Treasury and Finance is managing recruitment of the person with the requisite skills for the role of the CTP regulator. The bill, if passed, will clearly define the functions of the office of the state CTP regulator and will vest responsibility to set and control CTP premiums with the CTP regulator.

The bill proposes amendments to sections of the Motor Vehicles Act 1959 to streamline the current regulatory provisions that are set out in that act and abolishes the existing Third Party Premiums Committee. The bill also provides amendments to the Motor Accident Commission Act 1992 that are consequential to the opening of the CTP insurance market to private insurers from 1 July 2016, including MAC ceasing to write CTP premiums. I commend the bill to the council.

The Hon. J.A. DARLEY (15:30): I rise to speak on the Compulsory Third Party Insurance Regulation Bill, which, according to the government, is about ensuring a fair and affordable CTP scheme and consumer protection for motorists and CTP claimants through the establishment of an industry specific and independent CTP regulator. The functions of the CTP regulator will be:

to regulate approved insurers and perform other functions relating to approved insurers conferred on the regulator under the Motor Vehicles Act;

to determine premium amounts payable in respect of CTP insurance policies;

to determine the minimum terms and conditions of CTP insurance policies;

to monitor, audit and review the operation and efficiency of the CTP insurance business;

to provide or facilitate the provision of information to consumers about CTP insurance business and approved insurers;

to make, monitor the operation of, and review binding rules and non-binding guidelines for approved insurers in relation to the determination of premiums, the management of claims, dispute resolution and the provision of information to consumers;

to make recommendations to the minister in relation to eligibility criteria for insurers, the terms of conditions of any undertakings or agreements entered into between the minister and an approved insurer relating to the provision of CTP insurance, and the assessment of an application from an insurer for approval or withdrawal;

to approve the novation of CTP insurance policies between approved insurers;

to regulate such other insurance business as prescribed by regulation;

to administer this measure; and

to exercise any other function conferred on the regulator.

As we know, the CTP insurance market is due to be opened to the private sector from 1 July 2016. The government's preference is that the role of the CTP regulator be established before the scheme goes live, that is, before 1 July next year.

The first and most important point to make about this bill is that, according to the government, it is not actually required in terms of the opening of the provision of CTP insurance to the private sector and the cessation of MAC as the sole provider of CTP insurance in South Australia. Further, according to the government, the current regulatory framework is sufficient in terms of establishing a regulator, but this will most likely result in a less than satisfactory and archaic model compared with that envisaged by the bill, namely, the creation of an independent regulator with a separate statutory head of power.

I think it is fair to say that my experience was probably very similar to that of the Hon. Rob Lucas, in that the government advisers were quite explicit in terms of this advice. At the briefing I attended, they certainly indicated in very strong terms that if this bill is not passed it will not inhibit or in any way prevent the proposed privatisation process. That may very well be the case, but it does not mean that this bill should not be properly scrutinised, especially in the context of what MAC's residual role will be.

On that particular point, I was advised at the briefing that MAC will continue its road safety role and that it will continue to manage the back book for those claims lodged prior to 30 June 2016. In terms of operating costs and duplication, I was advised that long term the government does not envisage the operations of MAC and the CTP regulator to be greater than the existing organisation. Given that, according to the government we as a parliament will have no say in the privatisation of MAC. It is important that we get any associated legislation correct. That applies equally to this bill.

I understand that the minister will be placing on the record a series of answers to questions asked by the Hon. Rob Lucas and I, too, intend to scrutinise those very closely before proceeding any further. That certainly is not to say that I will not be supporting the bill. I simply make the point that I, like other honourable members, wish to have the opportunity to examine the information provided by the minister in response to those issues that have been raised. I should also add that I have circulated the bill for comment amongst various groups and am yet to hear back from them on this issue as well.

The Hon. G.E. GAGO (Minister for Employment, Higher Education and Skills, Minister for Science and Information Economy, Minister for the Status of Women, Minister for Business Services and Consumers) (15:35): I understand that second reading contributions have been completed, and before proceeding to committee I would like to address some of the questions asked by the Hon. Rob Lucas during his second reading contribution and also referred to by the Hon. John Darley.

In relation to the question about the premium impacts in New South Wales and Queensland as a result of privatisation, I am advised that detail and specific analysis of pricing in other states has not been provided. However, a PriceWaterhouseCoopers-led commercial adviser reviewed the Queensland and New South Wales models, and effectively proposed the best option so as to fit the context of the proposed South Australian model and strike a balance between the regulation of price, price control, and sustainable competition.

The South Australian model will manage pricing through, first, CPI-like premium increases in the first three years, the transitional period; secondly, appointment of a strong independent regulator who will determine fair and affordable CTP premiums; and, thirdly, a sustainable, competitive market with three to five insurers and a CTP insurance market allocation of 15 to 35 per cent per insurer. This will ensure that, in year four, post the transitional period, a robust CTP insurance market is established to maintain ongoing price competition for motorists.

I am further advised that, of the three states where private sector provision of CTP insurance occurs, the Queensland CTP scheme has four insurers (four brands) and is a community-rated scheme with a strong price regulated arrangement. However, under this strongly regulated arrangement there is more limited choice in terms of CTP insurer. The New South Wales CTP scheme has five insurers (seven brands) and is primarily a risk-related scheme, with insurers having flexibility in premium price setting. The scheme is a 'file and write' arrangement, and premiums are based more on the risk characteristics of the motorist; however, there is a greater choice of insurer. The ACT CTP scheme until recently had only one CTP insurance provider, NRMA, but now has two insurers and four brands.

In relation to the issue about the fair and reasonable provisions, the government has announced that premium prices will remain fixed for the first three years, with CPI-like increases and governed by an industry specific CTP regulator to ensure motorists are protected. This has been reflected in the key objectives of the CTP insurance market reform process, which includes ensuring transparent and equitable CTPI premium setting and review processes.

I am advised that at present the TPPC considers what should be appropriate premiums, and the only guidance given to the TPPC under the Motor Vehicles Act 1959 is that premiums are to be fair and reasonable. This is a legally vague concept and does not provide any specific guidance to the TPPC. The practice of the TPPC has been to receive a detailed report involving actuarial and other advice, and it is the intention of the government that this process continue with the CTP regulator receiving a similar report to assist in determining appropriate premiums once the fixed price path required during the transitional period has come to an end.

To improve upon the current system, the bill proposes to amend the Motor Vehicles Act 1959 as set out below. In addition to those proposed new statutory provisions, it is intended, regardless of whether or not the bill has passed, that the government will enter into contractual arrangements with approved insurers to maintain a fixed premium price path during the transitional period.

The contractual arrangements will require a sophisticated premium setting process for the period beyond the transitional period, including through the publication by the CTP regulator of detailed premium setting rules and guidelines. I am advised that, in this way, the reform process objective of ensuring a transparent and equitable CTPI premium setting and review process will be met.

Importantly, those contractual arrangements have statutory standing under sections 101(4) and 101(8) of the Motor Vehicles Act 1959 and so have a higher standing than if they were merely enforced under contract law. Section 129(1) of the Motor Vehicles Act 1959 provides:

(1) Upon the recommendation of the Minister, the Governor may appoint a committee to inquire into and determine from time to time what premiums in respect of insurance under this Part are fair and reasonable.

Section 17 of the bill proposes to repeal section129(1) in its entirety because the TPPC's role will no longer be required once the statutory CTP regulator is established. The report on the bill prepared by the parliamentary counsel indicates that this amendment is consequential on the establishment of the CTP regulator. It is proposed that, in place of the repealed section 129(1), the following premium setting provision be enacted:

Section 5(1)(b) of the bill provides for the regulator to have a function of determining premium amounts payable in respect of the CTP insurance policy.

Section 5(1)(f) of the bill provides that one of the regulator's functions is to make, monitor and review binding rules as well as guidelines in relation to a range of matters, including the determination of premiums.

Section 5(3) of the bill limits the capacity for the regulator to set differential premiums to certain rating factors. This mirrors the existing section 129(5a)(a) of the Motor Vehicles Act 1959.

Section 5(4) of the bill allows the regulator to recover his or her reasonable costs and expenses.

Schedule 1, section 10(2) of the bill provides that 'insurance premium' or 'premium' in relation to a motor vehicle means the premium appropriate to the motor vehicle for a policy of insurance under part 4 as determined by the CTP regulator from time to time and includes any money that the registrar is required to retain under section 99A(14).

Schedule 1, section 22(a) empowers the minister to direct the CTP regulator on the setting of premiums during the transitional period.

In relation to the question on how the stronger regulator model proposed for SA is reflected in either the bill or the contract, I am advised that there is no direct comparison from a regulatory perspective for the proposed South Australian model and the private sector models currently in place for Queensland, New South Wales and the Australian Capital Territory.

Based on expert advice and analysis, the optimal regulatory model has been developed specifically for the South Australian market, which will ensure a strong, sustainable, competitive and viable CTP insurance market. The regulatory model is enhanced by locking in for three years CPI-like premium increases, and in year 4 ensuring price control is managed through a premium ceiling and a premium floor arrangement which will be the responsibility of the CTP regulator.

It will be a sustainable, competitive market with three to five insurers and a CTP insurance market allocation of between 15 to 35 per cent per insurer. This will ensure that in year 4 (post the transitional period) a robust CTP insurance market is established to maintain ongoing price competition for motorists.

All elements of the model must be viewed together when determining its strength, including the three-year CPI-like increases during the transitional period, the presence of a strong independent CTPI regulator, and a sustainable competitive market in year 4 to ensure price competition is maintained.

The fundamental purpose of the bill is to establish an independent statutory CTP regulator who can provide robust regulation by discharging the function set out in section 5 of the bill. This is considered to be the optimal regulatory model. The contracts to be entered into between the government and the approved insurers (which will have statutory standing under section 101(4) and 101(8) of the Motor Vehicles Act 1959) reflect these functions.

If the bill does not pass, the contracts will still require the insurer under contract law, and by force of section 101(4) of the Motor Vehicles Act 1959, to comply with a regulatory regime set out in the contracts in the same terms as provided for in the bill. In relation to the question about why not use ESCOSA, I am advised that the CTP regulator must be an independent financial and insurance services specialist to:

ensure a fair and affordable CTP scheme and consumer protections for motorists;

provide the insurance industry with confidence that governance will be objective, fair and headed by a specialist with the capacity and experience to engage with their prudential regulator, the Australian Prudential Regulation Authority (APRA);

liaise with APRA to manage insurer compliance as occurs in interstate private sector CTP models to ensure APRA functions are not duplicated; and

maximise interest from credible insurers and any return to government from licensing.

Regulation of CTP insurance is a financial services regulation, as opposed to general utilities regulation (ESCOSA) and I am advised that the skill sets do not generally overlap, so there is very little ability to leverage economies of scale and scope within ESCOSA.

I am further advised that the insurance industry and other financial services regulators much prefer to deal with other independent financial services regulators and not a general utilities regulator. This is nontrivial and will materially impact on the effectiveness of the regulator. The three other private/competitive CTP insurance markets have an independent CTP insurance regulator and do not combine this with the general utilities regulator. South Australia should look similar, given the above and given that some or all of the CTP insurers will likely be the same as those in other markets.

In relation to the question about the government's future commitment to road-safety funding and the mechanism by which that will be achieved and how existing commitments for road-safety funding and other community programs would be maintained, the government has announced that MAC will continue operating its non-commercial community programs, including sponsorship of road-safety research and communications aimed at safer road-user behaviour. These activities are currently funded from CTP premiums collected by MAC. I am advised that from 1 July 2016, road-safety activities will be funded at the same overall cost through the CTP premiums.

Under section 20(2) of the Motor Vehicles Act, an applicant for registration must pay to DPTI certain amounts, including the appropriate insurance premium. The appropriate insurance premium as determined by the TPPC in the past and in the future by either the TPPC or the CTP regulator (depending on whether or not the bill passes,) comprises a number of elements including a 'pure premium' component which will be passed on by DPTI to the approved insurers under section 99A(13) of the Motor Vehicles Act 1959. Various government costs associated with the CTPI scheme, including road safety funding, will be passed on by DPTI to the relevant government entity (in the case of road-safety funding, MAC) under section 99A(14) of the Motor Vehicles Act 1959 as proposed under schedule 1, section 12(9) of the bill.

If the bill does not pass, then the government intends that various government components, including road safety, will continue to be part of the premium calculation which has to date been determined by the TPPC under section 129(1) of the Motor Vehicles Act 1959 and will continue to be so determined. Again, I thank honourable members for their contributions. I hope that these answers satisfy the questions asked and I look forward to this being dealt with expeditiously through the committee stage.

Bill read a second time.