Minister… Ladies and Gentlemen

I am honoured to have this opportunity to address this conference on Australia-China services trade, focusing on the financial services sector, and the opportunities and challenges this presents for a free trade agreement.

My company, Insurance Australia Group or IAG, is the leading general insurer in Australia and New Zealand. IAG is an industry leader in these markets with significant expertise, especially in auto insurance. IAG writes close to 50% of the business in the Australian motor insurance market.

IAG has been present in the Chinese market since 1999 and is committed to the ongoing development of the Chinese general insurance sector. For some years IAG has been providing the skills and experience that can help China, through its participation in CIRC committees on reserving, data and motor pricing. IAG is also committed to working in China, and has a wholly owned subsidiary, China Automobile Association or CAA, in Beijing which is China's largest motoring road side service organisation and insurance agent.

Sustainability

Today I would like to talk about the strengths of the Australian general insurance industry, and why Australia is uniquely well placed to be a partner for China in the next stage of services liberalisation, through the perspective of sustainable industry development. Australian regulators and the insurance industry believe that creating a sustainable insurance industry requires a regulatory framework that balances the interests of all stakeholders. At the same time, an open competitive insurance market is the best foundation for achieving sustainable industry development.

Firstly, insurers have an important role in the community and society in reducing risks. At IAG, we use our comprehensive understanding of what is driving insurance claims to try and prevent those claims from occurring in the first place. After all, fewer risks mean our customers can avoid unnecessary hardships and benefit from more affordable insurance, creating a better outcome for both society and insurers.

For example, in Australia, we use our claims data to identify the worst car crash sites each year and work closely with governments to find ways to reduce accident rates at these sites. We also share research findings with car manufacturers, which leads to automotive innovations to improve driver visibility and safety, and reduce car repair costs. Ultimately this reduces the strain on scheme funding, and in turn improves sustainability and funding.

In China, we have started a partnership with Tsinghua University to improve road safety, with initiatives focused on drink driving and wearing seatbelts, to name a few. We are also in the process of developing a China New Car Assessment Program to improve the transparency for consumers of new cars in China, and ultimately to improve road safety and reduce injuries and cost to the community. This is all part of IAG's long term commitment to China.

Secondly, insurance needs to be affordable. This ensures that more people are not only covered, but take out adequate levels of cover, so that when hardships occur they are properly protected.

Thirdly, insurance providers must operate profitably, to enable us to build and maintain the capital strength to maintain stability and security for our customers, shareholders and the community. An unprofitable insurer is simply not going to be there when customers make claims.

Case study of motor liability schemes in Australia

The best way we can think of to illustrate what sustainability really means in practice is to discuss a practical example. Today I would like to focus on a case study of IAG's own experience in motor liability insurance, directly relevant to the development of a sustainable Chinese general insurance market.

The dramatic increase in numbers of cars on the road in China today parallels the experience in Australia over 60 years ago with the dramatic increase in accidents and injuries then demanding universal cover for motorists to compensate for this cost to the community.  In China, the motor liability insurance sector is currently closed to foreign insurers and this restricts the ability of companies like IAG which has over 60 years experience to contribute more to the development of this sector in China.

We believe that the current scheme in NSW, the most populous Australian State, is closest to a model scheme internationally, which provides a sustainable balance between the elements we have identified of profitability, capital strength, affordability and social outcomes for the community.

IAG has been a significant advocate of reform to the NSW scheme, in particular driving major changes which were aimed to bring the scheme to a more sustainable platform. There are a number of key elements which help achieve such stability:

Firstly, the scheme should be provided by private underwriters at a risk based price and operating in an open and competitive environment, with a strong prudential framework to generate maximum capital, pricing and operational efficiencies. Pricing and product features should be determined by insurers with market forces providing the incentive to price keenly and to provide the best products. Experience around the world has shown that overly restrictive regulation of pricing and profitability has resulted in high prices, inferior products and poor service with eventual withdrawal of potential providers.

Secondly, the scheme must be stable and predictable, and maintenance of premiums must be affordable by all sections of the community. In insurance terms, it also means that risk is more widely spread across the community, increasing diversity and reducing volatility, which reduces cost to the consumer.

Thirdly, compensation should be fair and just with the majority of compensation going to the seriously injured who need it most. It should avoid US style litigation models that ultimately present a blow-out in scheme funding and encourage maximisation of compensation rather than return to health. It should also ensure that scheme funds are paid towards medical fees rather than lump sum payments which are often spent inappropriately,

Fourthly, the scheme should focus on injury management and optimization of health outcomes to return people to health, rather than simply paying compensation. We see safety and injury prevention as a key factor in any scheme that provides cover for bodily injury. IAG is a major participant in safety and injury prevention programmes in Australia and we consider it a key part of our role in the communities in which we operate.

As the largest motor liability underwriter in Australia, IAG has developed robust disciplines and risk frameworks to sustainably price risk and pay claims. Firstly, robust risks control frameworks and mechanisms protect policyholders and provide certainty to shareholders. Secondly, pricing products realistically and disciplined selection of risks leads to sustainable underwriting. Thirdly, paying and managing the legitimate claims of policyholders improves confidence in the scheme and ultimately reduces claim costs. Fourthly, clear product design ensures that customers understand what they are buying when they purchase a policy. Fifthly, developing and supporting a clearly defined regulatory framework facilitates more affordable premiums and more predictable claims costs.

The capability that we have in these schemes has resulted in the most affordable – that is the lowest in real terms – premiums in motor liability insurance in over 25 years. IAG's input into the latest round of reform in 1999 was directly responsible for AUD 100 reduction in premium per policy, and at the same time deliver a more stable and profitable scheme for the community and industry. For example, in NSW, compulsory motor liability insurance prices are now as low at they were 10 years ago, and the average annual premium for motor insurance in NSW has reduced year on year over last 6 years, relative to average weekly earnings.

During 2005, IAG participated in the Chinese government's consultation on the Third Party Liability regulations, by providing detailed submissions, and continues to support the government's ongoing reform in this important sector and development of a sustainable motor liability scheme.

Although this is one of the areas of the Chinese general insurance industry that is currently most restricted, IAG believes that a more active participation by foreign capital and expertise, drawing on over 60 years of Australian experience in reform, would represent a win, win result for Chinese consumers, insurers and regulators.  It would do this by creating an open and competitive environment where private underwriters with international best practice disciplines in underwriting, pricing and products would be able to provide the best service and products to Chinese consumers and contribute to the development of a sustainable industry.

A free trade agreement that can allow us to achieve this would, we believe, benefit China and Australia for many years to come. Thank you.