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   Official Committee Hansard


Reference: Public liability and professional indemnity insurance

               FRIDAY, 9 AUGUST 2002

                     BY AUTHORITY OF THE SENATE

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                                    ECONOMICS REFERENCES COMMITTEE
                                                        Friday, 9 August 2002

Members: Senator Collins (Chair), Senator Brandis (Deputy Chair), Senators Chapman, Cook,
Ridgeway and Webber
Participating members: Senators Abetz, Boswell, Calvert, George Campbell, Carr, Cherry,
Conroy, Coonan, Eggleston, Faulkner, Ferguson, Ferris, Forshaw, Harradine, Harris, Kirk,
Knowles, Lightfoot, Mason, McGauran, Murphy, Murray, Payne, Sherry, Stott Despoja, Tchen,
Tierney and Watson
Senators in attendance: Senators Brandis, Chapman, Collins, Ridgeway and Webber

Terms of reference for the inquiry:
               To inquire into and report on:
               a) the impact of public liability insurance for small business and community and sporting
               organisations; and
               b) the impact of professional indemnity insurance, including Directors and Officers Insurance,
               for small business;
               with particular reference to:
               c) the cost of such insurance;
               d) reasons for the increase in premiums for such insurance; and
               e) schemes, arrangements or reforms that can reduce the cost of such insurance and/or better
               calculate and pool risk.


BROWN, Mrs Margaret Mary, Chairman, Study and Investigation Committee,
Country Women’s Association of New South Wales..................................................................................365

CAMPBELL, Ms Jane Caroline, Manager, Structured Settlement Group.............................................371

COCKBURN, Mr Milton Roy, Executive Director, Shopping Centre Council of

CUNDALL, Mr Peter, Member, National Risk Committee, Property Council of
Australia; and Strategic Sourcing Manager, AMP Henderson Global Investors ...................................396

HUGHES, Mr Sean, Director, FSR Regulatory Operations, Australian Securities
and Investments Commission.......................................................................................................................378

KELL, Mr Peter, Executive Director, Consumer Protection, Australian Securities
and Investments Commission.......................................................................................................................378

KIRK, Mr Greg, Director, Consumer Protection, Australian Securities and
Investments Commission ..............................................................................................................................378

MARLER, Mr Ian George, Chairman and Managing Director, Australian
Consulting Surveyors Insurance Society.....................................................................................................390

WEST, Mr Duncan Gerald, Chief Executive Officer, General Insurance, Royal and
SunAlliance Insurance Australia Ltd ..........................................................................................................350

WORTH, Mr Craig Dennis, General Manager, Hang Gliding Federation of
Friday, 9 August 2002           SENATE—References E 349

Committee met at 9.22 a.m.

   CHAIR—I declare open this public hearing of the Senate Economic References
Committee. Today the committee holds its fifth public hearing of its inquiry into
public liability and professional indemnity insurance. Before we commence taking
evidence I reinforce for the public record that all witnesses appearing before the
committee are protected by parliamentary privilege with respect to evidence provided.
Parliamentary privilege refers to the special rights and immunities attached to the
parliament or its members and others necessary for the discharge of parliamentary
functions without obstruction or fear of prosecution. Any act by any person which
operates to the disadvantage of a witness on account of evidence given by that witness
before this committee is treated as a breach of privilege. These privileges are intended
to protect witnesses. I must also remind people, however, that the giving of false or
misleading evidence to the committee may constitute a contempt of the Senate.
Unless the committee should decide otherwise, this is a public hearing and, as such,
all members of the public are welcome to attend.

E 350                            SENATE—References Friday, 9 August 2002

WEST, Mr Duncan Gerald, Chief Executive Officer, General Insurance, Royal
and SunAlliance Insurance Australia Ltd

  CHAIR—Welcome. The committee prefers all evidence to be given in public but
we will consider any request for all or part of your evidence to be given in camera. I
note that your submission is confidential and I request that senators, in dealing with
any questions, respect that component of it. However, the committee would prefer to
remain in public session for as much of the evidence as possible, so we will seek your
indulgence if there are areas that create difficulties in terms of the questioning.
Perhaps if we attempt to work around those areas before there is a need to go into any
private questioning we may be able to avoid that completely. The committee has
received your submission, No. 141, and we have accepted it as a confidential
submission. Are there any alterations or additions you would like to make to that

  Mr West—No.

  CHAIR—I invite you to make a brief opening statement.

   Mr West—Firstly, I would like to thank you for the opportunity of appearing in
front of you on what, as you know, is a intricate issue of public liability and
professional indemnity insurance and for the opportunity to put Royal and
SunAlliance’s position. We are interested in finding real, lasting solutions to a very
difficult problem. We also recognise that there is no silver bullet to this issue. There is
no one solution that will resolve things. It is our belief that all parties have to be open
and forthright in putting their positions on the table.

  Secondly, in our paper we are not seeking to replicate what is written elsewhere.
Plenty has been written by plenty of people elsewhere and we are not seeking to
replicate that. We are looking at trying to put specific things that may add some value
for the committee in terms of an insurer-specific view. At the same time we are
looking not to revamp what the ICA are doing but to put an insurer-specific view. We
believe we have some value to add in being open with our own information and our
own real data. In our submission we have been open in showing you our own real
data. That is factual audited data, and we believe that the weight of that evidence is

   We believe that the evidence shows clearly that personal injury claims are
increasing. We believe that public liability claims are increasing. We believe that the
number of lodged personal injury writs is increasing. We believe that average claim
costs are increasing. The rate of the increases is faster than the rate of GDP growth,
inflation and medical cost inflation. We believe that we can prove that plaintiff lawyer
advertising expenditure has increased significantly and that maximum court awards
for catastrophic injuries have increased significantly. We also include some more
qualitative analysis of the root causes of some of those factual statements. We believe
that courts are more generous with damages awards. We believe that courts are more
lenient in their interpretation of common law and that court verdicts are increasingly

Friday, 9 August 2002            SENATE—References E 351

less predictable. We believe that litigants are more opportunistic and that plaintiff
lawyers are increasingly aggressive in terms of quantum and tactics. I am happy to
expand on any of those points and on the data that we have provided in our paper.

   We believe that there is a need for both short-term and long-term solutions. We
understand the need for some short-term solutions for society and particularly for the
not-for-profit sector. We recognise that at state and federal level there has been some
movement in legislation to resolve some of those issues, but we do not believe that it
is sufficient, so we are proposing a workable solution of a pool for resolving that
issue. However, to resolve the fundamental tort issue, there needs to be a broad-
ranging inquiry which includes all parties. We will be disappointed if this issue
develops into a partisan debate—that will not benefit society in general. There is
clearly an issue and it needs all parties to get around the table to develop workable
solutions in order to achieve the benefits for which society is prepared to pay.

  We believe, as I say, that it has to be an all-party approach, and it has to be a
consistent, national approach. An inconsistent approach is just not workable from an
operational point of view. It will not drive the behaviour changes that we are all
looking for. We believe it needs to be fundamentally within tort reform and we believe
that ultimately it is a decision for society and for you, as representatives of society, to
decide what type of society we want to create. We have a role to play in that but it is
not for us to determine the facts; we purely have a role to play within the environment
that is created for us. That is all I would like to say as an opening statement.
Hopefully there will be plenty of questions and areas for analysis both within and
outside the report as issues are moved forward.

   CHAIR—In your opening comments you mentioned concern about how tort
reform issues have evolved to date. Should I take from that the view that there should
be stronger national leadership of this debate?

  Mr West—We believe the only way that ultimately you can get a national
resolution is by a national leadership position. That is the only way that that can
happen. It is not within the power of an individual state to resolve that; it has to be a
federal issue.

   CHAIR—In recent times we have seen national leadership on the issue of data
collection, but I take from your comments that you think it should be on much broader
issues than that.

  Mr West—I think data collection is the beginning of that. I would like to see a
more robust proposal than there is at the moment. I think tort reform is the area where
key national leadership has to be taken.

  CHAIR—Given that in the past the data collation issue has been a matter of
industry self-regulation, we now have the APRA role there. Could you elaborate on
how you think it should be more robust than what is in place now?

  Mr West—Yes. Whilst there is obviously an APRA role, my own view is that the
level of detail that that currently looks like it will go down to will not be adequate. It

E 352                            SENATE—References Friday, 9 August 2002

will have some limitations in terms of the data that will be collected. Our view is that,
at the moment, that needs to go down to a greater level of detail than is currently

   CHAIR—Can you give us examples of the types of detail you think are not likely
to be addressed?

   Mr West—One of the key issues in this is not just collecting what data currently
exist but actually forcing insurers to collect a lot more data than they currently collect.
Not-for-profit organisations are a classic example. We do not collect specific data on
not-for-profit organisations and we would not be alone in that as an insurer. People
might try to draw some conclusions from that, but we have never considered it to be a
risk factor, so we have not collected the data. Unless you start getting down to a much
more micro level of data and you force insurers to collect data at that micro level—as
would be the case in workers compensation, where most workers authorities force you
to collect and submit data at a much more detailed level—unless you get right down
to minute trade specifications and you have consistent trade specifications and
consistent accident types, so that you can start measuring the accident type and the
cause of that accident type, and unless you mandate those at a much more detailed
level than currently APRA, ISA or anybody else is proposing, the data will stay at a
macro level. There are issues with macro data because you collect it together. Once
you start collecting it together, you start averaging, and once you start averaging, you
lose some of the nuances in that data that you would require.

  CHAIR—It is correct to say that APRA will be requiring some greater level of data
collection from the industry, but you say that that does not go far enough at this point.

  Mr West—Yes. At this stage I am not aware of exactly what level of data they are
looking for. It has not been spelt out to us at this point in time.

   CHAIR—On the data issue, the submission to us from the Plaintiff Lawyers
Association suggested some concern with the data that has been used to indicate that
there has been an increase across the board, relative to the various measures you
mentioned in your opening statement. One of the reasons they argue that is the case is
that over the last decade there has not been a consistent base for those measures. They
argue that there have been market responses to various things that have occurred in
the industry which have led to, for instance, increases in the level of excesses that
have not been taken into account, and that those increases in excesses, for example,
remove many of the lower cost claims that in the past would have been measured
from the current measures. Is that a reasonable concern in terms of the data?

   Mr West—The data we have submitted has been consistent for a 15-year period.
Regarding the excess issue on the bodily injury component—which is really the
component that one would be focusing in on—certainly, for larger corporate
organisations, that excess will have changed over a period of time, but for smaller
retail type organisations that excess has not changed over a period of time. So that
would not be a data issue. For us, if anything, the excess is reduced in what we would
call the soft market. So, when prices go down, not only do prices go down but the
excesses go down and the excess gets lower. For periods when the concern comes

Friday, 9 August 2002           SENATE—References E 353

through, which are the 1997-2000 accident years, at that stage in the cycle of the
market, there would have been lower excesses rather than higher excesses.

  CHAIR—Are there other factors from your own databases that you admit would
skew the data in one way or another over that 10- to 15-year period?

   Mr West—Not overtly. There are always issues of accuracy of data collection. You
have to make sure that the people at the front end put the right data into the system.
We audit that reasonably rigorously; we do post-file audits and we look at the quality
of data entry. That has improved significantly in the last three years. Inevitably, you
would not put your hand on your heart and say that there was no failure of data entry
at any point in time, but there are no overriding concerns for us. Obviously, we go
through those issues when we are setting our claims reserves, and we analyse and do
individual file reviews if we are particularly concerned about particular trends. There
is nothing in there that would cause me concern that it would undermine the overall
trend or direction.

  CHAIR—So, aside from what we discussed earlier in terms of excesses, there are
no factors that have changed the nature of the population over that period of time.

   Mr West—No. Obviously, there will be changes in portfolio, so we might insure
different types of industries over a five- or 10-year period. That would be a factor. We
try to strip those out and look at those portfolio changes. There would be some issues
of that type, but nothing that causes us concern. They are judgments that you
ultimately have to make in terms of those factors.

  CHAIR—One final issue that concerns me in relation to the insurance market at
the moment is the area of consumer difficulties and complaints. As I understand it,
that has also been an area of self-regulation within the industry, although we
understand there are some new requirements that ASIC will be implementing over the
next two years. Is there anything you can inform us about in relation to either the
industry self-regulation or what is developing in terms of the new ASIC role in
dealing with consumer complaints about how their cases or insurance contracts are
being managed by insurers?

  Mr West—It would be our view that the IEC, which is the primary body for
complaints and which is self-regulated within the industry, has been highly effective.

  CHAIR—What does the IEC stand for?

   Mr West—It is Insurance Enquiries and Complaints Ltd. It has been highly
effective, not because it gives us the outcomes that we want but because it actually
does not give the outcomes that we, as insurers, would want. I would determine that,
when you look at whether that type of body is effective, (a), it is independent in terms
of the way it operates and the people who are on the commission and, (b), there would
be complaints, I suspect, within the insurance industry that sometimes we would not
agree with the outcomes that they find. The fact that the insurance industry is not
always comfortable with the self-regulator would actually give me a level of comfort
as a consumer. I think they have done a good job and, if you add what ASIC is clearly

E 354                            SENATE—References Friday, 9 August 2002

going to look at in terms of the way that it operates, at a technical level, they will also
do a good job.

   One of the issues, however, is that people do not generally understand the insurance
industry, and their level of understanding and their level of confidence, when they
come to approach the insurance industry, is relatively low. Therefore, sometimes the
perception of how the insurance industry will deal with an individual claim is less
than positive. In reality, the industry deals with claims extraordinarily well. The
number of complaints that go to the IEC are very low, as a percentage—I have not got
the numbers in front of me, but we can provide those—and the outcomes are balanced
in favour of both the consumer and the insurer. I have the view that the complaints
system works reasonably well, particularly around claims. There has not been the
same rigorous nature in terms of complaints on premium, purely because it has been a
free market. For example, if people do not like the premium from one insurer, they
have been able to just go to another insurer, get another premium and maybe find it
lower. There has not been the need for that same rigour. Obviously, the liability issue
has made that significantly more difficult for people. It is also more difficult as to how
you regulate free enterprise in terms of how it prices individual risk.

  CHAIR—Let me put it to you this way, Mr West, because this is why this
particular area concerns me. There is activity now in the various measures that are in
place in relation to complaints about claims. There will be the Productivity
Commission assessment of claims management in the industry, but there has not been
much attention drawn to the issue of complaints regarding premium levels and
other—as I would class them—consumer complaints about how their contracts have
been managed within the industry.

  We have had Allan Fels make comments recently on concerns about consumer
protection. We have had the New South Wales Premier make comments about the
need for us, generally, to address the issue of complaints within the insurance
industry. I have asked a number of witnesses, including some from federal
government departments, whether they can explain the complaints process to us. I
have to say, although we did not cover this particular area in any detail with the
Insurance Council, that your evidence is the first that has given us a clear impression
of precisely what is in place and, probably, is the first that has mentioned the IEC.
That obviously leads us in the direction of the IEC. We should now approach them
and ask for details about how they manage such complaints and what their case
history has been, because how that area is managed into the future is quite a critical

  Similarly, in a sense, it is quite a general problem. We will be talking to ASIC later
today. ASIC, for instance, have not mentioned their new role in relation to
unconscionable conduct and such matters, so it seems that we need to draw that out of
the government’s current approach in relation to managing these issues as well. I take
on board your comments that in a harder market these things are now becoming more
of an issue. The question is similar to the data collection issue: is this an area where in
the future we should leave things predominantly to self-regulation or should we be
drawn into a broader response?

Friday, 9 August 2002           SENATE—References E 355

  Mr West—If there were a broader response to pricing and provision of cover and,
therefore, an interference in the market—maybe I would say this because of what I
do—my experience elsewhere in the world is that intervention has actually caused
more problems than it has actually solved. The issue has become a problem because
for the first time—certainly in a generation, if not in living memory—people have not
been able to get insurance cover for certain events. That is something that never
existed previously. If they can get the cover, they can only get it at significantly
increased prices.

  A myriad of insurance companies operate in Australia, including a myriad of
overseas insurance companies. Lloyd’s operates here, and there are 500 companies in
the London market. There is not a shortage of insurance companies or a shortage of
competition in the market. Certainly, all research that the ACCC has done into the
market has never indicated that there is actually a shortage of capacity or that there
are companies in the market in any sort of monopoly position. The issue is that, unless
we change some of the fundamentals, you will not find anybody who will offer the
insurance cover because the risk is too great for anyone to carry. Those are the basic
facts of the life. Why would a commercial organisation put its capital at risk and its
shareholders’ capital at risk when the outcome is inevitably going to be negative? If
there is a desire by society to do something along those lines—and that is where we
came up with a solution on the not-for-profit scheme—we can come up with some
ideas as to how we might help and deal with that. But, in our view, wider price
regulation or wider intervention into the marketplace would not be constructive.

  CHAIR—I have further questions, but I will give my colleagues an opportunity to
ask some now.

  Senator CHAPMAN—A number of the submissions we have received, as you
have already heard, have noted sometimes quite dramatic increases in premiums, not
just generally but also on the part of customers who have no history of claims against
them. Can you comment on that apparent anomaly? Are there any elements of cross-
subsidisation in premiums from high-risk to low-risk clients?

   Mr West—There are two issues. The issue of why some people who have had no
claims get high increases goes back to the fundamentals of insurance—that is,
everybody pays into a pool to pay out the claims that some people in the pool might
make. Therefore, some people in the pool never have any claims but have to pay for
those who have claims for more than they pay in. That is the fundamental principle. If
the overall pool is short, everybody has to pay in more. Therefore, you get some
people who have significant increases because they pay more into the pool, dependent
on their risk, than others. That basically goes back to the fundamentals of the way
insurance works.

  Senator CHAPMAN—What about within, say, an industry or a professional sector
where the whole sector have a good claims history? Do they still have to pay into the
pool for sectors unrelated to them?

  Mr West—To an extent. What we are trying to do—and it comes to your second
question—is get down to a level where we can reduce cross-subsidisation. The more

E 356                              SENATE—References Friday, 9 August 2002

detailed data we get, the easier it becomes to reduce cross-subsidisation. Where you
have data built into wider cluster groups or you have to cluster data together,
inevitably you get some cross-subsidisation within that pool, and we are not
sophisticated enough, particularly in the liability area. We are better in some of the
personal lives areas where the risks are more homogenous so it is easier to look at
things differently, but in some of the liability areas we are not as good at having
enough data to stop cross-subsidisation. That, to my mind, is why data is so critical—
to enable us to get to that level.

   The other side of it is that it is not only data that is the issue for pricing; there is also
the mystical science of risk assessment, and in our paper we try to split it between the
pricing component and the risk assessment component. The risk assessment
component, whilst we try to codify that, is a view on more subjective matters.
Because it is more subjective by definition, that can change as an insurance industry’s
or an insurance company’s attitude to risk varies depending on the environment in
which they find themselves. That component can therefore impact on whole segments
where you have maybe a low claims frequency but a potential for a very high
individual claim cost. At a time when your attitude to risk is maybe more averse, you
tend to avoid those areas where, 99 times out of 100 or 999 times of 1,000, you do not
have a problem, but the one problem you have will cost you $X million. You tend to
go for those where you have maybe a few more incidents but each one will cost you
less because you can predict them more. That is the psychology, I suppose, of
insurance underwriting.

  Senator CHAPMAN—One example we were given, for instance, relates to the
Audiological Society of Australia, which is a very highly qualified profession. I think
members of the profession do five years of postgraduate study before they are allowed
to undertake the profession, and they simply conduct and analyse hearing tests. It is
not anything that is medically intrusive or invasive that creates some sort of risk,
which you might expect from medical procedures or anything like that, yet apparently
they have premium increases of 500 per cent.

  Mr West—I do not know the specifics of that. We as a company have taken a view
on those aligned medical professions. We are not a medical malpractice insurer—we
do not operate in that area—but in those aligned medical areas, we have taken the
view that we would be prepared to continue to underwrite those. Our personal view is
that there may have been an over-reaction in some areas to areas where we take a
view that there may not be as much risk as there is in a straightforward, more
mainstream medical area.

   Senator CHAPMAN—Do you think there are initiatives that could be taken—and
these again have been referred to in some of our submissions—to improve the
efficiencies and lower the costs of legal processes? Examples that have been given are
having sanctions against lawyers to prevent unmeritorious claims, court-supervised
timeliness and mediation type processes.

   Mr West—Yes. We deliberately do not in our paper try to put forward a whole
series of tort reform. We are not legal people; we are insurance people. Clearly,
stripping cost out of the legal profession while still making sure that the appropriate

Friday, 9 August 2002             SENATE—References E 357

money goes to the people who really need that money can, I think, be done. It has
been proven to be done in other bodily injury type jurisdictions. So, in workers comp
and CTP, there has been action that strips the legal cost component out of that. The
legal cost component is a significant one in the public liability arena at this point in

   Senator CHAPMAN—One figure we were given was that up to 50 per cent of the
total cost of claims were legal and administrative costs.

   Mr West—Mine would be somewhere nearer 40 per cent. But it is still very

   Senator WEBBER—I want to go off on a tangent on that one. We are talking
about premiums that certain occupational categories in particular face. One of the
things that a few people have raised with us is that there is no differential premium
within their occupational category to take into account any risk management practices
that they may adopt themselves. So there is a financial disincentive for them to reform
their practices and become good corporate citizens. Do you have any comments on

  Mr West—Clearly, if you do not reflect risk, then you do lead to that position. I
suspect, as an industry, that we have not been in all areas sophisticated enough to
really give people the premium differential. It comes down again to data and drilling
down in individual areas to be able to say what is a good or bad risk within a
particular occupation or industry. I think probably, as an industry, we have not been
sophisticated enough to be able to reflect that at all times.

   Senator WEBBER—Picking up on risk management, one of the common things
that everyone is talking about at the moment is the need for tort law reform. I am
fairly open minded about that. I have not formed a view. But it seems to me that it is
only fair, if you are going to restrict individual citizen rights to a legal process, that it
goes hand-in-hand with reforming the practices of certain occupational categories. We
do not seem to be talking about both of them as equal practices within a reform of the

  Mr West—I would certainly agree with your position. Tort law reform is clearly
one of the major issues on the agenda. But the whole data collection and risk
management areas and the whole area of just getting smarter on how we differentiate
between risks are responsibilities of the insurance industry. Certainly, at Royal and
SunAlliance, we have been working on that over the last three years to just try and get
smarter. We have been looking at what data we have, how we manage that data and
how we can differentiate between risks. We have been working on becoming
specialists in certain areas so that we really understand those areas very well, rather
than trying to do everything. That enables us to then differentiate between those who
do take risk management seriously and those who do not.

   Senator WEBBER—That is good. We heard from Treasury yesterday. One of the
issues they raised was the state of the market and the fact that we all talk about the

E 358                           SENATE—References Friday, 9 August 2002

hundreds of providers out there, and that this is due to the very low entry level
requirements. They feel that may have led to the current crisis that we are having.

  Mr West—We fully support the new APRA guidelines. We think they are strong
and good and will mean that the industry remains healthy. However, there are still a
number of areas that are outside the APRA guidelines—whether it is mutual funds or
offshore insurers. They are not regulated in the same way.

  Senator WEBBER—Should they be?

  Mr West—In my view, they should be. Everybody who is providing public liability
cover in this country should be regulated in the same way and should be required to
collect data in the same way, and those sorts of issues. My view is that they should be.
The new APRA regulations have gone some way to significantly strengthen the
indigenous Australian industry, but there are still areas that could be strengthened.

  Senator WEBBER—Treasury were saying that, as part of their analysis of the
data, they can pick the trend that the cost of bodily injury claims has gone up by
approximately 10 per cent per annum since 1993. It seems to me that if you can
establish a trend like that, how is it that you can account for a very sharp jump in

  Mr West—The reality is that we did not pick that trendline quickly enough. That is
the simple fact. We look at trendlines quarter by quarter as they emerge after the
accidents happen. There was clearly a fundamental shift in around 1995, 1996 in our
data. We did not pick that till 1998 because we still thought that the claims were going
to emerge in the same way they had in 1993, 1994, 1995. Then suddenly, when we
pick it, not only do we have to catch up for the year that we pick it in but we end up
catching up for all the previous years. We bring a very significant loss into our current
account and we then have to bring that through to our pricing. So it immediately
changes your assumptions, which brings a rapid increase in the pricing approach.

  Senator WEBBER—So some of the increase in premiums would actually be loss

  Mr West—No, that is not what I am saying. We have lost money. The money we
have lost we have lost. What we are trying to do is get the price right going forward.
The money that has gone has gone. There is nothing we can do about that. The way
we set our prices is on the basis of our assumptions going forward and what claims
costs are going to do for claims that happen in the year that we are underwriting.
Clearly, our assumptions on that have changed because our start point has
substantially changed from what we thought it was going to be.

  Senator CHAPMAN—So you do not lift your premiums to the extent that you try
and get additional profits in future years to recoup the past losses.

  Mr West—No, last year has gone, and the year before has gone. We are $270
million below what our benchmark numbers should have been over that period. That
money has gone. It has gone from our shareholders and it has gone out of our capital.

Friday, 9 August 2002           SENATE—References E 359

Our pricing is set absolutely to deliver our return on capital going forward, and we are
very clear about that.

  Senator BRANDIS—Is that approach or that discipline in your understanding
observed by other insurance companies?

  Mr West—That would broadly be the case. The long-term companies that have
been and are in the insurance market would all adopt a similar approach.

  Senator BRANDIS—That is an important point, Mr West, because it has been put
to a number of spokesmen for the insurance industry, and in particular by Senator
Conroy, who is not with us this morning, that one of the driving factors behind the
escalation in premiums in the last little while has been, in effect, price gouging by the
industry—that is, seeking to recoup past losses. I am sorry I was not here for the
beginning of your evidence—perhaps you have already been asked this question—but
could I invite you to make any observations you care to make on that assertion?

   Mr West—Certainly I can speak for Royal and SunAlliance specifically. The way
we set prices is absolutely based on delivering our internal capital requirement, which
is a group requirement. We set prices on that, we set our technical price based on that,
and I monitor every month what we are charging against our technical price. If we are
overcharging our technical price, I am as concerned as if we are undercharging our
technical price, and I monitor that like a hawk every month. That is what we set our
technical price on—based on achieving our return on capital. I can speak for Royal
and SunAlliance.

 Senator BRANDIS—Are you able to speak generally about industry practice, or
would that be speculation on your part?

  Mr West—It would be speculation. I cannot speak on behalf of other companies.

  Senator BRANDIS—Could you speak a bit about industry practice generally?

  Mr West—Industry practice among the major players would be to follow a similar

  CHAIR—Mr West, in part the issue here, as your submission indicates, is that
there are some areas of the insurance industry which the main insurers have exited
because of a high risk assessment. The feeling, certainly of many consumers, is that in
those sectors where they have been able to get business part of the significant
increases is due to price gouging. The audiologists are probably a good example.
Where they were eventually able to get business they are looking at something like a
500 per cent increase. There are sections of business within the industry where this
price gouging is possible and is occurring among those who have remained, rather
than the main players, who have actually exited those areas of business. Can you
comment on that?

  Mr West—It is difficult for me to comment on that, to be honest. We certainly do
not adopt that practice. We do not stay in areas where we do not believe we can get a

E 360                           SENATE—References Friday, 9 August 2002

sensible technical price. Price gouging is an emotive term. In some of those areas, no-
one would actually know what the right price is. Is the right price the market price or
is the right price a technical price? We choose not to be in segments where we do not
have the accuracy to price it.

  Senator RIDGEWAY—What does that mean in relation to Royal and SunAlliance
as compared to others? Have you taken a strategic decision since that time—I think it
was 1998 you mentioned—to vacate the market in relation to high risk or have you
not looked at that as a predominant part of the business?

   Mr West—We vacated some components of, for example, the liability market and
the professional indemnity market. At that stage, in 1998, we were not a major player
in the professional indemnity market. We are now a major player, but we have chosen
the areas that we want to be a major player in, which are not the high risk areas, to be
absolutely honest with you. In the liability area, we have exited areas that have a
predominance of bodily injury claims—

  Senator RIDGEWAY—That probably explains why you are the only insurance
company that has appeared before the inquiry.

  Mr West—Who knows?

  Senator BRANDIS—Mr West, you used an expression a moment ago that I am not
familiar with. It was ‘a technical price’. What is the difference between the technical
price and the market price?

  Mr West—There should be absolutely no difference. However, in a soft market
you may well, for whatever reason, find insurers charging significantly below their
technical price because of competition in that marketplace.

  Senator CHAPMAN—Is that what HIH did?

  Mr West—You would have to ask HIH whether they knew what their technical
price was!

  CHAIR—Does the reverse apply in a hard market?

   Mr West—It could. All I can say is that, from Royal and SunAlliance’s point of
view, I am aware of the issues and that is the approach that we want to take. Hard and
soft markets are not good for anybody. They are not good for the consumer and they
are not good for the industry—they ruin the industry’s credibility. For business and
the individual to have massive changes in their insurance costs, year on year, is just
not good news. Consistency has got to be the way that things should happen. So we
take a rigorous approach to technical pricing. Our approach, and I suspect the
industry’s approach over the last two to three years, has got significantly smarter than
it was five or seven years ago. Techniques in commercial insurance pricing have got
significantly better than they were five to seven years ago.

Friday, 9 August 2002           SENATE—References E 361

   Senator CHAPMAN—Even though the industry has been around for centuries, it
is only in recent years that you have got that smart?

  Mr West—In our submission we acknowledge that in some areas the industry has
not been as well managed as it should have been. That is a fact of life.

  Senator BRANDIS—I wanted to pick up on a point that Senator Ridgeway made
to you a moment ago—that is the fact that Royal and SunAlliance is the only
insurance company that has made a submission to this Senate hearing. Were you
aware of that?

  Mr West—No, I was not aware of that.

  Senator BRANDIS—Does that strike you as surprising and, indeed, outrageous
that the witnesses who would be in the best position to speak on what is happening
and, in particular, on the real reasons for the escalation of premiums seem—other than
the honourable exception of your company—almost consciously to be avoiding this

  Mr West—I cannot speak on behalf of other insurance companies. It is impossible
for me to do that. Obviously, the Insurance Council of Australia—

  Senator BRANDIS—I am really using you to make a rhetorical point, Mr West.

  Mr West—I know you are—and I think I will probably respond. The Insurance
Council of Australia is the peak body that represents the insurance industry—

  Senator BRANDIS—Their submission was memorably opaque.

   Mr West—I think one of the issues is that in any trade body, because you are
competitors, people will not be open with their data. We took a view that being open
with our data helps the debate because we have got nothing to hide. When you are not
clear with your data and facts, people think you have something to hide. We have
nothing to hide; we have lost a lot of money in this segment. People think we are
profiteering when all we are trying to do is stay in business. By showing the facts, that
helps a balanced debate. That is the view we have taken.

   Senator BRANDIS—Absolutely. Thank you. One other thing—and again, let me
apologise in advance if you have already given this evidence in my absence—that is
of concern to all of us is this question of claims history and the apparent lack of
relationship between claims history and very rapid escalations in premiums. We have
heard plenty of evidence, both in the professional indemnity and public liability
sectors, of insureds with perfectly clean, spotless claims histories being treated
exactly the same when it comes to premium escalations as others who do not have
spotless claims histories. Would you care to comment on the extent to which regard is
had to claims histories in the industry in pricing premiums? How narrowly focused is
the pricing of a premium on the claims history of a particular insured? What
opportunities do you see for reform in that area so that the sorts of complaints I have
mentioned can be met?

E 362                           SENATE—References Friday, 9 August 2002

   Mr West—It is a complex issue. Firstly, as I said, there is the ‘pooling’ concept of
insurance, where everybody has to pay in to pay for the claims that go out. So, even
though you may not have a claim, if the overall claims going out are greater you have
to put the money into the pool and more money is needed in the pool. So that is one
driver of individual costs going up. Of course, it is always dangerous to talk about
specific examples, because they tend to fall down on the specifics rather than the
generics. So, hopefully, you will bear with me if I stay at a generic level. That concept
drives your technical price for that industry or for that segment. Then you look at the
risk factors between the different areas within that industry segment. One of those risk
factors that you would look at from an underwriting point of view would be claims

  Senator BRANDIS—A claims history of what, though? Doesn’t it depend on how
broadly or narrowly the industry sector is defined? I am sorry to interrupt, but I will
give you an example. If, in public liability insurance, the ‘industry sector’ were
defined as broadly as ‘recreational activities’, then—to use an example Senator
Webber gave yesterday—it seems a bit silly that the bingo hall’s premium should go
up because it is in the same sector as the hang-gliding club. Surely, the narrower it is
the more fairly individual cases will be treated.

  Mr West—That is right, and that is where the data issue becomes critical. There are
always going to be clusters. If there is only one industry, do you rate that on the
industry itself, because there is only one client in the industry? The statistical
accuracy of your pricing falls away; you have to have a certain amount of data in a
cell to be able to price that. But, yes, within reason we want to narrow it down to
smaller segments so that you can actually differentiate from a pricing point of view.

  Senator BRANDIS—Is that an industry trend, though; increasingly to narrow the
sectoral definitions?

   Mr West—Yes. Certainly if you look at what has happened in personal lines
insurance, for example, that is getting down to lower and lower levels of accuracy of
segmentation. The personal lines industry is further ahead than the business side of
things in that area, but you are increasingly seeing that as a trend within the business
area of insurance.

   Senator BRANDIS—I may be wrong, but my impression is that, although there is
quite narrow sectoral definition within professional indemnity insurance—to use a
famous example, anaesthetists are rated as anaesthetists rather than as general medical
practitioners—in the public liability area the sectors are much more generic. Is that

  Mr West—I would agree with that.

  Senator BRANDIS—And that is bad, isn’t it? In the public liability field it would
be better if there were much more specific definition by reference to the activity or
function of each sector.

  Mr West—Yes, absolutely.

Friday, 9 August 2002                   SENATE—References E 363

  CHAIR—I go back to the issue regarding the level of competition within the
market. Given that your company has withdrawn from some high-risk areas, would
you accept that there are some areas of business where there is limited or no
competition in the Australian market at the moment?

   Mr West—Certainly there are some areas where there is limited competition; that
is absolutely right. There are not that many examples—although you come across
them occasionally—of people who genuinely cannot get cover. But there are
examples of where their choices of cover are limited. I would say that they are tip of
the iceberg; they are not everybody. In looking at some of the solutions put in place in
Victoria on the not-for-profit side, it is interesting to note how many cases have
actually gone to that scheme. At the moment it is less than five per cent of the
expected cases within a not-for-profit area. The danger is that you always pick out the
one example. Ninety-five per cent of people actually got the cover, and they are not
having a problem. Of course, obviously, the ones who come to attention are the ones
who do have the problem. But we have to be careful that we do not extrapolate from
the five per cent, three per cent or one per cent of a particular segment that therefore
the whole segment has an issue.

  CHAIR—But there are some segments where that is the case.

  Mr West—Yes, there are some.

  CHAIR—Finally, on the issue of stronger national leadership in this area, I want to
take you to a section from the submission of our next witness, who is from the
Country Women’s Association. It picks up another area where I have been following a
concern. It says:

Finally, perhaps the most difficult reform/change of all, the re-organisation of the various regulatory bodies
of the insurance industry at State and Federal levels. No fewer than THREE Commonwealth bodies
“regulate” the insurance industry in Australia. The Australian Prudential Regulation Authority is supposed to
regulate insurers, though there has been some doubt of its efficacy expressed in current enquiries into the
industry; the Australian Competition and Consumer Commission is responsible for competition issues within
the industry; and the Australian Securities and Investments Commission administers consumer protection
provisions under the Trade Practices Act.

Do you have a concern about the number of agencies involved in regulating? Do you
think it is something that should be consolidated?

   Mr West—There are a number of changes going on here, so I think it is very early
days to make those sorts of judgments. At the moment our position would be that we
are comfortable with there being different bodies with different responsibilities. We
are comfortable with the new APRA regulations and working through those, which
have brought significant change to the industry. Obviously ASIC, both from a
corporate law point of view and also from the financial sectors reform component,
will have a significant impact on the industry, although again we see that as beneficial
from a consumer protection point of view. And obviously the ACCC has a role to
play, and our view is that we have nothing to hide from the ACCC and we are happy
to be open in our approach and our pricing, and have been at all times with them. So
at the moment there is not an issue for us operating under those three different

E 364                            SENATE—References Friday, 9 August 2002

  CHAIR—The new ASIC provisions in relation to consumer protection have the
requirement that insurers sign on to an independent dispute resolution process. Would
you be arguing that the IEC is the appropriate body that conducts that task?

  Mr West—Yes. We have had a dispute resolution process since the IEC was
formed 10 years ago, so we have had an internal one and then through to the IEC. So,
yes, we will argue that that is the IDR approach.

   Senator RIDGEWAY—I have a couple of quick questions. I am trying to get an
understanding of the insurance industry in terms of where Royal and SunAlliance sits
in relation to the rest. Would you regard it as being one of the top four, if you like, in

    Mr West—It varies by area. Royal and SunAlliance has a number of brands under
it. AAMI is part of the Royal and SunAlliance group, for example, so they would be a
major personal lines insurer, along with Australian Pensioners Insurance Agency,
which is part of the Royal and SunAlliance group as well. We are very significant in
the personal lines area. We are top three in terms of premium income within the group
and here in Australia. In terms of public liability, though, our position is as a five per
cent market share player. That is a quite conscious and deliberate decision. In terms of
professional indemnity we would be more significant that that, although it is difficult
to actually get figures, but we would be a top four player certainly in the professional
indemnity area in this market.

  Senator RIDGEWAY—One of the reasons that I ask the question is that at least in
our Melbourne hearings there was a lot of evidence put forward by local government
and Surf Life Saving Australia about, if you like, getting coverage offshore, mostly in
London. One of the other things I am trying to get to, and I am mindful of the fact of
confidentiality, is reinsurance. What component of the business would Royal and
SunAlliance look at there in terms of Australian coverage?

   Mr West—If I understand the question correctly, I will try to answer. Royal and
SunAlliance is not a reinsurer, so we do reinsure. We reinsure on what we call an
excess of loss basis—that is, any claim above a certain amount would go to a
reinsurer. But we are not a reinsurer as a company and although we are a major UK
insurance company we do not write Australian business out of the London market. We
write our Australian business in Australia because we think we know that better in
Australia than we do out of London. So we would not a be a player in the London
market of business coming out of Australia going into London.

  Senator RIDGEWAY—In terms of industry practices—and again I will seek some
guidance here from the chair—what is a security list? Can you describe that as a
practice in relation to insurance companies?

   Mr West—Yes, I can try and do that without breaching any confidentiality. We
would review the security of all reinsurers. We have a group security committee that
operates for the whole group worldwide. We would take a view on the security of
reinsurers and who we are prepared to insure with, effectively. All reinsurance is us
insuring. We would look at the financial security of those companies.

Friday, 9 August 2002         SENATE—References E 365

  Senator RIDGEWAY—That is pretty normal of any insurance company, as

  Mr West—Yes, any insurance company would look at having a security list.

  Senator RIDGEWAY—All right. I won’t go beyond that. Thanks.

  CHAIR—Thank you very much for your appearance. As other senators have
indicated, we appreciate the fact that you have put forward a submission. Also, the
amount of work that has been put into the discussion on data is much appreciated by
the committee.

E 366                                SENATE—References Friday, 9 August 2002

[10.17 a.m.]

BROWN, Mrs Margaret Mary, Chairman, Study and Investigation Committee,
Country Women’s Association of New South Wales

  CHAIR—Welcome. The committee prefers all evidence to be given in public but
we will consider a request for some evidence to be dealt with in private should that be
necessary. We have received your submission, No. 13. Are there any alterations or
additions you would like to make to that?

  Mrs Brown—One of those little towns with the golf courses, on the first page,
under ‘(a) and (c) The impact of public liability insurance for small business’, has 500
people not 350.

  CHAIR—Where it says, ‘three golf clubs across communities ranging’?

  Mrs Brown—Yes. It reads:

The second has a club house which opens 3 nights a week …

That is a rural village of around 500.

  CHAIR—Rather than 350?

  Mrs Brown—Yes. They have obviously grown.

  CHAIR—I invite you to make a brief opening statement, and we will deal with any
questions after that.

   Mrs Brown—Our submission, unlike Mr West’s—I have been quite terrified
listening to him—concentrated on the impact of the cost of liability insurance on
small towns and villages. We made an effort to move beyond the tangible impacts into
the intangibles, the loss of the community life in small towns and villages, if certain
organisations fold or if certain events cannot go ahead. That leads to the loss of
community spirit and cohesion. It leads to the loss of volunteers and therefore the loss
of expertise.

  A lot of these places—we have members right across the state and we asked for
input right across the state—have only 200 people, 150 people or even fewer. If you
lose your volunteers’ expertise, who is going to run anything when anything is on—if
they can get the insurance to run it? The closure of small business in a country town
has a major impact on that community. People will not stand for executive office for
local organisations if they feel the fear of litigation. Therefore, those intangibles again
are the loss of their skills, of their expertise and sometimes of the organisation itself.
Small towns and villages and small business cannot absorb increased premiums and
costs the way bigger ones can spread them out.

Friday, 9 August 2002            SENATE—References E 367

   Why the increase? September 11 and the collapse of HIH, for example, and the
resultant reinsurance facilities are regularly cited as reasons. While September 11
might have contributed quite considerably, the lack of real supervision of insurance
regulatory bodies, we feel, played a role in the FAI-HIH debacle—$5.3 billion is a
debacle, isn’t it? The legal profession claims it is innocent. The insurance profession
claims it is innocent. Society itself increasingly wants to find somebody to blame.
Ordinary people—us—want to blame somebody and that, we think, is a symptom of
our society as a whole. One of the questions we put in our submission was: when did
you last hear a government minister accepting responsibility for something going
wrong? There is always somebody else to blame in political circles. In corporate
circles, there is always somebody else to blame. In places like banks and insurance
companies, the loyalty is to the shareholder and to the money; it is not to the
community. That, we think, is a change in Australian life over the last generation—or
two generations, perhaps, since I was a child, once upon a time.

   How do we overcome it? Small groups that are incorporated with larger ones, such
as Molong Garden Club incorporated with Garden Clubs of Australia, have to absorb
a smaller amount of premium for each little club. I am the CWA representative here.
Each of our branches had only a small increase in premiums, because it could be
spread. You cannot spread a huge increase if you are a carpenter in a small town and
your premium goes up 200 per cent. You cannot spread that among other people—you
meet it, you increase your prices and impact on your community or you close your
doors. That is why we concentrated on the little people, if you like. We represent
13,000 country women. That is a misnomer, really, because there is a proportion of
city people. Basically, we are rural and regional representatives. That is why we
concentrated on the impact on those little people in little areas.

   CHAIR—Thank you very much. Perhaps one of the main reasons we sought for
you to appear was the fact that you had concentrated on some of the less tangible
aspects of the consequences of the current circumstances in this sector, particularly
issues such as community involvement that can no longer occur because of an
inability to access insurance cover. I was listening to the Treasurer the other day, on
the radio, saying that perhaps a significant element in dealing with our current fertility
problems will be in the future to encourage people to continue in the work force
beyond the age of 65. I am not sure if your submission did, but certainly others have
highlighted that in some areas of engagement in volunteer work it is impossible to get
cover for people who are over 65 years of age. Are you aware of some of those cases?

  Mrs Brown—Somebody over 70 cannot go out in the rural fire service any more
and be covered by insurance. We do not have that many young people in our country
towns. Where are your rural fire services based? In your country towns. Once you
turn 70 you cannot be covered to go out and fight a fire. To me that is crazy. If you are
an upright, physically able, mentally with it person, I do not think age matters. Yes,
that is a specific instance where they cannot get cover once they are over 70.

  CHAIR—The other issue that your submission highlights—not so much contrary
but in contrast to the previous witness—is that there are some large scale areas of
community involvement that have become uncoverable, and mainstream discussion
by the industry seems to be not giving much attention to those areas.

E 368                           SENATE—References Friday, 9 August 2002

   Mrs Brown—I think it is reprehensible that a carols by candlelight cannot find
cover. That is something that brings an entire community together—and that was not a
little community; it was a thriving community and it could not get cover for its carols
by candlelight. I do not know how many people are going to sue for burns from the
candles but, honestly, they have never had a claim; it is something that has been going
on for decades and all of a sudden last year this town could not get cover for its carols
by candlelight. One regional city could only get cover this year—and this is a
different one—by pulling in all sorts of organisations and basically being underwritten
by their council. It seems to me that something like that is crazy.

   We did highlight some of things that had to be cancelled simply because there was
not any cover. There was the Sea, Food and Sail Festival on the North Coast. Also, the
street procession that has been on every year through Dubbo could not go on. The zoo
was able to cover the outside acts that were brought in, but that meant you had to go
to the zoo to see them. All those people who would have been involved and who
could have shown off their skills to their community lost the opportunity because that
street carnival did not happen. That might not seem important to people who are in
jobs or positions which are fairly high profile anyway, but often the only time that
some people come to the notice of their fellows is in that volunteer capacity. That has
gone. So, yes, I would agree with you.

  CHAIR—To what extent are you aware of events continuing now without cover?

   Mrs Brown—I know of two farmers in our area who simply refuse to move their
public liability cover over and are simply sweating that nothing happens on their
farms. That Sea, Food and Sail Festival did not go ahead, the carols did not go ahead,
the street procession did not go ahead and there is that camping holiday for kids under
the auspices of the Epilepsy Association which did not go ahead. I do not know what
is going ahead without cover. I think those three golf clubs I mentioned—I cannot
understand it myself, but golf seems to be a binding influence in a country town; and
you use your golf club for wakes, for weddings, for 21sts and things like that; it is not
just belting a little white ball and being a Karrie Webb—will technically have to go
out of existence, especially the first one, the little nine-hole sand green one, but
people will continue to play.

   It is no use saying, ‘At your own risk,’ because lawyers will say, ‘No, that is not
right.’ They can get round the ‘At your own risk’ sign. That golf club had its
premiums increased from, I think, $3,000 to $7,000. It had had one break-in which
involved the fixing of a door—and that was it—in its existence. Mr West was talking
about sharing through the pool, but there must be some golf clubs, for instance, that
have horrendous claims for damages. The three I have cited all look like going out of
action because of their increased premiums. Two of those three have made claims,
and each of them was under $1,000. Each was paid and that was the end of story—
until the account for next year’s insurance came in.

  CHAIR—The alternative explanation, picking up from the previous discussion, is
that insufficient data exists to differentiate a lower level of risk for a golf club from
other higher risk sporting groups. That is one of the problems that needs to be

Friday, 9 August 2002           SENATE—References E 369

  Mrs Brown—Yet Senator Brandis spoke about channelling data more efficiently,
and he agreed that that has happened.

   CHAIR—Although the Royal and SunAlliance submission is confidential in terms
of much of the comment about data, I do not think they would have a problem with
me representing this element of it. One of the things that was impressive about their
submission was, in conclusion, the section that deals with insurance industry
mistakes. One of those mistakes, which I would agree has been a considerable one in
terms of the debate over this issue to date, is that consumers deserve a sensible
explanation for why premiums are increasing. Often that explanation bears no
relationship to their particular individual circumstances. No-one is providing that
explanation in a way that people can understand.

  Mrs Brown—One of the things I picked up on that he said is that the insurance
industry has not sold itself very well. People do not understand it. Whose
responsibility is that?

  CHAIR—I do not think he was shirking that aspect.

   Mrs Brown—No, but we do not know why Lambing Flat Enterprises could not get
insurance until it went public, and went all over television and radio. Suddenly its 130
disabled people now have cover after a month of agitating for it. You cannot hold a
billycart derby anymore. Let us face it—the machines are far more sophisticated than
when we got into fruit boxes with pram wheels, and even moved right up into modern
technology with ball bearings. You have to have roll bars—you have to have this and
you have to have that these days. But still a fellow was saying on the ABC yesterday
that Bermagui, Ballina, Parkes and Port Stephens could not get cover for their
billycart derbies. Murrurundi is going ahead with theirs, but there is no cover for the
billycarters; it is only for the spectators—I presume for if one of their new you-beaut
machines decides to go and create havoc among the spectators.

   There is no explanation. You are simply told that there is no cover, and that just
decimates things. Our country towns have already lost their young people, and that is
our fault. We educate our kids out of our country towns; there is no doubt about it. But
it is also the fault of business, where banks go and post offices go. Schools have rigid
demarcation lines for when a new teacher can come in and things like that. Farming,
like other businesses, grows and so you do not have the family farm. I was reading
somewhere that family farms in Australia have disappeared by a rate of about 80 per
cent. They are corporate farms now.

   Our small towns are disappearing and yet they are an integral part of our whole
Australian way of life. We are not just the five teaming sores, as A.D. Hope put it,
around our coastline. I find it really frustrating because you see the people in those
towns and they feel unacknowledged and burdensome. At the end of a long working
life with good productivity and having paid taxes and things like that, you should not
feel that you should curl up your toes, stay at home, put on a beanie and knit all day or
watch soaps. You really should not. And yet, what are we doing to them as a society?

E 370                            SENATE—References Friday, 9 August 2002

   The paragraph I put in about the most poignant effect really upset me, where people
in nursing homes and hostels can no longer do their daily dusting or their taking out of
the dead flowers, not because they might hurt themselves but because they might hurt
somebody else—they might cause somebody to trip. How are they meant to feel
contributing members of our society? I know that is highly emotive but people are a
mixture of their emotions and their minds.

  CHAIR—Thank you.

   Senator CHAPMAN—I do not have any questions. I think you have covered the
issues very well and reinforced the earlier evidence that we have had. It is a matter of
trying to find the solutions to those issues.

   Mrs Brown—The legal profession says that it is not responsible at all, and a
member of the Law Council of Australia told Bob Carr in the Sydney Morning Herald
on 2 August that they would not consider exempting non-profit community groups
and things like that. That is a legal industry decision and that cuts across voluntary
work. Another one of their officers has said that the number of claims for negligence
and so on have been generally unsuccessful since 1996. But that means a majority of
claims—unsuccessful albeit—have been put forward and have taken legal time and
court time. So they do contribute to the higher costs. The insurance industry say, ‘No,
not us. Those terrorists have so much to answer for, and not us.’

  Our own Prime Minister said last night that he is not in favour of regulation of
corporations or big business because you get a system that is more cack-handed. He
did not use that word; I have forgotten the word he used. But it is more difficult and
messy than if you have self-regulation as we have. Why have we got royal
commissions? We have got two inquiries going on at the moment into HIH and
One.Tel and each of those witnesses yesterday said it was fine by them. One felt that
he was a very good director. One felt that $14 million in directors’ rewards was fine—
you have been good boys, you have made big profits while the company was bust.
One said, ‘Yeah, it’s fine to go out and give AMEX cards to all the wives and all and
sundry. I was a very good director.’ If that is self-regulation, all of us little ordinary
ants are going to be eaten by the ant lion, aren’t we? Yes, we are in favour of some
regulation somewhere, and perhaps a couple of heads rolling.

  Senator CHAPMAN—I must defend the Prime Minister. I think you are taking an
extreme view of what he was saying.

  Mrs Brown—That is what he said. It might have been a bite, but that is what he

  Senator CHAPMAN—He also said that he would be taking into account the
recommendations of the royal commission in relation to the regulations.

  Mrs Brown—I hope they do take account of the HIH royal commission—I hope
they say something. I might have been a bit hard on him, but it is just so frustrating
that nothing happens. We cannot do anything except pay up or go out of existence.
When you have no country shows, no garden clubs, no Red Cross, no CWAs, no

Friday, 9 August 2002           SENATE—References E 371

Lions, no Apexes, no street stalls, no processions, no fairs and no school fetes, what
have country towns got? People will not come into town unless there is something on.
They are already bypassing their local village to go shopping in a bigger city. So if the
volunteer aspect is wiped out through insurance premiums, you are wiping out your
country communities.

  CHAIR—On that note, I would like to thank you for your appearance.

  Mrs Brown—I did not know what to expect and I was terrified.

  CHAIR—You have been very impressive and we thank you for your appearance.

  Mrs Brown—Thank you for the opportunity to speak to you.

               Proceedings suspended from 10.40 a.m. to 10.52 a.m.

E 372                            SENATE—References Friday, 9 August 2002

CAMPBELL, Ms Jane Caroline, Manager, Structured Settlement Group

  CHAIR—Welcome. The committee prefers all evidence to be given in public, but
we will consider a request for all or part of evidence to be dealt with in private, should
that be necessary. We have received your submission, which has been numbered 87.
Do you want to make any alterations or additions to your written submission?

  Ms Campbell—No.

 CHAIR—I now invite you to make a brief opening statement, after which we will
move to questions.

   Ms Campbell—As you know, many reforms are being suggested to address the
issue of rising public liability and professional indemnity premiums. Structured
settlements are one reform option that has rare unanimous support. Structured
settlements have been given the support of the federal government and all state and
territory governments, and they will be going ahead as part of the raft of current
reforms. A bill is currently before the federal parliament enabling the use of structured
settlements, and state governments are in the process of passing facilitative

  Today I would like to explain the role of structured settlements in the context of
your term of reference (e), which relates to ‘schemes, arrangements or reforms that
can reduce the cost of such insurance or better calculate and pool risk’. The view I put
forward is that structured settlements will not have an immediate impact on premium
costs but will greatly improve the calculation and pooling of risk and will generally
improve the common law compensation system. I will also make a few points
comparing structured settlements with a full or partial statutory scheme.

  Firstly, it is worth confirming what structured settlements are. Essentially, they are
a way of paying compensation for personal injury, usually in very serious cases.
Instead of a single lump sum being paid to an accident victim, the parties can agree
that the defendant or insurer will use some or all of the compensation money to
purchase a lifetime annuity for the accident victim. The annuity will be part of the
settlement agreement between the parties and, once it has been purchased for the
accident victim, the insurer can close their file. The accident victim will thereafter
own an annuity contract with a life insurance company.

   The bill currently before the federal parliament provides a tax exemption for
annuities that are purchased in the context of compensation for personal injury.
Essentially, the bill creates a tax incentive for accident victims to receive at least part
of their compensation in the form of periodic payments. The bill allows the use of
structured settlements wherever common law lump sums are currently paid. That
includes all public liability cases, all medical indemnity cases, motor vehicle cases in
some states and territories, and other cases involving personal injury and negligence.
The bill specifically excludes workers compensation. It follows similar tax
amendments that have already been made in America, Canada and England.

Friday, 9 August 2002            SENATE—References E 373

   Commenting on structured settlements and how they improve the compensation
system, I would say that they are a proven and effective way of paying compensation
that is becoming increasingly popular overseas. I have here a list of bullet points of
what structured settlements will do. Essentially, they provide a better outcome for
accident victims at no greater cost to defendants or insurers. They ensure that current
compensation dollars being paid out by insurers are better used. They ensure that
accident victims have the benefit of financial planning advice before they receive their
compensation. They retain the benefit of finality and certainty for defendants and
insurers: both sides know exactly how much is being paid out and how much is being
received at the time of settlement. They also retain the rights and responsibilities of
accident victims to spend their compensation money sensibly. Importantly, and going
to your term of reference, they shift the risk of living too long, the mortality risk, from
accident victims to large insurance companies, life insurers, which are better placed to
handle that risk. They also encourage early settlements and a less adversarial
approach to claim settlements. Finally, they mean that fewer accident victims will
need to access government welfare support.

  I will make two points about what structured settlements will not do. As I said
before, they will not have an immediate impact on lowering premiums. Any potential
savings from the use of structured settlements will be more subtle and will emerge in
the medium to longer term. Secondly, structured settlements do not guarantee that
accident victims will necessarily have all their future needs met by the compensation
paid, particularly if their condition deteriorates significantly after settlement.
Structured settlements are still a once-and-for-all method of calculating compensation.

   I will elaborate briefly on those two points. First, I will address the impact on
premiums and then I will compare structured settlements with statutory schemes.
Briefly, in terms of the impact on premiums, as I said, in the short to medium term,
structured settlements are not likely to have any significant impact on premiums. But
in the longer term, for three reasons, it is thought that they will keep the cost of
premiums down: first, they tend to reflect real future needs, the real cost of care over
time, and are therefore less likely to be excessive or speculative; second, they tend to
reflect real life expectancies; and, third, because they involve a less adversarial and
more cooperative approach to claim settlement, they tend to lead to faster settlements,
which means lower legal costs. Overseas insurers support structured settlements and
feel that they bring about claim savings. However, I think the primary benefit of
structured settlements is that they make a better use of existing compensation dollars.

  Lastly, I will go over a comparison of structured settlements with statutory
schemes. I am aware that some stakeholders have suggested that a statutory scheme
should be established to deal with catastrophic injury cases or, alternatively, that one
type of damages, which is the future care cost, should be taken out of the common law
system and dealt with through a pool or a statutory scheme for that particular head of
damage. The idea with those alternative schemes that are being proposed to
government is that accident victims would receive medical treatment instead of
money to pay for medical treatment. As you probably know, in large or catastrophic
cases, a relatively large proportion of the damages is to pay for future medical and
care costs. Obviously, if a person is severely injured, this will be expensive and will
add up over time.

E 374                           SENATE—References Friday, 9 August 2002

   I will draw comparisons with the three approaches. The common law approach is to
pay a single lump sum at the time of settlement, which is based on the best estimates
of future care requirements. It is a single lump sum paid and received. The structured
settlement approach is to use part of the settlement money to purchase an annuity that
will deliver money to pay for care costs over time. The annuity is selected on the basis
of the best available estimates of future care requirements and costs. There is no risk
that the money will disappear before being needed. The money will continue to flow
and be available to pay for care costs for as long as the accident victim is alive. The
third approach is the statutory scheme approach, which is to have an administrative
authority with responsibility for paying out medical care costs and treatment costs on
an as-needs basis over time.

   Finally, I will make three points comparing structured settlements with the statutory
scheme approach. Firstly, in relation to administrative costs, statutory schemes require
the funding of an administrative organisation that will have to bear the ongoing and
continual cost of making decisions about entitlements to medical care and treatment.
That will be expensive. In contrast, structured settlements do not require the
establishment or maintenance of a statutory authority. Periodic payments are handled
by life insurance companies, which are already set up to make periodic payments.
Also, with structured settlements, the decision about future care is concentrated at the
time of settlement using the best available expertise. There is no need for constant
decision making on the part of an administrator and, therefore, no ongoing
administrative drain on compensation dollars.

   Secondly, in relation to dependency, statutory schemes force accident victims to
have an ongoing, possibly lifelong, relationship with an administrative authority.
Accident victims will not have the benefit of privacy or the ability to make decisions
about their own health or medical treatment. They will be in a continual state of
dependence and have to continually deal with a bureaucracy. In contrast, structured
settlement recipients will have a contract with a life insurance company. They will be
financially independent and able to get on with their lives without interference or loss
of privacy. They will have the money available, paid to them monthly or fortnightly,
to meet their medical needs as they see fit.

   Lastly, in terms of costs, a few things suggest to me that statutory schemes paying
ongoing medical bills are likely to come under financial pressure. Firstly, accident
victims who are not paying medical bills out of their own pocket are less likely to be
cost conscious. That you are likely to make different decisions about expenditure if
the money is not coming out of your own pocket I think is human nature. Secondly,
some case studies have been done in Australia that indicate that lump sum settlements
in serious injury cases tend to end up being insufficient. In contrast, where there is an
arrangement allowing for the ongoing payment of care costs, the costs end up being
higher than was originally anticipated. GIO Insurance entered into some settlement
agreements in the 1980s that involved a promise to meet medical costs over time. I
understand that these cases proved extremely expensive. I also understand that
workers compensation and other statutory schemes have run into problems trying to
keep down the costs of care. I do not have such statistics available to me, but I suggest
that they be looked at carefully before statutory schemes are seen as a way of saving

Friday, 9 August 2002           SENATE—References E 375

   In summary, statutory schemes can be expensive to administer, can encourage
dependency and may end up costing more than common law lump sums or structured
settlements. It is worth noting also that, in America, there is a movement away from
statutory schemes towards structured settlements. In America, statutory schemes can
purchase an annuity for an accident victim. It is something that is becoming very
popular with both the statutory schemes and the accident victims.

  CHAIR—Thank you very much. You may or may not be able to assist me in
respect of annuity contracts. As I understand it, HIH had a number of them. Do you
know what happened to the people who had HIH annuity contracts?

   Ms Campbell—I am not sure that I am correct, but I believe that HIH was only a
general insurance company, not a life insurance company, and therefore did not issue
lifetime annuity contracts. There is a big distinction between life companies and
general insurers. It is probably worth making the point that we are talking about
people buying a lifelong annuity and, obviously, the financial security of those
insurance companies is extremely important. In favour of the life insurance industry,
no life company has failed in Australia, yet many general insurance companies have
failed. There is a different scheme of prudential regulation applying to life companies
that is considered far stronger.

  CHAIR—So, to your understanding, HIH had no life insurance business?

  Ms Campbell—That is right.

   CHAIR—As you acknowledge, the viability of the business is quite significant if
we are talking about lifelong annuities, and the prudential requirements would be
significant if you are looking at having a structured settlement arrangement.

  Senator BRANDIS—Ms Campbell, I find myself almost completely in agreement
with what you have said. There is one observation that you made that I fail to
understand. Why do you say that structured settlements tend to produce earlier

  Ms Campbell—Essentially, rather than the parties focusing on a particular lump
sum, from the beginning the idea is to meet the person’s mainly future care costs and
future income needs—

  Senator BRANDIS—Yes, I understand that.

  Ms Campbell—so there is a very early focus on looking at real needs. That is the
experience from America.

  Senator BRANDIS—So there is data that supports that observation.

  Ms Campbell—Yes, for earlier settlements.

E 376                           SENATE—References Friday, 9 August 2002

  Senator WEBBER—You think that structured settlements ensure that people
spend less money than a statutory scheme would spend on medical care. Is there any
proof of that? Is it the fact that people are getting too much care or the fact that they
have more flexibility in the kind of care they get because it is not tied to their income
so they are getting better care?

   Ms Campbell—If you are getting a structured settlement, you are getting a fixed
amount of money coming into your account every month, and you know that money
needs to pay for your care costs. People therefore budget accordingly and they decide
how much of that money they will spend on their care. They know that they do not
have any more than that. If you are under a statutory scheme, it does not matter what
it costs, so you could go to the doctor six times a month because you are not paying,
whereas if you know you have a certain amount of money—

  Senator WEBBER—Except that doctors get into trouble for overservicing—there
are other regulations that deal with that. How would a structured settlement take into
account the changes in the range of care that are available as the medical profession
and industry develop new ways to treat things that 10 years ago they could not treat?
How do you anticipate that? Or do you just get this monthly payment and it does not
matter what developments there are, those options are not open to you?

  Ms Campbell—They are, as long as you can afford them within what you get.

  Senator WEBBER—So it can restrict the amount of care you can get?

   Ms Campbell—Yes. I was trying to make the point that, if you agree to a
structured settlement and you have an expectation of future care costs but if you
rapidly deteriorate or if the cost of medical care rapidly escalates, you might not have
enough money—that is true.

  Senator BRANDIS—But the reverse is also true, isn’t it?

  Ms Campbell—Yes, absolutely.

  Senator WEBBER—I accept that but, with the developments in medical
technology and what have you, in five years time we could well be able to treat
something that we cannot treat now.

  Ms Campbell—That is true.

  Senator WEBBER—And that would not be taken into account in a structured

   Ms Campbell—That is true. Once you agree to a structured settlement, it is a once
and for all—you are entitled to periodic payments according to the contract, whereas
if you are on a statutory scheme and there is a cure perhaps the payments would stop.

Friday, 9 August 2002            SENATE—References E 377

 Senator WEBBER—Or a lump sum payment, if you are a sensible financial
manager, may allow you that flexibility too.

  Ms Campbell—Yes.

   Senator BRANDIS—Ms Campbell, I hope this is not oversimplifying it, but a
structured settlement is exactly the same, isn’t it, as if there were a lump sum
settlement and the recipient of the lump sum then went out and bought an annuity
with it?

   Ms Campbell—That is absolutely right. The only difference is that, if it is
purchased not after settlement but at the time of settlement, it will be tax free. That is
the incentive. The problem is that people do not tend to buy annuities now, even
though they are a very sensible way of paying money. The government has seen that it
is sensible to encourage the purchase of annuities.

  Senator CHAPMAN—Have you calculated how they compare financially? You
give the example of a $1 million lump sum and you say the cost will be similar.

   Ms Campbell—Essentially, the cost of a structured settlement will be about the
same as the cost of a lump sum because it is an agreement negotiated between the
parties. If the structured settlement were going to cost a lot more, the defenders would
not agree to it. So it will always be roughly the same. In terms of whether it adds up,
if you have a certain amount of money you will have to invest it in some way, and if
you invest it in an annuity, the returns will be relatively good because all of the
interest will be tax free.

  Senator CHAPMAN—And the annuity would return both the earnings—interest
or whatever—and the capital over a time frame.

  Ms Campbell—That is right.

  Senator CHAPMAN—I suppose it is a bit like superannuation, is it not? What
happens if the person lives longer than the time frame of the annuity?

  Ms Campbell—It lasts as long as you live.

  Senator CHAPMAN—So it is a lifetime annuity?

  Ms Campbell—It is based on your life expectancy.

  Senator CHAPMAN—It is not a fixed-term annuity?

  Ms Campbell—No. The federal bill says it must be a lifetime annuity. That was the
point I was making about shifting the mortality risk.

  Senator CHAPMAN—Would it have a residual if the person dies before a

E 378                            SENATE—References Friday, 9 August 2002

  Ms Campbell—The federal bill says that you can organise a 10-year guarantee
period, so that if you enter into a structured settlement and then you die the payments
would continue for 10 years to your family or your estate. So there is a certain
measure of protection.

   Senator BRANDIS—How does the structured settlement model take into
account—if it does at all—large up-front capital costs that might be associated with
injury? When there is a judgment and the court has gone through the process of
assessing future and past economic loss, special damages and all of that—and a large
component might be, for instance, to equip a house for a person who has become a
quadriplegic or a paraplegic—quite often one sees in catastrophic personal injury
cases a large initial capital outlay. How do structured settlements accommodate that?

  Ms Campbell—Pretty much every structured settlement includes an up-front lump
sum. It is up to negotiation between the parties, but usually at least a third and often a
half is paid as a lump sum. The bit that goes into the annuity is really the future care
and the future lost earnings.

  ACTING CHAIR (Senator Brandis)—As there are no further questions, thank
you very much, Ms Campbell.

Friday, 9 August 2002           SENATE—References E 379

[11.22 a.m.]

HUGHES, Mr Sean, Director, FSR Regulatory Operations, Australian Securities
and Investments Commission

KELL, Mr Peter, Executive Director, Consumer Protection, Australian
Securities and Investments Commission

KIRK, Mr Greg, Director, Consumer Protection, Australian Securities and
Investments Commission

   CHAIR—Welcome. The committee prefers all evidence to be given in public but
we will consider any request for all or part of the evidence to be dealt with in camera
should that be necessary. We have received your submission No. 130. Are there any
alterations or additions to the written submission?

  Mr Kell—No.

  CHAIR—I now invite you to make an opening statement and then we will deal
with questions.

  Mr Kell—We would like to take the opportunity to make a brief opening statement,
so thank you for allowing us to do that. We thought it would be useful to simply
briefly state in opening the context in which we deal with public liability and
professional indemnity insurance issues. In broad terms, there are two aspects to
ASIC’s regulatory role in this area. Neither of them go to regulating cost increases,
which is important to note.

   The first aspect of our role in relation to the regulation of general insurance
concerns ensuring that there is proper market conduct. That includes ensuring that
people receive clear disclosure about general insurance products, that they receive
appropriate advice and that they are able to get their disputes dealt with. We have had
that role since mid-1998. The second aspect of our regulatory role arises because of
our licensing powers, and that is that professional indemnity insurance in particular is
in several areas a licence requirement on the part of entities that we regulate to ensure
that they have the capacity if needed to pay out, say, consumer claims against them.
So professional indemnity insurance in effect is an important part of the compensation
regime in the financial services sector. So we have those two aspects to our role, but
neither of them goes to the issue of regulating cost increases and monitoring cost
increases across the board.

  CHAIR—Can you elaborate on your powers regarding consumer protection from
the financial services reforms that commenced in March this year?

  Mr Hughes—I want to correct an impression which might have been left with this
committee regarding those powers. ASIC acquired jurisdiction in relation to consumer
protection for general and life insurance on 1 July 1998 upon the dissolution of the

E 380                           SENATE—References Friday, 9 August 2002

former ISC and the creation, as a consequence of the Wallis reforms, of APRA and
ASIC. ASIC, as you will know, acquired consumer protection market conduct and
disclosure responsibilities, while APRA acquired the prudential responsibilities in
relation to the insurance market.

   The implementation of the financial services reform legislation on 11 March 2002
did not significantly affect that jurisdiction except in the following ways. Firstly,
general insurers will be required to be licensed by ASIC as financial product
providers at some point in time during the two-year transitional period. I should say
that none of the general insurers operating in the Australian market have applied for a
licence yet and, indeed, they have the full two years to do so. There is nothing
negative to be taken from that fact.

   Secondly, the licensing obligations create a series of associated obligations in
relation to disclosure and other issues which we are happy to talk about, but they stem
from those reforms. They are not new in the sense that they have been around—those
obligations stem from 11 March. We have had consumer protection in relation to this
market since July 1998.

  CHAIR—We understand that issue, but we are more interested in, to some extent
perhaps, enhancement of responsibilities in this area as a result of the 1992 reforms.

  Mr Hughes—The 2002 reforms?

  CHAIR—Yes, I am 10 years behind. That is right—the 2002 reforms. For instance,
Treasury put to us yesterday that one of the new provisions—I cannot recall the
precise reference—is one of the licensing requirements in relation to signing on to
independent dispute resolution procedures. I, at least, am interested in how you see
that process developing.

   Mr Kell—Yes, we do see that as one of the clear positive consumer protection
developments under FSRA—the requirement for licensees that deal with retail clients
to belong to an approved dispute resolution scheme. In the general insurance area,
there is a scheme that has been in place for some time now—almost a decade—on
insurance inquiries and complaints. It was approved by ASIC in 2001 against the
standards set out in our policy statement 139. That is the policy that we look to when
we are approving dispute resolution schemes.

  There are currently two other schemes approved—the Banking Industry
Ombudsman and the Financial Industry Complaints Service—that deal with financial
advisers and investment products. There are a series of other schemes which currently
have applications in before ASIC. The IEC scheme is a fairly large scheme. It
receives in the order of 70,000 queries a year, and its primary role in relation to
complaints is dealing with complaints about claims in relation to a specified set of
insurance products.

  It is true that under FSRA we have asked the IEC to reconsider their coverage of
that scheme to ensure they are compliant with the new regime. In particular, they will
have to ensure that they can deal with complaints about, say, arguments about

Friday, 9 August 2002           SENATE—References E 381

disclosure of premiums or costs, or arguments about, say, incorrect information being
recorded about details that lead to disputes down the track when claims arise.

  So it is a well-established scheme. We are in regular dialogue with the scheme.
They report to us quarterly on complaints statistics and they comply with the policy
under our policy statement PS139.

  CHAIR—Do they report publicly?

  Mr Kell—Yes. I did bring a copy of their 2001 annual review. I do not necessarily
want to propose to speak on their behalf, but this is quite a detailed report about the
number of complaints, the types of complaints, where they come from, the sorts of
policies they are against and the time period taken to resolve complaints, and then
there is a narrative about some of the issues that they are seeing in the market, such as
around telephone sales of insurance. So we think the IEC’s annual report and its
outline of complaints statistics is quite a good document.

  CHAIR—Can you table that?

  Mr Kell—I am happy to table it.

  CHAIR—There being no objections, it is tabled. While we are clarifying roles
here, what were the responsibilities that were moved over to ASIC from the ACCC?
The reason I seek to clarify this is that the ACCC took on notice to compile a
complaints record from their end. They were going to have dialogue with you in terms
of no double counting and picking up your end of the line. Can you clarify that issue
for the committee?

  Mr Kirk—There was a transfer back in 1988, both from the ACCC and the ISC,
and both those elements involved consumer protection. That coming from the ISC
was responsibility for the Insurance Contracts Act and the provisions there, which are
mostly of general application across both general and life insurance and deal largely
with disclosure issues in relation to contracts of insurance, the general duty of utmost
good faith between insurers and insureds, and some softening of some of the
harshness of the common law provisions in relation to insurance, particularly about
denial of claims on technical grounds.

  The jurisdiction coming from the ACCC, which had previously been theirs through
application of the Trade Practices Act, related essentially to the misleading and
deceptive conduct provisions, which were then repeated in the ASIC Act, the
principal one being the prohibition on misleading and deceptive conduct. There are
some specific variations on that main prohibition about misleading representations in
particular circumstances but largely under the subheading of misleading conduct. The
other main one was unconscionable conduct.

  There are some other more specific prohibitions which also have application to
insurance, but I do not think there has ever been any need to particularly rely on them
in relation to insurance. They are things like referral and pyramid selling, and
harassment in both sales and debt collection and the like.

E 382                            SENATE—References Friday, 9 August 2002

   CHAIR—Is there any reporting on complaints under those various provisions, in
relation to insurance in particular, that can be utilised by this committee?

  Mr Hughes—We do not report specifically in relation to complaints in any one
sector of the financial services industries which we regulate—and you will appreciate
there are a number. Obviously the commission reports on an annual basis to the
parliament in relation to its activities. In relation to specific high profile, significant
matters which might involve the insurance industry, those matters would be
highlighted, but as far as I am aware we do not break those complaints down into
industry sectors. For internal purposes, so that we can identify areas where we might
want to target our activities, we certainly do break down individual consumer
complaints into categories based on industry.

  I think your question might be leaning towards whether ASIC are in a position to
provide that information to this committee. We would be able to take that on notice
and do so.

   CHAIR—Can I clarify whether that request has come to you from the ACCC at
this stage? We were interested in their data pre-1998 as well.

  Mr Kell—Not that we are aware of.

  CHAIR—Again, if and when the ACCC respond to the question on notice that they
took, we will need to clarify the issue of any double counting related to that transition.

  Mr Kell—Can I clarify that? Are you after complaints information about general
insurance across the board or specifically about public liability and professional
indemnity insurance?

  CHAIR—There is some interrelationship, in a sense, between the two. Our main
focus is obviously the terms of reference, but if what has been happening within the
insurance sector as a whole informs that, obviously we are interested in that as well.

   Mr Hughes—We would be in a position to provide this committee with statistics in
relation to complaints that we have received about general insurance products since
we acquired that jurisdiction in 1998. But is your question to us that you want
information for that period of time or for some shorter period of time? What would be
your preference?

  CHAIR—For that period of time, yes. I would also understand that to some extent
you might not be able to break that down into particular business classes within
insurance. But to the extent that you are able, that would be useful, if it relates to
professional indemnity and public liability.

  Mr Kell—It might be worth making the point at this time that, while we do not
have the exact numbers on us today, we do not receive many complaints at all about
public liability or professional indemnity insurance that fall within our jurisdiction.

Friday, 9 August 2002                   SENATE—References E 383

  Mr Hughes—To add to that answer, the number of complaints that we receive
about general insurance products across the board, including domestic lines of
products, represents some of the smallest numbers of complaints we receive across
the whole financial services industry.

  Mr Kell—One of the reasons for that is because of the dispute resolution scheme
which we have approved. We are able to refer quite lot of consumers to that, if they
call us.

   CHAIR—That, at this point in time, is the information that the committee is
lacking. If it reflects general consumer understanding of what complaints mechanisms
exist, it took this committee until yesterday afternoon to clarify precisely what the
sector’s complaints mechanism is. That might be one of the issues that ends up being
relevant to complaints as well. When we have had anecdotal examples of what you
would probably class as retail complaints and the question is asked, ‘Where have you
taken that complaint?’ the response is: ‘I rang the Insurance Council and nothing
happened.’ So it would probably be quite informative for the committee to look
through the detail of the IEC’s reporting, to understand what is happening from their

  Senator CHAPMAN—The Association of Consulting Engineers, among others,
have suggested reform of the Trade Practices Act, including:

Elimination of interpretation of matters of error in professional judgment arrived at in good faith as matters
of misleading and deceptive conduct.

They have also suggested:

Application of unconscionable conduct provisions to circumstances where large clients (including
governments) use market power to dictate untenable conditions of contract and service requirements to small

Does deceptive and misleading conduct in relation to financial services come under
ASIC or is that still with trade practices?

  Mr Kell—It does come under ASIC, yes.

  Senator CHAPMAN—What would your view be of those proposed changes to the

   Mr Kirk—In relation to insurance in particular, the misleading and deceptive
conduct provisions in the ASIC Act would very rarely be applied in the insurance
context to those types of professional judgments, in that the ASIC Act is aimed at
misleading and deceptive conduct of the insurer, mostly in the way they sell the
insurance policy. It might have more application in the context of the types of claims
which might be made against financial planners and other financial services advisers
in relation to advice given to consumers based on professional judgment.

  Senator CHAPMAN—Which would affect the professional indemnity insurance.

E 384                           SENATE—References Friday, 9 August 2002

  Mr Kirk—Yes, of that group.

  Senator CHAPMAN—Is that what you are leading to?

   Mr Kirk—Yes. The difficulty is that if you took away errors of judgment in
relation to misleading and deceptive conduct, or if you took away any remedy in
relation to errors of judgment, there would be very little basis left for consumers to
make complaints about poor advice given to them by financial advisers, putting aside

  Senator CHAPMAN—But errors of judgment in relation to professionals like
engineers would not come within the aegis of the Trade Practices Act as ASIC is
responsible for it.

  Mr Kell—That is correct.

  Senator CHAPMAN—We have also heard from Australian Business Ltd that they
have received reports of unfair tactics used by insurance companies, such as
unreasonable time frames in which to accept increased policy quotes. Have you been
made aware of any such cases?

   Mr Hughes—It would be fair to say that we have heard of a number of instances,
particularly in the current market, of entities which are regulated by ASIC
encountering difficulties in obtaining professional indemnity insurance because of
significant increases in premiums—which is not an issue that ASIC is able to deal
with; it is not within its regulatory jurisdiction—or because of the limited time within
which those professionals are able to determine whether an offer of insurance put
before them is one that they can accept. In relation to the second instance, that does
have some indirect bearing on ASIC’s regulatory jurisdiction. If a professional or a
regulated entity which we regulate is unable to obtain professional indemnity cover,
that may amount to a breach of its licence condition, and it may prevent us from being
able to license that individual. As a consequence, we are in dialogue with professional
associations to identify some of the problems that some of those entities are having in
obtaining professional indemnity cover, to the extent that it does affect ASIC.

   However, I would not want to leave this committee with the impression that we are
in a position to negotiate with professional indemnity insurers on behalf of regulated
entities to improve or enhance the negotiations that they are having with those
insurers. To the extent that it might give rise to some systemic or broad concern across
the industry, ASIC would certainly want to partake in that debate, but we would not
want to get involved in individual debates between insurers and businesses.

   Mr Kell—In relation to that broader issue about the availability of PI cover, I
would make the additional point that the government has announced its intention to
release an issues paper on the compensation regime under the Financial Services
Reform Act. The Parliamentary Secretary to the Treasurer, Senator Ian Campbell,
announced that a little earlier this year. That will provide what we see as the major
opportunity to discuss and engage in a dialogue about some of the issues as to

Friday, 9 August 2002           SENATE—References E 385

availability of PI cover, what it should appropriately deal with and how it should fit
within the compensation regime under the act.

   Senator CHAPMAN—The inquiry into the law of joint and several liability in
January 1995 found that there is no express provision in the Corporations Law for a
right of contribution or indemnity if two or more people are found to have been in
contravention of section 995 and that, as with section 52 of the Trade Practices Act, it
would appear doubtful whether there is a right outside the Corporations Law to obtain
contribution or indemnity. Is that still the case under the law? The inquiry also
recommended that in negligence actions for property damage or purely economic loss
joint and several liability be replaced by a proportionate liability. Does the
Corporations Law allow for proportionate liability? Does it prohibit it? Does it need
amendment for that alternative form of liability to be introduced?

  Mr Kell—We might have to check that.

   CHAIR—I will just go back to another retail/consumer type issue that has been
raised by this committee, which is partly an industry data issue as well—that is, the
concern about cross-subsidy in relation to premiums being offered with the concern
that, because of how a particular group or organisation might be classed, the premium
price that has been quoted is reflecting them potentially being unfairly classed in a
group and cross-subsidising a high-risk group or activity. How, if at all, can ASIC or
the complaints mechanism, the IEC, deal with those types of issues?

   Mr Kell—That is an underwriting issue, first and foremost. Our powers do not go
to regulating underwriting practices, with the possible and very exceptional
circumstance of one individual who was clearly being unconscionably dealt with, and
that could perhaps be looked at under the unconscionable conduct provisions, but that
would need a rather unusual circumstances. But you are talking about classes of
consumers being rated in particular ways. Our powers do not go to that issue.

  Mr Kirk—On the second part of your question in relation to the IEC, the position
would be the same there. They are specifically prohibited from examining those broad
policy considerations about underwriting and the overall prices of products. They look
at individual disputes about claims rather than the pricing of broad classes of

  CHAIR—So about claims, as in claims against a particular policy?

  Mr Kirk—Yes.

  Mr Kell—Typically when a claim is denied and there is a dispute about that issue.

  CHAIR—So that is more claims management than consumer protection?

  Mr Kell—Most consumer disputes tend to arise in insurance at the time a claim is
made and, typically, if it is denied or only partially paid. That is often the point at
which arguments about what was disclosed about the terms of the policy or the
coverage of the policy then become apparent. It is certainly the case in our experience

E 386                           SENATE—References Friday, 9 August 2002

that the majority of disputes about general insurance arise at the point a claim is being

   CHAIR—It might be fair to say that in a hard market, at least at an anecdotal level,
the material that has come before this committee is showing a new class of consumer
concern which is in relation to accessing cover and the terms in which cover is
offered. From what you say to me, if that dispute pertains to the price, you have no

  Mr Kell—That is correct.

  Mr Hughes—It would also be fair to say that we have been made aware of a
number of those concerns ourselves. We have received references from a number of
bodies and from state members of parliament asking ASIC to look into those matters.
I agree with Mr Kell: in each case we have to refer those consumers and those
inquiries elsewhere because it simply is not within our bailiwick.

  Mr Kell—It is the ACCC’s jurisdiction to cover the general price issues, as long as
the price is clearly and accurately disclosed and there is no misleading information
given about it; those are the issues that we are concerned with. As long as that is
undertaken, then that is as far as we go on the issue of price.

  CHAIR—Where then do you refer someone to?

  Mr Hughes—To the ACCC.

  CHAIR—So it is to the ACCC, which has no jurisdiction to deal with individual
complaints—or do they? Under what jurisdiction would they then act, in such a case?

  Mr Kell—The ACCC has the prices surveillance role and also the role to look at
anticompetitive behaviour. They would look at it in that context. That is our
understanding. As to whether you could establish that on the basis of an individual
complaint, that would have to be something that the ACCC would form a judgment

   CHAIR—This will be limited to the detail of this particular case, but let us look at
our example of the audiologists. We have a group scheme which established a cover
from which the insurer then withdrew. When pressed for detail about why they were
withdrawing, they indicated—correct me if I am not getting all of this accurate—that
it was because of complaints history. When pressed further for the detail of the
complaints history, two cases were provided. As it turned out, those two cases were
not members of the society who had engaged in this group scheme. So, at least on the
face of it, the insurance company had classed other contracts into the group scheme,
perhaps inappropriately. Ultimately, the only cover they were eventually able to get—
and they might have gone offshore—was at a hike of 500 per cent. Who, if anyone,
has jurisdiction to deal with that type of consumer complaint?

 Mr Hughes—Firstly, there are provisions under the Insurance Contracts Act
whereby an insurer, if it is going to cancel a policy—and I am talking purely about

Friday, 9 August 2002           SENATE—References E 387

cancellation—is obliged to follow a procedure in terms of both timing and the
provision of notice as to the cancellation. If the conduct of the insurer in relation to
the reasons why it is refusing to provide cover are unconscionable, then there could be
an argument that that is unconscionable conduct in relation to the provision of a
financial service, which would be an issue for ASIC to consider. If the conduct of the
insurer was unconscionable in relation to the price of that product, then that would be
an issue for the ACCC to consider.

   Senator BRANDIS—Has there been any decision by a court to that effect—that is,
that the unconscionable refusal to renew, or in other words the unconscionable refusal
to supply, an insurance product is unconscionable conduct in relation to the supply of
that product?

   Mr Kirk—As far as I am aware, there has been no such decision. Adding to what
Mr Hughes was saying, you might also say, in this context, that the insurer’s conduct
was misleading and deceptive in relation to the reasons given for refusing cover. The
difficulty is that the remedy would not be a court order compelling them to provide
cover; it would be at best some compensation for what damage was caused by that
particular piece of misleading or unconscionable conduct in relation to providing
reasons. Whilst you might have a technical win, it would provide no real remedy to
the audiologists. That is probably where our jurisdiction falls short in trying to deal
with this part of the problem.

  Mr Kell—Furthermore, I think it is true to say that in relation to the
unconscionability provisions, although price is one of the elements that is taken into
account when determining whether conduct has been unconscionable, to our
knowledge, there is no instance where price alone has been the determining factor in
an unconscionable conduct case.

   Senator BRANDIS—I am struggling to think of any case that I am aware of under
the Trade Practices Act where refusal to supply a good or service has, of itself, been
treated as unconscionable; it can be misuse of market power, but that is of no concern
to you. I am not aware that that is within the category of unconscionable conduct.

  Mr Hughes—If the refusal was based on, as I think Mr Kirk was saying, the
provision of incorrect information—

  Senator BRANDIS—That is different.

  Mr Hughes—then that would be a regulatory issue because there is a disclosure
concern there. But if it is a commercial decision at a business level, then I would
suggest that it is not a regulatory issue.

  Senator BRANDIS—Also, if it were a constructive refusal to supply you could say
there is nominally an offer to supply the service but at a prohibitively high premium,
that that is a constructive refusal to supply and, for that reason, because the price is
prohibitive, that might be unconscionable, perhaps.

  Mr Kell—We are pushing the boundaries here, I think.

E 388                           SENATE—References Friday, 9 August 2002

  Mr Hughes—Or on other terms which are incapable of performance.

  Senator BRANDIS—Yes.

  CHAIR—But in a case like this one, hypothetically, your insurer is far better off
simply saying, ‘We have made a commercial decision to exit the field.’

  Senator BRANDIS—You could not go behind that, could you?

   Mr Hughes—No. We are already aware of a number of insurers in the professional
indemnity market who have exited the field for commercial reasons and have
signalled that to the market. From our perspective, to the extent that the disclosure is
adequate, there is no regulatory issue.

  CHAIR—In terms of unconscionable conduct actions in the insurance sector, are
you able to give us any recent examples of cases that have been addressed?

   Mr Kell—Yes. It might be useful to give you an example of the sorts of
circumstances where unconscionability is more often going to be applied. ASIC took
action in the Federal Court in 2000 and again in late 2001 against Combined
Insurance Company of Australia for practices associated with the sale of insurance
policies in remote Aboriginal communities. That included, say, selling policies that
provided coverage for injuries suffered while travelling on planes, monorails, buses or
trains—typically, forms of transport that were not in use in those communities—and
also to people who typically had very low language skills and numeracy skills.
Unconscionability was one of the provisions that we relied on in taking that case and,
as a result of that, we obtained both court orders and an enforceable undertaking that
eventually led to the opportunity for people to get refunds as a result of ASIC’s action.
That is an example where you have particular individuals who are significantly at a
disadvantage when it comes to understanding complex products such as insurance and
in areas where they typically are not going to be able to take advantage of many of the
points where you could claim.

  CHAIR—So that example would lead you towards some claims where, under
certain covers now being made available—I think more so with professional
indemnity—the incidence of exclusions, excesses, exemptions and the like results in a
product has no real worth anyway, as is claimed by some of our witnesses.

  Mr Kirk—The relevant difference between perhaps the Combined Insurance
Company case and these ones is that your witnesses are aware that the product they
are being offered is of limited use to them, and that is their concern. In the Combined
Insurance Company case, the problem was that the consumers involved, because of
the disadvantages they had and the exploitation of those disadvantages—which is
where the unconscionability comes in—bought a product being unaware of the
limitations in terms of its usefulness to them.

   CHAIR—So it would be more an issue of whether there is industry collusion in
terms of the range of products available and whether that is an issue in that second

Friday, 9 August 2002            SENATE—References E 389

  Mr Kirk—If there is collusion about the range of cover, I think that then would
bring in the ACCC’s jurisdiction.


  Senator BRANDIS—But that is a different issue, isn’t it? The conduct you are
describing is unilateral conduct; it does not depend upon any other player in the
market also participating in like conduct.

  Mr Kirk—Yes, that is correct.

  CHAIR—Can you give any other examples that might inform the committee?

 Mr Kirk—Another example again involved the sale of policies in remote
Aboriginal communities. We investigated that in 1998 and 1999.

   CHAIR—I asked a question this morning about cover being available in Britain
against being kidnapped by aliens and whether that would be unconscionable conduct.
I did not get a straight answer.

  Mr Kell—It is very difficult for us to comment on hypothetical cases such as that.

   CHAIR—Certainly, if a company were offering that to Indigenous Australians, you
might be prepared to run a case on whether they had been properly informed of the

   Senator BRANDIS—Am I right in saying that the unconscionability operates as a
ground of avoidance only in relation to circumstance in which the insurance contract
is formed, that conduct post-formation of the insurance contract might sound like a
breach of that contract but it is not affected by principles of unconscionability if there
is a grievance about the way in which the insurance company has behaved?

   Mr Kirk—I think that technically you could rely on post-contract formation
conduct as unconscionable. I think it is occasionally argued also—not in the insurance
context but in relation to other contracts—that even the more powerful party relying
on one of the contractual terms they managed to get into the contract might in some
circumstances be unconscionable. But I have not seen it really occur in relation to

  Mr Hughes—The conduct that you are alluding to, Senator, might also constitute a
breach of the utmost good faith obligation under section 13 of the Insurance Contracts

  Senator BRANDIS—Quite. But almost invariably that is an obligation that is
enforced against the insured, not the insurer, isn’t it?

  Mr Hughes—It certainly seems to be, based on case authorities—

E 390                            SENATE—References Friday, 9 August 2002

  Senator BRANDIS—Essentially, it is based on disclosure.

  Mr Hughes—That is correct.

   Senator BRANDIS—Once an insurance contract is entered into, there is really not
much the insurance company can do to the insured, is there, except wrongfully refuse
to pay?

   Mr Kirk—That generally is correct. There are a few others. There are obligations
on the insurer at the time of renewal to give adequate notice and the like. If they fail
to do that and the insurance lapses for a period, then the insurer can be liable.

  Senator BRANDIS—But in almost all cases, when an insured has a grievance with
an insurer, it is that the insurer will not pay on the policy, either for good reason or

  Mr Kell—Indeed.

   CHAIR—It was put to us, I think by the Law Council yesterday—I would not class
it at the level of a formal submission but as a suggestion for canvassing—that perhaps
an ongoing relationship should be assumed similar to that which applies to lawyers
and their clients in relation to terminating a contract. With respect to the insurance
sector, do you have any response to that view? It would certainly eliminate the ability
for an insurer simply to exit a field.

  Senator BRANDIS—It would certainly also, one imagines, have an extremely
sharp upward effect on premiums too.

  CHAIR—That is why I am interested in the response.

  Mr Hughes—There are two different situations: one is a relationship which is not
only a commercial one but also a fiduciary one, and that is between a lawyer and his
or her client; the other is essentially commercial, for a period of time and in relation to
a particular risk. The two situations appear, at least to me, to be quite different.
Therefore, it would be difficult to see how that ongoing relationship between an
insurer and a policyholder, after the cessation of the policy, would continue.

  CHAIR—Are insurance policies usually annual?

  Mr Hughes—In relation to contracts of general insurance over property,
professional indemnity and public liability, that does appear to be the norm. But I
would add that there are some categories of professional indemnity insurance that
extend over three years rather than just one year.

  CHAIR—Has that simply been a historic, traditional or convenient thing for the
insurance sector?

Friday, 9 August 2002          SENATE—References E 391

  Mr Hughes—I think it enables the underwriter to assess its risk on an annual basis
based on claims experience and for the impact of other events in the market, such as
those we experienced on September 11, to feed into pricing.

  Senator BRANDIS—In the case of insurance contracts for terms of more than
three years, is the premium repriced annually—in other words, is it repriced serially
throughout the term—or not?

  Mr Hughes—Perhaps at this point I should declare that, prior to being at ASIC, I
had 13 years experience acting for professional indemnity underwriters, including
those at Lloyds. The usefulness of having a three-year policy for certain classes of
professional indemnity risks was more for the benefit of the insureds than for the
insurer, because the insurer took on the risk that the market premium might increase
over that period of time. So, in some ways, it represented groups of insureds coming
together and bargaining in a somewhat stronger position than the insurers were in,
which is somewhat unusual in today’s market. But, in each of those instances that I
am aware of, the premium was fixed at the commencement of the period.

  CHAIR—Would it be too onerous to ask for some type of description of the cases
that have come to ASIC that you have needed to refer on due to jurisdictional

   Mr Kell—We can certainly give an indication of the types of cases. It may be more
difficult to give you the exact numbers of those we have referred on. But we can take
that on notice, yes.

  CHAIR—Once I review some of the material about consumer complaints and
management, I may well end up putting to you more questions on notice. As there are
no further questions, thank you very much for your appearance.

               Proceedings suspended from 12.09 p.m. to 1.32 p.m.

E 392                            SENATE—References Friday, 9 August 2002

MARLER, Mr Ian George, Chairman and Managing Director, Australian
Consulting Surveyors Insurance Society

   CHAIR—Welcome. The committee prefers all evidence to be given in public but
we will consider a request for all or part of your evidence to be given in private if that
is necessary. We have received your submission No. 27. Are there any alterations or
additions that you wish to make to the written submission?

  Mr Marler—Not to the written submission. I have a few comments I want to make
as an introduction if that is possible.

  CHAIR—Yes. I will invite you to do that now.

  Mr Marler—The submission by ACSIS is made in the interest of helping your
inquiry appreciate what happens at a grassroots level. I am here today as chairman
and managing director of ACSIS Ltd. I am also a registered surveyor in private
practice. I am not a representative of any insurance broker nor insurer but rather a
professional surveyor with over 15 years experience in running a successful
professional indemnity scheme for surveyors. I have detailed for you the background
and operational details of our organisation which have been submitted to you. So far,
we have been able to survive the so-called insurance crisis. It is in that hope that our
experiences may assist your inquiry and be a guide to others.

   I would like to make a few brief observations from our perspective. Litigation, in
our view, has now developed into a sophisticated art form and is a multimillion dollar
industry. A substantial number of claims are bogus or inflated, and this figure could be
as high as some 30 per cent. The interpretation of negligence appears to have widened
to include anything less than an absolute perfect result and an increasing number of
claims now appear to have a Trade Practices Act component. This legislation under
the heading of false and deceptive conduct appears to be now used well beyond the
original intention.

  The availability and cost of PI insurance appears to be a direct result of three
factors: claims payments, insurer overheads including reinsurance costs and a profit
margin. It is the first of these points, which is the claims payments, that appears to be
the most volatile in the area where professional groups, such as mine, can be most
proactive. Whilst ACSIS is a membership based group, membership is in no way
compulsory and the organisation has to operate and survive in a commercial
environment. As a result of this, I may ask for privacy in respect of some questions
that you may ask if I feel they are commercial-in-confidence. Obviously, it will be
your decision. I wish your inquiry every success in the hope that it will contribute to a
better insurance system and I leave the following suggestions for your consideration.

   Firstly, there is the conflict between federal legislation, such as trade practices, and
state legislation, where the issue of caps on professional liability needs to be resolved;
secondly, the Financial Services Reform Act or FSRA needs to be revisited regarding
its impact on mutual type schemes; thirdly, the definition and interpretation of

Friday, 9 August 2002          SENATE—References E 393

negligence appears to require review; and fourthly, unrealistically low and
unsustainable premiums charged in the past potentially destabilise the industry and
could be considered.

  CHAIR—Sorry, Mr Marler, could you go back your second point in closing?

  Mr Marler—The Financial Services Reform Act needs to be revisited regarding its
impact on mutual type schemes.

  CHAIR—Could you elaborate on that point?

  Mr Marler—In the scheme that ACSIS ran in the past, we stood beside the insured
and basically carried a layer of risk. That helped us negotiate with the insurers,
usually for a cheaper premium. It put some of the onus back onto us to be responsible
for managing a level of risk there, and that made us very proactive. The Financial
Services Reform Act has, for all intents and purposes, prohibited us from doing that
without becoming licensed, authorised or whatever. That was a very good concept in
the past, but it is virtually prohibited now.

  Senator CHAPMAN—You are saying that under the FSR Act you are regarded as
a provider of financial services?

  CHAIR—An insurer.

  Mr Marler—Yes.

  Senator CHAPMAN—And you have got to be licensed.

 Mr Marler—And it is a fairly onerous process to become licensed, authorised or
whatever is necessary. Our legal advice—

   Senator CHAPMAN—I have another hat which is chairman of the Joint
Committee on Corporations and Financial Services, so I am aware of the issues of

  Mr Marler—I can only comment that, in the past, that layer of risk has worked
extremely well for us.

  CHAIR—Can you describe how it worked?

  Mr Marler—Yes. Very simply, if you negotiate a figure of $50,000, an insurer
does not have to fund anything at all under $50,000. If an individual firm carried a
layer of excess of, say, $5,000 we would have had to have picked up the balance of
$45,000. That meant that an insurer knew that he was clear above $50,000, and we
knew that we had a risk factor under that. We were able to manage that satisfactorily
and in doing so reduced the—

  CHAIR—How did you manage that?

E 394                          SENATE—References Friday, 9 August 2002

   Mr Marler—We had a series of claims panels and we worked very closely with the
insurer. What everybody was doing was all open, above board and on the table.
Primarily, our methods of managing it were to try and educate surveyors in particular
to have fewer claims and smaller claims, to be more careful and to be proactive in
claims management. Also, we charged a fee—or mark-up, as we described it—to
cover our component of risk. I suppose in a way we were like a mini insurer, and I
guess that is why we are caught up under the FSRA.

  Senator CHAPMAN—In effect, you were picking up the excess rather than the
individual surveyor?

 Mr Marler—It was shared between us and the individual surveyor, usually with
ACSIS picking up a larger amount.

  Senator CHAPMAN—Of the first $45,000.

  Mr Marler—I am using that as an example.

  CHAIR—So there is an interim level of excess, so to speak?

  Mr Marler—Yes.

   Senator CHAPMAN—I thought you just said that as a result of your activity
claims were smaller—or were small claims ignored? If claims were smaller I would
have thought that would have meant you were meeting more of the claims.

  Mr Marler—That is right, but we had funds coming in to do that, and it worked
quite successfully for a large number of years. It has only been in the last probably
four years that we have not had a layer of risk.

  Senator CHAPMAN—Have you looked specifically at the way in which the FSR
Act could be amended to get rid of this problem—without opening loopholes for other
people to exploit?

  Mr Marler—Not specifically. We have had it vetted legally and we are now
working under that legal advice. I suppose, from a fairly simplistic point of view, my
advice would be to amend the legislation. To have a mutual type of organisation,
where you were not basically trading with the public but were only dealing with your
individual members, might be all that is necessary.

   Senator CHAPMAN—I was not aware of the detail of this before. We were due to
have ASIC after you this afternoon but we rejigged them and had them this morning.
It would have been good to follow that up with them.

  CHAIR—We could do that on notice.

  Senator CHAPMAN—Yes, we could do it in writing. At the moment it is not
causing a problem because you have the two-year transition, I assume.

Friday, 9 August 2002           SENATE—References E 395

 Mr Marler—Commercially, we stopped having a layer of risk a few years ago but
we would like the option to have it again in the future.

  CHAIR—Why did you it four years ago?

  Mr Marler—Simply because in obtaining prices from the insurers at that point in
time, it was basically a better deal not to carry a layer of risk. That goes back to the
heady period of a lot of discounting and a lot of instability, I suppose, in some
regards, in the insurance industry.

   Senator CHAPMAN—So this scheme that you are describing has not been
operating in recent years—it was in an earlier period—but you would like to reinstate

   Mr Marler—We would like the option to reinstate it. We have not carried a layer
of risk for about four years, but we would like the option to be able to look at that
each time we go for renewal and negotiate with insurers. We would like that as an
option that we could use, whereas at the moment it has basically been taken away
from us.

  Senator CHAPMAN—Could you enlarge on the issue of the Trade Practices Act
and how it circumvents the caps applying in New South Wales and Western Australia?

  Mr Marler—Firstly, the surveyors have a scheme under the Professional Standards
Act in New South Wales, referred to as the PSOA—Professional Surveyors
Occupational Association. That organisation is made up of three parties: the
Institution of Surveyors, the Association of Consulting Surveyors and my
organisation, ACSIS. Not very many surveyors have joined that out of all those in
New South Wales. We have been advised legally that the Trade Practices Act would
override it. When you go to negotiate with insurers, there is no discount at all for
being a member of that organisation and, if it is not real in that claims are coming in
that way, the threat is certainly there.

   CHAIR—Is that the only issue? Is there also an issue of people forming contracts
in other states?

   Mr Marler—I believe that that is also possible—that, if you are operating
interstate and come across the border to take legal action, the capping legislation does
not adequately protect you.

 CHAIR—Have you had any concerns with how your group scheme has been
managed by the insurance company?

   Mr Marler—No, I do not believe we have had any concerns. Because of the nature
of the scheme and the way we do business, we have always had a very close
relationship with insurers. We have a broker between us and the insurer, but the three
of us work very, very closely together. It is pretty much an open table; we are quite
frank with one other. We have had a very small number of insurers in the 15 years or

E 396                            SENATE—References Friday, 9 August 2002

so that the scheme has been operating and I do not believe we have had any major

  CHAIR—Who controls the membership of the scheme—yourselves?

  Mr Marler—Yes. You need to be a member of the scheme and then, if you want PI
insurance, you get in touch with the brokers and then, in turn, the insurer. We act as
facilitators, not providers.

  CHAIR—I am just testing that against some evidence we had from a much smaller
group, a group of audiologists, who claim that non-members and those not
participating in the risk management aspect of the scheme had been lumped into their
scheme by the insurer, and the claims record of those not members or party to the
professional scheme was then cited as justification for premium hikes or withdrawals.

   Mr Marler—No. As an example, we know precisely how much the insurer pays
out on our scheme each year. Consequently, when we talk about premiums we know if
they are being realistic in what they are asking for. As I said, we have had a very
limited number of insurers and we have always had a particularly good working
relationship and an open-door type attitude where we can go and talk to them at any
stage. I think that has been one of the features of the scheme.

  CHAIR—But have you faced increases in premiums disproportionate to the
incidence of claims in the last year or so?

  Mr Marler—I do not necessarily believe so; no.

   CHAIR—So other factors such as September 11 and HIH have not been issues
relevant to your scheme?

  Mr Marler—They have been relevant because one of the overhead factors of any
insurer is reinsurance. Obviously, those global events affect reinsurance and, in turn,
that affects overheads. Also, I suppose the trend towards greater claims payments has
caused premiums to go up. But I would have thought that, whilst some guys are
hurting, we are not doing too badly under what you might call the present crisis.

  CHAIR—What has been the general level of increase?

  Mr Marler—It would probably be between 30 per cent and 40 per cent, maximum.
Some will be higher than that, but that will probably be due to a very bad claims
record, so it is only fair that it is starting to bite a bit harder than it has in the past.

  Senator CHAPMAN—So you have noticed a variation in premium increases
according to claims records?

  Mr Marler—Yes, according to claims records and according to what you might
call the overhead factors of an insurer.

Friday, 9 August 2002            SENATE—References E 397

  Senator CHAPMAN—Some of the evidence before the committee has claimed
that people with very good or nil claims records have had substantial increases in
insurance. That is not the experience of your organisation?

   Mr Marler—Not on average. I would have to say that, for some years, some
people in our organisation have probably been paying less than their percentage rate,
and that has been brought into line. So they would have some increases. Generally
speaking, they would quote a rate per $100,000 or $1 million of gross fees, and I do
not believe that we have been doing too badly. One of the reasons for that is that we
try to be very proactive in minimising claims. We have a very open philosophy of
trying to help an insurer make a profit because we know that, if they make a profit,
when we argue on premiums we have a substantial case that they be fair. That is part
of the open book. We have a fairly detailed knowledge of what they have paid out in
claims simply because of the structure of our organisation.

  Senator CHAPMAN—Do you play an active role in identifying areas of risk and
assisting your members to implement risk management?

  Mr Marler—Yes. As an example of that, in the last four to five years we have
probably conducted 50 to 60 seminars Australia wide, talking to groups of surveyors.
We have produced videos, we have produced an audio tape and we have sent out
technical circulars. Last year we entered into a fairly substantial arrangement with
Monash University to produce a very comprehensive risk management kit that has
gone to every one of our members. So we are very proactive in that regard. In fact, we
receive a small contribution from the insurer towards our risk management programs.

  CHAIR—What was the main impetus for your establishment in 1985?

   Mr Marler—At that point, the Association of Consulting Surveyors had a group
scheme going which was just a conventional type insurance scheme. This society was
the brainchild of a fellow in New Zealand called Dennis Adams, and he came across
to Australia and sold us the idea of being largely self-managed, of having claims
investigators in every state and of carrying a layer of risk. At that point in time we had
had three years of a conventional scheme and we thought we had matured enough to
try something a little bit more innovative. Basically, we have grown from there.

  CHAIR—Was the establishment of the group scheme in the early eighties in
response to difficulties getting insurance?

  Mr Marler—Yes. That is going back a fair while, but my understanding was that,
particularly in New South Wales, a number of surveyors had had their insurance
policies cancelled overnight and were traipsing the streets of Sydney looking for
insurance. Obviously, there was some buying power and a little more muscle in
banding together, and that was the start of the group schemes.

  CHAIR—That exhausts the questions I have arising from your submission. Thank
you for your appearance.

                Proceedings suspended from 1.50 p.m. to 2.02 p.m.

E 398                            SENATE—References Friday, 9 August 2002

COCKBURN, Mr Milton Roy, Executive Director, Shopping Centre Council of

CUNDALL, Mr Peter, Member, National Risk Committee, Property Council of
Australia; and Strategic Sourcing Manager, AMP Henderson Global Investors

  CHAIR—I welcome Mr Cockburn and Mr Cundall from the Shopping Centre
Council of Australia. The committee prefers all evidence to be given in public, but we
will consider requests for all or part of evidence to be dealt with in camera if that is
necessary. We have received your submission, No. 72. Are there any alterations or
additions you wish to make to that submission?

  Mr Cockburn—No.

  CHAIR—I now invite you to make a brief opening statement, and we will move to
questions after that.

  Mr Cockburn—I would like to thank you and your colleagues for the opportunity
to be here today. AMP Henderson Global Investors is obviously a very significant
member of both the Property Council of Australia and the Shopping Centre Council
of Australia. Peter is much more directly involved in this whole area than I am, so I
asked him if he would come along today in case there were technical questions that
the committee was keen to pursue.

   I would like to give a bit of background as to why we have been involved in this
issue. Although public liability has only been in the headlines for the last year or so, it
has clearly been a major issue for the property industry, and certainly for the shopping
industry, for some years now. About three years ago, in 1999, a number of our
members, including AMP, Westfield and Lend Lease, formed a loose association
called the Liability Action Group for the purpose of trying to address some of the
issues in what was clearly becoming a major concern for our members at that stage—
and that was the rapid escalation in public liability insurance premiums. Incidentally,
that committee also included some of the major retailers as well—Coles Myer,
Woolworths and Franklins. Certainly in shopping centres this is a problem for them as
much as it is for the shopping centre owner.

  That Liability Action Group, despite being a fairly loose coalition, did some very
important work in terms of what you might call cleaning up our own nest in this
whole area, looking at things like risk management techniques and procedures,
establishing dialogue with other parties who were impacted by it, including the
association that covers cleaning contractors and building service providers, and
establishing a protocol between some of those members and the cleaning contractors
as to how risk management techniques and various things could operate in shopping

  Towards the end of last year the Liability Action Group realised that they had
probably gone as far as they could in terms of looking at the internal issues of this

Friday, 9 August 2002            SENATE—References E 399

problem and they approached the Property Council to try and address some of the
external factors that are relevant in the debate. As a result of that, the Property
Council established the National Risk Committee, on which a number of our members
are represented. Because we have common membership, the Shopping Centre Council
is also involved in that committee. The first thing that the National Risk Committee
did—because at that stage there was a lot of government interest in this issue as
well—was to formulate a plan which we put before the federal government just prior
to the first ministerial meeting in March that was chaired by Senator Helen Coonan. It
is essentially that plan that we have included in our submission to the Senate

   Since then, of course, a fair bit of work has been done by governments around
Australia—the federal government, and various state and territory governments as
well. We are, I suppose, reasonably happy with the progress that has been made. I
think in all of these things one would always wish that progress was faster than it
occurs but I think some states, in particular, have struck out very substantially in this
area. A number of other states are now catching up. So we are quite encouraged by the
progress that is being made through that coordinated ministerial committee because,
after all, this is a national problem. It has to be addressed by all of the governments in
Australia. I know that some people have suggested that the role and work of this
committee has probably been made somewhat irrelevant by that, but we do not agree
with that. I think there is still a substantial body of work that could be done by a
committee such as this in terms of looking at what is being proposed and what is
being done, particularly ensuring the issue of uniformity of approach around
Australia. That is all I wanted to say by way of opening. We are obviously very happy
to answer questions.

   CHAIR—Mr Cockburn, I am not sure where it has been suggested that the work of
this committee has been made less relevant by Senator Coonan’s approach. It is
certainly not something I have come across on the public record. If anything, this
inquiry was established in response to a limited public component in terms of the
whole-of-government approach at this stage to this issue and an acceptance that some
level of community dialogue should be occurring as well.

  Mr Cockburn—We certainly do not disagree with that.

  CHAIR—Has the Property Council’s 10-point plan been put to us separately by the
Property Council as well?

  Mr Cockburn—No. The submission is really from the Shopping Centre Council
and the Property Council.


  Mr Cockburn—I should explain the relationship. Legally, the Shopping Centre
Council does not exist; we are not a legal entity. We are a part of the Property
Council. The situation a number of years ago was that the major shopping centre
owners were about to break away from the Property Council and establish their own
organisation. They did, in fact, establish their own organisation, the Shopping Centre

E 400                           SENATE—References Friday, 9 August 2002

Council. In the negotiations that took place a compromise was reached. The Shopping
Centre Council remain within the Property Council, so we are legally a part of the
Property Council. Our members are members of both the Property Council and, over
and above that, they fund the Shopping Centre Council as well. They are a semi-
autonomous body within the Property Council. As I made clear in the covering letter,
our submission is effectively a submission by the Property Council and the Shopping
Centre Council.

  CHAIR—I just want to ensure we have the full detail about the 10-point plan, if
that was not incorporated.

   Mr Cundall—Sure. I will add something, if I may. Our experience with public
liability claims—and we own a large number of shopping centres, as well as a large
number of commercial buildings; in fact, the total portfolio is worth about $15
billion—is that about 90 per cent of the claims that we get relate to retail properties—
in other words, shopping centres. Although it affects all property owners, it is
primarily a Shopping Centre Council concern, in many ways.

   CHAIR—Where the claims are focused. Could I take you to one area, which has
been the subject of discussion earlier today, in relation to the pre-litigation processes
that currently exist. One of the things this committee has been searching for is an
understanding of how consumer complaints are managed. We now understand that the
insurance industry’s self-regulation process is a complaints mechanism for general
insurance, but there is not even a self-regulated complaints mechanism applicable in
relation to public liability or professional indemnity. Do you see that as an issue or as
a problem in relation to a mechanism, other than litigation, for dealing with consumer
complaints about their insurance product?

 Mr Cockburn—I must confess that that is not an area I could comment on. It is not
my area of expertise.

  Mr Cundall—We certainly are great believers in early intervention, as far as
handling claims is concerned. Any pre-litigation processes, such as mediation and
arbitration, that will avoid a claim getting to court are welcomed from our side.

  CHAIR—If anything, this is potentially a stage before that. It is a self-regulatory
dispute resolution phase for complaints management. For reasons we are yet to
understand, whilst it exists for general insurance, it is non-existent with respect to
public liability and professional indemnity, which is our particular focus.

  Senator CHAPMAN—Regarding your suggestion that there be a uniform 12-
month limit on the commencement of public liability claims, we have had some
evidence before the committee that in some cases the extent of an injury does not
manifest itself until some years after the actual incident. Would 12 months allow
sufficient time to establish the extent of an injury and fair treatment of the plaintiff?

  Mr Cundall—There are two issues: one is notification and the other is
commencement of claim. If it takes time before notification comes through because of

Friday, 9 August 2002           SENATE—References E 401

the development of a medical condition, that is acceptable, but after the notification
comes through there should be commencement within a 12-month time frame.

   Senator CHAPMAN—Again, we have had arguments for and against capping
from various witnesses. The Law Council have argued strongly against it. Other
groups, along with yourselves, have argued for it. The argument that has been put
against it is that it could result in an injured person not being fairly compensated for
the negligence of someone else. With a cap, how would that be avoided?

  Mr Cockburn—It is my understanding that, in other areas such as workers
compensation, there are caps in existence at the present time. I do not really see why a
distinction would be made between a personal liability claim under common law and,
for example, a workers compensation claim. Most people seem to suggest that it
operates successfully; I know there are occasional arguments about relativity over
quantums. If it operates successfully, I do not see any reason why the same situation
would not apply in relation to a common law claim for public liability.

  Mr Cundall—I would agree with that.

  Senator CHAPMAN—Why do you think the courts need a direction to return to
the common law concept of negligence on the part of the occupier as the basis for a
payout to the plaintiffs?

   Mr Cundall—I am particularly aware of the situation as it has been in New South
Wales until recently. As a general comment, the court system in Australia in common
law has proven over the years to be fundamentally sound. On paper, it should provide
the best mechanism to resolve occupier liability claims. Regretfully, though, there has
not always been, in our view, complete adherence to the common law by some
elements of the judiciary. It has rarely been because of the fact that there has been a
tendency, in some cases, not to send plaintiffs away empty handed. But I believe that
state governments have seen the need to start to codifying laws and practices a lot
more than before.

   I guess there has also been a bit of a sea change within the minds of the Australian
public. One of the points that we called for—and I do not know myself how we can
effectively do this—was to ensure law-makers emphasise individual responsibility
because, at the moment, there is a lot of blame culture. People think it is somebody
else’s fault and therefore they are going to make claim on them, particularly if they
have got deep pockets. That is certainly what the occupiers of retail property or
owners of retail property are experiencing.

   Mr Cockburn—We will be very interested in seeing the New South Wales
government’s second stage of legislation in the next session of parliament. My
understanding is that the second stage will really address this whole issue of personal
responsibility. In fact, I was at a speech the Premier gave about a month ago when he
announced that he was going to call it the personal responsibility bill. In the first
stage, it was the civil liability bill. We will obviously be looking very closely at that
bill. Clearly, the New South Wales government have given a lot of thought to this

E 402                            SENATE—References Friday, 9 August 2002

issue and it may well be that they are able to give the lead to others in relation to this

   Senator CHAPMAN—Do you generally think the community has moved away
from people accepting personal responsibility towards a sort of victim mentality?

  Mr Cundall—Somewhat, yes—not throughout the whole of the Australian
community, but we have certainly encountered it. Our shopping centre managers see it
every day.

  Mr Cockburn—I think there is absolutely no doubt about that. I do not like to use
anecdotes in these sorts of things but about 25 years ago I was playing tennis at a
tennis court in Sydney which was stepped down. Three courts were on different
levels. I was playing at night. I stupidly chased a ball which had gone onto one of the
lower courts. I tripped over, broke my ankle and had to have a plate inserted.

  Senator CHAPMAN—And ruined your tennis career?

   Mr Cockburn—No, it didn’t, fortunately—but at that stage it was not a tennis
career that one could do any ruination to. About six months ago a friend of mine,
whom I was actually playing against that night, said, ‘Of course, if it happened to you
now you would sue the owners of the court.’ It just did not occur to me that the
liability was on any other person except myself—for stupidly running down a grassy
incline. I think it is true that the culture of our society has changed in 20 years. We
now look for someone we can blame rather than blaming our own stupidity.

   Mr Cundall—I can give you a specific example, if the committee is interested. An
individual visiting a shopping centre placed her two young children on a trolley. She
was walking through the mall and decided to stop in front of a tenancy which had a
couple of games out the front. She decided to leave her two children on the trolley in
front of one of the games and she entered another shop on the other side of the mall.
One of the children tipped the trolley over, attempting to gain access to the game, and
struck his head, sustaining a cut above the left eye which required sutures. The mother
then proceeded to lodge a public liability claim against the tenancy. So in this case it
is a retailer—

  CHAIR—The tenancy where the trolley had been left?

   Mr Cundall—The tenancy where the trolley was outside, because it was within the
lease line. I do not know, but I suspect that it was probably a small retailer. It might
have been Toys R Us or something like that, but I suspect it probably was not. That, to
me, is just a typical example of someone who was not taking individual responsibility.

  CHAIR—There is a fine line here, and I am not sure how you can clarify that line.
I will give you another individual example. This is from personal experience where
there was no consequent action, fortunately because no damage resulted. Again in a
shopping centre environment I was with my son when he was probably about the age
of four. We had come out of a supermarket into the central area where there was a
food hall type arrangement. The food hall was closed. It was a fairly open access

Friday, 9 August 2002            SENATE—References E 403

arrangement, rather than a closed area. Because it was closed, the occupier of that
food section put a rope across the main entry. As you would understand, a four-year-
old child will often run around. On his own instigation, he ran ahead of me and tried
to run through. Because it was not clear that there was a rope across this area—the
colouring of the rope concealed it—he almost garrotted himself. My response to that
was to report that incident to the centre, because I thought it was highly inappropriate
that a boundary be secured by a poorly visible rope that was likely to garrotte a child.
In that case, I would say that I do not think it is quite clear that that is necessarily the
responsibility of the—

   Mr Cundall—Agreed. Clearly there are going to be some scenarios where the
shopping centre owner or occupier is liable. As Milton said at the outset, we have
tried in the last few years to really put our house in order. In some ways, I guess the
fact that we have had so many public liability claims has been a good thing because
they forced us to actually look at our occupational, health and safety and risk
management procedures and ensure that, where necessary, they are beefed up and

  CHAIR—This leads to another issue that we have been considering as a
committee. In the case that I was suggesting, some reflecting on it could say that it is
the responsibility of the parents to ensure that their children do not go straying off.

  Mr Cockburn—That would certainly be my response. We all know young
children. We have all had them and we know how difficult they are to control. In
those circumstances the young child should be under the control of the parent.
Certainly a rope like that would be a warning to parents.

  CHAIR—But what I am saying is that the rope was not visible.

  Mr Cockburn—If the issue was the fact that the rope was not visible, as far as I
am concerned I agree—that is a safety breach on the part of the centre. There would
be a liability on the part of the centre in those circumstances—and so there should be.
We are not arguing—

   CHAIR—An issue that was not raised in your submission was proportionate
liability. Is that because, from your experience, it is not often an issue—that there are
other parties within which the proportion of liability can be determined?

   Mr Cundall—We probably should have raised the issue of proportionate liability.
The reason we did not was that we hoped the legislation that was being spoken about
to go on the books in New South Wales would deal with that more thoroughly. There
have been a number of situations, and a good example that comes to mind, although I
cannot remember the name of the case, was an instance where a car park in a
shopping centre in South Australia was not adequately lit. Somebody got assaulted.
The lighting was adequate but there was a timer on the lights and it had switched off,
in spite of the fact there was a video store still open. The person who was assaulted
had been a patron of the video store and he was returning from it when he was
assaulted. In that case I think 100 per cent of the liability went to the shopping centre
owner. I would argue it should not be anything like as much because at the end of the

E 404                            SENATE—References Friday, 9 August 2002

day the assault was not commissioned by the shopping centre owner. It was by an
unknown individual that the crime was committed. At the end of the day the only
shop that was open in that particular shopping centre was that video store. Certainly
you can argue that there was an error made and that perhaps the lighting should have
been left on a little bit longer. Therefore there was some liability accruing to the
shopping centre owner. But I would argue with 100 per cent.

  Senator RIDGEWAY—I was interested when you made a comment that about 90
per cent of claims are in the shopping centre retail industry. I presume that in terms of
looking at trying to limit liability or to risk manage there are best practice standards
put in place that are uniform and agreed to by people in the industry?

   Mr Cundall—I do not know about uniform but there are agreed levels of best
practice, which certainly the larger owners are following. I cannot answer whether it
is throughout the entire industry now but I suspect that given the cost of public
liability it would be a very silly owner who did not apply those best practice

   Senator RIDGEWAY—When you say there has been an increase in premiums of
between 20 and 600 per cent, have you kept data and can you provide that data? I am
trying to get a handle on the issues that are before us. I would imagine that in a
shopping case scenario we are probably talking about numerous but small claims. I
gather from what you said, particularly in terms of the second point of the 10-point
plan—making pre-litigation processes compulsory—that the practice usually is to
look at trying to settle those for reasons to do with economies of scale rather than
having to go to court and pay out the legal costs.

   Mr Cundall—Best practice currently is, as I said before, early intervention. That
might involve, without any admission of liability necessarily on a centre’s part, a
bunch of flowers being sent, a phone call or immediate contact with our claims
handlers to ask the potential plaintiff if they need any financial assistance as far as
medical costs and things of that nature are concerned. This is in situations where we
believe that there is likely to be liability on our part. If we had a case that is clearly
fraudulent, and we get those, then we would not do that. But where we believe there is
potential liability on the centre’s part then we would try to go back to the potential
plaintiff as soon as possible to prevent them from going to a lawyer and to try to agree
to a settlement up front.

   Senator RIDGEWAY—I am trying to clarify two things. First, in a shopping
centre environment you are presumably talking about numerous but small claims
which are usually settled outside court. How does that equate to the other end of the
spectrum—for example, the case at Bondi Beach and the Calandra Simpson case in
relation to smoking—where we are talking about enormous payouts? How do you
equate those to coming up with a ‘one-shoe-fits-all’ approach in a national scheme
through a 10-point plan as some sort of contribution towards that thinking?

   The other thing I would like clarified is in relation to dealing with the prelitigation
process. How do you weed out unmeritorious claims beforehand if it has never been
tested in the courts? You may end up in a situation where you are still getting

Friday, 9 August 2002           SENATE—References E 405

numerous but small claims being settled but never knowing, because of reasons to do
with economies of scale rather than testing the veracity of a claim, what is legitimate
and what is not. I am trying to understand those numerical figures equated against the
other data that has already been provided from insurance companies, the Insurance
Council of Australia and a range of others.

   Mr Cundall—Sometimes, to be honest, we are not going to be able to distinguish
between unmeritorious claims or otherwise. I was up at one of our shopping centres in
Newcastle recently when a woman came into the shopping centre management office
and claimed that she had torn her very long, flowing caftan dress on one of our
travelators. We gave her a gift voucher for $50 and that was how it was dealt with.
You do get those sorts of situations.

   Senator RIDGEWAY—Do you have an average value for the numerous but small

  Mr Cundall—I do not have the figures, but we know within our own centres what
the costs of these minor claims are, and there are an awful lot of them.

  Mr Cockburn—These minor claims are adding to the rapid increase in premiums.
In these cases, they might not be big payouts, but they are obviously adding to the

  Senator RIDGEWAY—In that case, do your members pool it or is it up to each
individual tenant?

   Mr Cockburn—No, it is up to each individual owner. We generally look after the
larger owners and they have their own insurance arrangements through their relevant
brokers. Nevertheless, although we do not generally look after the smaller shopping
centre owners, clearly all the work we do in advocacy and other areas tends to benefit
them. From time to time I get phone calls from small owners and it is very clear that
they are being significantly impacted upon by this at the present time. Being small
and often only owning one, two or three centres, they obviously do not have the clout
that a larger owner may have with insurance companies or brokers. From time to time
they ring me, even though they are not formally members. I have some material,
because for each case I ask them to send me material and some of them do. The
increases in premiums that they are facing now are in the 200 per cent, 300 per cent
and, in one case, 900 per cent category. So, in many cases, one could argue that this is
probably a bigger problem for smaller owners than it possibly is for larger owners.

  CHAIR—What are their risk management practices like?

   Mr Cockburn—As Peter said, I could not make a judgment about that because
they are not our members. These days, in order to get insurance, unless you have good
risk management procedures in operation you will probably go uninsured. So, in
many ways, it is self-enforcing because if you were to get public liability cover, you
will only get it at an adequate price—albeit at a substantially increased price—if, in
fact, the insurance company is confident that you have good risk management
procedures in place.

E 406                           SENATE—References Friday, 9 August 2002

  Mr Cundall—Even those companies with good risk management are seeing
substantial increases in their premiums. Returning to Senator Ridgeway’s two-part
question: as far as the first part is concerned, my understanding is that the Property
Council’s 10-point plan is directed at litigated claims and at risk management
practices, some of which have been developed by individual shopping centre owners
and occupiers and some of which have been generated through the Shopping Centre
Council, the liability action group and, more often, the pressure from the insurers
themselves, which deal with all the small claims.

  Senator RIDGEWAY—That is what I was going to come to next. Where you talk
about reform in relation to how claims are put and to thresholds, what is the quid pro
quo for that arrangement in terms of better practices for the operation of shopping
centres or tenancy arrangements that alleviate or deal with the possibility of there
always being something that happens somewhere along the line in a shopping centre?
How do you deal with that? Particularly in terms of the prelitigation process, what
would you do and what do you currently do? I am presuming that this reflects
practices that currently exist before you even get to court.

   Mr Cundall—It does, although one of the big concerns that we have is that we
often only discover a claim against us two or three years after the event, and it
becomes very difficult to go back through records and to determine what might or
might not have happened or whether you had an adequate cleaning contract in place
that was working well. We have spoken earlier about the fact that notification in some
cases is necessarily going to be delayed, but I think it is absolutely imperative that,
once somebody discovers they have an injury, they provide notification within a fixed
and reasonably short time frame, because it makes it very difficult for us to defend
claims. With the statute of limitations the way it is, particularly for minors, you could
potentially have an 18-year-old claim suddenly land on your doorstep.

  Mr Cockburn—In relation to your other question, I was going to make one point.
As you are aware, the New South Wales government’s Civil Liability Act addressed
the issue of unmeritorious claims, so there are now penalties for bringing
unmeritorious claims. That would be something that, if we could see it reflected in
other jurisdictions, would never completely solve the problem. It is obviously quite an
anomalous situation at the moment that there are not penalties for bringing
unmeritorious claims.

   Mr Cundall—There is an interesting side effect of that, which is being reported
already. A partner in a legal firm whom I spoke to yesterday, who specialises in
defending corporate occupiers, has told me that in the last two months they have had
110 prelitigation conferences—in other words, conferences held before it has even got
to the stage of necessarily involving a statement of claim—with plaintiffs and their
lawyers because of concerns that lawyers have about proceeding with a claim that
might be deemed in the court to be unmeritorious. That, in itself, has been a major
improvement. It has prevented the wasting of court time in a number of instances and
it has meant that we have been able to achieve speedy settlement, which is what we
are looking to do. Acknowledging the fact that some of the claims that we get against
us are going to be genuine and that high payouts may well be justified, we want to
deal with them quickly.

Friday, 9 August 2002            SENATE—References E 407

   Senator RIDGEWAY—I am still left in that quandary of how you put it to the test
to work out what is legitimate and what is not, but I suppose there is no one uniform
set of circumstances.

   Mr Cundall—All circumstances are different. I have three examples of fraudulent
cases—or apparently fraudulent cases—which I have been given by our claims
handlers and which are instances where it appears on the surface that there is clear
fraud. In one case, a plaintiff claimed they fell from an escalator after attending a
nightclub and fractured their pubis and coccyx. They denied being intoxicated at the
time of the fall, but the hospital note stated that they had a high blood alcohol reading.
Upon further investigation of the claim it was found that, on the date on which they
claimed the accident occurred, the part of the building where the accident was said to
have occurred had not even been constructed. That one was listed for a directions
hearing and, after the evidence was tendered, the plaintiff decided not to proceed with
their claim.

   I think that is a fairly clear cut case of fraud, but I would have to say that in our
experience, clear cut cases of fraud are much less common than strong suspicions of
exaggeration. Particularly where there are soft tissue or lower back injuries there is a
strong impression—and you can talk to a number of different people in the insurance,
legal and property industries and they will tell you this—and often very strong
suspicions that these guys have slipped and fallen and suffered fairly minor injuries
but sufficient for them to go and see a lawyer and the minor injury certainly comes
out to be a major debilitating injury which results in a substantial payout. We certainly
believe things like that to be far more the case than instances of fraud but that is not to
say that instances of fraud do not occur.

   Senator RIDGEWAY—This is one probably more out of self-interest and
curiosity. Car parks and shopping centres: I imagine that you would get a number of
complaints there in relation to theft, despite the fact that there are signs up about not
leaving valuables in vehicles and so on. How do you deal with issues there in terms of
proportionate liability, for example, whether it is about damage to the vehicle or about
valuables being stolen as a result of break and enters? Are they issues that come up or
claims that perhaps might be pursued?

   Mr Cundall—Sadly, proportionate liability does not usually come into that. The
only time you would have it would be if there was a contractor involved; for example,
if a cleaner left a sweeper parked in the wrong place or something of that nature. Then
it would be proportionate liability between the cleaner and the shopping centre owner.

  Senator RIDGEWAY—What about runaway shopping trolleys, for example?

   Mr Cundall—With runaway shopping trolleys, usually the damage is discovered
after the event rather than during the event. We have had cases where people have
claimed on us successfully in the past for things like that.

  Senator RIDGEWAY—Thank you for that.

  CHAIR—You have got his curiosity up now.

E 408                     SENATE—References Friday, 9 August 2002

 Senator RIDGEWAY—You have satisfied my curiosity.

  CHAIR—That concludes my questions, too. Thank you very much for your
appearance. We will suspend briefly while we wait for the last witnesses.

Friday, 9 August 2002            SENATE—References E 409

   [2.49 p.m.]

WORTH, Mr Craig Dennis, General Manager, Hang Gliding Federation of

  CHAIR—The committee prefers all evidence to be given in public, but we will
consider a request for all or part of evidence to be given in camera if that is necessary.
We have received your submission numbered 45. Are there any alterations or
additions you wish to make to that?

  Mr Worth—No.

  CHAIR—I now invite you to make a brief opening statement, and we will move to
any questions beyond that.

   Mr Worth—Thank you for giving me the opportunity to address the committee.
The Hang Gliding Federation, or the HGFA as we call it, is a not-for-profit
organisation charged under CASA to administer the sports of hang-gliding,
paragliding and microlighting. Australia has an ideal climate for hang-gliding. It is a
most popular sport worldwide; we have a lot of visiting pilots come here each year.
As the vast majority of our sites are on public land, we obviously have a need for
third-party insurance. Most of our sites are in national parks, councils and the like and
they all seek the $10 million cover, and we appreciate the need for that. We also cover
our instructors, our clubs and our passenger carrying people under our broad cover

   In the last couple of years, our premiums for this insurance have tripled due to the
climate, to a point where our policy now costs us 43 per cent of our turnover each
year. We do get some funding from the Civil Aviation Safety Authority to administer
our sports and that is mostly operational. It does not go far towards fighting insurance
claims and the like. Given the rising costs, we have been forced to put our fees up and
naturally we have a number of people dropping out of the sport. In the last two years,
our numbers have dwindled by 10 per cent. We see it as a decline that will be ongoing
if our current climate of insurance continues. Our premium rises have been based on
claims. I guess we are one of the organisations that do have claims come in. We
struggle with the costs that the lawyers are charging us with our claims handling. We
are also frustrated by the ease with which they seem to be able to prove negligence
against our instructors.

   We have quite comprehensive training guidelines. About 65 per cent of our claims
are coming out of instruction. While we have people sign waivers to accept the risk
that these sports are dangerous, as soon as they break an arm or twist an ankle they
will sue. They seem to be quite readily able to prove negligence against our
instructors, despite the fact that we have quite good risk management procedures and
training programs in place. Obviously, anything that could be done to alleviate that
would certainly be much appreciated. As I said in our submission, it has got to a point

E 410                            SENATE—References Friday, 9 August 2002

where it seems that a lot of these negligence claims—or this proof of negligence—are
almost normal human activity and we struggle against that.

   The only thing I would add to my submission is a graph on training accidents which
I brought with me. The federation has had a very good record over the last nine years,
where we have had our injury accidents during training come down from 16 per
annum in 1993 to only one or two over the last few years. So we have quite a good
record in our risk management. Even though we have far fewer injuries coming in
now, we are finding that claims are coming in at the same rate, so we are getting
basically everybody claiming nowadays, rather than the occasional ones it used to be
in the past. That is all I really need to say, above and beyond what is in my report,
which sums up pretty well what we are looking for.

  CHAIR—You say the insurance premiums are currently about 43 per cent of
turnover and you have had a threefold increase over the last couple of years. What
proportion of turnover would it have been a couple of years ago?

  Mr Worth—A few years ago our turnover would have been about $800,000 and
we were paying about $115,000 for insurance. Now we are paying $345,000 on the
same turnover.

   Senator CHAPMAN—The Law Council has put the argument to us that moving to
protect volunteers, community groups or sporting groups from legal actions could
inflict injustice on people who are injured through negligence of members of any of
these groups. Have you got a response to the Law Council’s argument?

   Mr Worth—We appreciate that there are risks involved in our sports, and we
assume that risk. Our response to that is that it is an assumed risk. Despite that, we did
have a pilot who was involved in a midair collision some years ago. He actually sued
the volunteer safety officer who was on the site overseeing operations on the day. He
said that he did not have the skills to be up in those conditions and, given the number
of pilots in the air and so on, the safety officer should have stopped him. He basically
threw that blame back onto the safety officer. This guy ended up a paraplegic. In the
end he did not pursue the claim; nevertheless it was enough to frighten off our
volunteers. We appreciate that there is a duty of care, but at the same time those of us
who are participating in our sports—we have the three different sports—accept that

  Senator CHAPMAN—You have indicated that you use waivers on the part of your
participants but that they are not proving successful as a defence.

  Mr Worth—Not at all; they barely slow the lawyers down. They seem to be able to
hurdle straight over them.

  Senator CHAPMAN—Have you had legal advice on the way the waiver is

  Mr Worth—Yes.

Friday, 9 August 2002             SENATE—References E 411

  Senator CHAPMAN—And on the disclosure you have got to make to the person?

   Mr Worth—Yes. They are quite specific. They say in big, bold lettering that our
sports are dangerous and ask that they accept the risk. We are advised that it has to be
informed risk, so we give them some statistics on the possibility or likelihood of them
being injured. As a general rule, we are finding that these waivers are not standing up
in the commercial environment. I believe they are suing us under the Trade Practices
Act in that our instructors are required to provide a safe training environment under
the Trade Practices Act.

  Senator CHAPMAN—Are you aware of the amendment proposed to the Trade
Practices Act?

  Mr Worth—Yes, I am.

  Senator CHAPMAN—Will that deal with the issue or not?

  Mr Worth—To some degree I believe it will. I sought legal advice yesterday from
our lawyers. They see that it will assist us in some claims, but they cannot guarantee
that it will stand up. It certainly is of assistance, but they are saying that in itself it is
not enough. I have not got advice from our lawyers as to what more they would like to
have transpire, but nevertheless they are saying that these changes are not adequate.

  Senator CHAPMAN—The graphs that you have given us deal with hang-gliding,
paragliding and microlighting—microlighting involves aircraft, does it?

  Mr Worth—They are motorised hang-gliders. They have an undercarriage where
they push a prop at the back. They are usually two-place.

  Senator CHAPMAN—These are the actual numbers?

  Mr Worth—They are the raw numbers of training injury accidents.

  Senator CHAPMAN—Have you any idea how they relate to the numbers of

  Mr Worth—About 500 members come into our organisation per annum. Not all of
those are students; some are rejoining members. Half would be students. We have 250
per annum who are learning. Those numbers have dwindled over the last couple of
years to around 200, so this is accidents out of 200 people taking up the sport.

  Senator CHAPMAN—That is hang-gliding accidents?

  Mr Worth—That is across the board: all three put together.

  Senator CHAPMAN—But paragliding is undertaken by a lot of tourists, isn’t it?

E 412                           SENATE—References Friday, 9 August 2002

   Mr Worth—Paragliding is the foot-launched version, not the one where they are
tied up behind the boat. They are similar to a hang-glider in that they foot launch them
off a mountain. They deploy the canopy behind them and run off a mountain. So it is
free flight.

  Senator CHAPMAN—What is the other one called, where you are behind the

  Mr Worth—That is parasailing.

  Senator CHAPMAN—That does not come within your organisation?

  Mr Worth—That is not our department, no.

  Senator CHAPMAN—Although it is a similar sort of activity, isn’t it?

  Mr Worth—It is.

 Senator CHAPMAN—Are you aware of the accident rate there? You have a lot
more participants there, obviously.

  Mr Worth—I am aware that their insurance has got to the point where it is almost
unaffordable. I know there is an operator up near where I am on the north coast who
has recently gone out business because of insurance costs.

  CHAIR—But they are on a rope, so the CASA is not that concerned about them.

  Mr Worth—Exactly. The department of labour and industry is what got them, not
our department.

  CHAIR—I want to clarify a point about this table. Are you suggesting that back in
1992 and 1993 where you had a higher incidence of accidents—

  Mr Worth—These are injury accidents.

  CHAIR—there was a lower proportion of claims with respect to those injuries?

  Mr Worth—There was a similar number. We were getting two or three claims each

  CHAIR—That is a much higher number of incidents.

  Mr Worth—Yes, exactly. There is a six- or eight-fold inclination to sue now.

  Senator RIDGEWAY—I have a few questions about the increase in premiums.
Have you been in a situation where you have had to shop around and look for cheaper
coverage—not that it would come cheap in your industry?

Friday, 9 August 2002           SENATE—References E 413

   Mr Worth—No. Due to the claims, the insurers we were with up until a little over
two years ago—we renew in March—gave us an offer that we had to refuse. It was
totally unaffordable—it was over $1 million. We shopped around and we were not
able to find any insurers in Australia. We ended up with a UK based insurer called
Trigg Baltica Insurance, who are underwritten in Scandinavia. We have reinsured with
them this year for a similar price to last year, which was basically related to a good
year, as far as claims went last year, touch wood. It was pretty good, so we were able
to maintain that three-fold level of premium. Unfortunately, as that insurer was not
registered here in Australia, our clubs were not covered last year. Recently, New
South Wales Fair Trading have changed their requirements and have allowed
incorporated clubs to operate without insurance, so it is certainly voluntary insurance.
Although we have the insurance and we believe they are adequate insurers, they were
not recognised or registered here in Australia. Nevertheless, we have overcome that
hurdle given Fair Trading’s change to their requirements.

  Senator RIDGEWAY—I want to ask a question relating to the possibility of
amendments to the Trade Practices Act that Senator Chapman raised. From evidence
given by many other groups—and I imagine this would apply given the nature of your
business—talks with an insurance company in relation to coverage would include
extensive risk assessment in such a way that, on one hand there would be the
management of the risk and on the other hand there would be an assessment about
whether there were adequate safety standards in relation to the business itself. How
seriously have insurance providers been looking at that in trying to deal with what the
appropriate premium level should be?

   Mr Worth—As I said, we renewed back in March. That was for a fixed term for
this year, so I would anticipate that we could use that as a lever next year, come
renewal, when they would hopefully appreciate that their risk may well have been
reduced through those changes.

  Senator RIDGEWAY—They are not looking at that, at the moment—

  Mr Worth—Not at this point in time.

  Senator RIDGEWAY—You referred to a training manual or guide.

  Mr Worth—They do look at those procedures and they believe that they are most
adequate. The same company that we are insured with also insure the hang gliding
association in the UK, and it was through their involvement there that they were able
to hold our training programs and our risk management systems up against the UK
systems, and they were quite happy to take us on. Without their knowledge of what
the British organisation is doing, chances are that we would not have been able to
negotiate at the price we did.

  Senator RIDGEWAY—I am trying to put this in the context of the spectrum of
everyone else that is trying to get coverage, for instance, the Country Women’s

  Mr Worth—They are chalk and cheese. That is right.

E 414                           SENATE—References Friday, 9 August 2002

   Senator RIDGEWAY—Given the nature of your business, how do you compare in
terms of your experience as opposed to adventure tourism, for example—those people
who might be running the speed boats around Sydney Harbour or the Sydney Harbour
bridge climb—all those sorts of things?

  Mr Worth—Our current situation with insurance, even though we are struggling to
cover those costs and we have had to put our fees up substantially—they have gone
up by two thirds in the last two years—is that we are in a fairly good position
compared to other organisations, given the activities that we do. I think we were
fortunate to gain these insurers and we were also fortunate that we have been able to
maintain our safety record over the period of our insurance with them. I think if we
had to change insurers now, we would struggle to find another one.

  Senator RIDGEWAY—Thank you.

  CHAIR—If the amendments to the Trade Practices Act are passed and are in an
appropriate form to bolster waivers, do you have any idea how much impact that
would have on your reinsurance?

   Mr Worth—I would hope it would be substantial. Given that 65 per cent of our
claims are coming out of training, the majority of those claims will not come to
fruition if people who take up training accept the risk in case they break a leg or
something. It certainly should assist us. I spoke very briefly with our lawyers
yesterday, and they said in passing that it probably would not be enough. I cannot add
to that at all.

  CHAIR—In terms of the international market of insurance for high-risk sporting
activities, do you know whether there is a significant difference in any other countries
that have a regime that reinforces waivers?

  Mr Worth—I understand that in the United States their waivers are standing up
with regard to our activities. I also hear stories of people being advised and briefed
about informed risk, and that advice is often videotaped. They go to great lengths to
ensure that they can demonstrate that the person has taken on the risk under advice. In
continental Europe, it seems that there are not the same problems. I think most of the
countries there do not actually carry insurance for instruction; it is every man for
himself, but I am totally unaware of their situation.

  CHAIR—Is it every man for themselves, or is there a statutory scheme that covers
the types of accidents that—

  Mr Worth—I am sorry; I do not know.

   CHAIR—It may well be that the risk is assumed by society generally in relation to
a statutory scheme.

  Mr Worth—Like in New Zealand. They tell me it is the same there.

Friday, 9 August 2002           SENATE—References E 415

  Senator RIDGEWAY—Do you have to be licensed to be a pilot or an instructor?

  Mr Worth—Yes, absolutely.

  Senator RIDGEWAY—Under what legislation does that occur?

   Mr Worth—Under the Civil Aviation Act. It comes under civil aviation activity
here. Under the civil aviation orders, under which we operate, it is a legal requirement
that you either hold a certificate issued by our federation or you are a member of our
federation. There are some moves afoot to destabilise that situation to some extent, in
that CASA have seen that it is possibly an illegal monopoly that we have on our
pilots. We are meeting tomorrow with other air sport operators and associations to try
to hold our status quo in being able to cover our sports under the one umbrella. We
find that safety is paramount, and the way that we are doing it, under the one
umbrella, it is working. We are concerned that changes that CASA are proposing will
undermine that. That is certainly something that we have got in the pipeline that we
are struggling against, but currently it is a requirement that they join our association.

  Senator RIDGEWAY—Thanks.

   CHAIR—I assume that some of these issues in relation to waivers will be dealt
with by the parliament as we move with the legislation. If you gather further
information on any of the issues that we have raised, we would certainly be interested
in looking at that.

  Mr Worth—Thank you for that. I am sure that we will be seeking advice as those
changes are made. I guess our advice would be no different from what you might get;
nevertheless we will do that.

  CHAIR—I think one of the critical questions would be: which, if any, countries
have waiver schemes that do hold up, and what has been the impact on premium
levels in the international market as a consequence? We obviously do not need to
pursue that in detail in this inquiry, but I am sure further opportunity will come to
look at that issue when the legislation moves through the process.

   Mr Worth—I am aware that the association in the UK is covered by the same
insurer as we are, and I think their numbers are about three times the size of ours, or
more than that, and they are paying a similar premium to us. I think that the higher
rate of litigation here in Australia has resulted in that situation. I was in the UK
talking with our insurers back in March, and they said that the climate there is
changing and they are starting to follow us down the road of litigation. Perhaps we are
world leaders in having to fight this situation. I do not know whether that is enviable
or not.

  CHAIR—I would be interested to ascertain the US experience, since ahead of
Sydney is meant to be California.

  Mr Worth—You hear conflicting reports about that, whether we are in front of

E 416                           SENATE—References Friday, 9 August 2002

  CHAIR—I think part of the problem with the US experience is that in many areas
their legislation varies from jurisdiction to jurisdiction, so you might be reflecting
on—and I would not know—state or federal—

  Mr Worth—In the US, hang-gliding is organised much differently in that they gain
a certificate and they have to undergo training, but there is no compulsory follow-up
with insurance or association membership. Their accident rates reflect that, in that
they have got no ongoing training and their accident rates are substantially higher than
ours here in Australia, just from general participation. I would certainly argue that the
system that we have got is leading the world as far as safety goes. Despite the fact that
the common belief is that hang-gliding is a dangerous sport, it has got a point now
where it is only as dangerous as the pilots want.

  Senator RIDGEWAY—And safer than driving a car.

  Mr Worth—Absolutely—or riding in a taxi.

  CHAIR—I thank you for your appearance today.

                         Committee adjourned at 3.11 p.m.


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