Private and public regulation of the general insurance industry in Australia 1897 to 1992

Abstract

Only one third of the number of Australian insurance companies that were trading in 1890 survived the financial crisis of the decade that followed. In the wake of these collapses, a group of the major British companies operating in Australia set up a cartel-like organisation in 1897 which set rates and policy terms for the whole country. Through an agency network it controlled distribution, and its inter-company trading rules concerning reinsurance and risk sharing effectively excluded any new opposition. Despite a Federal Royal Commission appointed in 1908 to inquire into the insurance industry, which recommended Commonwealth regulation in 1910, governments did not proceed with legislation. With the pressures of World War I the matter was passed over. This private regulation, known as the 'Tariff', went largely unchallenged until 1974.

The Tariff co-existed with State regulation introduced in Queensland in 1916, resisted competition from Lloyd's and other free-riders between the Wars, and adapted to deposit only requirements for insurance companies introduced by the Commonwealth in 1932. It also co-existed with a number of state government insurance companies, the first of which was established in Victoria in 1915. The Tariff distribution system, and the political pressure it applied to keep state offices out of the direct competition they were designed to create, prevented the state offices from making any significant impact on the market.

Competitive pressures exerted by overseas brokers, and by new insurers entering the expanding motor vehicle insurance market, eroded Tariff dominance to some extent after World War II, but private regulation was abandoned only after the introduction of the Trade Practices Act 1974. In 1973 the Commonwealth introduced solvency regulation for all general insurance companies. This regulation is still in place.

This history offers a rare, perhaps unique, opportunity to compare the behaviour of two markets in the same country, one under private and the other under public regulation. For a period of more than forty years the outcomes of public regulation of the industry in Queensland can be compared with outcomes of private regulation in the rest of the country. It is also possible to measure changes in the market under private regulation arising from some competition after the Second World War, and the further changes which occurred when private regulation was abandoned in the face of the Trade Practices Act 1974.

The evidence produces the conclusions that private regulation kept profits and distribution costs at a level that allowed the least efficient companies to remain in the market, and created super-normal profits for the most efficient. State government insurance offices are shown to have been failures as mechanisms for government to regulate markets.

Although the present market is shown to be much more efficient, a critique of existing Federal regulation is offered. This increasingly expensive operation has failed to achieve the purpose for which it was established. The failure rate of insurance companies is higher under public regulation that it was before the legislation was introduced, the public are not able to obtain full information of the financial status of insurance companies from the Insurance and Superannuation Commission, and policyholders are not protected by a guarantee fund from company failure.

Finally, classic regulatory theory is tested against each of these forms of regulation and their outcomes. The conclusions reached are that these theories could not have predicted either the forms of regulation adopted, or the outcomes of the movements.