Opening statement for Senate Standing Committee on Finance and Public Administration - March 2021

Sean Carmody, APRA Executive Director, Cross-Industry Insights and Data Division - Senate Standing Committee on Finance and Public Administration, Inquiry into the lessons to be learned in relation to the Australian bushfire season 2019-20

I thank the Committee for the opportunity for APRA to appear here today. I am joined by my colleagues Peter Kohlhagen, General Manager, Advice and Approvals; and Jonathan Wood, Head of Insurance Risk.  I have some brief opening remarks, which briefly describe APRA’s mandate and the impact of the 2019-2020 bushfire season on the insurance industry in particular.

The bushfire season during late 2019 and early 2020 brought about enormous devastation to communities around Australia. We welcome this inquiry into the lessons learned.

APRA’s mandate is to protect the Australian community by establishing and enforcing prudential standards and practices designed to ensure that, under all reasonable circumstances, financial promises made by institutions we supervise are met within a stable, efficient and competitive financial system. In the case of the insurance industry, this primarily means ensuring insurers have the financial and operational resources to pay the claims of their policyholders as and when they fall due.

The 2019/2020 bushfires have underscored the importance of a financially sound and resilient insurance industry because of its important role in helping the community recover from catastrophic bushfires and other natural disasters.

Notwithstanding recent events, the prudential soundness of the general insurance industry remains robust. Despite insured losses from four Insurance Council of Australia (ICA) declared catastrophes (bushfires, hailstorms, storms and floods) between November 2019 and February 2020 totalling more than $5 billion¹, general insurers had adequate capital, liquidity and reinsurance arrangements to meet their obligations to policyholders.

This bushfire season also highlighted the importance of accessible and affordable insurance coverage. Available and affordable insurance is essential to avoid the detrimental impacts of underinsurance and non-insurance. APRA has a strategic focus on addressing and mitigating underinsurance given the likely social and economic impacts which may have broader implications on the stability of the financial system. Our view is that an enduring solution to insurance affordability and availability challenges needs to focus on the underlying causes. 

We recognise it is a complex problem to solve. In tackling this problem, there is a role for all levels of government, households, insurers, and businesses in the types of resilience, mitigation and hazard reduction measures needed to reduce the impacts of natural disasters. This includes funding for pre-emptive infrastructure work, risk mapping, land-use rezoning and robust building codes. Investing in the types of resilience measures needed to better protect Australian communities – and to keep insurance affordable and accessible – comes at a cost, but this cost is lower than both the financial costs of recovery and the impact to people’s lives.

Looking ahead, climate change is forecast to drive an increase in the frequency and severity of extreme weather events in the future and will also drive regulatory developments here and internationally. APRA has a number of initiatives underway to ensure the financial sector is effectively managing the financial risks of climate change, including providing all APRA-regulated entities with guidance via a dedicated Prudential Practice Guide (PPG), conducting a climate vulnerability assessment (CVA) beginning with the major banks and increasing the focus on these risks through APRA’s regular prudential supervision.

With those remarks, my colleagues and I are pleased to answer the Committee’s questions.

Footnote:

¹Insurance Council of Australia, News Release, 27 August 2020.