US futures heading down, page-27

The bigger problem for insurers is that unlike Banks, most insurers have not had the same prudential requirements applied to them, or if they have, then not to the same degree of detail.

Banks (both in Australia and elsewhere) have been operating on the Tier 1, Tier 2, and Tier 3 capital ratio basis for 12+ years now.

Most are fairly well supported when it comes to capital adequacy ratios.

Insurers, on the other hand, have been more recent converts to the capital adequacy ratio debate.

Similarly, in Australia and elsewhere, regulatory controls such as those administered by APRA have only, in recent years, been extended through to the insurance industry.

Despite ths, insurers are financial businesses in nature, some with more apparent risks than others.

Re-insurers, in particular, have experienced considerable trading difficulties over the last 12 -18 months.

More problems in the re-insurance industry is, therefore, likely, particularly as capital adequacy will be an issue for them going forward.

As for the Australian market, both the general insurance, and re-insurance activities of HIH contributed directly, immediately, and most potently, towards a generally recessed insurance market throughout the 1990s, and to today, where insurance offerings were largely uneconomic (ie: relative to their premium values, risks being covered, and culpability of risk).

If we talk about greed, and the excesses of it, this should serve as a good example of:
1)
a self-serving business writing business without any appetite for risk, accountability, or good management (ie: HIH);
2)
a select few customers out there seeking to cover insurable risks in a game of chance sort of manner (ie: and pocketing the proceeds in the process) (ie: perhaps some of those who are coming before the HIH Royal Commission for closer examination);
3)
insurance brokers acting in a cavalier manner (ie: as has been alleged by the regulator from time to time); and
4)
customers seeking out the maximum cover for the smallest price (ie: I think we may all have been guilty of this at some stage in our lives).

Re-insurance and general insurance will make a comeback in due course, but in the course of doing so, the level of prudential regulation, and capital adequacy management requirements, will increase dramatically.