Page 18 - Week 01 - Tuesday, 12 February 2008
The community rating approach adopted by the government, coupled with the consequent and necessary price controls, was strongly criticised at the Institute of Actuaries accident compensation seminar in April last year. This critique was set out in the report Game theory and Australia’s CTP markets. In this report, the authors criticise the community rating approach, saying:
By enforcing community rating upon a line of insurance in which different policyholders have materially different claims cost profiles, governments are creating inherently unstable and chaotic systems for insuring motorists.
The authors further observe that the consequence of prohibitions on providing insurance to only some sections of the market, combined with price controls to prevent the full recovery of costs on high-risk drivers, is to encourage insurers to avoid these high-risk drivers through other means such as poor service or lack of marketing. Again, at present this is not an issue in the ACT’s single-provider market. However, if the government’s goal is to open the market up to more competitors it may well become a serious issue.
The authors observed that the result of this approach of subsidisation to high-risk drivers is to increase overall costs. They state:
The CTP market has relatively high barriers to entry as discussed above. This means there are unlikely to be new entrants who will compete in the market and drive profits down by putting pressure on prices. By its nature an oligopoly should have lower prices than a monopoly but higher prices than a free competitive market. There is an implicit cost for community rating and long-term price stability.
The fact that prices are regulated also has an effect of increasing prices compared to a free market level. As competitors want a return in the long term and the government wants stability in prices, the compromise is generally a higher price than a natural competitive market.
There are clearly issues with CTP regulation. If the best product possible is to be provided to consumers at the best price, these will, in time, have to be considered.
It is clear that there are a great many problems with government regulation of the CTP insurance industry. The report I have cited indicates that the basic system for CTP insurance is in need of serious reform. The bill before us does not tackle these problems, but instead takes other steps towards allowing insurers greater flexibility and greater certainty in claims processes. The bill does not make the industry any worse, but I fear that without further reforms there will be continuing problems.
Nonetheless, my desire for further reform in this area does not preclude me from supporting the reforms that are contained in this bill. I will be supporting this bill. I hope, as do other members of the Assembly, that we will see greater competition in the ACT insurance market as well.
I will be moving the amendment circulated in my name and also a second amendment which has not been circulated.