Operations of the Insurance Bodies - Research Paper Example

Name: Tutor: Course: Date: Operations of the insurance bodies Abstract The insurances industry in Australia has been in its healthiest state for a very long time. This success has been achieved after the introduction of some major insurances reforms in the year 2002,development of stronger management disciplines in the country ,expansion of a more technical underwriting, several law reforms that are introduced by various states and federal governments that are largely concerned with claims of the environment. Generally, the Australian insurances industry has had capital that is at least two times its current minimum capital. There are new capital approaches that are used to replace the previous blunt ones that go hand in hand with the prudent standards .The guidance notes that were mostly applied in the areas concerned with capital adequacy, liability valuation, risk management as well as reinsurance management. There have been some regulatory frameworks that have been put in place to be used by APRA in its supervision of all the regulated financial institutions. The main focus of this discussion paper is on micro-insurances and the complete insurances value chain that covers re-insurances, insurance, intermediation and various policy holders in the sector. The general scope of this paper will be on the micro-insurances risks that is prudential and consumer protection. All this is determined by the way in which the nature and features of the insurances products are written and how the complexity is managed by the insurer and the intermediary. Table of Content 1. Introduction ………………………………………………………………4 1.1. Literature review………………………………………………………………..5 1.2. Methodology…………………………………………………………………….5 1.3 Importance of insurance to citizens………………………………………………5 1.3.1. Risk of consumer abuse……………………………………………………….5 1.3.2. Opportunities for financial sector development and inclusion………………..5 1.3.3. Unifying framework across diverse policy and regulatory processes…………6 2. Policy of the insurance industry…………………………………………………7 2.1. Financial inclusion……………………………………………………………….7 2.2. Competition and market efficiency……………………………………………….7 2.3. Financial sector development……………………………………………………..8 2.4. Stability…………………………………………………………………………….8 2.5. Consumer protection……………………………………………………………….8 3. Principles of Insurances………………………………………………………….…9 3.1. Efficiency and Economy………………………………………………………9 3.2. Proportionality…………………………………………………………………..9 3.3. International character…………………………………………………………...9 3.4. Innovations………………………………………………………………….…..9 3.5. Competitions…………………………………………………………………….10 4. Conclusions………………………………………………………………………..10 Introduction 1.1 What is micro-insurance and its importance? According to the definition by the international Association of Insurance Supervisors (IAIS).micro-insurance is the insurance that is mainly easily accessible to those who earn low income. Potentially, provided by a variety of different providers and managed in accordance with generally accepted. Micro-insurance it forms part of the broader insurance market and it is mainly distinguished by its particular market segment focus. At one time or the other, members of the society face particular risks that are mostly very severe for the poor. This problem mostly causes a lot of interruptions in the process of asset formation. Through direct government provision, such issues can be solved but incase where this is not possible; such cases can be mitigated through savings, informal support networks and some semi-formal risk pooling mechanisms. Insurances have been proved to play a very important role in the mitigation of such cases. In some instances, individuals may not be in a position to accumulate sufficient savings to cover the losses that have occurred but they may be able to pay all the premiums that will be connected to the risk. This is only possible if the product that has been designed is affordable and appropriate to the needs of the poor. Australia is known to have a well developed commercial micro-insurance industry but it is also faced with some challenges which will be tackled in this discussion paper. One of the main objectives of the finance industry is to reconcile the importance of addressing potential abuse in this particular market this is in regard to prudential and customer protection as well as the interests of financial inclusion. The main goal of this discussion pare will be to develop a very coherent and a clear regulatory framework that will aim at encouraging and facilitating the provision and distribution of good value, and low cost products that are appropriate to the needs of the low income earners. In accordance to this analysis, the goal of this discussion paper will be to develop a very clear framework that will encourage and facilitate the provision and distribution of good value. Most of the low cost products are appropriate to the needs of the low-income consumers by a variety of the market players who mostly compete for the market and treat their policy holders very fairly in order to provide them with insurance .The government’s objectives is mostly directed to providing a supportive regulatory environment suitable for the implementation of the Finance sector charter. 1.2. Literature review According to the definition by the international Association of Insurance Supervisors (IAIS), micro-insurance is the insurance that is mainly easily accessible to those who earn low income. Potentially, by providing a variety of different policies to its providers. It is managed in accordance with generally accepted rules and regulations. Micro-insurance forms part of the broader insurance market and it is distinguished mainly by its specific market segment focus. At one time or the other, members of the society face risks that are mostly particularly severe for the poor. This problem mostly causes a lot of interruptions in the process of asset formation. Through direct government provision, such issues can be solved, but incase where this is not possible; such cases can be mitigated through savings, informal support networks and some semi-formal risk pooling mechanisms. Insurances have been proven to play an extremely crucial role in the mitigation of such cases. In some instances, individuals may not be in a better position to accumulate sufficient savings to cover the losses that have occurred, but they may be able to pay all the premiums connected to the risk. This is only possible if the designed product is made affordable and appropriate to the needs of the poor. Australia is well known to have a well developed commercial micro-insurance industry, but it is faced with some challenges, which will be tackled in this discussion paper (APAR 2005). One of the main objectives of the finance industry is to reconcile the importance of addressing potential abuse in this market. This is in regard to prudential and customer protection as well as the interests of financial inclusion. The main goal of this discussion paper will be to develop a remarkably coherent and a clear regulatory framework that will aim at encouraging and facilitating the provision and distribution of good value, and low-cost of products appropriate to the needs of the low income earners. 1.3. Methodology In accordance to this analysis, the goal of this discussion paper will be to develop an exceptionally clear framework encourages and facilitates the provision and distribution of good value. Most of the low-cost products are made appropriate for the needs of the low-income consumers by a variety of the market players. They mostly compete for the market and treat their policy holders’ ultra fairly in order to provide them with insurance. The government’s objectives are directed to mostly provide a supportive regulatory environment suitable for the implementation of the Finance sector charter. 1.4. Importance of insurance to the citizens 1.4.1. Risk of consumer abuse It has been noted that, there has been a substantial risk for consumer abuse in the low-income insurance market, and this issue raised by members of parliament as one of the major concerns. During the presentations made at the parliament hearing, there was a need to bring change to the funeral insurance market. To try and create a solution to this problem, the regulatory review process was initiated, and they came up with a frame work suitable to bring changes to this sector. 1.4.2. Opportunities for financial sector development and inclusion The initial motivation for the regulatory review process was the need to have a reform in the insurance sector and reduce the cases of abuse (APAR 2005). Through various consultations and discussions by the government bodies, it was established that the insurance was also capable of providing good value to low-income households which leads to the extension from the funeral cover to life cover more broadly. The developments established in the market have also been known to be potential in the expansion of the set of products on offer to lower-income households, and in turn, they reduce the vulnerability more broadly. This action was in line with the government’s central policy objectives of poverty alleviation. 1.4.3. Unifying framework across diverse policy and regulatory processes Most regulatory developments are considered to be responsible for bringing about an impact on the provision of micro-insurance. According to the finance Advisory and Intermediary Service Act of 2002, the Co-operatives Act of 2005, the move hat was proposed to the Financial Condition Reporting in the short –term industry, the processes that were involved in the social security reform, restructuring of the commission as well as the review of all the potential impacts on the provision of more insurance organizations. Most of these diverse policy processes, it is appropriate for the regulators periodically to review the insurance regulations as well as the role it plays in the wider policy processes. Through this framework, it becomes particularly easy for the prudential regulations and objectives to be reconciled with some of the other government policies such as consumer protection and to promote access to the demand of insurance by the poor individuals. Accordingly, the goal of this discussion paper is to be able to develop a coherent and clear Regulatory framework that encourages and facilitates the provision and distribution of good value, products of low-cost that are appropriate to the needs of low-income consumers by a Variety of market players who compete for the market, treat their policyholders fairly and are able to manage the risks of providing insurance (APAR 2005). This is also in line with government’s objective of providing a supportive regulatory framework for the Financial Sector Charter. 2. Policy of the insurance industry According to the proposed framework, there is the multiplicity of policy objectives across the government functions which are known to bring a significant impact to the market through the functioning of the policy. 2.1. Financial inclusion The main aim of financial inclusion is to try and extend the number of people using the products or services since they are very relevant to their needs. Inclusion seeks to extend products and services to the vulnerable population groups such as the poor. The financial regulator has been supporting the financial inclusion by removing barriers on the demand side as well as, on the supply side. This is to allow individuals to access the financial services that they need to get access to products that they desire to have. Financial inclusion is also supported by providing incentives and support on both sides of supply and demand to strike a balance in the formal market. Support programs also help to initiate this knowledge to individuals who may be living in the local areas (APAR 2005). Government approvals through certification for being a legitimate provider is also necessary for the creation of clear and simplified regulatory regimes, that mainly support the legitimate players who usually conduct their businesses in a very formal and efficient manner. 2.2. Competition and market efficiency This policy is particularly important to ensure that both products and services are delivered and in this way the profit margin is increased. This process in turn causes a lot of competition within the business providers, and they may be forced to come up with new strategies to beat their partners in business. Some of the regulators may act as barriers, and they may be removed to ensure that new business models and technologies are put in place. Some of the other barriers may be considered to be unnecessary since they only end up increasing the cost of delivery for some models and products. Through the insurance bodies, competition is made health by removing all the barriers and putting them to the minimum and therefore, balances the consumer interests. 2.3. Financial sector development. It is essential to create some space for innovation so as to ensure that overall development is achieved by the businesses (APAR 2005). Through the insurance regulators, it becomes possible to support the developments by providing very clear and unambiguous regulatory framework. This innovation can be implemented by taking pro-active and flexible approach to accommodate new models and technologies. 2.4. Stability This financial service regulation seeks to ensure trust in the financial service providers (FSP) and they ensure that they are able to manage and deliver most of their commitments to their clients. It is clear that the individuals’ failures mostly affect the trust and the performance of the system as a whole. This whole process is made possible by an insurance policy. 2.5. Consumer protection This policy involves the regulation of the market conduct intermediaries, consumer education programs and this aims at protecting the consumers (APAR 2005). These regulators ensure consumer recourse mechanism thus ensuring that they focus on other areas that need transactions. 3. Principles of Insurances In addition to these policy objectives, it is very crucial for any insurance body to consider principles of ethical regulation, which will help in guiding practical implementation of legislation. These principles are included in the supervisory bodies, to ensure that the implementation process of regulation is successful framework. 3.1. Efficiency and Economy Most of resources should be applied efficiently in the market to be able to bring about economic development by minimizing the administrative burden is reduced (APAR 2005). Non-regulator options are the most recommended principle type. 3.2. Proportionality Total cost of regulation should be considered by the implementers to ensure that the restrictions put in place are cost effective. This will strive to favor the industry where the firms and consumers are able to afford these facilities. 3.3. International character Most of the insurance bodies aim at having regulators that facilitate global competitiveness and integration by compliance with the international standards. 3.4. Innovations The insurance regulations usually aim to facilitate innovation in the industry. This ensures originality by allowing scope for different means of compliance to avoid restricting the market participants (APAR 2005). When regulatory frameworks do not exist together, the need to have pro-active and flexible efforts from the regulator. 3.5. Competitions The insurance policies are partly responsible for the competitiveness between the regulation bodies. These processes will involve the removal of the unnecessary barriers to ensure that there is no biasing against firms. 4. Conclusion In conclusion, policies, the government puts in place some alignment through the Acts to be able to distinguish between guaranteed and non-guaranteed benefits so that the other products do not have to follow the long –term or short term Insurances Acts. These help the insurance industry to achieve their intended objectives by proper implementation of the Legislation Acts. Work cited Australian Prudential Regulatory Authority (APRA), 1995. Life Insurance Act 1995. Australian Prudential Regulatory Authority (APRA). Available at: http://www.austlii.edu.au/au/legis/cth/consol_act/lia1995144/ (accessed March 2007). Australian Prudential Regulatory Authority (APRA), 2005a. Prudential Standard LPS 510. Available at: http://www.apra.gov.au/Friendly/Prudential_Standards/LPS%20510.pdf (accessed March 2007). Australian Prudential Regulatory Authority (APRA), 2005b. Prudential Standard LPS 520. Available at: http://www.apra.gov.au/Friendly/Prudential_Standards/LPS%20520.pdf (accessed March 2007). Barbin, E; Lomboy, C; Soriano, E, 2003, working paper 30: A field study of micro insurance in The Philippines. International Labor Organization (ILO) Available at: http://www.ilo.org/dyn/infoecon/iebrowse.page?p_lang=en&p_ieresource_id=456 (accessed October 2007). Department of Trade and Industry, 2007. Explanatory Memorandum to the Companies Bill, 2007. Available at: http://www.thedti.gov.za/ccrdlawreview/part1companyBill1_145.pdf (Accessed October 2007). Financial Services Authority, 2002. Reforming polarization: Making the market work for Consumers. Consultation Paper 121. January: Financial Services Authority: London. Read More