20 August 2014
Speech - #2014011, 2014

Speech to Group Insurance Summit 2014, Sydney

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Thank you for the opportunity to speak today.

The theme of today’s conference, ‘paving the way to sustainability’, reflects an important priority.

This is a priority not just for group insurance, but for the Government. Paving the way to sustainability is our approach to managing the financial system and the nation’s finances.

So, let me first take a moment to consider the role of financial services in Australia.

The main role of the financial system, of course, is to allocate funds, facilitate payments, transfer risk, and create liquidity.

In that role, the financial system channels the flow of funds from savers to borrowers, to meet the needs of the businesses and households that rely on it.

Financial services providers help facilitate that transfer.

The financial sector currently employs around 400,000 people, and represents around 8.5 per cent of the economy.

It is one of the largest industries in Australia.

And it has grown faster than the rest of the economy, at about 5 per cent a year.

As part of its role, the financial system pools funds and risk. This allows for risk diversification and for larger investment projects to be undertaken.

The financial system also specialises in credit assessment. This allows the economy to better manage risks and returns from investment, at a lower cost.

As we all saw during the global financial crisis, when a systemically important financial institution fails, the financial system has a crucial role to play.

The crisis demonstrated the catastrophic effect that financial instability can have on the real economy. It showed us that we can’t have sustainable growth without financial stability.

Australia’s financial system has generally served us well. Australia withstood the global financial crisis in relatively good shape largely because of its strong prudential framework.

Because of that, we were able to maintain a healthy and stable domestic financial sector, at the same time as other countries experienced financial instability.

Well-functioning financial markets also directly benefit the economy by directing financial resources towards the most productive and low-cost forms of investment. This in turn increases economic growth, employment and living standards.

More specifically, financial services play an important role in helping Australians improve their financial health and wellbeing.

Financial services assist Australians to engage with the financial system. For example, financial advisers help consumers to manage financial risks and maximise financial opportunities.

The Government is committed to making sure that the financial system can continue to support economic growth, in order to meet the evolving needs of users.

But we cannot be complacent.

The financial system needs to evolve, so that it can appropriately respond to and manage new risks. And a smooth and efficient financial system will help us build a strong, competitive and prosperous economy.

That’s why the Government has already started on its full agenda for reform and progress in this important sector. We are taking steps today to prepare us for the challenges we will inevitably face in the future.

This includes tailored and appropriate regulations. It also includes the removal of excessive red tape, which impedes the efficient allocation of capital.

This alone is not enough.

Preparing for the challenges of tomorrow demands the important work of budget repair.

Since coming to office, the Coalition has made tough decisions to reduce the Government’s debt and to get the Budget back on a more sustainable footing.

Some of these decisions are not popular, but they are the right thing to do.

We need to reduce the debt burden on future generations; to reduce the size of government; and to unshackle business so that it can get on with doing what it does best.

And that is to invest, innovate, and exploit opportunities created by a withdrawal of government activity from areas of the economy best served by the private sector.

This should not be seen as just a positive for business alone.

There will also be flow-on benefits for governments and for the Australian population.   Industry employs people, pays taxes and invests. The benefits will be widespread. But industry will need to capitalise on these opportunities for these benefits to be realised.

As you may know, we commissioned an inquiry into Australia’s financial system.

The Inquiry is undertaking a thorough examination of Australia’s financial system to determine whether it is best placed to support future economic growth and the evolving needs of our nation.

The Inquiry has already made a number of observations, and put forward a range of propositions.

Indeed, the Inquiry has touched on many issues of importance to Australia’s retirement incomes system.

For example, the Inquiry is seeking feedback on ways to improve superannuation and retirement income policy, to best position Australia to manage the challenges of an ageing population.

It is also seeking feedback on a range of policy options to improve the superannuation and retirement income framework.

The Government welcomes the release of the interim report and all of the Inquiry’s work so far, and we look forward to receiving the final report in November.

The Inquiry’s focus on Australia’s superannuation system reflects its importance to our economic growth and development.

Let me pause here and take a few moments to outline four key facts about superannuation.

  • First, superannuation is the financial system’s second-largest sector after banking.
  • Secondly, financial assets held in the superannuation system were 50 per cent of those of the banking system in 1997, but grew to 60 per cent by the end of 2013.
  • Thirdly, superannuation assets are around six times their level in 1997 and are now over $1.8 trillion. By comparison, the Australian Securities Exchange market capitalisation is roughly $1.6 trillion.
  • And fourthly, Australia has the fourth-largest pool of superannuation assets in the world, and is one of only a few countries with pension assets worth more than annual Gross Domestic Product.

Australia clearly has a large pool of relatively stable superannuation assets.

This provides a growing source of funding for the rest of the economy as well as meeting its primary objective of improving the retirement incomes of Australians.

Our superannuation system is robust and internationally respected. The Government’s plan is to make it even stronger.

To this end, we are taking action to strengthen our superannuation system by implementing our election commitments, including:

  • paying superannuation under our new Paid Parental Leave scheme;
  • reviewing regulatory barriers restricting the availability of retirement income stream products; and
  • improving governance and transparency in superannuation.

The Government is also aiming for best practice governance, which holds superannuation trustees to account, and appropriately manages conflicts of interest.

This kind of governance is important to protect members’ interests and ensure a stable and efficient superannuation system.

We acknowledge people need confidence when making long‑term investments for their retirement. Therefore, our policy settings should remain reasonably stable.

That’s why we won’t make any unexpected detrimental changes to superannuation, and why we have a moratorium in place on significant new financial regulation while the Financial System Inquiry is underway.

Australia’s superannuation system is large and continues to grow rapidly. By implementing our reform agenda we will strengthen the system and help grow the retirement incomes of Australians.

As well as helping their members save for retirement, many Australian superannuation funds provide another important benefit to members and their families – insurance cover for when the member dies, is totally and permanently disabled or is temporarily unable to work due to illness or injury.

Death and disability insurance, provided through Australian superannuation funds, provides vital assistance when members and their families need it most. It provides people with financial choices in times of illness and bereavement, and gives peace of mind to members and those close to them.

In the year to March 2014 over $2 billion in insurance payments were made to superannuation fund members as a result of their group death and disability cover.

In order for our superannuation industry to continue to provide these important benefits to their members, there must be a successful partnership between fund trustees and the insurers who back these benefits. This is important for the sustainability of the group life sector.

Australia has a strong, innovative life insurance industry, focussed on meeting the needs of its customers, including superannuation funds and their members.

The life insurance industry in Australia is profitable and well-capitalised. For the year to March 2014, the industry earned net profits after tax of $2 billion.

But in recent years there have been some challenges to the profitability of insurers’ group life business, which backs the insurance cover provided by superannuation funds.

These challenges, I’m told, were due to a range of factors, most notably:

  • significant increases in disability insurance claims; and
  • premiums that did not fully reflect the risks being borne by insurers.

It has been very encouraging to see the life insurance industry, in partnership with superannuation fund trustees, take important steps to address these factors.

This has included steps to introduce more accurate pricing of insurance cover, such as through improving the quality of the data funds provide to their insurers.

The partnership between insurers and superannuation fund trustees is particularly important.

The industry response to the challenges facing the group life sector has been undertaken in close consultation with the industry regulator, APRA.

APRA supervisors have been actively engaging with the life insurers in relation to the challenges they have faced. APRA has lifted the level of its supervision in this area significantly over the last few years.

APRA has also been increasing industry awareness of these issues through a number of forums, including discussions with insurer boards and management, and speeches and presentations at public forums and conferences.

The Government commends superannuation funds and their insurers for working together to maintain the sustainability of group life insurance – which delivers important benefits and provides peace of mind to many hard‑working Australians.

Events such as this conference provide a valuable opportunity to share ideas aimed at achieving this objective.

As you may know, the Government’s philosophy is not to impose unnecessary regulation on industry, but instead to have industry resolve its own issues in the first instance.

We are well aware, from talking with business and not-for-profits, that the cumulative effect of Commonwealth law, state law and local regulation is stifling innovation and creativity.

One of the best ways to enhance Australia’s economic development and prosperity is to create a vital business environment.

Such an environment promotes competition and allows businesses in Australia to get on with doing what they do best, without being burdened by needless red tape.

In this regard, the government is committed to removing unnecessary red tape, which adds to business costs and provides little benefit to both businesses and consumers.