COMMONWEALTH OF AUSTRALIA Official Committee Hansard · Monday, 8 July 2002 SENATE— References E...

COMMONWEALTH OF AUSTRALIA

Official Committee Hansard

SENATEECONOMICS REFERENCES COMMITTEE

Reference: Public liability and professional indemnity insurance

MONDAY, 8 JULY 2002

C A N B E R R A

BY AUTHORITY OF THE SENATE

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SENATE

ECONOMICS REFERENCES COMMITTEE

Monday, 8 July 2002

Members: Senator Collins (Chair), Senator Brandis (Deputy Chair), Senators Chapman, Cook, Ridgewayand Webber

Participating members: Senators Abetz, Boswell, Calvert, George Campbell, Carr, Cherry, Conroy, Coonan,Eggleston, Faulkner, Ferguson, Ferris, Forshaw, Harradine, Harris, Kirk, Knowles, Lightfoot, Mason,McGauran, Murphy, Murray, Payne, Sherry, Stot Despoja, Tchen, Tierney and Watson

Senators in attendance: Senators Brandis, Collins, Conroy and Ridgeway

Terms of reference for the inquiry:To inquire into and report on:

a) the impact of public liability insurance for small business and community and sporting organisations; and

b) the impact of professional indeminity insurance, including Directors and Officers Insurance, for smallbusiness;

with particular reference to:

c) the cost of such insurance;

d) reasons for the increase in premiums for such insurance; and

e) schemes, arrangements or reforms that can reduce the cost of such insurance and/or better calculate andpool risk.

WITNESSES

BAIN, Dr Robert, Secretary General, Australian Medical Association .................................................... 22

BAKER, Dr Kenneth, Chief Executive Officer, ACROD Ltd.................................................................... 70

BURTON, Ms Pamela, Legal Counsel, Australian Medical Association................................................... 22

BUTLER, Dr Robert John Francis, Executive Director, Australian Dental Association Inc.................. 33

CLARK, Mr David, Legal Officer, Local Government and Shires Association of New SouthWales................................................................................................................................................................ 13

DRUMMOND, Mr Robert, General Manager, Regulation, Insurance Council of Australia Ltd .......... 45

JAMVOLD, Mr Peter, Group Manager, Southern Division, Insurance Council of Australia Ltd ........ 45

JONES, Mr Raymond Lloyd, President, Insurance Council of Australia Ltd.......................................... 45

MARDEN, Mr Bernie, Secretary, Professional Standards Council........................................................... 78

NANCE, Mr Gregory John, Chief Executive Officer, Surf Life Saving Australia ..................................... 1

ORTON, Mr Paul, General Manager Policy, Australian Business Ltd..................................................... 64

PERSSON, Ms Monica, Executive Manager, Audiological Society of Australia Inc. .............................. 33

REGAN, Dr Sean, Senior Policy Adviser, ACROD Ltd ............................................................................. 70

SEDGLEY, Dr Michael, Chairman of Council, Australian Medical Association..................................... 22

STEPHENS, Dr David Hector, Policy Consultant, Australian Council of Professions Ltd..................... 33

WILKINSON, Mr Warwick AM, Chairman, Professional Standards Council........................................ 78

Monday, 8 July 2002 SENATE—References E 1

ECONOMICS

Committee met at 9.19 a.m.

NANCE, Mr Gregory John, Chief Executive Officer, Surf Life Saving Australia

CHAIR—We will delay formally commencing the Senate Economics ReferencesCommittee’s inquiry into public liability and professional indemnity insurance but we willcommence with an informal briefing from our first witness, Mr Nance, from Surf Life SavingAustralia Ltd. Unfortunately, because the committee at this stage is not quorate, anysubmissions at this point will not attract parliamentary privilege. However, Mr Nance is awareof this issue and the committee should be happy to incorporate his remarks once it becomesquorate. Welcome to this briefing, Mr Nance. I look forward to the opportunity to hear from youin relation to your submission.

Mr Nance—I will briefly recount some facts about SLSA and our recent insurance historyand will then update the committee on our observations of what is going on at the moment. Weare a member based volunteer charitable organisation and have been around for nearly 100years. We provide a free rescue service on the nation’s beaches. Some 10 years ago, we decidedto pool our insurances because of increased premiums for public liability insurance. We do notreceive any public support or government support at any level for public liability. We pay for itourselves, which means the members pay for it.

Ten years ago, when we pooled our insurances, the national premium for public liabilityinsurance in surf was around $125,000. Today it is over $600,000 a year. Despite the pooling,we experienced an increase in the claims. Our premiums went up well before the HIHcollapse—we were never insured with HIH—and the September 11 disaster. As I have related inthe submission, we have put in a number of very strict risk management procedures within ourclubs. We have modified our activities to counter the increasing incidence of the claims.

The claims came from a range of areas. Mostly they were not in the surf but from incidentson the land, particularly slips and falls. In the last 3½ years, there have been 83 claims againstour public liability insurance, of which 21 have been in the water. Around one in four claimshave been in the surf, which is our primary area of responsibility, and the rest have occurred onthe land.

The predominant reasons for the land based claims have been for slips, falls and,occasionally, human error related to normal activities—just going about your daily life—in abuilding or near a building. We insure over 285 surf clubs and over 300 operating entities. Wehave about 110,000 members today. A variety of things go on in surf clubs. We are in a riskbusiness, and people lose their lives—occasionally our members, tragically, lose their lives, sowe will have some things going on—but it is distressing that the claims are coming from an areathat no-one foresaw, which is mostly slips and falls around the clubs. There are occupationalhealth and safety issues across the range of activities our members are involved in, and we havea duty of care to make the environment far safer for them.

An element in the increased premiums has been the number of claims from our members. Ofthose 83 claims, only eight—or one in ten—are from our members. Most are related to injuriessustained in the use of our inflatable rescue craft, the IRB. I am reasonably confident fromspeaking to our brokers that, with the risk management and the fact that we moved our

E 2 SENATE—References Monday, 8 July 2002

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insurance offshore three years ago, the underwriters, who are all London based groups ofinsurers, will be able to successfully write our insurance at an affordable level again this year. Iam hopeful of that. But three years ago we were basically uninsurable in this country, evenwhen HIH was operating.

I will conclude by making some comments about the current situation as I see it. We arewatching the state legislation being put forward in New South Wales, in particular, and in otherstates, and we are very closely tracking what the states are doing. I applaud the New SouthWales state government for what they are doing. The first raft of legislation appears to me to bea pretty good shot at bringing the premiums down, although there are no guarantees. The secondrange of legislation that will be tabled in New South Wales, which will protect charitableorganisations like ours, is a must have as far as I am concerned. It should be consistent acrossevery state. You can protect the individuals, but unless you protect the charitable organisationswe will go out of business if we cannot insure our members. That is a responsibility that wemust apply to the membership of the organisation. We must give our individuals that degree ofassurance, otherwise they are not going to volunteer. If the organisation goes out of business,that is the end of us. Without public liability insurance we could not put patrols on the beach.There is no way we could do that. So we must have it, in whatever form. That is why, even asthe premiums went up, we have always met the bill.

I also applaud the Commonwealth for the amendments to the Trade Practices Act. I am nottoo sure where that is at, but giving force to the waivers helps an organisation like ours, whereour members all sign a waiver. Giving the force of law to that waiver not just for surf-lifesavingbut for sporting organisations and general risk businesses is another must. Those waivers havebeen around for a long time and they do not seem to have any clout when you get into a legalsituation. So I would like to think that the Commonwealth will see the Trade Practices Actamendments right through and also that the Commonwealth government continues to facilitateconsistent legislation across the states, which I know they are doing at the moment. I aminvolved in it and have been consulted, and I would ask that that continue. That is about all Ihave to say at the moment.

Senator RIDGEWAY—I have a number of things to ask about. I know that much of yoursubmission is based on the anecdotal evidence of what has been happening in the Surf LifeSaving Association over the past 10 years and longer. One of the difficulties from aparliamentary point of view is trying to put your finger on where the problems are. Given therange of measures that you would support both in terms of what is happening in New SouthWales and other states and the amendments to the Trade Practices Act and a range of othermeasures presumably being put forward by the federal government, do you think that theywould deal adequately with the problem of increasing premiums?

Mr Nance—No. My contact with the insurance industry through our brokers tells me thatthere are no guarantees—that is what they are consistently saying—with any of this legislation,state or federal, that premiums will come down. I have never heard one individual in theinsurance industry say that they would, which is a bit of a worry. However, practically, whenyou add it all up at the state and Commonwealth level, you would have to think that over timethe premiums would come down, because the number of claims should drop.


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The practical problem under the current system can be seen in one of our claims which hasbeen settled—a $750,000 initial ambit claim. Someone fell over in a pool that was operatedjointly by a surf club and a council. The guy falls over and comes up with a $750,000 claim. Ofthe $750,000, $6,000 was for medical expenses; the rest was for pain and suffering and loss ofearnings. We settled it for a few thousand dollars. That $750,000 claim was on our books forover two years. You only have to have a few of those and all of a sudden, under the currentsystem, you are assessed as having a risk. The $750,000 is all they are worried about; all theyare worried about is settling it.

I do not think you are ever going to remove the individual’s right to sue; no-one is asking forthat. But until standards are applied and the individual’s ability to sue frivolously—and I viewthat one as a frivolous claim—is not there, an organisation like ours, or any other organisation,is always faced with that problem. In relation to those 83 claims, if we could not pool everyonetogether and we were just one small surf club there is no way we would be able to get insurancetoday. That is what is happening with a lot of very small organisations around the country.

So I do not think there are any guarantees at all. Until that system fundamentally changes,whereby a person can make an ambit claim and think they are going to be successful, I cannotsee how you are going to get a drop in the premiums. All the insurance companies are worriedabout is the number of claims that are lodged and what people are suing for in their claims—atthe moment, it is a lot of money.

Senator RIDGEWAY—What I am trying to establish is whether, in trying to come up withsome answers to the current problems in getting coverage, some of the immediate solutions onthe table are going to be effective in the long term. Given that premiums have been increasing ata dramatic rate over a long period of time—you talked about it going from $153,000 to nearly$600,000 over a 10-year period—is that going to continue as a trend in the future? Firstly, whatare the things that have contributed to you going offshore to get coverage? Secondly, arediscussions that you may have had with insurance groups providing incentives in relation toundertaking their own structural reform to deal with what I believe will continue to be aproblem in the future? I think we have short-term solutions and they have yet to be tested; afterthat, I suspect that premiums will continue to rise.

Mr Nance—The reason we went offshore was the market. Three years ago our then brokergave us a quote that was unaffordable. It was in the order of $900,000 a year. We said, ‘You’rekidding!’ So we changed brokers and the insurance was placed in London immediately. It hasstabilised at around $600,000 now, so it was the market forces offshore. I have never hadadequately explained to me how insurers assess the amounts for premiums. We had incompletedata 10 years ago; now, I have an excellent track on the data—that is, our claims, where they arecoming from and the nature of them. We have been tracking them over the last four to fiveyears. It is relatively accurate data and some of it is included in the submission.

Ten years ago we did not have any of that data and, as you changed companies, you tended toloose the history of them. So I have not had adequately explained to me how these premiumsare calculated. If they go back on your history—there is no relativity to your claims history as tohow the premiums are determined. In one case I was given a $900,000 quote and in the sameyear—three years ago—with a separate broker we were paying, I think, $500,000. So that is a


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$400,000 differential assessed by the same industry on our premium. That blew me away. So Iam very cautious as to whether there will be any short-term fixes, even with the legislation.

The insurance industry itself certainly does require scrutiny going forward, but it is only onepart of the system. The legal profession is another part of the system. There is no doubt that thelegal profession’s ability to seek business through personal accident type of insurance is aliveand well in the community, and people are taking advantage of it. We have been on thereceiving end of a number of those types of claims. Various groups have approached me andasked the question, ‘Has your number of claims increased over the years?’ I have told them thatit has. The number of claims is stabilising now, but in that ten-year period it certainly increased.It peaked about three years ago. With 83 claims in 3½ years against our organisation—of whichthree out of four are land based and have nothing to do with Surf Life Saving’s core business—something has to change fundamentally in the system for us to survive long term. Somethinghas to change. The change can be effected through legislation and/or the insurance industryitself providing a better service and better premiums. At the moment, if we could not bring allof our surf clubs together under one umbrella, we would not get insurance. Individual surf clubscannot get it.

Senator RIDGEWAY—One of the things that you talk about as one of the possiblerecommendations is risk management education. Do you want to talk a little bit more aboutthat? I am interested in the idea, because a number of others have spoken about educationcampaigns and making people aware of rights, responsibilities and so on. What do you mean byrisk management education?

Mr Nance—In our case, it was definitely educating volunteer surf-lifesavers that this wasserious and we had to change the culture. What we could change was our culture of not caringabout the risks that were involved in the day-to-day running of a surf club. Consequently, wehad to embark upon a series of structured educational forums and activities right across ourorganisation, hitting right at the grassroots level to make sure that the individual surf clubmanagement or volunteer understood that, unless they changed the nature of their activities toensure that they covered all risk—that is, the signage was right, there was adequate maintenanceon the buildings, they did not let the surf club or its equipment or its members get involved inactivities that were not part of the core business—then we were in trouble going forward withour insurance.

We started that nearly four years ago and it has had a compounding effect. I know we havechanged our culture in terms of the management. Now, with the recent publicity nationally, ourmembers are very much focused on the proper running of the clubs in terms of managing theirrisk, bearing in mind that when we had our first risk management assessment, done by ourbrokers, they produced a manual. There was nothing new in any of that, but they made thecomment that, in the daily operation of a surf club, you are at risk all of the time. The interestingthing was that your major risk is actually in the water or in your patrolling environment, butyour claims are coming from other sources. Your biggest unknown, going forward, is what isgoing to happen in the water.

I always remembered those words and, when the Bondi incident happened at Waverley, withthe individual who became a quadriplegic, the words came home to haunt me. Although wewere not directly involved, here was a claim being made against a council operating flags and


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lifeguards and it was for an accident in the water. That, to me, is the biggest unknown. Howmuch more of that is going to occur? It is a very uncontrolled environment in the surf; you canonly do so much. But risk management education for volunteer organisations is a must. It is onething you can control. We would not have got our insurance if we had not done it three or fouryears ago when we started. The brokers said, ‘You must do this.’ So we did it—and there is stillwork to be done. A volunteer joins a volunteer organisation not to do paperwork, not to worryabout processing an insurance claim. That is not where their loyalty lies. I will tell you that for afact. If you are in a volunteer organisation, that is the way it works. They volunteer for a corereason. In surf-lifesaving, it is not to process paperwork.

Senator RIDGEWAY—I will ask this final question, and there is probably a simple answerto it. You use the Bondi-Waverley case as an example. In relation to the surf-lifesavingassociations across the country, how do you delineate between your responsibilities in relationto public space, if you like, and what is under the control of a local government body, with thebeaches, patrolling and so on? Is there some sort of coordination of shared risk?

Mr Nance—Yes, exactly that; shared risk. In most of those claims against us, we and localgovernment are joined. I do not have the data at hand, but in 70 or 80 per cent of those claimswe are jointly involved.

Senator CONROY—Would you support then the proportionate liability concept?

Mr Nance—That happens now anyway, I think. The insurers negotiate an agreed wayforward; they negotiate either a settlement outside the legal system or, when there is a judgmentagainst us, an agreed share of what they are going to pay out. So, yes, I would support it. Theproblem for local government is that they are copping this all the time. It is a relatively newphenomenon for Surf Life Saving, but people know we are insured so they sue us. That is theproblem. The slips and falls are the classic cases. Essentially, councils own most of our surfclubs—they are on crown land and we lease them—so ultimately it is their responsibility, butwe are the tenants so we are automatically joined. Yes, I would support it, but I do not thinkthere is any formula that is going to solve the problem.

CHAIR—In relation to the Bondi case, how was it that solely Waverley Council wasinvolved?

Mr Nance—They have year-round, paid lifeguards—

CHAIR—Are they operated separately from the surf-lifesaving club?

Mr Nance—They are. We work on weekends and public holidays, although we do providelifeguard services through our state organisations. In Waverley Council’s case, they are operatedby the council—although they are all our members—so that was the reason they copped it. Thereason I am so concerned about that case is that it was an incident between the flags, allegedly.It is the subject of an appeal. A lot has been said about it but the principle worries me, and thatis along the lines of what I said before and of what the insurer said to me four years ago: ‘Yourreal risk is out there in the water.’ We provide a safe environment with the flags, but that doesnot mean things cannot happen between the flags. Over the last four years we have fought atleast two cases and challenged alleged incidents between the flags where action has been


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brought against us. I know we have been successful in one, where a surfboard came inside theflags, allegedly, and hit an individual. The individual sued us alone, not the council, and it wasoverturned on appeal in New South Wales. We appealed it. We got a lot of expert evidence, andwe basically fought the case as a matter of principle.

Going forward, if we get involved in any water based incident in the future, we will never beable to insure against it—inside or outside the flags. That is our concern. Because of the natureof Australia’s beaches, we have always put the flags up to say to the public: ‘That is a safe placeto swim.’ Someone said to me the other day, ‘Just take the flags away.’ Good one; that is a reallygood solution! With it goes 100 years of credibility, and you just cannot do that in Australiansurfing conditions. We already pull out of the water over 12,000 people a year, and they aremostly from outside the flags. If we did not have flags, I do not know how we would be able tocontrol the situation. That was a deadset solution given to me by someone in Sydney: ‘Pull theflags down so you don’t have a risk.’

CHAIR—Is your point that swimming at the beach has an inherent risk and that what theflags represent is a safer area rather than a safe one?

Mr Nance—Yes. We will never say that nothing is going to happen between the flags. But itis a good bet that if you are swimming between the flags and you get into difficulties you aregoing to get rescued pretty quickly. And you should not get into difficulties because we put theflags in a safe area. If we think it is unsafe, we will not put the flags out; we will close thebeach.

CHAIR—But there is still a risk of a flying surfboard?

Mr Nance—There is still a risk. That can happen, yes. Although now there are demarcationareas—and if you have had a surf recently, you will have seen the buffer areas, which tend tomilitate against that risk. It works pretty successfully. It is when you get out into the regions thatyou tend to find that the board riders come up closer to the flags and can injure people. Theother problem is public awareness. Approximately one in five of the 50 to 60 people who drownin the surf nationally is a tourist—about which there is a lot of anecdotal evidence—who doesnot speak English. We will fight to the end of the earth to make sure that the flags remain aconstant of our safety services. But a case like the Waverley case puts that under threat, becauseit questions the fundamental principle of putting the flags out there. After that, we as anorganisation did a fair amount of soul searching, and we are 100 per cent behind our system andwill stick with it. We are not going to change it.

Senator CONROY—What is the definition of ‘when you put the flags up’? What does thatmean to you?

Mr Nance—That is where the patrol on that day and under those circumstances has made adecision that this is a safe area to swim, given all the circumstances.

Senator CONROY—In your mind what does ‘safe’ mean? What do you think you aresignifying to the public when you put the flags up?


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Mr Nance—It means that the general public can go into that area and swim safely. There isnot no risk but the risk is reduced to being negligible. A negligible risk to, say, a person who isnot an expert swimmer or not a good swimmer is a different sort of risk to someone who reallyunderstands the surf, remembering we are dealing with the general public; you have to go forthe lowest common denominator. So you will find that our flags are set not necessarily wherethe best surf is at all but set where it is the safest place to surf. But there is a reasonable decisionbehind it that is based on the training of the individuals and, above all, their knowledge of thelocal surfing conditions.

Senator CONROY—The Waverley case is under appeal so I appreciate that this may putyou in a difficult position, but is looking for sandbars one of the issues when you plant theflags?

Mr Nance—One of the things you have to be very careful of is that as the tide changes and ifit is a largish surf that is breaking on sandbar type conditions it will present an inherent risk toanyone who is bodysurfing in the area. You have to be careful of that, and we often closebeaches because of the very dangerous breaks on the sandbanks. But a sandbank can change ina matter of seconds; it can collapse and change within a few minutes. The operationalconditions can change for a patrol and there is no way you can give minute to minuteconsideration to it. You have to observe it over a little bit of time. But our members, remember,are all locals and they understand the conditions, and they will generally—and, in ourestimation, all the time—do the right thing.

CHAIR—Of the 83 claims that we have been talking about, what proportion would youregard as frivolous?

Mr Nance—The slips and falls?

CHAIR—The total 83—21 of those were in the surf, weren’t they?

Mr Nance—Yes, they were in the water; they were water based. I think there was one casewhere a surfboat might have hit a board rider. You still get those odd ones. But to me, historyhas shown that those slips and falls will get settled out of court for a very small sum comparedto what was put on our books. A lot of those slips and falls were coming in the licensed clubs inQueensland. There were people making claims against those licensed clubs so they put camerasin. There is a lot more vigilant risk management based on the operation of the club, because theclub is part of the whole surf club scenario but the insurance is held by us. We have moved thatelement of the risk. Part of our risk management was to take those licensed clubs and put theminto a separate area of our insurance so that their risk did not translate across to a normal surfclub; slips and falls have got to be. There is the odd brawl or fight in a club; stuff like that goeson—not amongst our members but amongst the public—and then they end up suing us. Thatcould be eliminated, too, if you stopped people fighting. They are an element.

CHAIR—So you would say that, of the three-quarters of those claims that represent slips andfalls, you would regard a high proportion as frivolous?

Mr Nance—Definitely—based on the fact that they are settled for small amounts and that theinjuries are not normally that serious; some are, but most of the slips and falls are very minor


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injuries. But the claims are very high in dollar proportions because of the way the system hasbeen operating, as I described before. People sort of put in an ambit claim. You cannot stop aperson’s right to do that; I understand that. They have got to be ambit claims. The $750,000claim on the pool that was settled for a few thousand dollars is a classic case, and that was a slipand fall. That was one of those 83.

Senator RIDGEWAY—Did you say that, as part of the risk management, on some beachesyou now have cameras? Is that what you said?

Mr Nance—We have cameras in the physical environs of some of the clubs, yes, inQueensland. They are quite publicly located, with signage and everything, normally in areaswhere the slips and falls are occurring. That is a direct result of the insurance activity, whereclaims are made.

Senator RIDGEWAY—How useful a method has that been?

Mr Nance—The cameras? Excellent; my word. It has turned up quite a few frivolous claims,and it has meant the insurer can tough it out. Often, the person will go away when theyintroduce the video. Unfortunately, you cannot have videos in all those circumstances; you justcannot afford it. Any insurer will tell you that is a tactical way ahead in areas of the slips andfalls, particularly when you have a controlled environment. An environment like ours is veryeasily defined. People can only walk in the clubs, but we have 285 of them. I think that, of the285, there would only be 20 to 30—and they would all be in Queensland—that would havecamera surveillance.

CHAIR—I also wanted to ask you about the wilful negligence test that you, amongst someothers, are promoting as one of the solutions. What do you say about the implications ofintroducing that test with respect to recklessness?

Mr Nance—Do you mean by ‘recklessness’ that someone is, by their own behaviour,reckless and then makes a claim?

CHAIR—No. I am saying that someone who is injured would need to demonstrate wilfulnegligence, whereas their injury may be the result of recklessness, but that they would no longerhave access—

Mr Nance—Their own or the organisation that they are—

CHAIR—The organisation’s.

Mr Nance—Not being a lawyer, if the individual who is taking an action against us—in oursituation, bearing in mind we are a safety organisation first and foremost—had to prove that wehad been wilfully negligent or had acted recklessly in whatever it was that we were being suedfor, then I would prefer to be in that environment than in an environment where they did nothave to prove that.


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CHAIR—But in a sense what I am asking is: if the wilful negligence test were expanded toincorporate or to ensure that recklessness was a component of the definition, would that concernyou?

Mr Nance—I see what you are getting at.

CHAIR—Some of the arguments against that test are concerned that recklessness will not beaddressed and that people will not have an avenue to sue in relation to reckless behaviour unlessthey can also demonstrate that it was wilful negligence.

Mr Nance—I see. It is hard for me to comment on that. Our organisation has never supportedthe removal of the individual’s right to take an action. Someone better than me and myorganisation has to come up with a better test that will protect a charitable organisation likeours. There needs to be legislative reform. If it goes down that route—and it has been suggestedto us that it should—then that will help us to survive long term. I fail to see why a goodsamaritan, charitable, not-for-profit organisation should be laid bare—which is what ishappening—by a system that can clearly be corrected and fixed. To me, there is legislativereform that definitely can be done. Certainly, the insurance industry has to be held to account insome way—through some form of public scrutiny or accountability—because they are anotherfactor. The legal profession itself needs to be examined and maybe put under the same sort ofpublic scrutiny. It is all part of one system. But at the end of it all an individual should have theright to take action.

You would like to think that a charitable organisation like ours is always going to take thesafe option. We are only acting safely and in accordance with our charter. We are a humanitarianorganisation—we are not in it to make money; people volunteer their time. We are not unlikemany other charitable organisations in the country which are not-for-profit. The whole reasonthat I am sitting here talking you today is that there is a problem. We have suffered silently forover 10 years and now all of a sudden this whole issue is definitely on the public agenda. Weare asking that action be taken by government at all levels and also by the industries that areinvolved in it, otherwise, without that insurance, we cannot operate—no way.

There are many charitable organisations facing this right now that are not as large as us.Many of them have come and spoken to me one to one about what they are going to do. Theyare small organisations. They do not have the strength of numbers that we do. We arecommercially attractive to the insurance industry, because of the size of the premium, but if youare a small charitable organisation operating somewhere out there in the boondocks by yourselfthen you are just not going to be able to get the insurance at the moment. It is just unavailablenow. A few years ago you might have been able to get it, but it is just unavailable.

CHAIR—Looking at the situation a few years ago before you went offshore, was the brokeryou had within Australia before that time looking at HIH, at that stage?

Mr Nance—No.

CHAIR—Was that simply a result of HIH not venturing into that particular sector?


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Mr Nance—No. That particular quote I got at that time was, I believe, a combination ofcompanies. The insurance for the year before had been written by an outfit in Australia that wasbacked overseas. It was not HIH. The way the insurance industry works is quite complicated,from what I can make out—they group their insurances and they reinsure. That particular year,with that very high quote, I think was going to be a combination still in Australia and someoffshore.

After the Waverley incident, the brokers in the UK who are working with our brokersinformed me that the Australian public liability scene is on the nose—I have got that in anemail, which is very encouraging. They are shifting the group of underwriters from the ones thatwrote it last year to another group, and they are reasonably confident they will get the insurancewritten for us. But I will not know whether we will get insurance at an affordable rate foranother two to three weeks. That is really what has to change. Every year we face this. It has tochange somehow. Somewhere along the line, this has to change. If I get the answer that wecannot get insurance I do not know what we are going to do.

CHAIR—So this is two to three weeks before the policy expires, is it?

Mr Nance—No. With our current brokers we have a condition that they have to give me thequote six weeks before the policy expires, so that gives me time to go elsewhere. I do not knowwhere but it gives me the time.

CHAIR—So in two to three weeks time you will get your six weeks notice.

Mr Nance—That is right. Either I will get a price that we can afford or I will have to gosomewhere else. At the moment, the options of that somewhere else are narrowing. Three orfour years ago there were options in Australia.

Senator RIDGEWAY—So shopping around is not an option.

Mr Nance—No. I do not know but I believe there are some American players coming intothe market, but they have not knocked on my door yet. A few brokers have knocked on mydoor, but I think they have all ended up in the same market over in London writing theinsurance. I had that experience three or four years ago. So the way the insurance industryworks is a bit of a mystery to me. There needs to be some public accounting of it. I notice fromthe public debate that that is happening, and that is great. But the fact of the matter is that, at thecoalface right at the moment, what I have just described to you is the situation. I do not think weare any different from any other organisation. I see different people coming forward, lining upin the media, saying that they cannot get the insurance or that it is unaffordable, or both.

Senator CONROY—The bungee jump is the example I always use regarding the capacity tosign away reasonable risk. If you do a bungee jump and the rope is a bit long, that is probablynegligence. But if you walk away from a successful bungee jump and your back is a bit sorebecause it has been stretched out a bit you would probably have to say, ‘That’s why you did it;’you can actually sign a form. The intent of the legislative change proposed and supported byeverybody is that you can sign away some risk. But, practically, how can you do it on a beach?


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Mr Nance—You could not do it for the public, but it is very important for our members. Wehave always had a waiver in our membership form. As a result of our recent experiences andunder legal advice, we have strengthened that waiver into a very strong statement of waiving theindividual’s rights. The amendment to the Commonwealth trade practices legislation is veryimportant in securing that protection for organisations like ours. But, for the public, unless youhave a specific business situation—

Senator CONROY—Queuing up at the beach—you know, ‘Come and lie down and sign thisform.’ You would be running around on the beach signing forms. I am just trying to think howyou would make it work practically.

Mr Nance—You could not do it for the general public, which is the majority of our risk. Butcertainly for our members it is a very worthy piece of legislation, and I made a comment aboutthat at the start. I do not know the status of the trade practices legislation.

Senator CONROY—It has been tabled in parliament, in the House of Representatives.

Mr Nance—I would urge the Commonwealth government in a bipartisan way to see thatthrough, because it will shore up sporting organisations. If the definition could be as wide aspossible it would protect any member based charity like ours.

Senator CONROY—As President of Volleyball Victoria, I assure you that there is bipartisansupport for this.

CHAIR—There being no further questions, thank you very much, Mr Nance. Again, ourapologies for the informal nature of this session.

Mr Nance—That is all right. Thank you very much.

Proceedings suspended from 10.03 a.m. to 10.51 a.m.


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CHAIR—Today the committee will begin its program of public hearings on its inquiry intopublic liability and professional indemnity insurance. The committee will hold further hearingstomorrow in Canberra and on Wednesday in Melbourne. It also plans to hold public hearings inSydney on 8 and 9 August. On 20 March 2002, the Senate referred the following matter to theSenate Economics References Committee for inquiry and report by 27 August:

(a) the impact of public liability insurance for small business and community and sporting organisations; and

(b) the impact of professional indemnity insurance, including Directors and Officers Insurance, for small business;

with particular reference to:

(c) the cost of such insurance;

(d) reasons for the increase in premiums for such insurance; and

(e) schemes, arrangements or reforms that can reduce the cost of such insurance and/or better calculate and pool risk.

The committee advertised the inquiry and called for written submissions. It wrote to numerousgovernment bodies, organisations and associations with an interest in this matter, alerting themto the inquiry and inviting them to make a submission. To date the committee has received 145submissions on this matter. The committee wishes to thank the many organisations andindividuals who have assisted the committee with its inquiry so far.

Before we commence taking evidence, I reinforce for the record that all witnesses appearingbefore the committee are protected by parliamentary privilege with respect to evidenceprovided. Parliamentary privilege refers to the special rights and immunities attached to theparliament or its members and others necessary for the discharge of parliamentary functionswithout obstruction or fear of prosecution. Any act by any person which operates to thedisadvantage of a witness on account of evidence given by that witness before the committee istreated as a breach of privilege. These privileges are intended to protect witnesses. I must alsoremind you, however, that the giving of false or misleading evidence to the committee mayconstitute a contempt of the Senate. Unless the committee should decide otherwise, this is apublic hearing and, as such, all members of the public are welcome to attend.

Before we commenced today, we had an informal briefing from those who were scheduled asour first witnesses: the Surf Living Australia Pty Ltd. There being no objection, the Hansardrecord of that briefing will be incorporated into the record.


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[10.53 a.m.]

CLARK, Mr David, Legal Officer, Local Government and Shires Association of NewSouth Wales

CHAIR—Welcome. The committee prefers that all evidence be given in public, but if youwould like to give part of your evidence in private you may ask to do so and the committee willconsider such a request. The committee has your submission, No. 23. Are there any alterationsor additions you wish to make to your written submission?

Mr Clark—Let me deal with the first issue: there is nothing that I wish to say, other than inpublic. There is nothing in our submission that we wish to have changed.

CHAIR—I invite you to make a brief opening statement.

Mr Clark—The association welcomes the opportunity to speak to our submission to theinquiry. From my point of view, it is almost deja vu. This is my second session as legal officerfor the association. I was legal officer from 1985 to 1989 and then came back in 1992. One ofthe first jobs that I did when I joined the association in 1985 was to prepare a submission toanother government inquiry about the cost of public liability insurance for local government.The same issues that arose then seem to be coming back again. The only difference is that thesedays the cost of insurance is, unquestionably, much higher, and the number of people willing towrite insurance, particularly for local government, are becoming fewer and fewer.

We are now forced to buy any reinsurance from London. We cannot get an Australiancompany to insure a council in New South Wales. The only way that we can get public liabilityinsurance is by the formation of our own insurance pool, which most councils are now doing orhave done. Something like 135 of the 172 councils in New South Wales are in the biggestinsurance pool in the state, which is Statewide Mutual Insurance. There are a number of othersmaller pools. A couple of the larger councils, such as Sydney and Wollongong, are actuallyself-insurers from the public liability point of view. We have a problem with public liabilityinsurance in that the Local Government Act of New South Wales requires every council to carryan adequate amount of public liability insurance. We shudder to think what is going to happen ifwe reach a point where we cannot buy public liability insurance in the market, but themovement seems inexorably towards that situation at the moment.

We have always had the problem which I think a lot of public authorities, not just localgovernment authorities, have and that is what I choose to call the ‘tethered goat syndrome’. Weare here, we are on the ground, we cannot run away, we are perceived as having very deeppockets, whether we do or not, and we are seen as fair game by some members of thecommunity when anything comes up which is remotely related to the possibility of recoveringsome money. That by itself has made public liability insurance for local government the areaabout which we, as an organisation, are most concerned, rather than with the professionalindemnity side of this inquiry. By and large, we are reasonably well in control of professionalindemnity, but the public liability side is becoming more and more desperate.


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We see that there is a need for more action in a number of areas. There is a need to definemore clearly the areas of responsibility of a public authority and, dare I say it, a need to limit theability of some of my professional colleagues to be creative in the way they cast their pleadings.There is also a need to make the public at large aware of the risks they accept when theyundertake certain activities—that there are things that people do that are inherently risky andshould not automatically attract a right to compensation merely because in the course ofundertaking that activity somebody gets injured. There are limits to that. In broad terms, that isan area that we see needs to be addressed. That more or less covers the broad thrust of thesubmission that is before the committee now.

CHAIR—Thank you. Your submission notes that many of the claims that councils aredealing with are small ones, most of which are deductible under the council’s policy. Has anythought been given to alternative means of dealing with small claims?

Mr Clark—A number of suggestions have been made. The most consistent one has beenthat, where there is a claim against a public authority, whether it be a council or anybody else,the claimant should need to meet some sort of—for want of a better expression—deductible,that a claimant should meet a certain proportion or a certain level of the claim up to a certainpoint before that claim against a public authority can proceed. For argument’s sake, if it is saidthat a claimant should bear the first $10,000 of a claim, given the number of smaller claims thatwe are now confronting—and they are the real problem areas, because so many of them arebelow the deductible and so many of them, when you look closely at the evidence that supportsthem, are, shall we say, questionable—the area of claim that is of most concern to us would besignificantly reduced.

CHAIR—I think in the earlier session we had it suggested that one of the issues is that, withrespect to small claims, the costs of processing the claim are significant, if not the largestcomponent of the claim. Rather than the current process for dealing with all claims, has anythought been given to whether there should be a small claims process? That would perhaps be acheaper option for processing these types of claims rather than just eliminating them from beingable to occur through a cap or a limit.

Mr Clark—We have not given a great deal of thought to that, because there is an inherentcost with any process like that and there is still going to be a measure of cost. Certainly it willnot be as high as the cost of contesting, say, a $10,000 claim through the court system as is theprocess now. That might involve a council in $20,000, $30,000 or $40,000 worth of legal costs.Quite often the commercial decision is made to settle these claims—even if they are, on the faceof them, spurious—because the cost of fighting is simply out of all proportion to the cost ofpaying the claim.

CHAIR—Yes. But apart from some of the measures that I think your submission alsosuggests—in terms of limiting some of these small claims or limiting the ability of a claimant tomake a claim—have other avenues been explored to, for instance, remove the frivolous claimsfrom that process and still allow claims that are small but not frivolous to occur?

Mr Clark—We have certainly come to the view that some process like that would be useful.We have not given a great deal of thought at this stage to how the process would be set up.


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Senator BRANDIS—Mr Clark, you are a lawyer, aren’t you?

Mr Clark—I am.

Senator BRANDIS—You are aware, of course, that there is already a jurisdiction in courts todismiss frivolous or vexatious claims?

Mr Clark—There is.

Senator BRANDIS—So what do you propose when you speak of eliminating frivolousclaims? What additional mechanism do you propose beyond what the rules of court alreadyprovide for?

Mr Clark—As I just said to the chair, we have not really given any serious thought to whatthe alternative process would be. We see it as being useful to have an alternative process thatdoes not involve the necessity to bring into force the full litigious process.

Senator BRANDIS—But that is not up to you, is it?

Mr Clark—It is not up to us.

Senator BRANDIS—It is up to the claimant.

Mr Clark—To an extent, but if we are—

Senator BRANDIS—Unless—and some participants in this debate have suggested this, Iknow—one categorically prohibits certain classes of claims denominated either by type or byvalue.

Mr Clark—I do not think we would support that because we accept that the mere fact that aclaim is small does not necessarily mean that it is a frivolous.

Senator BRANDIS—That is right.

Mr Clark—But as things stand if there is a claim which is seen as frivolous it is up to thedefendant to plead that and to seek the court’s action to have the thing dismissed. That by itselfinvolves a level of cost which, even if the motion is successful and the court orders costs againstthe claimant, the respondent might not necessarily recover because of the financial status of theclaimant.

Senator BRANDIS—Yes, I understand that. Thanks.

Senator RIDGEWAY—I wanted to follow through on some of the evidence that you haveprovided in your submission about statistics held by Statewide Mutual Insurance—

Mr Clark—Yes, that is the big pool.


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Senator RIDGEWAY—which deals with most of the local councils in New South Wales.Are you able to provide us with some of the information about the number of claims and thetypes of claims to give us an indication of the trend of those being settled outside of courts andthose that end up getting to court and being resolved in some form?

Mr Clark—I cannot give you details but from speaking to officers of Statewide—

Senator RIDGEWAY—Whilst I note in your submission that you talk about other factorsthat need to be looked at in terms of trying to provide a solution to the current problems andwhile I recognise that the issue is not simplistic, with regard to the issue of small councilshaving what is called a below council deductible element in their policies—that is, they pay thecost themselves and deprive themselves of the opportunities to provide other services—wouldn’t that necessarily mean that the number of claims being made is generally smaller andshould it not also mean that, in terms of either arrangements with the current insurer or anyonethat you might be shopping around with, on the basis of your history you must be in a goodposition to get lower premiums? I am trying to establish what is driving the premiums up,particularly for your member groups.

Mr Clark—It is the sheer volume of the small claims that seems to be driving premiums up.I do not know whether I have actually got the figures here.

Senator RIDGEWAY—There are probably a couple of things I want to find out. How manyare there? How many are dealt with under the policy arrangements? What is the cost impact ofthat on local governments right across New South Wales, for example? What are New SouthWales people being deprived of in terms of much-needed services that local governmentordinarily would provide?

Mr Clark—I have some statistics back in Sydney but unfortunately I did not put them in thefolder that I brought with me.

Senator RIDGEWAY—I would be interested in numbers, the types of claims that are beingmade, what is settled out of court, what cost and that sort of thing.

Mr Clark—If I can take that on notice, I will supply that to the committee when I get back. Ido have those figures and can make them available.

Senator RIDGEWAY—Okay.

Senator BRANDIS—Mr Clark, the problem is, I suppose, that if you identify the smallclaims as being the driver of upward cost pressures on premiums for your association, the smallquantum of the claims bears no necessary relationship to the validity of the claims. For instance,the worst possible example of gross negligence by one of your member associations or shiresmight cause a relatively small injury to a person who is a perfectly and properly entitledplaintiff. I am not suggesting a solution to you but I am calling to your attention the fact thatmerely to say that small claims are the driver of the cost pressures does not mean that thoseclaims are frivolous or unmeritorious. It is not immediately apparent to me how onediscriminates, without invoking some kind of judicial process, between meritorious small


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claims and small claims that are essentially try-ons or, for that matter, big claims that areessentially try-ons.

Mr Clark—In some cases, it is very apparent. Of the cases the New South Wales courts havedealt with in the recent past, two at least did not get past the initial court hearing.

Senator BRANDIS—I understand that. But the point, and it is the point you made before, isthat you still have to be in court. The jurisdiction of the court has to be invoked before that canbe tested. It seems to me that, no matter what method you devise, if a person says, ‘I have aclaim which I wish to agitate,’ which you or one of your member associations as the respondentasserts is a frivolous claim, then a decision maker—whether a judicial decision maker or someother decision maker—has to go through a process of argument and reasoning to determinewhether or not the assertion that the claim is frivolous is made out. So you are in a litigioussituation the moment a claim is made.

Mr Clark—That is right. We are certainly in a dispute situation the minute the claim is made;whether it needs to be litigious is another issue, I would suggest.

Senator BRANDIS—One method that I know has been used in my state of Queensland, notjust in relation to local government cases but in general, is a compulsory reference to a mode ofalternative dispute resolution before the court is seized of a claim. That is quite often done incommercial disputes. Have you given some thought to that?

Mr Clark—As a body, the association has not given any particular consideration to whatmight be a useful alternative process, but certainly something like that does lend itself because,as you say, it seems to work in the commercial sphere.

Senator BRANDIS—Quite commonly, commercial courts will not allow commercial casesto proceed until there has been an attempt at a structured mediation to resolve the dispute—which is potentially much less costly than a full-blown trial.

Mr Clark—Certainly something like that would be useful.

Senator BRANDIS—But that is probably not going to get you over your problem with thesmall claims, though.

Mr Clark—It is not, but it might contain, at least to some extent, the cost of dealing withthose small claims. At least we would know that we would not have to spend $30,000 or$40,000 fighting the thing from beginning to end through the judicial process if we could spend$5,000 or $6,000 putting it through some sort of compulsory mediation or arbitration. We wouldmuch prefer to see that sort of situation than the present situation where, when we lock horns,we commit ourselves to spending large amounts of public money.

CHAIR—I want to backtrack to one issue which your submission and others raise in relationto the loss of the nonfeasance immunity. Could you take the committee back through preciselywhat occurred in relation to that High Court judgment, what was taken away and how youwould see the status quo being restored?


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Mr Clark—What happened in Brodie v. Singleton Shire Council was that the High Courtruled that the principle of nonfeasance was no longer good law in Australia.

CHAIR—Can you describe what that principle referred to?

Mr Clark—It came to us from English law. It had its origins in about the 14th or 15thcentury, when local government in any form was not an organised force in the way it is todayand when communities basically banded together to provide whatever common infrastructurewas necessary. For example, a town would have some arrangement for looking after streets.There is a case on the law reports, somebody versus the men of Devon. That arose becausesomebody suffered an injury on a road in Devon and they sued every resident of the county ofDevon. The principle established in relation to that was that because these bodies, howeverformal or informal they were, were established for the common good and had limited resources,they would not be liable for injury suffered as a result of, basically, letting things go.

Nonfeasance simply means ‘not doing’, and it has come to be refined in relation to roads—again through a series of English cases—to say that a road authority which forms and maintainsa road is not liable if, as a result of natural degeneration, somebody using that road suffersinjury. But it is liable for misfeasance, by either not designing and building the road properly inthe first place or subsequently doing something to the road which was not done properly and theinjury flows from that. That was held to be good law in Australia by the High Court in a 1935decision, Buckle v. Bayswater Road Board, and was confirmed by the High Court in the early1950s in Gorringe v. The Transport Commission (Tas). Until 31 May last year, road authoritiesgenerally—not merely local government, but state government road authorities as well—haveproceeded on the basis that the nonfeasance immunity rule was available to them and theywould not be liable for injury suffered on the road unless they had actively done something tocause that injury. Now the High Court has told us that that is no longer good law.

Our immediate concern about nonfeasance and the loss of the immunity is that most councilsin New South Wales, certainly, and, I suspect, in the rest of Australia as well, have planned theirrisk management strategies around the availability of nonfeasance. Many of the claims that havebeen made against them in relation to road related incidents have been successfully contested onthe basis that the only thing that the road authority was guilty of was nonfeasance, notmisfeasance. Many of those claims, because they are not yet statute barred and have not actuallybeen through the courts so they have not actually been subjected to the judicial process, aregoing to have to be revisited. Something like 60 per cent of the claims made over the last fiveyears in New South Wales come into that category, and they are, notably, claims of a fairly lowlevel. A classic example was one that came across my desk recently. A woman in a largecountry town in New South Wales claimed against the council because she backed into a treeguard. She had lived in the town all her life. The tree guards had been around the trees in themain street for at least 20 years. The evidence available to the council was that she had simplymisjudged her approach to the parking space when she reversed into it, but she claimed that thetree guard was built in such a way that she was not aware of its presence and hit it as she backedin. The council is fighting that.

Senator BRANDIS—That is arguably in the category of a frivolous claim.


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Mr Clark—It is arguably frivolous, but the council has been fighting that on the basis that itwas not guilty of misfeasance: that it acted reasonably in putting the tree guards there; they wereclearly visible to anyone paying proper attention; and, if the vehicle involved came intocollision with the tree guard, it was because the driver was negligent by not keeping a properlook out. That claim is still in the courts.

Senator BRANDIS—If we can identify two specific proposals arising from our discussions,I suppose you would say, first of all, that the definition of what is a frivolous claim ought to begiven a more robust and interventionist meaning than what is currently understood by theprohibition against frivolous and vexatious claims in the rules of court. Secondly, you seem tosee some light in my suggestion that, as in commercial cases—and so in claims against localauthorities—there ought to be some initial compulsory attempt to mediate the dispute before itis litigated. Those are two ideas.

Mr Clark—Yes, those two ideas are ones that we would very strongly support.

CHAIR—Let me explore one other issue about this nonfeasance immunity. Has it beenapplied solely to roads? Was it ever extended into the activities of charitable organisations?

Mr Clark—No, it is peculiar to road authorities.

Senator BRANDIS—With respect, I think you are being a bit hard on the High Court. Oneof the reasons the High Court decided those cases the way it did was that—

Senator CONROY—As a lawyer, declare that you are a member of that fraternity, SenatorBrandis!

Senator BRANDIS—it acknowledged that the distinction between what was ‘misfeasance’and what was ‘nonfeasance’ was so blurred at the edges that it had begun to almost entirely lackpractical utility.

Mr Clark—Speaking personally, I am very surprised that nonfeasance lasted as long as itdid.

Senator BRANDIS—In England the distinction between ‘nonfeasance’ and ‘misfeasance’did not really last after about the 1940s, did it? You might be familiar with the decision of theHouse of Lords in East Suffolk Rivers Catchment Board v. Kent et al.

Senator CONROY—Stop showing off!

Mr Clark—East Suffolk Rivers Catchment Board v. Kent was the classic case, but I thinkthere was statutory abolition in England in about 1964. Certainly the courts in New SouthWales—I do not know what it has been like in Queensland—have been very creative in findingways around the nonfeasance rule to the extent that we have, for instance—

Senator BRANDIS—You cannot blame the litigants for that, can you!


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Senator CONROY—You always used to be able to appeal to the Privy Council.

Mr Clark—No, but with respect, I blame some creative pleading on the part of somelawyers. For argument’s sake, we have a decision in New South Wales that states that a tree in aroad is an artificial structure, and an artificial structure is not covered by the nonfeasance rule.

Senator BRANDIS—That might just be a stupid decision. You cannot blame the litigants, orindeed their lawyers, for taking advantage of a decision.

Senator CONROY—You started off by telling Mr Clark that he was being hard on the HighCourt. Now you are blaming the judges!

Senator BRANDIS—No, I am not. I am merely saying that the law is ultimately subject toparliament, as the courts declare it to be.

Senator CONROY—You said it was a stupid decision; we agree.

Senator BRANDIS—That does not mean one has to agree with every decision but, equally,you cannot blame the litigants for taking advantage of the law as declared by the courts.

Mr Clark—No, indeed. But I think the Smith and Hunters Hill case is a classic example ofhow some judges have been very creative in making sure that plaintiffs at the end of the day gettheir two bob’s worth.

Senator BRANDIS—I think that is right.

Senator RIDGEWAY—In the annexure to your submission, there is a list of localgovernment bodies and the range of problems that exist in getting coverage for public liability.What I have not found in your submission—and you might want to give some sort ofdescription—is how cover is procured at the current time for all the local government bodies inNew South Wales. Are they pooled at the moment? Have some of them decided to get together?Is there a comparative analysis of which ones work best in finding solutions? You have a rangeof things listed, from those councils that cannot get cover for everything from senior citizenfunctions through to Christmas carols events to other bodies that are potentially at risk and needcover for the same types of things. What is the difference between them? Are councils going todifferent insurers?

Mr Clark—No. I think you have misconstrued what we put in that submission. Those areexamples of community groups outside local government—albeit that they might be sometimessponsored by the local council. These are community groups that are coming to their councilsand saying, ‘We can’t buy public liability insurance anymore. Can you help us?’ The councilshave come to us as the peak body in New South Wales and said, ‘Is there anything that theassociations can do to help these people?’ At the moment, we cannot do anything because it isoutside the ambit of our powers.

It is there to give an example of the size of the problem that community groups in New SouthWales are having and it seems to us that a lot of the problem is coming from the fact that manyunderwriters that were previously writing policies in this area have now made the commercial


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decision to get out of the field. These small community groups are not profit making and it isnot worth the while of these underwriters to write policies for these people anymore, even ifthey have no claims record at all; even if they are pure and unsullied and have never had a claimagainst them in their lives. I cannot imagine groups like quilters guilds and the local art classbeing seriously exposed to public liability risk, whereas I can see—for argument’s sake—thelocal trail riding organisation having some exposure. But whether it be the trail riding group orthe quilters guild, they are all in the same boat. None of them can buy public liability insurance.

Senator RIDGEWAY—So is pooling of the shared risk something that is normal in NewSouth Wales amongst local government bodies, given that you wrote a similar submission backin 1985?

Mr Clark—It has come to be the norm. The difference between now and 1985 is that in 1985there were companies in Australia that were still prepared to write public liability insurance forlocal government. Now there is no-one in New South Wales or in Australia for that matter thatwill write local governments public liability insurance. We have to go to London for it.

Senator RIDGEWAY—So it is predominantly being done through London now—offshore?

Mr Clark—Yes.

Senator RIDGEWAY—Okay. Thanks.

CHAIR—That concludes the questions. Thank you very much for your appearance, MrClark. Again, I apologise for the earlier delays.


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[11.35 a.m.]

BAIN, Dr Robert, Secretary General, Australian Medical Association

BURTON, Ms Pamela, Legal Counsel, Australian Medical Association

SEDGLEY, Dr Michael, Chairman of Council, Australian Medical Association

CHAIR—Welcome. The committee prefers all evidence to be given in public but, if youwish, we will consider a request for any evidence to be given in private. The committee hasreceived your submission, No. 111. Are there any alterations that you wish to make to that? No.I invite you to make a brief opening statement, and we will move to questions after that.

Dr Sedgley—Thank you very much for agreeing to see us. The AMA is here today becauseof its concerns regarding the actual loss of large numbers of medical services in the community.Not only has the medical indemnity crisis rendered several areas of medical practice financiallyimpossible but also increasing litigation—win or lose—is placing larger and larger burdens onmedical practitioners, which is leading to very unsatisfactory working conditions. We have asituation where even the very beginnings of medical practice are threatened, with medicalstudents and their teaching becoming unsustainable for reasons of insurance. General practicetraining programs are threatened as general practice owners are no longer willing to employtrainees, and the reason for that is that they cannot get insurance.

Doctors, particularly in rural areas around the nation, are increasingly unable to afford thehuge hikes which are and which have been occurring in medical indemnity premiums.Examples of this are the rural specialist obstetricians in Victoria. They are now pretty muchforced to deny women the choice of private obstetric care. That has actually happened. Publichospital services in rural Victoria are also threatened. Many doctors in Queensland have beenunable to continue working, and you will have seen in the press that there is massive unrestacross the country. The collapse of UMP and the problems arising from that are just part of awider picture of crisis in provision of medical services in this country.

Government, philosophically, has decided to subsidise general practice and other privatepractice in Australia via the Medicare rebate system. This system has remained virtually frozencompared to the rises which have occurred in our medical indemnity premiums. An example ofthat is that last year the Medicare rebates went up by about 1.7 per cent across the board, asopposed to—and it varies a lot in different areas of my profession—a 30 per cent rise across theboard in medical indemnity premiums.

Government is currently considering measures to guarantee various immediate problems inour medical insurance industry, but these have been sufficient only to help many doctorscontinue working temporarily without fear of losing everything they own as a result of a lawsuit. These measures are only guarantees with the caveat that the medical profession—thedoctors—will eventually pay for them with interest. That concept, of course, has to be untrue; itis the patients, the sick people in the community, who will have to pay these levies in the end.Without proper long-term reform, and government subsidy in the meantime—while that is put


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in place—many doctors are simply giving up practice. Some are stopping the private element oftheir practice and sending their patients into the public sector where, of course, they are insuredby the government. Postgraduate training programs are threatened; student teaching isthreatened.

We believe that the medical indemnity crisis threatens medical practice in Australia as weknow it and we are now at a crossroad. Do we go down the American path, which has involvedcrisis after crisis over the last 20 to 30 years, a huge loss of services and total unaffordability ofmany services to Americans? Do we go down the British path and completely nationalisemedicine? That, of course, means that the government pays for everything. Or do we find ourown uniquely Australian solution to the problem based on a public and private system of healththat is affordable to the community? I pose those questions. We would like to answer anyquestions you might have of us.

Senator BRANDIS—I do not profess to be an expert in medical insurance but I can tell youthat where I come from, in Brisbane, it is commonly said by people in the medical and legalprofessions that one of the main catalysts of this crisis—that is, the collapse of UMP—wasproduced by the fact that for years, in order to expand market share, UMP had been offeringunrealistically low premiums to members of the medical profession, which they were taking upwith alacrity. Ultimately, as a result of that commercial strategy, UMP found itself woefullyundercapitalised. What do you say about that?

Dr Sedgley—I do not think that we would disagree with that at all. What we are reallysaying, though, is that there is much more to the problem than just the collapse of UMP.

Senator BRANDIS—I am not suggesting that there is not.

Dr Sedgley—What we would like to see as a reform in the future is the medical defenceorganisations being more answerable to their members. We have been advocating that they beanswerable to APRA—the Australian Prudential Regulation Authority—in certain ways. We arelooking at a situation where some people say, ‘The doctors got a bargain, didn’t they?’ Theirpremiums are absolutely out of control at the moment, without even considering the levies thatare going to have to be found to pay for the results of this collapse. Our concern is that we in theprofession are small business people. Like anybody else, we will have to pass these costs on. Ifwe have to pass the cost of that collapse and the premium rises on to our patients then ourservices will become unaffordable.

Senator BRANDIS—Did you say that you are the chairman of the medical professionalindemnity taskforce of the AMA?

Dr Sedgley—Yes.

Senator BRANDIS—Surely you understand people—even though, obviously, you would notshare their cynicism—who say that, for years and years, doctors were in effect underchargingthemselves and paying uncommercially low premiums to UMP, and now they are coming alongand whingeing that they are paying too much. You say that you are paying too much, yet thereason the premiums are so much higher now is that, for all those years, they were too low. Youmust appreciate that some people are a bit cynical about doctors, if we were to put it that way.


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Dr Sedgley—I do appreciate that. It is an argument that was applied to the collapse of HIHand to many insurers: they had been undercharging premiums to get other people out ofAustralia and developing, they hoped, a bigger membership so they could cope with theproblems that would arise from their very low premiums. I understand that absolutely. But if weare going to have medical practice survive, I think that our only way is to look forward. Thereare four factors that are said to have contributed to the collapse of UMP-AMIL. One of themwas the production of the new laws in New South Wales—the reforms. That meant that a lot ofcases were brought forward, so there was a bit of a surge in claims and that made a difference.

Senator BRANDIS—That was a one-off.

Dr Sedgley—That was a one-off. There was the collapse of HIH; that was a one-off.

Senator BRANDIS—Hopefully a one-off!

Dr Sedgley—One of the major problems is the enormous rise in the long-term care andrehabilitation costs of the severely disabled—that is an ongoing thing—and they are expandingand expanding. You will remember the Calandra Simpson case in New South Wales. I am notsure how much that cost UMP-AMIL but I think, by the time all the interest and legal fees werepaid, it was up to $19 million. I do not want to blow it out of proportion; the settlement itselfwas $12.9 million, I know, but there were other costs involved in that. If you divide thatamongst the number of obstetrician members of an MDO, how much money it is per doctor ismind-blowing. Of course, they have to then take that cost from the fees that they charge theirpatients. It is this side of it that we feel that we and the government could do something about.We cannot do anything about the poor management practices of the past; we are stuck withthem. We have to pick up from here and try to improve the situation for our patients.

Dr Bain—Perhaps a point worth making is that, through that period, the doctors’ costs andfees reflected the lower level of premium; the patients were as much beneficiaries of it as thedoctors were.

Senator BRANDIS—There is a time equity problem, isn’t there? It is all very well to saythat at that particular time that may be so, but it now has an equity effect some years later.

Dr Bain—Yes, it does, from both the patient’s and the doctor’s perspective. The patient had agood deal and the doctor had a good deal, with the benefit of hindsight, but now we are in asituation where hindsight has caught up with us and we have a completely unsustainablesystem.

Senator BRANDIS—I am a little struck by the irony: when Mr Whitlam toyed with the ideaof a national compensation scheme which, in some respects, resembled what the AMA isproposing, I do not think anybody in the community screamed louder than the doctors did. Theytalked about ‘socialised medicine’, I recall.

Dr Sedgley—We are not advocating a full national compensation scheme, although we mayneed to do that. We have to do something to preserve the affordability of our services. That ishow things are; they are as bad as that. Whatever the AMA did in the past, we have to look tothe future of medical services. We have a lot of support in the community, I believe—and from


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lawyers and, hopefully, from politicians—for the concept of a scheme to cover the long-termcare and rehabilitation costs of people who have been injured and who have awards againstmedical defence organisations. That cost, I believe, at the moment—and these figures are real,but I do not know quite how accurate they are—would be about $77 million per year. That is thesort of cost that we believe the government actually needs to take out of the system to stabiliseit.

To give you an idea of the sort of inflation we are talking about, I will use the CalandraSimpson case as an example. When the doctors were paying the medical indemnity premiumsfor Calandra Simpson, who was 22, 22 years ago—and I do not know how much they werepaying—they were probably paying $100 a year. It might have been less than that; it wasvirtually nothing. That is what the doctors of that time were putting aside for the future, becausethey had no idea what would happen. In terms of what we are putting aside now for our medicalindemnity organisations, I have seen figures that suggest that the Calandra Simpson case, in 22years time, at the rate of inflation that has been occurring in medical indemnity awards, wouldbe worth $700 million. Those are figures that you hear a lot around the place, but those figureshave come from somewhere into my mind.

Senator BRANDIS—Have you taken out some figures or done a study that plots the rise inthe professional indemnity premiums for given subgroups—for example, neurosurgeons—as apercentage of the average income of the members of that subgroup?

Dr Sedgley—Figures in this matter are extremely difficult to obtain. The medical defenceorganisations have only met twice.

Senator BRANDIS—Just answer my question. Do those figures exist?

Dr Sedgley—There are some figures that exist in a report of Trowbridge Consulting. It is anindependent analysis. That came out of the first meeting of the medical defence organisations inthis country about eight months ago, when they formed a working party representing 96 percent of Australian doctors. One of the defence organisations—MIPS—did not join that, but allthe others got together. They were able to provide some statistics for Trowbridge so that theycould put out a report.

Senator BRANDIS—I have seen that report.

Dr Sedgley—There are state government organisations as well, such as the VictorianManaged Insurance Authority, that could give statistics.

CHAIR—Could I flesh out this issue of a nationally funded scheme for the ongoing care ofseverely injured people. Are we referring to all severely injured people or just those who mightotherwise have had a claim?

Dr Sedgley—I think that the AMA’s aim in this is to make our services affordable, so wehave to confine our interest, or our advocacy, to those people who have awards. I believe that isabout one to two per cent of the total, if you look across the severely injured in the community. Ihave forgotten how many million dollars our market is. WorkCover and TAC are about $2.2billion, and our market is a very small part of that.


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CHAIR—Is this how the New Zealand system operates, to your understanding?

Dr Sedgley—Yes. New Zealand has an accident compensation scheme which covers allmedical injury and negligence. We are not advocating that. We are advocating purely to take outof the tort system the one type of damages that is burgeoning out of control in cost. We areadvocating for tort law reform at the same time, but not necessarily saying that there should notbe fault. The payout for fault would be for things like general damages, loss of earnings andmodifications to the house. I think those types of costs in Calandra Simpson’s case would haveamounted to about $2 million—they tend to in a large settlement. We would like to see long-term care and rehabilitation costs removed from the system and also that the people who areinjured are properly managed.

CHAIR—So you are essentially looking at an extension of what applies to, say, TAC peopleto this class of people as well?

Dr Sedgley—Yes.

CHAIR—Rather than going down the path of the New Zealand system, which is moregeneralised?

Dr Sedgley—That is correct. We are not advocating for a full-on, no-fault compensationscheme at all.

Senator RIDGEWAY—I want to follow up a few things in your submission. I gather thatyour submission is really about trying to deal with the unsustainable part of the current systemthrough, presumably, a community funded national scheme. You also talk about other aspectsthat need to be looked at in terms of reform. I am particularly interested in the comments aboutreform of the Trade Practices Act and the issue that you raise in relation to the ACCC andobstetricians in Rockhampton. Do you want to talk a little bit more about that? I am not familiarwith that case.

Dr Sedgley—This is very much to do with the provision of services. Dr Bain will answeryour question.

Dr Bain—As you know, the government has an inquiry into the impact of the Trade PracticesAct on the recruitment and retention of rural doctors. We are waiting for that inquiry to report.In essence, doctors might get together to form a roster or, as in this case, to share the workload.Three or four doctors in a country town might say to one of their number, ‘You have got adiploma in obstetrics, so you take out the insurance and we will send you all the babies.’ Themoment you did that, you would have Allan Fels knocking at your door.

In Rockhampton, three obstetricians got together to set up a one-in-three-weekend roster.They are now being pursued for collusion. Every one of their patients has been written to byFels, who said, ‘We believe that your doctor has breached the Trade Practices Act.’ Of course,the patients mostly would not know. The result is that two of the three obstetricians have givenup obstetrics entirely rather than try to keep going without a roster. Each of them is facing quiteheavy fines by the ACCC. One of them has told me that he is going to leave Rockhampton onthe weekend. So the consequences are that the level of obstetric services in Rockhampton has


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been decreased by two-thirds—two of them have given up obstetrics—and the doctors arefacing fines. Everywhere that doctors try to get together to form rosters or to share the work orwhat have you, they run straight into the Trade Practices Act. It creates a major problem,particularly in country towns where three or four doctors want to set a roster.

Senator BRANDIS—That has nothing to do with the escalation of insurance claims.

Dr Bain—Doctors have said, ‘We can’t all afford to take out cover for obstetrics in thistown’—because it is $40,000 or whatever—‘so one of us will take out the cover for obstetricsand deliver all the babies.’ So they have tried to reduce the insurance costs amongst themselvesby sharing the work. If all the doctors at a country hospital get together and say, ‘We need aspecialist of a certain type here for a couple of days a fortnight,’ and they approach a cityspecialist and say, ‘We will guarantee you all the cases of a certain type if you will come downto Bega’—or wherever—‘once a fortnight,’ it is immediately a breach of the Trade PracticesAct and the doctors are in all sorts of trouble.

Senator BRANDIS—Why didn’t the doctors just apply for an authorisation under the TradePractices Act?

Dr Bain—We have.

Dr Sedgley—We have applied for several, Senator Brandis.

Dr Bain—We have spent a fortune on authorisations that have failed. The last one was forcountry hospitals in South Australia, where we asked that doctors be able to speak jointly withthe local hospital. That was denied.

Dr Sedgley—It would be of great advantage to rural doctors as independent practitioners ifthey could have somebody represent them in their negotiations with the hospital. They cannothave this, because of the Trade Practices Act. Another example, which you may have heard of:three or four anaesthetists in New South Wales breached the act by deciding that they wouldcover a hospital together for a certain amount of money, and they told the hospital how muchthey wanted. The association of anaesthetists settled with Mr Fels for $60,000.

Senator RIDGEWAY—What do you see as a reform in the Trade Practices Act that woulddeal with those types of issues that are presumably done on the basis of achieving economies ofscale and applying some commonsense?

Dr Bain—Yes, and to give doctors tolerable working hours while making sure that someoneis available the whole time. They are separate issues, but they do interact in quite a number ofareas.

Senator BRANDIS—The problem is that collusion, per se, is breach of the Trade PracticesAct. Your problem would be addressed if section 45 of that act were amended so as to requirethat there be demonstrated as well an anticompetitive effect.

Dr Bain—Maybe.


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Senator CONROY—What were the grounds on which the authorisations failed?

Dr Bain—The South Australian hospitals case was knocked back on the grounds that whilethey accepted that there was public benefit in doctors being able to—

Senator CONROY—So there is a public benefit test that you can appeal to?

Dr Bain—But they said, ‘We’re not convinced that you could not achieve the same benefit insome other manner.’ They did not go on to specify what that other manner was, and no-one elseknew what the other manner was.

Senator CONROY—Collective bargaining on behalf of doctors.

Dr Bain—They said, ‘You can’t do any collective bargaining.’ We had been doing it in SouthAustralia forever, and the South Australian government supported it. The consequence is thatwe are losing doctors in rural Australia.

Senator CONROY—Tony Abbott will be stopping you now!

CHAIR—I want to cover the issue of the solutions you see for APRA in the future. Giventhat there have been considerable concerns raised in a few areas now about the level ofregulation that has occurred to date and to what extent that has generated the problems we arenow facing not only in relation to insurance but also in some other areas as well, suchsuperannuation, I am curious as to the extent to which you think the new prudentialrequirements set down by APRA will resolve some of the current difficulties.

Dr Sedgley—That is a difficult one for me as a doctor to answer.

CHAIR—It leads to the further question: what else do you think needs to be done to improvethe regulation that APRA can provide?

Dr Sedgley—I take Senator Brandis’s point about what has happened in the past. I would notlike to see that ever happen again. One of the things that the AMA has been trying to do forseveral years is persuade the medical defence organisations to come together and give us somedata so that we know what is going on and could answer some of these questions you have beenasking, or somebody else could take an independent analysis and show that what we think ishappening in our marketplace is actually happening so that we could have an independentopinion.

That took years. The previous health minister agreed to let me and a couple of other doctorsspeak semi-informally to some of the senior bureaucrats in Canberra. We never got anywhereand we never managed to get that data; it is only just becoming available now. So we would liketo see a situation where the medical defence organisations have to have some sort of database,which is de-identified of course—we do not want to undermine their business sensitivities—sothat the profession, their members, can know what is going on.


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As to the issue of financial regulation, I just do not know enough about those areas to be ableto say exactly how that should be done. I would like to see a situation where a medical defenceorganisation is properly capitalised, everybody knows where it is going and it is transparent toits members. I guess there is always the chance of any organisation falling over, even a bank,but I would like to see a situation where those chances are minimised. One of the problems, ofcourse, is that nothing comes without cost, and it will cost the members of the medical defenceorganisations something just to have that regulation. The other thing—and I am sure Dr Bainwill talk about it in a minute—is that, if the APRA regulations were put in place right now, I donot know what would happen to our medical defence organisations. I think there would be quitea few difficulties—the matter of discretionary cover comes up, but I will stop there and let DrBain continue.

Dr Bain—As you are no doubt aware, at the present moment the MDOs are not covered bythe insurance act, which has enabled them to do a range of things and not have to hold the sortsof reserves necessary if they were insurance companies. UMP has a captive insurance company,AMIL, and the factor that precipitated the need to bring in a provisional liquidator was thatAMIL was clearly not going to meet the capital requirements of APRA.

We would like to see some APRA requirements on the MDOs so that all of them have to meetminimum capital. There is also the question of common accounting standards. They have alladopted slightly different accounting conventions, with the most starkly different being at UMP,which had not brought the tail of what are called IBNR—incurred but not reported—incidentsonto their balance sheet. When they were finally estimated last year at about $455 million, therewas no way that UMP had sufficient assets to meet anything like that.

So we would like to see a common accounting standard and a reasonable set of APRA reserverequirements put in place. As Dr Sedgley said, the MDOs would not initially be able to movestraight to that. Because of their nature, they cannot go out and raise equity capital, so theywould have to be given a period of two or three years to meet certain requirements and to gettheir capital up to what is considered a reasonable level.

CHAIR—If we go back to these not-reported incidents in relation to UMP, how was itascertained that they had not been put on the balance sheet?

Dr Bain—They acknowledged that they were not putting it on the balance sheet. Theyclaimed that, as a discretionary fund, they were not legally required to. There was someambiguity in the accounting standards until very recently as to whether you needed to put thosethings on. Their view was: ‘As claims come forward our actuaries will estimate how muchmoney we need each year and then we will raise that from the premiums.’ That was working allright until the actuaries said, ‘I’m sorry, but your claims have gone up enormously, particularlyyour large claims.’ The premiums that they had to put on to then meet those claims were quiteout of the question for some.

Senator BRANDIS—It was not even recorded as a contingent liability?

Dr Bain—No, it was not recorded at all.


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Dr Sedgley—This was common practice a few years ago. This happened with all of theMDOs. Presumably you have seen the medical defence organisations already today, so youknow how many there are in Australia. None of the medical defence organisations used to putthat on their balance sheets because, until the last few years, I suppose, it was not such a hugefactor. You just did not have these massive claims that you have now.

Dr Bain—As long as claims were not escalating it actually worked all right. The moment yougot a spike in claims it just blew up.

Dr Sedgley—It is worth noting that one of the reasons that doctors are becoming veryrestless is that there have been levies all around the country already. If you remember, inVictoria two or three years ago, the MDAV and MIPS both levied all the doctors in the state anadditional year’s premium. That is how they have been trying to catch up. They have the abilityin their memorandum and articles of association to make a levy equal to the annual premiumeach year. They have exercised that levy right around Australia. So when you are talking aboutpremium escalation you are forgetting, almost, the fact that doctors have already had to pay afairly substantial levy in all states of Australia in order to try and help the other MDOs, apartfrom UMP, into a better financial situation. Of course, if the government did support us in theprovision of the long-term care scheme, we believe a lot of these problems would be dealt with.They would not exist anymore. If those long-term care costs were taken out, you could go backto these IBNRs—that is the tail of it; the incurred but not reported claims—and all of a suddenthey would shrink because you do not have to reserve so much if you do not have to bereserving for the contingency of $15 million claims.

Senator BRANDIS—You said in your evidence earlier that the area that has escalated mostis the cost of future medical care of seriously harmed patients.

Dr Sedgley—Not the medical care but the care and rehabilitation costs. Medical costs go onand on, of course, but it is the care and rehabilitation costs or the costs of looking after thesepeople—of giving them physiotherapy or just caring for them—that have escalated. Somepeople are so severely injured, of course, that they need 24-hour care.

Ms Burton—The attendant care is an element—that is around-the-clock care. It needs morethan one person to relieve and sometimes two to pick people up. So that can be very expensivein the common law award of damages to cope with that on a proper basis.

Senator BRANDIS—To what extent is the growing cost of more sophisticated forms ofmedical treatment an important influence on the expansion of that category of damages and towhat extent is that a driver of the escalation of premiums for your members?

Dr Sedgley—I cannot quantify it for you but, of course, severely injured people are livingmuch longer because of the improvements in medical care. That exacerbates the insuranceproblem.

Senator BRANDIS—I suppose it is a bit like the debate we are having in this country aboutthe Pharmaceutical Benefits Scheme. As medical science improves it can provide more andmore benefits to patients and keep them alive longer, but people tend to forget that thoseimprovements often come at an extremely high incremental cost as the technology and the


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modes of treatment become more sophisticated. Do you say that that consideration is animportant driver of the problem?

Dr Sedgley—It is an important driver, I suppose, of the courts’ perceptions of how longpeople will live, because they are going to live a lot longer as a result of modern day care. But alot of the costs come out a judgment called Kerkmeyer in the seventies—

Senator BRANDIS—Griffiths v. Kerkmeyer?

Dr Sedgley—That is right. That has to do with the cost of people looking after other people.In that judgment, of course, they put in all the costs of superannuation and all the rest thatcomes in for attendant care. As I understand it, those are the costs that are really ballooning outmore than anything else.

Ms Burton—I just want to add there that, as Dr Sedgley said, the life expectancy for 20-year-olds—say, Calandra Simpson, and many others—has increased enormously. It is a group theyonce did not really understand. Their life expectancy has gone up—I think Calandra Simpson’swas estimated at 75 years. Some allege that the normal life expectancy for a female at 20 will be86.

In addition to that, you talk about the actual medical costs. There is not necessarily muchmedical treatment involved in terms of increased costs of the treatment because these arelifelong disabilities. But occupational therapy, machinery, equipment and types of aids to makelife more comfortable are being bettered and come at much higher costs. Electric wheelchairsare being perfected. There are all sorts of communication machines—computers of all types tohelp people talk or to indicate their needs through their mouth and so on. These have beenexpanded enormously. They were not considered or even thought of years ago. In fact, withseverely brain damaged infants, many years ago they assumed there was total mentalimpairment or a high degree of impairment. In fact, they found that with total physicalimpairment there is sometimes normal intelligence. So these aids have been brought about andare now used, at great cost—quite rightly—to bring out the intelligence in a physicallyhandicapped person. So there is a huge cost when you estimate the replacement costs up to, say,the age of 70.

Senator BRANDIS—The second question I had is probably going to be more a matter ofimpression than anything else for you. To what extent is this a New South Wales drivenproblem? Famously, the awards of damages are noticeably higher in New South Wales than inother jurisdictions. To what extent are these pressures the result of the way that the court systemworks in Sydney?

Dr Sedgley—I can answer that state by state. New South Wales—and I suppose you shouldinclude the ACT in that—has always been said to be the second most litigious state on earthafter California. New South Wales is very much at the epicentre of the problems.

Senator BRANDIS—It is not just the quantum of litigation, though; it is the quantum of theawards.


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Dr Sedgley—Yes. Victoria has not had nearly such high awards and neither has Queenslandor any of the other states. I guess there may be a problem in the perception of reinsurersoverseas. I do not know—perhaps that is something the MDOs would have told you about. Icome from Victoria myself, and in Victoria we have problems purely because the premiums areescalating so quickly. As I told you in my opening address, in obstetrics the premiums havegone up 100 per cent this year, or very close to it. It has gone from $32,000 to $58,000. Thereare some specialties that are more threatened than others.

Senator BRANDIS—It strikes me that there is a disequilibrium here because, whereas thecost of risk, or the premium, is a national market—and to a certain extent, when you considerreinsurers, it is an international market—the drivers of that cost within Australia are notnational. They are local, and they are quite specific to the inflation of awards in one state—NewSouth Wales. Presumably when actuaries decide what the premiums ought to be, or when theyadvise the insurers what the premiums ought to be, they have to factor in the premiums for thelargest potential awards. That affects everybody, irrespective of the jurisdiction within Australiain which they live.

Dr Sedgley—That could be so. In Victoria the numbers are much lower. UMP insured 70 percent of Australia’s doctors and the other 30 per cent were insured by other organisations. Sowhen you look at MDAV, MIPS, MDAWA, MDASA and MPS Tasmania, you are looking at thesmaller part of the market. If one of those organisations was to handle a Calandra Simpsonaward, I assume—I do not know—there would be massive problems.

Senator BRANDIS—Is this a problem that is more acute for your members in the smallerstates? I am guessing now but I imagine the income of an obstetrician in Hobart would probablybe lower than an obstetrician’s income in Sydney.

Dr Bain—But the premiums would be proportionally lower as well. They do not pay thesame premium nationwide. The premium in Hobart might be $40,000 as against, say, $120,000in Sydney.

Dr Sedgley—The medical defence organisations of course have national members. We have1,500 UMP members in Victoria. MDAV insure people outside Victoria and I am pretty surethat they have a weighting for the state in which their members work, so there are statedifferentials.

CHAIR—That concludes the questions. Thank you very much for attending.


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[12.17 p.m.]

BUTLER, Dr Robert John Francis, Executive Director, Australian Dental Association Inc.

PERSSON, Ms Monica, Executive Manager, Audiological Society of Australia Inc.

STEPHENS, Dr David Hector, Policy Consultant, Australian Council of Professions Ltd

CHAIR—Welcome. The committee prefers all evidence to be given in public, but if youwould like to deal with any part of your evidence in private, please ask to do so and thecommittee can consider such a request. We have your submission numbered 55. Are there anyalterations or additions that you wish to make to the written submission?

Dr Stephens—I think the only one is the reference to a report from the Australian Institute ofQuantity Surveyors being a draft. That is now a final report and the substance has not changed,as we quoted it in the report.

CHAIR—We can now regard that as the final report?

Dr Stephens—Yes.

CHAIR—I invite you to make a brief opening statement and then we will proceed toquestions.

Dr Stephens—The Australian Council of Professions welcomes the opportunity to appearbefore the committee. Our president, Mr John Castles, regrets being unable to attend. As a peakorganisation representing a number of professional associations, we are acutely aware that whatwe are facing is not just a medical indemnity insurance crisis, or a public liability insurancecrisis, but a crisis that affects a range of insurance cover held by many different individuals andgroups. Accordingly, we commend the committee for the breadth of its terms of reference. Wealso welcome the broad terms of reference of the Assistant Treasurer’s review of negligence lawannounced last week.

With me are Ms Monica Persson, who is Executive Manager of the Audiological Society ofAustralia, and Dr Butler, who is Executive Director of the Australian Dental Association. Boththe Audiological Society and the Dental Association are constituent organisations of theAustralian Council of Professions. Ms Persson represents a profession for which insuranceoptions have been drastically reduced in recent times by the unwillingness of insurers to take onbusiness. Dr Butler speaks for the hundreds of dentists who, as former clients of United MedicalProtection, are still waiting to hear how the government’s decision on this crisis will apply tothem as well as to the doctor clients of UMP. Those are two aspects of the crisis that thecouncil’s submission to the committee did not touch on. Perhaps Ms Persson and Dr Butlercould say some more about those aspects shortly.


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Another aspect we did not mention was the disappearance of cover for certain types of workdone by professionals. That issue is well covered in the submissions from the Engineers and theCPA, both of which are constituent organisations of ours. Our own submission presentsinformation, survey based and anecdotal, about premium rises affecting a number ofprofessions. As to the reasons for those rises, we are no more qualified to say than are othercommentators, although we do make two comments in the submission that I would like toemphasise now. There does not appear to be a strong link between claims history and increasesin premiums. It is foolish to look for a single cause and a single target for blame in what is avery complex issue. Our submission also canvasses some possible solutions, most of whichhave been addressed by other submissions. One would have thought that the wide agreement onthe package of solutions might have led to action by governments earlier than this. Some ofthese issues have been around for a long time. As we say in our submission, they have longsince passed from the realm of tardiness into that of failure of will. We hope that is about tochange.

Ms Persson—My main concerns surround the withdrawal of insurance cover under the guiseof our being a high-risk profession, where the insurers have been unable or unwilling tosubstantiate this allegation. I have asked on repeated occasions for details of the claims historythat has led to this decision to withdraw cover but so far have not been supplied with anydocumentation that comes even close to providing answers. We have been insured by Aon, intheir various incarnations, since 1993, and they have only been able to provide details of fivereports since 1998 and only four possible claims since 1993. I use the term ‘reports’ as theyhave not become claims and, according to their own documentation, they have been closed. Theonly names I have been able to glean from them are for people who are not members of oursociety, nor have ever been as far as I can ascertain from the records in our office, which onlygo back to 1968. Two claims are for a company, and I would suggest that, if Aon chose toinclude a company on their books under our group scheme, they did so without our knowledgeor approval.

One of the key issues here is that we are very particular about who can become a member ofthe ASA. There have been a number of people who have not been accepted as they did not meetour requirements, either in qualifications or practice, and there have been people who have alsobeen expelled for inappropriate practices. If the insurance company have chosen to lump all theaudiologists they have on their books into our group scheme then we should not be brandedhigh risk due to their lapse in quality criteria in accepting them. There is no registration orlicensing for audiologists, and almost anyone can hang up a shingle and claim to be anaudiologist—which is a problem in itself. These may be the very people who have had claimsmade against them, and, if so, the insurance company should then be taking responsibility fortheir poor judgment. We are waiting for them to substantiate their allegations, but at this stagethey do not appear to be in any hurry.

My second concern is that they have quite deliberately hindered our efforts to accessalternative cover. They have been tardy in providing documentation upon which another insurercan assess our risk potential. By delaying the provision of appropriate documentation, theyhave, in effect, deprived us of the opportunity to negotiate alternative insurance options for ourmembers, leaving our members in a potentially precarious position as they try to find insurancecover in order to continue to practise. They must have this insurance cover at the request of thegovernment under the Office of Hearing Services requirements. They have to have a minimum


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of a $5 million PI policy—because that is the requirement if they wish to do government work.That, in itself, is creating a problem.

Thirdly, Aon has now come back to us with a group scheme with insurance coverage that hasincreased by over 500 per cent. We have an example of a member who had a $950 policy that isnow $5,970, and it does not include all the issues of coverage that the previous policy did. Aonhas required our audiologists to complete extensive, detailed paperwork requiring in-depthresponses on a promise of possible cover, with only days to go before their cover ran out. Manyof our members did not receive notification of the cessation of cover other than by our quarterlymagazine, where we notified them when we received our information on 5 June that it wasstopping and, under Royal and SunAlliance’s own view of things, it would not be covered after30 June no matter what. So we got the information into the magazine, but that did not get out toall our members until the middle of June. Some of our members were not told until 26 June thattheir cover had, in fact, ceased. It was verbally indicated to me that the exercise is all aboutmoney. Our group scheme had a total pool that was too small and therefore was not worthpursuing.

Audiology is a highly qualified profession requiring five years of postgraduate study toachieve a Masters of Clinical Audiology, and it is not a profession based on physically intrusiveor invasive practices. It has no substantiated claims history. Remember, a very fair groupscheme was negotiated. We understood that there would be some increases; we never expectedthat there would be no cover. More particularly, audiologists who are members of theAudiological Society of Australia have to abide by the highest professional practice standardsand code of ethics. Why should our members be refused cover based on scurrilous suggestionsand innuendo by an industry trying to cover its back and recoup losses due to decades of poorbusiness judgment? We are held to ransom as the field of insurers rapidly reduces. There arenow two players. At the moment, our people manage to get coverage through AMP-GIO, butthat only goes until April. Large numbers of our members moved across to get this cover; it wasthe only thing left. Royal and SunAlliance and CGU are the only players in the game, and thatis where you get the increases of 500 per cent.

The policy costs will escalate to the point where either insurance will become a thing of thepast or practitioners will cease to practise as the law creates instant millionaires, with noapparent concern for the effect on the fabric of society. Our increases have been up to andcertainly just over 500 per cent. We have 1,000 members in the Audiological Society.Interestingly, the Psychological Society has 10,000 members and, funnily enough, their increasewas only around 18 per cent. Are we talking numbers or are we talking risk? The other thing isthat audiology remains a preferred occupation, according to Immigration, because we have toofew audiologists. If the increases continue at this rate, we will have even fewer. One of mymembers paid $395 for her insurance last year, and she earns about $6,000. Her policy for thisyear was $1,700. She is going to have to pay that and she earns $6,000. Why bother to stay inthe profession?

CHAIR—Ms Persson, before I go on to Dr Butler, can I clarify with you: your memberswere previously part of a group scheme that can no longer attract cover?


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Ms Persson—Aon was, I gather, the broker. Aon indicated via an email to us that there wasno appetite for paramedical insurance and that, as such, we were considered to be too high a riskfor Royal and SunAlliance to continue to provide it.

CHAIR—So at this point in time the pool cover is not—

Ms Persson—It is not deemed to be attractive enough to the insurance companies.

CHAIR—But these cases that you have indicated, of people who have had 500 per centincreases, were on individual cover?

Ms Persson—There were three audiologists in the one group, and theirs went from a $950policy that covered the three of them to a $5,970 policy. A $395 policy went to $1,700. A $720policy, which is the one that an individual would have in order to meet the Office of HearingServices requirement, went to $2,465.

CHAIR—But these cases were people who were not previously in group schemes. Is thatcorrect?

Ms Persson—No, they had all been in group schemes.

CHAIR—So you are looking at what their cover had been under the group scheme and atwhat their cover now is as individuals or small groups?

Ms Persson—They were no longer allowed access to a group scheme and Aon was comingback and requiring them to apply as individuals, with the potential that some of their practiceswould not be covered anyway.

CHAIR—So some people have continued with Aon as individuals?

Ms Persson—I would suggest very few of them have, because market forces would apply,and therefore the other insurer that will be out of the game at the end of this financial year hasmanaged to gather most of them. Aon have been very petty in the way they have gone aroundsuggesting that we were wasting their time in going out and getting quotes because ourmembers were turning around and saying, ‘No, thank you.’ But, at the end of the next financialyear, there will only be—as far as I have been informed—Royal and SunAlliance and CGU, andthey are the ones who are charging the 500 per cent increases. If audiologists are thinking ofpulling out of practice now, at the end of June next year they may leave in droves. By the way,audiology is a growing field due to the increase in hearing problems that we are having withworkplace noise issues and to the boom box generation, which is creating massive numbers ofclients for our members.

Dr Butler—We represent approximately 8,500 dentists. That covers just about all the dentistsin active practice. It is pretty usual for all dentists to join the ADA, and we therefore feel thatwe have well over 90 per cent of dentists—probably more if you take the private practisingdentists who are the focus here. Some three to four years ago we became fairly concerned aboutthe MDO situation—and our members were largely covered by MDOs. Two in particular hadmost of the market share in Australia and UMP was nibbling away, trying to break into that. As


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a consequence of that—and it has been on a state basis; our state branches have had carriage ofit for their individual states—most of our branches went to an insurance basis and a claimsmade basis and got away from the discretionary doubts of the MDOs. Nevertheless, our bestestimate is that just under 1,000 of our members are still covered by MDOs. In one branch inparticular, a couple of hundred people in New South Wales—a state with an MDOorganisation—elected to go to what were then the cheaper premiums of UMP.

Our concern, and what we want to bring to the committee, is the fact that there areprofessions other than the medical profession—with its crisis and its large judgements,admittedly—that are affected by the professional indemnity crisis. We have to look after somehundreds of people who are involved with the UMP situation. All of the governmentpronouncements have focused on the medical profession. In each case when a statement hasbeen made—by the Prime Minister’s office or by the health minister—we have had to seekclarification. They talk about doctors and about consulting with the AMA et cetera, and we havehad to go and say, ‘What about our policyholders?’ We have gained some clarification. I gotsome further clarification on Friday from the office of the Assistant Treasurer, which answeredsome of these queries. But there appears to be a feeling out there that the government is focusedon the medical profession and is not cognisant of the fact that there are other professionsinvolved—perhaps not in the same way but, nevertheless, with difficulties in professionalindemnity.

Unlike our colleagues in audiology, we do not have a problem with gaining insurance. Mostof our coverage in the last three years has been with insurance companies, and fortunately themajor one that we use does not insure the medical profession, which is a nice thing given theliability aspect of it. Nevertheless, we have had to face significant premium increases in NewSouth Wales. Commencing on 1 July the premium went up by 80 per cent from a base of $1,200or thereabouts. These are perhaps not the headline grabbing dollars that we see with medicalprofession premiums; nevertheless, they are passed on to patients and therefore the communitysuffers in an area that many people cannot afford to get care in anyway. That is our significantconcern. The main thing to bring to the notice of the committee is that there are otherprofessions that certainly have difficulties with changing professional liability.

I support Dr Stephens’s comment that it is multifactorial; it is not a matter of putting yourfinger on one thing or another. But one thing that we feel is very significant is the litigiousculture that appears to be growing—in New South Wales, for example, I am told that indentistry now it has actually outstripped California, which is an awful benchmark to have. It isvery litigious and, from what I have experienced and heard, the tendency in many cases is tosettle rather than defend, even though the judgments are small and even if the particular matteris quite defensible. In fact some of them are quite ludicrous. I know of one particular case thatcould be described as ludicrous. It would never have got anywhere, but it is cheaper to give thatperson $1,000 or $2,000 to go away than it is to go through the process of litigation.Unfortunately, that feeds that same culture. While we do not have the crisis that has hit themedical profession, I think we can see indications of this growing—the increase in premiums etcetera. So we are also very concerned to be part of any discussion of this very matter.

Senator BRANDIS—Dr Butler, do you have a view on the extent to which the phenomenonyou described a second ago—the growing culture of litigation, particularly with small claims—is driven by what are sometimes described as ambulance-chasing lawyers, offering ‘no win, no


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s driven by what are sometimes described as ambulance-chasing lawyers, offering ‘no win, nofee’ deals?

Dr Butler—I am not really qualified to have a comment on that.

Senator BRANDIS—Is there any body of anecdotal evidence of which you are aware?

Dr Butler—Anecdotally, yes.

Senator BRANDIS—I mean within your profession. Anecdotal evidence is a little bit moredignified than gossip.

Dr Butler—I do have that feeling. In my previous existence, I was director of a dental schooland I knew of a particular case, and it was not driven by an ambulance-chasing lawyer. It wasthen the GIO that covered the hospitals in New South Wales, and it was purely a matter ofeconomics.

Senator BRANDIS—We have always known that small claims are more cheaply settled thanlitigated. That is a given. It does not matter what system you have; unless you prohibit smallclaims—which I do not think anybody is suggesting—there will be a point at which theeconomies of scale of litigating a small claim dictate that it is settled rather than defended. Isthat your experience?

Dr Butler—Yes, that is true.

Senator RIDGEWAY—Ms Persson, I have a question following on from your statement. Inrelation to the practices that you have identified for the profession that you represent, can youtell us a little bit about what is a high risk type of work that your members might perform thatattracts high premiums. I am trying to understand the driving factors, if you like, in relation toincreases in premiums that you see from an insurance industry perspective.

CHAIR—Or perhaps your non-members—from what you said earlier.

Ms Persson—Firstly, I am not an audiologist, so when it comes to the specifics of the actualpractice I have had to rely on my members to inform me exactly what they do. I have beenassured that there is nothing invasive. They do hearing tests and ear moulds. I looked into eachof the three cases that we could find where there had been a payout. As I said, we have onlykept our records since 1968, and we have been insured with these people since 1993. I cannotfind anywhere on our records the three people named as the insured, so I have no idea who theyare. One was a case where somebody indicated that the hearing test that they had had broughton tinnitus—that ringing in the ears which can be very debilitating. The insurance companychose to pay out $2,000 for that. Another one was a case where somebody suggested that theyhad had a perforated eardrum as a result of the testing. The insurance company paid out $12,000for that. Another one was where somebody had also indicated some sense of discomfort aftertheir hearing—I think it was ear moulds or something similar. If you are foolish enough to put acotton bud into your ear—that is about as invasive as it is going to get. You are looking at thesame sort of thing. The case that was held there was about $4,000. Again, this was not one ofour members.


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It is not invasive. I guess the definition of invasive would be different for different areas, butyou would be hard pressed to find anything that could be deemed to be invasive, certainly byour members, who have to abide by very high practice standards and a code of ethics. Thepsychs have only an 18 to 25 per cent increase, maximum, with 10,000 members—how muchmore invasive can you get than someone mucking around with somebody’s mind versussomeone who is simply doing hearing tests? I do not know. As I say, I have been assured that itis not in any way life threatening or physically damaging so one would have to wonder wherethe high risk comes from. Essentially, I believe that the suggestion of high risk was a knee-jerkreaction on the part of insurers to withdraw cover because, initially, we had only 78 members inthe scheme, which did not bring in a large enough pool of funds for them to consider paying ifthere was a claim, which is why in our last magazine I went to the trouble of creating a fullfocus on insurance to raise the understanding of our members—95 per cent of them arecovered—as to why they need to be covered. Our next issue will look at a whole range of thingscovering what an employee should be asking their employer to make sure that they areadequately covered, raising the focus and having them understand the responsibility of beingadequately covered.

We are in a particularly litigious society, and I would like to beg your indulgence for amoment. There is an article in our magazine—and I would like to leave this with you—in whichwe had a bit of a play with that sense of where insurances could go. The article is set in LosAngeles in 2010, although it could just as easily be set in Sydney in 2010. It says:

Mr Frog jumped out of the pond one day

And found himself in the rain.

He said, ‘Gee, it’s wet and I might get cold’

‘I demand compensation.’

Further on, the article says:

Employers’ liability lawyer Ben Scrounger agrees. He cites the famous case of Humpty Dumpty. “The rhyme gives nosuggestion that such a fall involving multiple fractures and permanent incapacity could be worth millions if litigated. Notonly was the wall manufacturer clearly liable,” said Mr Scrounger, “the authorities who treated the injured Dumpty werealso culpable. I’d like to hear someone explain how ‘all the King’s horses’ qualify as authorised medical practitioners!”

So the whole future could be seen as something like another rhyme in the article:

Little Jack Horner sat in the corner

Eating his Christmas pie

He put his thumb in

And pulled out a pin

And said ‘What a rich boy am I.’

It is ridiculous. You cannot substantiate it and you cannot justify it, but the fact is that we havetwo insurers who see our being audiologists as some reason to charge us with 500 per cent


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increases, with no substantiated claims and no history of any problems. So I guess ouraudiologists could possibly take the view: ‘Well, we haven’t had any claims so why should wehave insurance. We’re paying it for nothing.’ But, then, if they wish to be registered with theOffice of Hearing Services they have to have $5 million worth of PI, so it is a no win situation.

Senator RIDGEWAY—I think you mentioned in your opening statement something abouttwo or three reports that had been prepared by the insurers at the time, in response to yourquestions on reasons for increases in premiums. Is there anything in those reports that might beuseful for the committee’s consideration of the issues that are before us? Or, do they notilluminate in terms of getting answers?

Ms Persson—I can make them all available to you. There is one list of audiologists claims,and for every one of them the file is closed. No payment was made on any of them. The otherlist is the one that I said has ‘not a member, not a member, not a member’ on it—there are threeclaims where moneys have been paid out. We went to the Pharmacy Guild’s own insurance armto see if we could negotiate insurance, having been told at the last minute that we were notgoing to have it. Aon and Royal and SunAlliance would not provide us with paperwork at allinitially. I talked to the guild to try to get them to come up with an arrangement for ourmembers. They were more than willing to do so but could not without access to a claimshistory. When we finally got the first piece of information, it was a table like this that did notmean a thing. When we finally got a little more information it was in fact this list, on whicheverything said ‘file closed’. Then we got this list, for which I am clearly saying, ‘They’re notour members.’ If they are I would like to know where the files have gone. They are not on ourdatabase, they do not belong to our organisation; therefore, they are not bound by our code ofethics.

We negotiated our group scheme on the basis of the highest possible standards, because weknew that our members would be observing those. Again, there is no registration or licensingfor audiologists, so some of those people who are out there doing the wrong thing could veryeasily be the people that the insurance companies have lumped in because: ‘They are allaudiologists so, heavens, who knows the difference between them? One audiologist is as goodas another.’ It is the dollar. Maybe they are in the wrong profession, because we do know thatthe oldest profession in the world obviously has a dollar value and everything its members do isbased on dollars. Perhaps we ought to be suggesting the same for this profession—or lack of it.I certainly would not quote them to the Australian Council of Professions as the sort of ethicalorganisations that we mix with.

Senator RIDGEWAY—I would be interested in receiving copies of that.

Ms Persson—I will give it all to you.

CHAIR—Do you have the documentation about the original negotiation of the groupscheme?

Ms Persson—I have looked everywhere for it and, again, have asked Aon for it. Nobodyseems to have it. I have some documentation on the woman who originally negotiated this forus in 1993, but I have nothing that actually defines the parameters. All I understand is that theyhad to be members of our organisation in order to be able to gain insurance. If these people are


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supposedly our members and I cannot find any documentation on them, I do not understandwhere the slip-up has occurred.

CHAIR—How they have been put into the scheme—

Ms Persson—You supposedly had to put your membership number on the policy when youfilled it in.

CHAIR—Could we also have a copy of the correspondence you quoted earlier regardingfuture interest in your group scheme from Aon? I think you quoted the ‘unattractiveness’—Icannot remember the exact words.

Ms Persson—Certainly. I will just leave the file here for you.

CHAIR—The additional question I have is: what is your avenue of recourse?

Ms Persson—None. When it comes down to it, if there are only two players in the game—Royal and SunAlliance, and they have thrown us out the door, and CGU, and they gave us the500 per cent increases—that is it. I do not know what our answer is. But I do know that many ofour audiologists are part-time and that many of them are in the situation of clearly weighing upthe advantage of even bothering to stay in the field.

CHAIR—Is there an element of the Insurance Council that deals with complaints about theconduct of providers?

Ms Persson—I did suggest that I would try to find out if there was an insurance ombudsman.I must say that, when I raised that, Royal and SunAlliance actually came back with somepaperwork. I do not know if there is an insurance ombudsman but I suspect there may be, giventhat I got an email back fairly quickly after that.

CHAIR—We have the Insurance Council appearing before us this afternoon. We might askthem precisely that: how complaints about the management conduct of insurers are handled atthis point in time.

Ms Persson—As I say, it seems to be simply a case of dollars, because the AustralianPsychological Society, with 10,000 members, to me is as risky. I would have said it is morerisky than audiology, but I would not want to put an emotional twist on it. If they only had tohave an increase of 18 to 25 per cent then why is it that, just because we are a little group ofpeople with totally unsubstantiated claims, we warrant a 500 per cent increase? There is nosubstantiated claims history.

Dr Stephens—We were quite attracted to the recommendation in the ACCC’s review ofpricing in the insurance market, where they said there was a need for better information to beprovided, particularly as to the reasons for rises. The discipline of requiring in some way—whether through self-regulation or some other way—an insurance company to specify whatcomponent of a rise was attributable to what cause we think would make a hell of a differencein this field. There is an element—as I think one of the submissions to the committee said—ofopportunistic pricing; there are elements of picking a number. I think Ms Persson’s association


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might be a good example of picking a number. That discipline of having to say to clients why arise has occurred would certainly make a difference.

CHAIR—What is the report you were just referring to? When was that released?

Dr Stephens—It is referred to in, I think, the first footnote in our submission. It is mainlybased on broad brush statistics of the industry, which means it shows how often the statistics inindustry are not very good. It is the ACCC Insurance industry market pricing review, March2002. It is on their web page under their publications section.

CHAIR—This is one of the areas where, at this stage, I am partly confused, because APRA,for instance, inform us that ASIC looks after consumer interest in relation to insurance. I mustadmit that I would have thought that it was more sensible for that to reside within the ACCC. SoI am interested to the extent that they are actually reporting on those issues.

Dr Stephens—We certainly had a recommendation in our submission that there needed to bework done in this area, particularly on the issue of the ‘deep pockets’ syndrome, wherearchitects working on a building with lots of other people, like builders and carpenters and soon, are often the ones who are sued because they have the insurance cover. Someone shouldlook at that. We said it should be APRA, but it could quite easily be the ACCC. One of thedifficulties that we have found is that it is a bit hard to work out who is responsible for thesesorts of things. There were other issues that we felt needed to be inquired into by someone. Ithink we said that APRA, again, should investigate whether professionals with low numbers ofclaims are cross-subsidising claims by others—that pick-a-number issue again. We are not surewhether it should be APRA or someone else. Maybe it should be a royal commission. I do notknow. But the information is not around at the moment.

Senator RIDGEWAY—Just to follow on from the comments about the Trade Practices Act,in your submission you talk about a need to amend the act to deal with the definition of‘professional judgment’. Are there examples amongst members or the groups that you representof court cases where individuals have ended up becoming liable for some action that was doneunintentionally but read as being a deceptive or misleading action on the part of the individualor company? Are you able to provide us with examples to show that what you are suggesting asan amendment to the act is justified by the number of cases that have already occurred? Howwould you go about amending the act to achieve that recommendation?

Dr Stephens—I am not sure whether that issue arose in our submission. I do not recall thatone being there. I may have missed it. Our two main issues with the Trade Practices Act are,firstly, the potential conflicts between what is required in professional standards acts in thestates. You can be covered by a professional standards act but still be caught by a trade practicesact provision which has a different level of proof. I think the other area is where there areelements of the Trade Practices Act which come into the negligence review. I may be wrong onthat but I do not recall that particular bit, unless you can quote a paragraph.

CHAIR—It is paragraph 36, according to these notes.

Dr Stephens—I will look at what we meant there.


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Ms Persson—I would like to mention a couple of statements from Aon Insurance. On 5 Junewe received an email that said:

This is an important email because it formally advises you ... that after extensive efforts we have been unsuccessful inrenewing the group scheme for Audiologists with Royal & Sun Alliance which has been running for many years.

This is largely a consequence of the nature of the risk involved (paramedical malpractice)—for which there is seriouslylittle appetite in the Australian insurance marketplace ... combined squarely with the very low numbers of audiologistsbuying this cover ...

At one stage we hoped to merge the group into another miscellaneous paramedical group facility operated by Aon,however the insurer of that facility was not satisfied that the risk profile of the audiological profession was compatiblewith other lower-risk professions in that miscellaneous group (naturopaths, reiki practitioners, massage therapists etc)which is virtually claims-free.

In other emails they went on to say:

... that insurers are not renewing terms based on the size of the pool. The risk of occupational claim is secondary.

When we were trying to get paperwork, as I indicated, from Aon, on the provision of that firsttable, they commented:

... this is a summary list and we do not have an expanded version at this stage. Insurers could provide but will not be in ahurry pre-30 June to help out another underwriter on business not wanted and not a priority—these are the sort ofchallenges we face ...

Finally, our members were told:

Anecdotally, we understand that audiologists are receiving advice from a couple of members with premium indicationsfrom Guild, for premiums much lower than ours.

Please advise if this is the case and if this is being supported by ASA, so that we may assess whether we are wastingeveryone’s time with the CGU pricing.

There has been no will whatsoever to support our profession. As you indicated, where do we goif, at the end of this, there is the innuendo that we are a high-risk profession, with no basis onwhich to actually support this? We cannot afford to pay 500 per cent increased premiums,because it will drive people out of business.

Dr Stephens—I have gone back to paragraph 36. That was the one I was talking about. Ithink I was confused by not breaking out the amendment of the Trade Practices Act on its own.Paragraph 36 is about attempting to make the Trade Practices Act and state and territorylegislation complementary, if necessary by amending the Trade Practices Act to ensure that, ifyou are covered by a professional standards act, you then are not caught by the Trade PracticesAct. The connection with Senator Coonan’s review is a term of reference which states:

... develop and evaluate options for a requirement that the standard of care in professional negligence matters (includingmedical negligence) accords with the generally accepted practice of the relevant profession at the time of the negligentact or omission ...

Whether—if that goes through a legislative change—that is a Trade Practices Act amendment oran amendment in a professional standards act, I do not know. But that would certainly be adesirable change. If you were able to show that you had gone as far as the generally accepted


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practice of the particular profession in the actions you had taken, you would not be caught bythe Trade Practices Act stuff about misleading conduct or deceptive—

Senator RIDGEWAY—So all you are really talking about is complementarity between stateand federal legislation?

Dr Stephens—Basically, complementarity and which legislation—

Senator RIDGEWAY—But there are no examples in your profession, amongst yourorganisation’s members?

Dr Stephens—We could certainly look for some if that would be of help to the committee.

Senator RIDGEWAY—I think it would be useful, with that sort of suggestion being putforward. Often they need to be justified and, if there were examples out there—

Dr Stephens—It is certainly something that is often mentioned in the literature onprofessional standards acts. You might want to raise it with Mr Wilkinson this afternoon, but wewill certainly look for some examples that we know of where it is a problem or potentially aproblem.

CHAIR—That concludes the questions. Thank you for your appearance.

Proceedings suspended from 12.57 p.m. to 1.44 p.m.


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DRUMMOND, Mr Robert, General Manager, Regulation, Insurance Council of AustraliaLtd

JAMVOLD, Mr Peter, Group Manager, Southern Division, Insurance Council ofAustralia Ltd

JONES, Mr Raymond Lloyd, President, Insurance Council of Australia Ltd

CHAIR—Welcome. The committee prefers all evidence to be given in public, but we willconsider any request to deal with all or part of your evidence in private if you so request. Thecommittee has received your submission, No. 67. Are there any alterations or additions that youwish to make to your written submission?

Mr Jones—There are no alterations at this time.

CHAIR—I now invite you to make a brief opening statement, and we will move to questionsbeyond that.

Mr Jones—We thank the committee for the opportunity to appear today. Obviously it is avery big issue and we are delighted to have the opportunity to present the Insurance Council’scase. The question of public liability and professional indemnity insurance is fundamental to theway in which Australian society operates. The issues reflect a number of complex aspects whichneed to be understood before solutions can be considered and found. The ICA’s submissioncontains a number of documents, including detailed papers prepared for the ministerial publicliability forums held in Canberra and Melbourne, detailed proposals on public liability preparedfor the heads of Treasury working party, submissions on matters relating to professionalindemnity prepared for the HIH royal commission and the federal Treasury and explanatorynotes for this inquiry. There are seven documents in total, and those seven documents providean extensive amount of detail covering the background to how this crisis arose, the pressuresthat currently exist on liability insurance, both professional and public liability, statistics andfinancial results from the industry and options that we believe are necessary for change to occurand for the product to become readily available at a price the public can afford.

It is perhaps worth setting the scene by providing a few basic statistics. Public liabilityinsurance losses across the industry have been very large. The APRA statistics show that for theperiod 1998-2000 gross premiums were approximately $2.5 billion, whilst claims, also grossincurred, were $3.5 billion. In addition, if you add the expenses to the industry for publicliability insurance, which was another $600 million, it results in an underwriting loss of $1.6billion for public liability insurance over that three-year period. Certainly, the number of claimshas increased dramatically—from 55,000 claims in 1998 to 88,000 in 2000. Over the past 10years, as proven by the ACCC investigation into pricing in the industry, the average return onshareholder funds for member companies of the industry has been less than three per cent.

The professional indemnity side has also been very unprofitable for a number of years. Theloss ratio—that is, claims to premiums—rose from 104 per cent in 1998 to 134 per cent in 2000,which meant that there was a loss of $400 million for the industry. When you take underwriting


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expenses into account, the insurance industry’s underwriting loss was $675 million in that three-year period. Investment income in prior days was capable of overcoming reasonably substantiallosses, but it is not these days, so there was an after-tax net loss of a substantial amount ofmoney. The ACCC’s Insurance industry market pricing review, which was published in March,provides a simple but accurate description of what happened in the Australian marketplace.Page 105 of the report states:

Premiums in recent years for Professional Indemnity Public & Product Liability have produced Very Low returns oncapital for insurers.

Page 55 of the report states:

Very Low indicates that the return on capital invested may be at an unsustainable level suggesting intervention to eitherincrease premiums (perhaps selectively) or exit from the market.

That has proved prophetic because increases in premiums have been evident and a number ofplayers are exiting the market for a number of reasons.

Appendix 1 of our submission includes a summary of a number of pressures that have beendriving the increase in claims and other costs. These pressures have included the changingattitude of society, with the increased expectation that if something happens someone will payme for it; changes to regulations covering lawyers—for example, being allowed to advertise ona no-win no-fee basis; and the courts and legislation itself—that is, the definition and definingof negligence. Also, there is the increase in the number of claims and claims costs; theproliferation of high-risk recreational activities, which we will come to in a second; and thecollapse of HIH Insurance, which was a major insurer of public liability. At any one time HIHwas writing between 30 and 50 per cent of the public liability insurance in this market, and thatcapacity loss was felt incredibly by the industry.

In addition, the terrorist attack on September 11 was the biggest insurance loss in history and,of course, it resulted in reinsurers substantially increasing their rates to the insurance market.The average increase on liability classes or the long tail classes was probably somewherebetween 30 and 50 per cent, which meant at least 10 to 15 per cent on top of premiums beingcharged to businesses and the public for insurance cover. There is also the issue of insurancetaxes, which, in the case of state taxes, add 20 per cent to the premium that the consumer andthe public are paying. We are pleased to see that in New South Wales and Tasmania there hasbeen tax reform. We encourage that and look forward to getting tax reform in other states. Thelast factor is the need for increased sums insured. In many states, governments will not allowcompanies to operate in a parks and land environment unless they have a minimum of $10million worth of public liability insurance. In the past, quite often companies would operatewith $1 million or $2 million worth of cover. So you are increasing the sums insureddramatically.

It is against this background that the community must consider all future actions. Indeed, itmust be emphasised that this is not an insurance industry issue, a government issue per se or alawyers’ issue—it is a community issue and we have to find a community solution for it. Webelieve there are some very key messages, the first of which is stability. Stability is neededthrough greater certainty and predictability in claims. A package of reforms is needed, as thereis no simple magic wand formula. I know there is a lot of criticism about some of the impacts of


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tort reform, but it is part of a package of reforms that are needed. A nationally coordinatedapproach is needed, because we certainly do not want all the states and territories going off indifferent directions. We need national standards and, hopefully, a national scheme in the longerterm. To attract insurers back into the marketplace with improved access and affordability ofboth public liability and professional indemnity insurance, the ICA recommends steps toestablish a balance between the benefits that the community expects to receive from thisinsurance cover and the price that the community is prepared to pay for those benefits.Certainly, there is no balance there at the moment. We need improved predictability of claimscosts so that insurers are accurately able to price the risk and therefore their premiums.

I can give an example of what happens in this market with long tail classes. One of ourmember companies collected £300 for an insurance policy for workers compensation back inthe sixties. Asbestos is now a very real problem, and they have reserved $21 million claimsagainst that £300 premium. So long tail classes have some sting. Unless there is predictability inpricing and claims development then companies are not particularly keen to play. We wouldcertainly like to emphasise that insurance companies are in the business of underwritinginsurance, but we can only do so in an environment that allows a satisfactory return on capital.Many shareholders in this market would have been happy to see their money elsewhere than inthe industry in the last number of years.

There are a large number of options open to governments and the community, some of whichrequire some tough decisions. A number of the options for reform are set out in appendix 1 ofour submission. They include legal reforms, which require both state and federal governmentactions, including tort reform and court procedure reforms. They also include risk managementinitiatives; the use of pooling, which has been talked about widely; better data collection, whichthe industry strongly supports; reviewing the impact of high government taxes on insurance—inthe area of liability it is not as bad as in the area of property, where in some cases 50 to 60 percent of the premium can be paid out in state taxes; and importantly, reviewing ways of changingcommunity attitudes to accepting responsibility for one’s own actions. We applaud the federalgovernment’s move to amend the Trade Practices Act to allow people to accept responsibilityfor their actions under section 68.

Steps are being taken by the Commonwealth and each of the state and territory governmentsto introduce faculties to address liability issues. Some are longer term, including structuralchanges such as important tort law reform, and others are short-term arrangements to provideemergency cover until the structural changes can take effect. They are all very important issues.At this stage, only two states—New South Wales and Queensland—have passed legislation.Some others are still considering what action they might take. It is important to emphasise theneed for action to be nationally coordinated and not piecemeal, as we have previously stated.

To date, as I said, the Commonwealth government has introduced amendments to the TradePractices Act, which is great. New South Wales has enacted legislation to reform tort law andconstrain legal costs, which are a major component of total liability claims costs. The front pageof the Telegraph this morning indicated that, in the case of liability, the lawyers’ fees and thecosts as a percentage of claims costs are a third—33 per cent—which is far higher than anyother class. Workers compensation and CTP are both much lower than that. It is a very highfigure. Queensland has enacted legislation to facilitate and speed the claims process and thecourts, in order to reduce claims costs. Victoria has implemented a range of short-term measures


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designed to assist certain community sectors to secure cover while they are looking for a longer-term solution, but we are very concerned about that because the mutuals involved are notinsurance companies and we are not sure that they have the capacity to understand or handle therisks that they are taking on.

ICA and insurers are working closely with governments to provide comment and advice. Wehave put a pooling proposal to the federal and state governments for not-for-profitorganisations, because we are very concerned that some major charities might find it hard tocontinue activities without cover in place. We are working with the governments to have asecond look at a not-for-profit scheme. We have provided data and we are developingarrangements for an improved official data set on insurance. That is one of the major problemsin this area: on behalf of the industry we have not collected enough data, and data is everything.That is the end of the official statement. We are very pleased to be part of this inquiry and wecertainly look forward to working with you to find solutions.

CHAIR—I am pleased you finished on that point in relation to data, because that leads to thefirst question I want to canvass with you. Your comments about the need for stability, certaintyand predictability are all based on having access to reliable data. A number of our submissionsrefer to concerns about the quality and reliability of data produced by APRA. I am interested inyour comments about where we go from here in terms of building up appropriate data to makedecisions on establishing stability and reliability in this field and who you would see as the mostappropriate for monitoring that data.

Mr Jones—We certainly agree that the data available has not been good enough. Most of themajor companies who underwrite public liability insurance did open their books to the ACCC,as you know, and to a number of other bodies that were looking to put together a profile ofunderwriting statistics. That was done without any concern on their part, obviously just to getthe picture clear. Certainly we have strongly promoted the use of Insurance Statistics Australia,a body that exists to do personal lines of insurance and pull the data together for that. Webelieve that, as a quarantined section of a major actuarial house, it is the ideal organisation topull together the data for us. So we do promote the collection of data from everyone in theindustry—those who are members of the ICA and those who are not—and we believe that ISAis probably the best organisation to do that.

Senator CONROY—The problem has been there for some considerable time, but the debatewas kicked off publicly by quoting APRA statistics showing a big jump between 1998 and 2000from 55,000 to 88,000, or something along those lines. Given the admissions by APRA and byyou and others, and the criticisms of the APRA data, do you think those figures were a fairrepresentation to demonstrate the size of the problem, or were they flawed as well?

Mr Drummond—We could certainly take the trends that they were demonstrating—the55,000 to 88,000—as a reasonably confident signal. The criticisms of the APRA data haverelated more to the most recent set of statistics they produced, because they did not include theHIH statistics. HIH was a major loss maker and their losses were not in there, so some peopleare taking the view that the latest APRA statistics are actually showing an improvement in thetrend. But the fact that it does not include the HIH data highlights one of the shortfalls. Othershortfalls are that it does not include self-insured arrangements, it does not include the statisticsfor government self-insured arrangements and it can be distorted from time to time because


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companies change accounting dates from 30 June to 31 December. But I think the broad trendthat they are certainly showing can be taken as a confident signal.

Senator CONROY—You talk about the ISA. Surely they have exact figures and not broadtrends?

Mr Drummond—They have exact figures but, again, they are limited because the collectionof data through ISA, Insurance Statistics Australia, is voluntary. At present, their statisticsrepresent something like 22 per cent of the market.

Senator CONROY—That is a big enough sample for you to be able to say that there hasbeen a five per cent or a 50 per cent increase?

Mr Drummond—Yes.

Senator CONROY—Statistically, 22 per cent is still a large enough sample?

Mr Drummond—It is a confident sample, but it is certainly not the whole market.

Senator CONROY—What is the trend or the percentage increase over the same two-yearperiod?

Mr Drummond—The trend is in parallel with what the APRA statistics are showing, andthat was highlighted by the work that Trowbridge did for the heads of Treasury working group.Most of the data they obtained was via Insurance Statistics Australia. The broad underlyingtrends are all heading in the same direction.

Senator CONROY—You are happy with the New South Wales legislation?

Mr Jones—As a first stage, we think it has gone a long way to improving the situation. Webelieve the Carr government has two more stages of necessary reform. There was very littleconsultation with industry on the first stage, and we have some concerns about the use of theold Motor Accident Act rather than the new one in terms of the measurement of whole of bodyimpairment. Premier Carr is spending a lot more time consulting with the industry in terms ofgetting the next stages of reform through.

It is certainly a move in the right direction, but by no means is it going to mean an instantreduction in the cost of public liability insurance. I think a number of people have askedwhether that will happen. A PricewaterhouseCoopers report said that the premium would comedown by 12½ per cent, but that was on the proviso that the companies are currently pricing theirrisks adequately. Two other reports—the JP Morgan report and the Trowbridge report—haveindicated that the insurance industry is still not getting enough premium for the risks that it istaking on. The Trowbridge report mentioned the specific number of 30 per cent by which theythought the insurance industry was underpricing public liability risk. The Carr reforms are wellon the way to setting a standard, which we support strongly, but so far only the first of the twoor three stages of reform we think are needed has occurred.


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Senator CONROY—What else is needed in terms of legislative improvement? Youmentioned two other stages. Could you take us briefly through what you expect them to includeand why they would make a difference?

Mr Drummond—The first point to make is that what has happened with the New SouthWales legislation and, to a certain extent, the Queensland legislation has to be taken up andrepeated uniformly and consistently across all the states. It is not enough that one or two statespass legislation. They are addressing certain elements of the problem but not all of them. If thelegislation cannot be uniform across all states, then it should aim for consistency in its outcome.It also requires that legislative reform be passed at federal level, particularly in the areas of theTrade Practices Act—on which we now have a bill for consideration after the winter recess. Theelements that need to be put into this legislative framework are spelt out in our submission.They were also spelt out very effectively in the report that Trowbridge prepared for the heads ofTreasury working group. Each recommendation in that report and in our submission representsan element in the solution that has to be put in place. The New South Wales legislation is a start.

Senator CONROY—Let us say we could wave a magic wand and Mr Carr were to pass hislegislation in the first month after their winter recess, what would be the benefit to premiums?What sort of figure are we talking about if we get the entire package that Carr has said he willdeliver?

Mr Jones—The ICA does not have an opinion on that per se, because we do not talk aboutpricing issues on behalf of our member companies. As I said, the PricewaterhouseCoopersreport said 12½ per cent, but it was on the proviso that everyone was adequately pricing theirpremiums now, and that is not known. Member companies, through their actuarial departments,are working on the numbers at the moment. So we cannot comment on their behalf.

Senator CONROY—Let me put it to you that there is a fair degree of frustration with thatanswer. You have been prepared to put up your hands for the last two, three, four or five yearsand say that major problems—court outcomes—are the main price driver. That has been fixedand, all of a sudden, you have not got a clue what the benefits to the community will be.

Mr Jones—I think our members do, but the ICA itself is not able to comment on what thosemember situations are. Can I take that question on notice and get back to you after putting out anotice to the member companies to respond individually?

Senator CONROY—I can only say to you that you have been quite willing to sally forth intothe media to say that it is necessary to achieve premium reductions, yet when you are asked aserious question of what the benefits are to the community—this is a debate that has been goingon really hard for a year and a half—you still have no idea. You have done no calculations, andyou have not asked your members what the benefits are. You are the industry association. It is alittle hard to take it seriously when you say, ‘We don’t know.’

Mr Jones—With respect, we have certainly asked our member companies to do that, andindividually they are doing that. There is a belief that in many cases this will not reducepremiums—it will slow them down, but it will not reduce them. There is not a collectiveindustry viewpoint on this, because every one of the member companies of the Insurance


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Council has a very different pricing strategy and policy. They are the ones that have to takeresponsibility.

Senator CONROY—Why should we believe you that it will make a difference at all? Let’sjust withdraw the legislation, and you can look after yourselves.

Mr Jones—That is fine; that is obviously an option. At the end of the day, the insurancecompanies will probably take their capital and put it elsewhere.

Senator CONROY—So you are threatening to close up?

Mr Jones—No, not at all. We have to get a return on capital. This industry has not madereturns on capital that are acceptable to shareholders for years.

Senator CONROY—Exactly whose fault would that be?

Mr Jones—I think it is combination of things, including the fact that Australians havecreated the environment.

Senator CONROY—And the inability of the industry to price risk, which would be your job.

Mr Jones—From the perspective of what is happening in the industry, there has been a pricewar for a number of years. There is an indication that the pricing levels are now back to wherethey were in 1993 and no higher. If you put any sort of inflation number on that, that is why theTrowbridge report came up with an adequate number. The HIH situation was a majorcontributing factor. We as an industry had no control over what they were doing as anorganisation. They were writing a huge amount of that premium and, as was found out in theroyal commission, for all the wrong reasons and with catastrophic results. This industry doesnot need to have another collapse of any sort at all, let alone something the size of that. So it hasto return to profitability. The members companies determine their own pricing strategies. Webelieve they are all very close to determining what the Carr government reforms will give them,but we as an industry cannot comment on what member companies are doing.

Mr Jamvold—The ACCC does not allow us, as an industry body, to comment on pricing.

Senator CONROY—Let me make this absolutely clear: I am not asking you to individuallyprice a policy; I am asking in general what you think the benefits of the Carr governmentreforms to consumers will be.

Mr Jones—The general belief is that it will slow price increases down but it will not delivermajor savings.

Senator CONROY—It is no wonder the other states are not interested in talking to you, withan approach like that from the industry peak body in terms of delivering legislation similar toNew South Wales.


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Mr Jones—As I said, it is stage 1, and I think it was delivered without consultation with theindustry. If there had been more consultation, I think it could have been better refined. It iscertainly a step in the right direction and will slow the increases down. Hopefully, it will attractcompanies to continue to put capital into the market.

Senator CONROY—As you know, I do spend my time talking individually to people inyour industry. One board member of a large company was honest enough to say that, if it wereacross the country—and I accept all the arguments about that—there should be substantialreductions in premiums. When I pressed him on what he meant by ‘substantial’—and you couldsay that that was an individual company—he was prepared to hazard a guess. I have threeabsolute experts in the industry sitting here in front of me in a parliamentary committee, andyou are not prepared to hazard your best guess.

Mr Jones—That is not, in any way, the role of the ICA. The Insurance Council does not getinvolved in the pricing of products on behalf of its members. It would be wrong to even make acomment on that.

Senator CONROY—So your job is to run around and campaign to improve the cost base ofyour members, but when asked what the return to the community is you have nothing to say.

Mr Jones—I cannot. My charter does not allow me to make a comment on behalf of anunderwriter or underwriters on that issue.

Mr Drummond—What we can say confidently is that if uniform and consistent legislation ispassed across the states with contribution and reform from federal government it will, hopefully,bring a pattern of certainty and stability in which insurers can confidently price their productsand collect enough premiums so they will be solvent enough to pay their claims. That is all thatthe ICA can promise the community. It is up to individual members how they react, in terms ofthe pricing, to the opportunities that these reforms will bring them.

Senator CONROY—You understand that this makes it very hard for people who want to tryto help you and are trying to convince people to actually come to the party?

Mr Jones—The last ministerial meeting in Melbourne between the state treasurers andSenator Coonan had member companies present—four major underwriters. It was a very frankand open meeting. They could comment on their policies and—

Senator CONROY—Were you present?

Mr Jones—Yes, I was.

Senator CONROY—Was it a secret meeting?

Mr Jones—No, it was not a secret meeting.

Senator CONROY—Can you give us an indication of the numbers that were kicked aroundby those people you have just referred to?


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Mr Jones—At that stage, no-one was able to give an accurate number, because they werestill working through the actuarial assessment of the reforms. The indication was, as I said, thatno-one could confirm the 12.5 per cent bandied around by PricewaterhouseCoopers, becausethere were too many provisos on that. Everyone said, ‘Yes, it will certainly provide somestability that is not there and, hopefully, it will reflect on some savings.’ But they were all tryingto find a way to qualify that through their actuarial departments, and it still was not available.

Senator CONROY—Can you understand that there is some suspicion that because ofstatements like that there is a need for the ACCC to be formally monitoring insurance premiumsto ensure that savings are passed on to consumers if these national laws are passed?

Mr Jones—We have accepted Senator Coonan’s comments about the ACCC pricinginvolvement. We do not think—

Senator CONROY—They have no pricing involvement. Senator Coonan’s statement is astatement of the status quo, which means there is no formal involvement of the ACCC inmonitoring. Senator Coonan’s statement, in actual fact, runs away from any formal ACCCinvolvement. What I am talking about is a formal reference to the ACCC to formally monitorpremiums to ensure that consumers are ultimately the beneficiaries of the tort reforms that youare demanding.

Mr Drummond—Our understanding is that the ACCC have a very clear brief to report to theheads of Treasury every six months for the next two years on the trend of insurance companiespassing on any premiums savings as the result of the reforms.

Senator CONROY—Unfortunately, a chat between the ACCC and the heads of Treasurydoes nothing to inform consumers and the parliament. That requires a formal written requestfrom Senator Coonan to Allan Fels—something in writing saying, ‘Do this and present areport.’ A bit of a chat between the heads of Treasury and Allan Fels is of no use to consumersfor them to be confident that they going to be the beneficiaries. Ultimately, that is whatparliament, with the assistance of the industry, is trying to help achieve—consumers beingbetter off and not facing this extraordinary jumping around. I know that is what the industrywants as well. I am not saying that you do not want be part of this. But Minister Coonan’sACCC involvement is actually completely and utterly non-existent. It is just a bit of an exercisein a press release with no substance. What I am talking about is a formal direction to the ACCCto be involved to ensure that consumers benefit from any savings that flow from the tort reformand the other measures that have been outlined.

Mr Jones—We did not know the detail of that. Out of the ministerial meeting in Melbournecame the statement about the ACCC monitoring pricing and the Productivity Commissionmonitoring claims competencies. Our understanding was it was going to happen, and none ofour members have complained about it. At the end of the day, this industry wants to be able toprovide product to the general public and to businesses in terms of professional liability andpublic liability but it must do so, obviously, with a reasonable return on capital invested. It is avery risky business.

Mr Drummond—I may add that I think it is perfectly fair to say—and we can say on behalfof our members—that they will cooperate with the ACCC, whatever substance the ACCC’s


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terms of reference are. We cooperated with them in the previous report. Much of informationthat we provided was on a voluntarily basis and there were no companies that refused or in anyway limited the information they were prepared to give the ACCC and that will be the positionfor the next two years. Whatever terms of reference the ACCC have, our industry will be morethan happy to cooperate with them.

Mr Jones—Lying behind that question is almost a thought of profiteering from the industry’sviewpoint, and I can assure you the industry has said: ‘We have lost money in the past, but thatis partly our fault. We played this game when we should not have played the game.’ A lot ofpeople went in there with their eyes wide open and lost money and paid the price on theseclasses of business. That has gone. This business, even though the concentration of underwritersis lessening—and that was always meant to be, because we are overinsured in the true sense ofthe word, and that creates a price war environment that does these things—is still verycompetitive. When the companies get back to making reasonable returns on the capital they riskto write this business, you will find that competition will kick in. It is a very competitiveindustry; it always has been. I think the industry will cooperate very fully with the ACCC andwith anybody else to make sure that that happens.

Senator CONROY—You can understand that there is much scepticism about the argumentsbeing put forward—that we do not know how much the savings will be to consumers, and thatyou are restoring your balance sheets, basically. Some think that is just trying to claw back pastlosses. I was actually surprised about one thing. Page 7 of your submission states:

Insurers first look at two things when setting liability premiums—the previous claims record and estimates of likelyfuture claims.

I always thought the two things were future claims and returns on investments. Maybe I wasmisinformed previously that previous claims was not part of the price signal for futurepremiums.

Mr Jones—No, very much so. In fact, because this is a classic long tail class of business, itcan take seven to 10 years for a claim to develop to its full extent. So you rely totally on theadequacy of the actuaries’ projections and where those claims are going and what they are goingto cost you in terms of pricing your product for the future. It is a very important part of theelement, yes, because you can only predict claims in the future being similar to claims in thepast, unless you have a cut-off period like Premier Carr has done in New South Wales in saying,‘20 March, that’s it: old scheme; new scheme.’ When the New South Wales government did thatwith CTP, they did a fantastic job of getting an instant reduction in premiums for the consumer,because you had an old scheme which you could clearly run off with well calculateddevelopment and a new scheme which was predictable and stable. That is the difference. If youhave a half measure, the tail can go on for a long period of time, as in those workerscompensation examples I gave you at the start. Who would have known that you would becopping $20 million worth of claims on £300 of premium back in the sixties? That is thepotential it has.

Senator RIDGEWAY—I have just a few questions. How long as the Insurance Council ofAustralia been around in its various forms over time?


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Mr Drummond—In its various forms, for over 100 years. It has existed as the InsuranceCouncil since 1974.

Senator RIDGEWAY—During that time, whether we are talking about recent years or overthe last 100, what sorts of requirements were put in place to deal with the gathering of data andstatistics to try and forecast or plot trends?

Mr Drummond—ICA did have various considerable statistics capabilities through theseventies and eighties but, as our members grew and as their capabilities grew, the need for ICAcentrally to collect statistics was diminished. Equally, in the Insurance Council we movedthrough a stage where we took the view that we should not be managing functions like that, thatthose functions should be managed independently and externally. At that stage ICA’s statisticalcollecting function was outsourced to Insurance Statistics Australia, and that is now the bodythat is collecting the industry statistics.

Mr Jones—This is probably the first time—and is the first time in modern times that weknow of—that there has been such a public issue with the supply and pricing of insurance. Ithink one of the reasons for that is that Australian consumers and Australian businesses, becauseof the price war that existed through this market, had been getting the cheapest, pure risk rateson most classes of insurance business of anywhere in the world. We look at the statistics aroundthe world and Australia is—or has been traditionally—one of the cheapest insurance markets, sothere has never been the need for the collection of statistics and data to be able to respond to thesorts of crises we are facing now. From the perspective of ISA, it was collecting data to ensurethat the industry was competent in the way it assessed risk rather than pricing its own portfolios.

Senator RIDGEWAY—The line of questioning is more in relation to how the industry,having been around for as long as it has, has not been able to forecast or to deal with problemsas and when they arose rather than get to the point where the issue has become a national one,mostly because of the increases in premiums—which have doubled, tripled and increased morein some cases. How was it not possible to deal with these things adequately over time ratherthan waiting until a crisis occurred? You are probably aware that APRA has said that you cannotrely upon its figures in relation to what the influencing factors are to reflect what is happeningin the industry.

How reliant are you upon what the Trowbridge report says? It seems to go back only to 1993and, from what I can gather, it seems to be based on only five insurers. It refers to 30 per cent,usually in the summary form, in respect of what is happening but with no distinctions betweenbodily harm as opposed to property damage. Are you satisfied that, with what is in this report,the sample reflects the trends accurately? You have different views coming forward from otherpeople—other stakeholders, if you like—that would seek to benefit from coverage. I am askingwhether you feel satisfied with the integrity of what the report says, based on the informationthat has been provided.

Mr Jones—I think the five companies, even though it might sound like a small number,represent a very large percentage of the business in this area so, as a sample, it is probablyreasonable. But it is a sample, and I think there are also qualifications in that report that playersoutside that group were clearly affecting the market quite dramatically. I do not think any of usis totally satisfied with any of the reports we have seen. We are, as an industry, now inviting our


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members to put in their data collectively so that we can understand just what the dynamics are.Dave Finnis has been contracted to the ICA to help with that process. We are not satisfied; wehave to get the data collection issue resolved.

Senator RIDGEWAY—I think in your opening statement you acknowledged what the Carrgovernment had done and said that you see that as a step in the right direction and as a first step,but you also spoke about the possibility of other things. What did you have in mind in relationto that? Are there things that need to happen as part of reform in the insurance industry as well?

Mr Jones—I think that question would probably be better asked of APRA. The newinsurance act has placed an enormous emphasis on getting the financial structure of theinsurance industry right, and just the minimum capital requirements, the solvency requirementsand the degree of certainty in terms of claims reserves have put an enormous burden on theindustry. I think APRA clearly will work more closely with the industry to make sure we do notever have another HIH or anything like it, because that has been so disruptive to Australia in somany ways. I do not think further reform at this stage is required. The reform we have had isenormous and has been very taxing on us in terms of both capital allocation and resourcerequirement.

In terms of the different classes of business and the application of capital, at the ministerialmeeting in Melbourne APRA said that, if you take public liability and professional liability, youneed a much higher application of capital against those classes of business because they are solong term and risky, whereas motor and household insurances are very short term and you canpredict them very easily. So I think the new insurance act does address most of the issuesassociated with what caused HIH to collapse.

Senator RIDGEWAY—I do not want to put words into your mouth, but I seem to recall thatyou were saying that, whilst the first step is a step in the right direction, it would not necessarilydeal with the possibility of increases in premiums into the future. Aren’t you going to reachsome crisis point again at some stage, in terms of both what people are seeking as a result ofshopping around and the viability of the industry? Aren’t there things that should be spokenabout now to try to avert that crisis before it happens, given that we have got one that we aredealing with now?

Mr Jones—One would hope that that crisis you are referring to will not happen. I thinkcompanies are now far more conscious of the fact that if they cannot get a return they will notplay in the game. Some of the big American companies that were in the public liability markettold the conference in Melbourne that AIG—the American International Group, the world’sbiggest insurance company—pulled out of this market back in 1998 because they could not getreturns that were required on the capital. It is easy for them—we are 1.6 per cent of the world’sinsurance pool, but a big company like that can play in any market around the world; it is a bigglobal market. But, of course, a lot of companies here wanted to keep going and took risks thatin hindsight were not sensible to take. I hope that the rationalisation of the industry will also seethat the players who are left here will be, firstly, financially viable—because everyone has saidthat the last thing we need to see is an unprofitable industry—and, secondly, very selective inthe way they write business in this market, and if they cannot get returns they will not play.


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Senator RIDGEWAY—You say in your submission as well that one of the things you seekto ensure is that your members look at two matters when setting the liability for premiums. Thefirst concerns previous claims and the record and estimate of a likely future claim. You areprobably aware, through what has been reported widely in the media and through witnesses thatappeared earlier today—and perhaps some that will come later on as well—that many out theresay that they have made either no claims or few claims. How do you reconcile that with apractice that is promoted amongst members of the ICA where people are having their premiumsdoubled, quadrupled or whatever the figure, or coverage is not being provided because of highrisk—or, in some cases, no assessment of the risk is being done at all? How do you reconcilethat as a practice with what is coming out in anecdotal form, because they do not seem to jell?

Mr Jones—I think you will find that, in this situation, there are a lot of very innocent victimsout there who are being penalised for poor performance and poor risk management on behalf ofsimilar organisations or similar companies across Australia. There are some very innocentadventure risk people who do manage their businesses very well. The insurance industry hasnever been able to go down to a one-on-one individual risk level—such as the Arthur’s chairliftin Victoria, which got so much press—and say, ‘How well do you run this?’ You look at thatclass of business and work out how well it runs as a class of business Australia wide. I think theindustry does that reasonably well. But inside those groups you will have individuals who arebeing disadvantaged, because they are very good risk managers and not incompetent like thosewho are setting the pricing for their industry.

When you look at the whole community and say, ‘These are the segments that I insure andthis is their past track record,’ the statistics are there by company. As I said, we have not pulledit together as an industry as well as we should have, but each company has that. In terms offuture claims, we are in the hands of professional actuaries who have the full-time task of tellingus what the claims experience of the past is, what the conditions in which we operate are andwhat the future is. There will be an incurred but not reported element built in because APRAdemands that of us. If you go to a central estimate without IBNR reserves or reserves toimprove your degree of adequacy, you will not be in the market—APRA would just shoot youout of the place.

I do not think anybody is fudging the numbers in terms of claims—it is just a tough area. Ithink people are being disadvantaged, as I said—good risk operators are being disadvantaged.When we see that, I have seen member companies step in and fix some of those problems,which is great. Individual risk can be addressed in high-profile situations, but it is a matter ofinsuring a market segment. That is where pooling has been seen as being something that willimprove the situation as well.

Senator RIDGEWAY—I do not disagree with the proposition you have put forward,particularly in the context of high-risk assessments. I guess what I had in mind was more inrelation to those assessed as being of a low risk and having had few claims made over the entirelife of the association or organisation. I think they are the ones being penalised, as well as manyothers. It just seems to be at odds with what you promote as a practice in the industry and whatis coming out in coverage in terms of increases in premiums or no coverage at all. I canunderstand it in relation to adventure tourism, but I am talking about something to do with, forexample, the profession of audiologists. We heard from them this morning.


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Mr Jones—Yes, I can imagine certain parts of the medical profession that is true for.

Senator RIDGEWAY—There are astronomical increases in their premiums. I think theywere very passionate about putting forward their argument. How do you justify that in thecontext of the practice and what members do in relation to an assessment or non-assessment ofthe risk and of the history involved where there have been no claims at all, as I understand it?

Mr Jones—Obviously we do not get heavily involved in medical malpractice per se. TheUMPs of the world are run very differently from most of our companies. They were a mutualfor a start and were not under APRA’s control; whereas, clearly, the members of our associationare. I will take your comment and put it into a different context—for example, something like apony club situation. It was just incredible to think that we would shut down every pony ridingschool in Australia. In the end we did not, and thank goodness we put it away. But it waslumped in with a number of other horse riding activities that were far less palatable for aninsurer, and they separated that risk and got it in place. Even then, you may have a fantasticallyrun pony club, wherever it is, with absolutely no claims history over a 20- or 30-year period ofexistence, but you also have one or two that give you $3 million or $4 million claims becausethey do not force the kids to wear helmets, they do not check the gear and accidents happen.

I do not know the audiologists’ story. I know that some parts of medical malpracticeinsurance have skyrocketed. I know that obstetrics in private hospitals in Victoria is uninsurablenow because, if you have more than five cribs in a hospital, the reinsurers say, ‘No, ourexposure to obstetrics cover is too high and we will not give you treaty protection against it.’ Sounderwriters cannot get involved.

Mr Jamvold—One part of the answer to the problem is formalised risk management.Australia is very early on in the process of getting risk management introduced on a broad basisacross the community. I think governments are moving in this direction. But when theseprocesses are put in place and when they are demonstrated to be effective, that will have aneffect on the way that the insurance companies can look on their markets.

CHAIR—I would like to extend this question for the moment because it relates to theaudiologists. The difficulty we are having with the audiologist case—and I would encourageyou to have a look at the Hansard when it becomes available, because I do not think you werehere when these issues were covered—is that we have a case of a relatively low-risk professionin terms of medical risk which has formed a group scheme related to the membership of theirassociation and the standards and risk management behaviours appropriate to membership ofthe organisation. They have claimed to us that the insurance company put other people into theirpool and are using the claims record of these other people in their pool to—

Mr Jones—Distort the numbers.

CHAIR—calculate the risk. On the record I might ask this, but I would do it off the record aswell: what is the appropriate complaints mechanism for somebody operating in that sort ofsituation?

Mr Jones—I cannot answer that question.


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Mr Jamvold—It is a really difficult one. There is a formal complaints mechanism, as youprobably know, called the Insurance Inquiries and Complaints Commission. That tends tooperate for consumers on an individual basis. I do not think there is any formalised arrangementat all—I know there is not.

Senator CONROY—Would they handle an argument about what the risk pool constituted?

Mr Jones—Probably not.

Senator CONROY—I would not have thought they would; it is a consumer issue.

Mr Jamvold—That is right.

Senator CONROY—The audiologists are saying, ‘We shouldn’t be in that risk pool.’ Whowould you have that argument with?

Mr Jamvold—I would suggest that it is really a negotiation between the industry body andthe insurers, or through the brokers. I would suggest it is a matter of a business relationship, amatter of sitting down and saying, ‘Hey, we’ve got a problem; let’s talk through it and see howit might be resolved.’

CHAIR—It is a bit difficult to do when you have a six-week period, if you are lucky, andyou are not able to reinsure the pool.

Mr Jamvold—Absolutely.

Mr Jones—Rationalisation in the insurance broking sector of our industry is also happening,and it is badly needed. A lot of the problems and publicity that has been given to risks that havebeen hard to place and have not been put away on time are because you have a lot of smallsuburban brokers out there who are really being challenged by a very difficult environment. Thebig professional brokers are very quick to get in touch with us and communicate on issues, andwe work closely with them. But a lot of these small brokers are really having trouble. Thathospital in Victoria was a classic case of a local suburban broker not understanding thecomplexity of what he was trying to put away in the marketplace, and contacting the majorunderwriter six days before the policy was due is just not on—it is crazy. So there is a real issuethere.

Mr Jamvold—I suggest that the essential part of the Arthurs Seat problem, which was fixed,incidentally, not long after it was publicised, was basically that the single broker approachedjust one insurer. When it was suggested that he approach a number of other insurers, he wasactually able to put the business away.

Mr Jones—I think that we would appreciate the inquiry also focusing on the need forprofessionalism in the broking industry to be lifted, because we are, in most of our members’cases, delivering products through them. We are wholesalers, not delivery mechanisms.


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Senator CONROY—I was talking about future premium movements and you are suggestingthat this may not be enough. It has also been put to me that a couple of the other factors that gotowards premiums and their level are the return on funds that you receive—I think there aresome terrible statistics, but everyone is suffering that at the moment—the reinsurance issue postSeptember 11 where the market just dried up and tort reform. In terms of the return on funds,you would have to hope that you do not have another 12 or 18 months as bad as this—at least,not for some time. That is returning to a bit more reasonable level of profitability. It has beenput to me that the reinsurance market is not as tight as it was. A few players have stepped backin, so it is possible to lay-off, in effect. The intricacies of the reinsurance market continue toamaze, through the HIH royal commission, but is it fair to say that the reinsurance market is abit more liquid that it was over the last six or eight months and that that has eased some of thepressure and is helping?

Mr Jones—That is a very fair statement. We hope, when we get to the treaty renewal period,which for most companies is December, we will see that occur. Certainly, they have indicated tous that they now have some appetite for terrorism cover, which has been a blanket exclusion onall our treaties, and we will hopefully get in with the Treasury to negotiate a situation to protectbig business in Australia with some sort of scheme. That is taking place now. Every indicationis that the panic that occurred after September 11 has settled down. Cooler heads are prevailingand we will see a bit more stability. I do not think we will see any major reductions in what weare paying the reinsurers, but I think we will see stability in the marketplace. Hopefully, thatwill not be a major impost on people—

Senator CONROY—So those upward pressures are, again, ebbing away? The insuranceindustry is a cyclical industry, probably more so than most.

Mr Jones—Yes, and it is competition that creates that cycle.

Senator CONROY—Absolutely. With major tort reform hopefully achieved, the reinsuranceindustry returning to a bit more stability and, for everyone’s sake in all markets, a bit betterreturn on funds than in the last 12 or 18 months, a lot of the pressure at the insurance companyend will be reduced. Is that a fair description of what is happening at the moment?

Mr Jones—That is a very fair description. Going back to the Carr reform, you asked mesome specific questions. We still do not think that they have got the entry point right, in terms ofwhere general damages claims are being paid. That threshold is really critical. If you look atwhat happened in the CTP scheme, it really did clean out all the frivolous claims, such as thesoft tissue injuries and the bad backs that never existed. It is still there to protect people and tocover their medical costs and lost wages, but a certain injury deserves to have a capital sum paidagainst it. The Carr government got it right there, but they have not got it right with publicliability, so slips and falls can still get through the system, and they add an enormous amount. Infact, the banding we saw for the ministerial conference in Melbourne just shows the enormity ofthe claims. I think they are up to $50,000 or $100,000.

Mr Jamvold—Yes, I think they are around that.

Mr Jones—They are huge. It does not take much to get a court to award you $100,000 thesedays, I can assure you on past history. So, with that plus a sensible cap, we think the average


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weekly wages that have been calculated are still far too generous. It is an average salary ofabout $270,000. Mr Average certainly does not earn $270,000, so we think that is too high. Thestructured settlement issue is the last part of this, and I know that the federal government isdoing an enormous amount on it.

Senator CONROY—Legislation is close to being passed, and it will be unanimouslysupported, as far as I am aware.

Mr Jones—We have seen instances in the past of very large capital sums being paid toclaimants who have been very badly injured. Within three years it has been poorly invested andfrittered away and they are back on the welfare system. There is something fundamentallywrong with that. An amount of money should be paid on an annual basis to maintain a lifestylethat they deserve, and that should be paid through an annuity or through some sort of structuredsettlement payment. So we think that is very positive. I know Senator Coonan is talking abouttax incentives for that as well. We are having trouble with the life insurance industry gettingsensible negotiations on annuities. That will be very important as well. And tax reform really iscritical. Twenty per cent of the premium is tax to state governments.

Mr Jamvold—The second level of the Carr reforms looks at things like the liability waivers,which require the Trade Practices Act amendment plus the state Fair Trading Act amendmentsin sympathy. It needs a number of other considerations too—for example, a look at the wholequestion of joint and several liability, which has a major impact on professional indemnity, inparticular. In our submission we raised a technical point which affects PI very much, and that isthe whole question of section 54 of the Insurance Contracts Act. Insurance is on a claims madepolicy basis, and the High Court made a ruling last year in the FAI and Australian hospital carecase which basically pulled the rug out from under the basis for working on claims madepolicies. That area is very similar, in a way, to the joint-several consideration, which in our viewneeds to be closely looked at to address the whole question of PI and the disincentives forinsurers to be in there. That particular issue extended the tail in PI. It makes it much moredifficult to estimate your incurred but not reported claims into the future, which obviously is anadditional cost to insurance and therefore a disincentive to be in the market. Of course, it is alsoreflected in the price.

Senator CONROY—In terms of where premiums go from here, with better return on funds,reinsurance market easing, lease stability—it would be great if you could pull off some savingsfor yourselves which could be passed on—and the tort reform with caps for frivolous, if apackage like that does not see substantial reductions in premiums, a lot of people are going toaccuse the insurance industry of pure greed. Is that a fair expectation?

Mr Jones—We are well and truly aware of that, I can assure you. The package you justtalked about is not in the Carr reforms; it is stage 1 of what needs to be done. The package youtalked about should, in its entirety, see substantial savings and, more importantly, productavailability to the public in Australia. That is clearly one of the important things.

Mr Drummond—There is another factor that will prevail against any notion of greed. It iscalled competition. Australia is a very competitive market and will remain a very competitivemarket.


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Senator CONROY—That is one reason we support Allan Fels having a more formal rolethan is currently proposed by the government.

Senator RIDGEWAY—In relation to that, is the market big enough, given that two of thewitnesses we heard from this morning said that they were seeking coverage offshore?Presumably that is a trend because of the cost of premiums here or the inability to get coverage.People are tending to go to the UK.

Mr Jones—An enormous amount of business goes offshore anyway.

Senator RIDGEWAY—Doesn’t that concern you as an industry in terms of viability for thefuture?

Mr Jones—Very much so, but we are a global market. At the end of the day, there is nothingstopping any of the major operators in the developed countries around the world dipping intothe Australian market when they want to. Part of it is the size of the premium pool. As I said,we are 1.7 per cent of the world’s premium pool, and with certain types of risks it is easier to goto a Lloyd’s broker, who has access to a much bigger pool of similar risks. That changes thewhole actuarial assessment of where those claims will go on claims frequency. So, if you aredealing just in this market, it is a very small market by global standards and a lot of risks haveto go offshore.

CHAIR—To the extent that those risks go offshore, you are looking at some of the regulationissues becoming semantic?

Mr Jones—Correct. APRA is certainly aware of that.

CHAIR—What proportion of the market is offshore at the moment?

Mr Jones—About 40 per cent.

CHAIR—As high as that?

Mr Jones—Yes. It always has been.

CHAIR—Is that higher in some areas?

Mr Jones—Yes. It is higher in the difficult-to-place classes, and professional indemnity isone of those. When HIH collapsed it had a very large book of professional indemnity anddirectors and officers business—I think it was about $140 million in round figures. About 70per cent of that went offshore. Australian underwriters were just not prepared to take it on atanything like the rates that were being offered, so it went into pools in London and Europe. So itis higher on hard-to-place risks, yes.

CHAIR—You said earlier that your members are conducting some of these assessments inrelation to the impact of these reforms. When do you anticipate some of that material comingback to you?


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Mr Jones—The ICA is encouraging member companies to do the work quickly, because theCarr government have been putting quite substantial pressure on us to come back to them forsecond-stage discussions. I do not think we have set a time frame for responses. I know that thecompanies are in various stages of doing that. If I could take that on notice and come back toyou, we will ask the companies where they are with their pricing review.

CHAIR—Yes. If possible, we would appreciate hearing the outcome of that process as well.

Mr Jones—We will provide that.

CHAIR—That concludes the questions. Thank you very much for your appearance.


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[2.47 p.m.]

ORTON, Mr Paul, General Manager Policy, Australian Business Ltd

CHAIR—Welcome. The committee prefers all evidence to be given in public, but we willconsider a request for all or part of your evidence to be given in private. The committee hasbefore it your submission numbered 115. Are there any alterations or additions that you wish tomake to the written submission?

Mr Orton—No.

CHAIR—I now invite you to make a brief opening statement, and we will proceed toquestions after that.

Mr Orton—Australian Business Ltd has 14,000 members, mostly based in New SouthWales. We conducted a survey of our members in late February this year to identify issues ofconcern to them at that time. We were principally concentrating on state based issues. The issueof public liability insurance premium increases and availability was one of the top three issuesraised in that survey of 400 businesses across New South Wales. Since then we have had plentyof anecdotal feedback from our membership to confirm that it has remained an issue of concernand contention for them right up to this date. That has been made more obvious by virtue of thefact that 30 June is renewal time for most policies that have a public liability coveragecomponent.

You have probably been through the causes, and they are dealt with in our survey. We wouldcertainly agree with the four key ones that APRA laid out in its submission. There seem to havebeen claims cost increases over time, as well as withdrawal of capacity and the HIHcircumstances. A large factor seems to be the insurance market pricing cycle, and we are beingcareful not to forget that. We are part of a global market and reinsurers are more risk averse thanusual—and, as you might have heard from your previous speakers, Australia is a very small partof the global market.

In the time that I have remaining I might reflect on some of the feedback that we have hadfrom members in recent weeks and months. The key feedback we have had is that mostordinary—that is, not ecotourism and other inherently risky businesses, like horse ridingbusinesses—manufacturing and service sector businesses have been able to get public liabilitycoverage. Price is the issue they have been less concerned about. Getting the coverage has beentheir No. 1 priority. Prices have increased between 30 per cent to 60 per cent. That is thefeedback we have from a number of brokers and members.

I guess the reaction we have had from a number of brokers is that they find their dealingswith insurers display two characteristics. One is perhaps a certain sense of indifference aboutthe difficulty that the ultimate consumers of insurance products are facing and the second is thelack of capacity to take on as many risks as our members would like the industry to be able todeal with. That indifference is reflected in the lack of rationale for knockbacks for the retentionof what had been long held cover with a particular firm. There does not seen to be any


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connection between claims history and the capacity to get insurance. While it is true that mostbusinesses have been able to get coverage, it may not necessarily have been with their currentcompany and indeed in a number of cases the brokers I spoke to have had to go offshore to findcoverage, and to the United Kingdom in particular.

One example was a nursing home that had had a single claim—a slip-fall claim—in 25 years,so I was advised. The broker went to five companies, none of whom was interested in evenquoting on the business. The existing insurer was prepared to accept it but at triple the premium.The broker eventually found another insurer at double the premium. The owner is planning tosell the home to have it converted into medium density housing. While that is not solely due tothe insurance issue, I guess it is one more difficulty that the owner of that particular nursinghome faced. There are similar stories out there.

As a result of that, we are supportive of action to moderate claims costs. We see that ashaving benefit over the medium to long term. We see the withdrawal of capacity as a big issueand hopefully if we really do have a competitive insurance market we should see somethingwithin, say, the next 12 months to indicate a re-entry of capital insurers and products into thepublic liability and professional indemnity markets. In the meantime our plea, which is directedmore at state government level, is to look at taxes on professional indemnity and public liabilityinsurance premiums—stamp duty in particular. We applaud the action of Tasmania for removingstamp duty and New South Wales for getting halfway there. We would like them to go thewhole way. Frankly, it is the only immediately obvious route to mitigate at least in part thefairly considerable increases that businesses are facing.

Finally, there is a longer-term issue not covered in our submission. There does seem to beenough similarity between a number of personal injury insurance schemes to at least investigatemore closely opportunities for better aligning schemes that cover public liability, medicalindemnity, motor vehicle accident and workers compensation cover, which all deal withpersonal injury—albeit that three of those are statutory schemes; public liability is not.

I guess the question is: would there be economies of scale in bringing together or betteraligning the administration of those schemes, the claims determination processes, the benefitregimes and possibly even funds management? There does seem to be enough there to warrant acloser examination of potential benefits. There would be extreme difficulties. We are notnecessarily advocating the New Zealand model. For example, in New South Wales the currenttort law reform proposal aligns the maximum benefit level with that in the recent healthindemnity insurance legislation in New South Wales. So there do seem to be more opportunitiesfor aligning regimes both within and between states.

CHAIR—The issue of rationalising some of the statutory arrangements with some of theother arrangements, from my reading so far, is one of the newer considerations. Although, fromthe evidence that we had from the AMA this morning, it was an obvious consideration whenthey started talking about aligning the statutory arrangements more along the lines of what isavailable through the Transport Accident Commission in relation to provisions for people withserious injuries and—akin to what you have just said—not going down the path of the moregeneral scheme that applies in New Zealand. You are suggesting that pretty much the samecould be done across all injury schemes.


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Mr Orton—Yes, certainly across those four. Attempting to do it at a national level, or at anylevel, would be a big ask, because there are quite considerable legislative and administrativearrangements in place for each of the schemes. Being a New South Wales based organisation,we see that maybe there is scope for a closer look at the feasibility of doing that within a stateand then perhaps translating that to a national level. We have already seen that there has notexactly been a wholly uniform approach to tort law reform, with different proposals enacted inNew South Wales compared with those proposed in Queensland. The magnitude of doing itnationally does seem to be huge, but it certainly should not be off the agenda.

CHAIR—What do you say to considerations or concerns to date, say from the disabilitysector, in relation to dealing with people with serious injuries and disabilities? To date, you havehad, in a sense, the Rolls-Royce treatment that people usually ascribe to those who have beenlucky enough to have an injury as a consequence of dealings with the TAC, in comparison withthe services and the provision made for people with other disabilities. You still do not think weshould go down the path of more generalised treatment such as we see in New Zealand?

Mr Orton—Our concern with the New Zealand model is perhaps less about the care andtreatment of injured people and more about maintaining a link between the premiums that arepaid and the level of service that is provided to both those who are injured and those who arepaying the premiums. That is an issue we see within the workers compensation area in NewSouth Wales. We are keen for there to be greater linkages between, I guess, the insuranceindustry, or the providers of injury management services, and those who are injured and, in theworkers compensation cases, employers.

CHAIR—To some extent, the structured settlement issue comes into this area as well.

Mr Orton—It does. That seems a worthwhile course to follow. Whether or not it will havemuch impact on the overall cost of the public liability insurance remains to be seen, but it iscertainly a better way, from a government perspective, to handle the long-term—

CHAIR—It will certainly cost the taxpayers—

Mr Orton—And the taxpayers, yes.

CHAIR—Going back to the evidence we received just ahead of you, in relation to brokers,has your survey of members raised the issue of the professionalism of brokers?

Mr Orton—We have run a number of seminars around New South Wales, and we have morehappening towards the end of this month. It is not an issue on which we have either directlyqueried members or heard back from them anecdotally. We are doing this in concert withbrokers. We have gone to the trouble of identifying brokers in whose professionalism we havesome confidence. I guess the insurance broking industry will give evidence later on. I do notreally know enough about the industry to make a comment on it, other than in relation to myown experience in dealing with those with whom we have established contact and who havegiven me every confidence in their capacity to service their clients. But that may not hold truefor all brokers.


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CHAIR—No. I understand your position: you have consulted and worked with those whoseoperations you have some reason to respect. I was more interested in whether, anecdotally,issues such as that which the Insurance Council has just raised about small suburban brokersbeing out of their depth, particularly in the current crisis, has been the experience of yourmembers. But, from what you are saying, you are not aware.

Mr Orton—No. I guess it is possible, but it is not something that we have had directfeedback on.

CHAIR—Do you see the lack of capacity as something that is cyclic?

Mr Orton—Talking to people in the industry, both insurers and brokers, there does seem tobe a pricing cycle that the HIH collapse has brought to a close. We would hope that there is acycle, because we would want to see some light at the end of the tunnel, with more competitorsentering the marketplace to meet the demand that is obviously there for a fairly priced product.Indeed, I guess that is why we support a continuing role for the ACCC, as proposed by theministerial council, to monitor the impact of cost savings on premiums.

CHAIR—Were you here earlier when Senator Conroy was asking questions about theACCC’s role?

Mr Orton—No.

CHAIR—There is some concern that what is being proposed for the ACCC is pretty muchthe status quo and that it has not been given the impetus it needs to seriously monitor what isoccurring in the insurance industry. In fact, I think the APRA submission itself does not mentionthe ACCC at all; it refers to ASIC having some level of responsibility in relation to consumermatters. It seems that there is quite a level of concern—although I am not sure that ‘concern’ isthe right word—that the role of the ACCC in this overall situation appears to be somewhatmeshed at this point in time.

Mr Orton—Yes. We would be keen not to react in a knee-jerk fashion to reintroducing fullyblown price control in the area. It is a fairly long cycle and we would be looking for someevidence of competition within a 12-month period; maybe towards the end of that period mightbe a time to consider reviewing the ACCC’s role. Certainly, in the meantime, we support theproposed action.

CHAIR—What is the experience of your members in relation to the industry’s currentcomplaints mechanism?

Mr Orton—Frankly, it is not something about which we have had feedback from members.We gave members an opportunity to comment on issues more generally when we surveyed 400of them in February, and insurance pricing was part of the issue. I do not think that was raised inthe open-ended part of the questionnaire at all, so I have not had enough feedback from ourmembers to comment on that in any meaningful way.

Senator RIDGEWAY—Mr Orton, in your submission you talk about—and I presume it isfrom the survey of 400 businesses that was undertaken—what appear to be unfair tactics used


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by the insurance companies when making or providing unreasonable time frames in which toaccept increases in the policy quotes that were given. Do you want to talk a little more aboutthat and give us some examples?

Mr Orton—Yes. In fact, that came not from the survey but from anecdotal stories that wehad heard from members. We do not really have enough concrete material from people to take itany further than we have done in the submission. One suspects that it might be lack of time tofind alternative insurers; I guess that was the issue that was raised. I suppose one couldcomment that, given the current level of public concern about public liability coverage, leavingyour investigation as a business looking for insurance until the renewal date might be a bit late.I suspect there was an element of belated activity on the part of the insurer in the case that weheard about. But, on the other hand, the anecdotal evidence we are hearing from brokers is thatthe insurance industry believes the pricing power ball is now in their court and that they aregoing to extract as much benefit from it as they can in this part of the cycle. Perhaps there is alevel of indifference in making sure that insurance clients find coverage.

Senator RIDGEWAY—Do you talk in your submission about the need to review the TradePractices Act? Do you have any views about that in terms of what changes might occur to theact to assist with the problem of rising premiums?

Mr Orton—I think we are looking at the capacity of individuals to waive rights they mighthave to public liability or to professional indemnity coverage, particularly in very riskyecotourism and other activities. That was the context, and it has been covered.

Senator RIDGEWAY—Do you have small tourism operators as members of the ABL?

Mr Orton—We do have some small tourism operators. We have had feedback from thosethat we have not heard much about publicly, such as the ordinary business like the small movietheatre proprietor who had been asked to pay 400 per cent more for his public liability premiumthan he had in the past. The ramifications of the current circumstances we believe extendbeyond the obvious highly risky activities. Indeed, businesses in New South Wales are facinganother cost burden on top of workers compensation premium increases and other cost burdensthat they feel they have limited capacity to pass on to their customers.

Senator RIDGEWAY—I notice that you seem to be a proponent of the changes that havetaken place in New South Wales under the Carr government’s changes.

Mr Orton—Yes.

Senator RIDGEWAY—One of the comments that was made by the previous witnesses, fromthe Insurance Council of Australia, was that, whilst they thought it was a step in the rightdirection, it would not necessarily deal with the question of increasing premiums. As a memberof another organisation, do you think there are things that, given the package and given theircomments, need to happen in the insurance industry as well in terms of reform?

Mr Orton—I think we have been careful not to ascribe a panacea characteristic to tort lawreform; any benefits it does deliver will be in the medium to longer term. Indeed, some of thecyclical and capacity issues perhaps are having a bigger impact at this time. The reason we are


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keen for the ACCC’s role to be maintained, as is currently proposed, is to be confident that wehave a competitive public liability insurance market and that we see evidence of that state ofcompetition through increased capacity coming into the industry and new products that betterdeal with particular sectoral insurance needs. One of our criticisms might be that there does notseem to have been a lot of action on the part of the insurance industry more generally in some ofthese group schemes.

It is difficult for our membership which is very broad based. Therefore, we do not necessarilyhave any easily identified or corralled communities of interest. But they certainly do exist, and,in the same way they have been proposed and already exist for the local government sector.Maybe we might have expected to see a little more action in facilitating the creation of groupingprovisions. We also acknowledge, though, that pooling does not necessarily provide a panacea.It only works if the members have a reasonably homogenous risk profile. It only needs one ortwo to adopt poor risk management practices to cruel the benefits for the pool as a whole. So itis probably not an easy solution, but maybe we could have seen more action.

Senator RIDGEWAY—Given that you represent a lot of small businesses and you hold theview that most things, if not all things, should be left to the marketplace to sort out, is there arole for the federal government in this in terms of trying to create some sort of national scheme?The AMA appeared this morning and spoke about the need to deal with that higher risk liabilityend of insurance coverage. Is there a role there for government in providing a halfway house ora halfway measure in doing its part, and then providing the conditions for industry to be viable?

Mr Orton—I think the foremost role is a leadership role in bringing together, to themaximum extent possible, the various state jurisdictions which operate most of the statutoryregimes. I guess that our first port of call would not be a government run scheme—at least withour current state of knowledge. But, as I mentioned earlier, we do see some benefit in exploringwhether or not there might be some benefits in bringing together or aligning some of theexisting personal injury schemes. It may not necessarily mean a government run scheme, butthere might be some opportunity for commonality of systems, funds management and disputeresolution mechanisms to provide economies of scale and greater certainty on the part of usersof those and to get more focus on injury management. Certainly, one of the key lessons we havelearnt from workers compensation in New South Wales is that better managing injuries anddealing with them quickly and appropriately is probably going to have as big an impact asanything else. Maybe some of those principles need to be applied more broadly.

CHAIR—That concludes the questions. Thank you very much, Mr Orton.



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BAKER, Dr Kenneth, Chief Executive Officer, ACROD Ltd

REGAN, Dr Sean, Senior Policy Adviser, ACROD Ltd

CHAIR—I welcome Dr Baker and Dr Regan from ACROD. The committee prefers that allevidence be given in public but we will consider a request for all or part of evidence to be givenin camera if that is necessary. We have received your submission which is No. 59. Do you wishto make any alterations or additions to that submission?

Dr Baker—No.

CHAIR—I now invite you to make a brief opening statement and we will then move toquestions.

Dr Baker—ACROD has been around for over 50 years. The acronym originally stood for theAustralian Council for the Rehabilitation of the Disabled, but from 1986 it has simply beenreferred to as the acronym. Thank you for the opportunity to present evidence to this inquiryinto a critical issue. The membership of ACROD includes around 550 non-government, non-profit disability service organisations which range from very small organisations with revenuesof under $100,000 to organisations with incomes in the tens of millions of dollars. They operatein all states and territories of Australia. The non-profit and non-government organisations havefunding agreements with the Commonwealth government and state and territory governments,and a requirement of all those agreements is that they have comprehensive insurance coveragetypically of $10 million, but it could be as high as $20 million. They are in partnership withgovernment. The government funds or subsidises them to deliver services to people withdisabilities. There is a partnership with government and implicit in that partnership is a sharingof risk.

The information provided to us by our members suggests that a significant number of themare facing quite critical problems in gaining insurance coverage at a level that they can afford,or even gaining cover at all. They have reported a reluctance by insurance providers to coverfundraising events which are often critical to their capacity to fund services. They have reportedquotations which often have so many exclusions that they become meaningless. There has beena huge increase in excesses. For example, a church agency has recently been told that its policyto insure against sexual molestation of clients will now carry an excess of $1 million when itformerly carried no excess. There have been premium increases ranging from 30 per cent to, bytoday’s evidence, 400 per cent. In some cases, organisations are having great difficulty gettingany insurance cover at all. These refusals to insure and the great increases seem to be unrelatedto the history of claims of the organisation. Organisations which may have been around formore than two or three decades and had no claims have nevertheless faced dramatic increases inpremiums.

The impact on these organisations has been quite considerable. It has affected their capacityto provide services. They are in a position where they cannot pass on the increased costs to theirclients; they have to either absorb those costs or receive additional funding from government.The insurance crisis has often cut off their other avenue of fundraising, which is through


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community events. At worst, they will be forced out of business because, as I mentioned, it is acondition of their funding agreement with governments that they have comprehensive coverage.They have also traditionally relied on the assistance of volunteers to provide services and this isagain an area where it is very difficult to get coverage at a reasonable rate.

Without rehearsing the measures that were mooted by the governments collectively on 30May, ACROD generally supports those initiatives flagged by governments following thatmeeting but recognises that these are long-term measures and that this crisis, for manyorganisations, is under way at present. There need to be immediate measures to address thesituation they face. One solution which I think we could commend is that which has beenfollowed in Victoria since October 1996—it has been common to governments of bothpersuasions. Through an authority called the Victorian Managed Insurance Authority alldisability services which are funded by the Department of Human Services automaticallyreceive, as part of that agreement, comprehensive insurance coverage. The Victorian ManagedInsurance Authority was set up principally to provide insurance coverage and risk managementadvice to government agencies but it has extended that coverage to agencies that are funded bygovernment to deliver services which government desires.

As a fall back measure, we think it is certainly worth considering that government be theinsurer of last resort if an organisation cannot find insurance from the private market, becausethis does seem to be a case of market failure where the private insurance industry cannotprovide coverage at an acceptable rate.

ACROD has embarked on the provision of risk management advice at its seminars andconferences and would see its role in that area expanding so that we can better inform thedisability services sector about risk management. As an organisation representing disabilityservice providers we are conscious that there is a tension for our organisations between riskminimisation on the one hand and what we in the sector call ‘dignity of risk’ on the other. Inother words, an essential part of the expansion of rights over the last 20 years for people withdisabilities has been recognition of the value to them of taking risks and of doing things in thecommunity with other members of the community, which may involve sporting events and othersituations where they are not guided by a paternalistic presence. That is very important to theirdevelopment and growth. There is a point at which it probably comes into conflict with riskminimisation. But if one were to take the risk minimisation line to its logical conclusion, onewould re-establish institutions which were originally designed to maximise supervision andprotection of clients. But that is not a direction that anyone wants to go in.

It does seem to us that the community services sector generally has probably been poorlyanalysed by the insurance industry. The Trowbridge Consulting report recognised that thecommunity services sector was the only one that was profitable in public liability terms for theinsurance industry. But many organisations which have records of making no claims seem to belumped in with organisations which are high risk and which might involve risky sportingactivities or recreational events. So there does seem to be some need to review the classificationprocedure, which at present seems to be extremely crude.

There is also I think, as an immediate measure, a need for government, as part of apartnership with the non-government sector, to provide additional funding in recognition of thehike in insurance premiums which organisations have experienced. A report published very


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recently—commissioned by the National Disability Administrators, representing every state andterritory government as well as the Commonwealth government, and done by the Social PolicyResearch Centre at the University of New South Wales—has identified and quantified theimpact of costs such as the hike in insurance premiums on disability service providers. It hasrecognised the need for the Commonwealth government in particular to replace its currentindexation formula with one which is much more realistic in reflecting the real increases incosts, including insurance costs, on this sector.

CHAIR—I cannot recall if I read this in your submission or if I picked this up elsewhere, butis it the case that some insurers are refusing to provide insurance if it involves certain activitiesbeing conducted by disabled people—so, if you have a generalised service they will insure it,unless you allow access to people with disabilities as well?

Dr Baker—There are different cases of that. One example is open employment providers,whose role is to provide training and assistance that can secure employment for people withdisabilities in the open labour market. As part of that there may be work experience or jobtraining involved which is off site. There have been insurers that have refused to insure thatwhile the person is off site. But that off site training is essential to developing job skills and thusto securing employment.

CHAIR—Will they insure it for an able bodied person?

Dr Baker—Yes, as far as I know, they will.

CHAIR—So is there a discrimination case?

Dr Baker—I think there is, yes.

CHAIR—So you have an insurer practising discrimination?

Dr Baker—Yes, it seems to me that that is the case. I can think of another case of a verysmall organisation whose activity was to provide a weekly dance in a town hall for people withintellectual disability. They had enormous trouble in obtaining public liability insurance for thatactivity, even though they had been around 15 years and had no history of claims. I think thereis an implicit misunderstanding of the nature of disability services and of people withdisabilities within a number of the judgments being made by the insurance industry.

CHAIR—I suppose the question in my mind was more to do with an example of where aninsurer was going to refuse to provide cover to a generalised service—something for the generalpopulation—if access to disabled people was included in relation to the activity.

Dr Baker—The open employment organisations are organisations which provide assistancespecifically to people with disabilities.

CHAIR—So you are not aware of a case similar to the one I have just described?


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Dr Regan—I am aware of cases where insurers can say quite legitimately that discriminationis part of their job—they have to discriminate between different classes of risk. Thatdiscrimination is based upon an actuarial assessment that may overlap with areas ofdiscrimination more generally—for example, discrimination against young people, who have topay higher premiums. There is this very grey area where a misunderstanding of what disabilityservices do gets confused with a general risk assessment by the insurance companies. So you doget these very messy cases where it looks as though there is discrimination on the basis ofpeople’s disability but it could be discrimination on the basis of a purely actuarial calculation.That is one of the areas of confusion that leads many insurers to consider that disability serviceproviders are a bad risk.

CHAIR—However, society more generally determines what actuarial discrimination isappropriate and what is not. I have very limited feel for the extent to which they have alloweddiscrimination between one class of individuals and another on the basis of whether they have adisability in terms of access to a service. This is why, when I look at this particular example, Iam surprised that it has got through any of our disability legislation—that an insurer coulddiscriminate on that basis or refuse to provide cover on that basis.

Dr Baker—Indeed. The population of people with disabilities is extremely diverse—asdiverse as any other—and to make blanket judgments about it seems inherently wrong.

CHAIR—Going back to the Victorian Managed Insurance Authority, you described thosechanges as occurring back in October 1996. What was the driver for the extension to not-for-profit?

Dr Baker—I understand that was when that particular authority was established. It wouldstill state its principal role as being to insure government agencies. I am not sure when this wasdone—whether it was at the inception or later—but the Department of Human Services put to itthe argument that organisations that receive government funding, in which government has asignificant investment, ought to be part of that.

CHAIR—It is a cost to the state government anyway, whether they pay it directly orindirectly. I presume the argument is that potentially they pay less if it is dealt with directly.

Dr Baker—Yes.

CHAIR—Do you know of the cost of those covers over the last few years?

Dr Baker—No, I do not.

CHAIR—So you are not aware whether they, similarly, have increased in line with yourexperience outside of those arrangements?

Dr Baker—No, because the cost is not stated within the funding agreement; it is absorbed bygovernment.

Senator RIDGEWAY—One of the things you say in your submission is that you fully acceptthat premiums have been underpriced and will have to be readjusted to meet real costs. I am


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wondering where or why the statement would be made to show that. Is that just your view of atrend in the insurance sector?

Dr Regan—I think it is generally accepted that during the 1990s—because of the aggressivemarket behaviour of HIH in particular—there was a lot of underpricing to get market share.That point is quite separate from the more general question of what ACROD would consider tobe relevant in the most sensible insurance arrangements for this particular sector. The fact is thatpeople had to get insurance in the private sector and during the 1990s there was very aggressiveunderpricing on public liability. All people who have argued about this accepted that thebehaviour of the insurance companies during that period was aggressive.

Senator RIDGEWAY—Given what is happening not only to not-for-profit organisations butalso to professional associations, where premiums have doubled, tripled, quadrupled and so on,would you say it is fair and reasonable in terms of catching up? I am trying to give some contextto the statement.

Dr Regan—Within the terms of reference of the insurance companies, given that they wererelying on profits from investments to, if you like, underwrite their own relatively lowpremiums in areas like public liability, it makes sense. Whether it makes sense to the rest of thecommunity is, of course, quite a different question.

Senator RIDGEWAY—Moving on to the argument about what the government should bedoing in relation to government funded programs, the previous witness spoke about the idea ofharmonising or packaging with existing statutory schemes that deal with CTP, motor accidentsand things of that sort. Do you have a view on that, given your suggestion about governmentfunded arrangements and the need to package them in some way?

Dr Regan—If you have a motorcar that is regarded as roadworthy, you have to take outinsurance. More importantly, the insurance company has to give you insurance. A very similarprocess applies in the case of a contract between government and a non-profit organisation. If,by giving you funding, the government recognises that your enterprise is acceptable and worthy,all other things being equal, and if it goes on to impose a condition that you should havecomprehensive insurance and the private market will not give you the insurance or gives youinsurance at an excessive rate so that you cannot actually afford it, I suggest that it is reasonableto suppose that the government should in some way help you to get that insurance so you cancarry on the activities for which you are being funded.

Senator RIDGEWAY—So you would not necessarily see that the condition for governmentfunding would be strict? For example, if other not-for-profit organisations are holdingcommunity events and have sponsorship or a grant from a local bank or something of thatnature, might they not also fall into that category of needing intervention or underwriting by thegovernment? I am trying to understand where you draw the line between those that fall into thescheme you are describing and those that do not. Does it just relate to the question ofgovernment funding or are there other circumstances?

Dr Regan—At one extreme you could have the government as the insurer of last resort forthe activities which, for whatever reason, government considers to be legitimate communityactivities. The alternative is to say that the private market is sufficiently competitive for there to


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be a good possibility of reasonable premiums being offered to those that are funded bygovernment, those that are not funded by government or whatever combination of the two youmay find. In practice, given the financial circumstances under which all governments nowoperate, I imagine that it is going to be considerably more straightforward to argue that theorganisations which are directly dependent on government funding should have priority in thekind of arrangement I have been canvassing. However, in principle, consideration should begiven to extending it to the other organisations we have talked about.

Dr Baker—Victoria has moved in that direction with its new scheme that was introduced on1 June which would cover non-profit organisations which are not currently covered by theVictorian Managed Insurance Authority scheme.

Senator RIDGEWAY—On page 12 of your submission you talk about encouragingstructured or staggered settlements. I presume you are aware of the government’s proposal forstructured settlements. Have you had a chance to look at that proposal and, if you have, can youoffer any comments?

Dr Regan—Yes, I have had a look at it. I have not heard any serious objections to it, so longas it is not used as an excuse for cutting back on justifiable compensation. Clearly insurancecompanies like it because it does not cost as much in the short to medium term, and there is avery good case for arguing for it more generally in that the rehabilitation or whatever the resultof the claim is more likely to be taken seriously if the structured settlement is tied in with aprogram of medical and other forms of rehabilitation. It is consistent with the argument that wehave put.

CHAIR—Further to that, you also suggest that we look at the proposal for a nationalstatutory no-fault compensation scheme. Are you talking about something akin to the NewZealand scheme?

Dr Regan—The New Zealand scheme is certainly very popular with some of our members,but it is just one option. If I could go back to Senator Ridgeway’s point about the parallel withother statutory schemes, I think there is a good case to be made. It was said that, perhaps likehealth, there should be a government backed scheme such as Medicare which provides for areasonable amount of medical treatment for everyone allied to a private health system—whichhas various advantages that have been canvassed on numerous occasions—but that no-oneshould be entirely dependent on a private scheme. Of course, there is a problem here involvingresponsibilities between the states and the Commonwealth but, philosophically, I can see a verystrong argument for saying that public liability insurance, particularly for non-profitorganisations, should be put on a statutory basis.

CHAIR—The proposal that Senator Ridgeway was referring to earlier was basically thecombination of the workers compensation, public liability, medical indemnity and transportaccident regimes into something that, presumably, is providing a more rationalised andconsistent approach to all people suffering serious injuries, which, to one extent, deals with theissue. I know, from my own experience in disability services, the regard for people who arefortunate enough to be Transport Accident Commission people in comparison to others withrespect to access to disability services. What I see as the main advantage is more related toclient care than to necessarily reducing insurance premiums. Presumably that is the attraction of


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following the New Zealand model rather than what is being proposed by the AMA and others,which is more limited in its approach. The AMA approach, for instance, was looking at limitingthe public liability issue in a regime similar to the Transport Accident Commission ones, ratherthan providing a more generalised scheme. Does your organisation have a position with respectto putting emphasis on one approach rather than the other, or is that at a very early considerationstage?

Dr Regan—As Dr Baker said, we have a very wide range of members. The only thing theyhave in common is that they provide disability services of one kind or another. There is a widerange of ideological views. What we are trying to do in the submission is canvass those optionsthat would command general assent and perhaps look at one or two which could be taken moreseriously than others. But you would find within the ACROD membership some people whowould be totally in favour of the New Zealand scheme, as I mentioned, and others who wouldhave certain reservations about it. We are simply trying to indicate the range of options that wethink should be taken seriously.

CHAIR—In relation to your earlier comments that the worst-case scenario for some peoplewill mean closures, have you experienced any to date?

Dr Baker—I know of an organisation that, as recently as this week, was on the point ofclosure before our organisation intervened and managed to find some insurance for it.

CHAIR—How did you do that?

Dr Baker—By using our own contacts within the insurance industry to try to broker anarrangement.

CHAIR—I presume this particular service had been using the broker that they had beenusing previously?

Dr Baker—Yes. It thought it had exhausted all its options; it is a very small organisation.

Dr Regan—There have been other organisations that have cut back on parts of their service.For example, there is a Tasmanian agency that relied very much on volunteers over the age of65. The insurance company said, ‘We’re not going to insure anyone over the age of 65.’ So theyhave had to close down certain, quite important parts of their operation pending a resolution.

CHAIR—That is an issue still pending, is it? Is that while you look for an insurer that isprepared to cover such people, or are there other means of resolution that you are hoping for?

Dr Regan—One can always hope for miracles, but there are a couple of insurers in NewSouth Wales and Queensland that are willing to take on new clients from our membership. Theyare far less ready to take on clients in Tasmania, because they cannot visit the agency. There is apractical barrier, particularly for isolated agencies, either in a state like Tasmania or in regionalareas generally. But we are getting calls every week from members asking, ‘Do you know ofany broker who would be able to find us cover? We are prepared to pay whatever we possiblycan.’ It is not something that is isolated.


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CHAIR—There being no further questions, thank you for your appearance today.



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MARDEN, Mr Bernie, Secretary, Professional Standards Council

WILKINSON, Mr Warwick AM, Chairman, Professional Standards Council

CHAIR—Welcome. The committee prefers that all evidence be given in public, but we willconsider any request that we go into private session if that is necessary. We have received yoursubmission numbered 99. Are there any alterations or additions you wish to make to the writtensubmission?

Mr Wilkinson—No.

CHAIR—I now invite you to make a brief opening statement and then we will move toquestions beyond that.

Mr Wilkinson—The Senate is to be commended for referring this matter to this committeefor inquiry. On behalf of the Professional Standards Council I am able to comment on theprofessional indemnity insurance aspect of the inquiry and I will be assisted by the Secretary toour council, Bernie Marden. The committee will note from the council’s submission to theinquiry that the council is constituted by the Professional Standards Act. This is state legislationand it exists in New South Wales and Western Australia. It is back-to-back legislation and it isvirtually the same in both states. I might add that it is an interesting piece of federalism, withoutthe federal bit. It also has bipartisan support, both in New South Wales and Western Australia.The Western Australian legislation was the subject of a recommendation of a jointparliamentary committee.

The legislation enables the occupational liability of professionals and other occupationalgroups to be limited. The council determines these limits. The council has regard for the claimshistory of the groups that we are looking at and for the important need to protect consumers.There are different kinds of limits for different occupations and different kinds of work.Consumer protection is a key plank of the legislation. This is to be achieved by reducing riskthrough improved professional standards. Compulsory professional indemnity insurance isrequired.

The schemes approved by the council are administered through the occupational associations.The associations are required to administer risk management strategies upon their members.The focus is on systems for improving standards, reducing risks and protecting consumers.Therefore, only members of the association—and only those to whom the scheme applies—have limited liability. You have to be in the schemes to be limited.

The debate and public concern that prompted this current inquiry is the same debate thatoccurred a decade ago, from which the Professional Standards Act arose. At the same time,similar legislation was developed in New South Wales to deal with personal injuries and publicliability—the Personal Injuries Damages Bill. For a number of reasons it did not proceed—thatwas some 10 years ago. However, the Professional Standards Act does not apply to personalinjuries claimed, because at the time of its development there was this concurrent legislationwhich was going to look to personal injuries. The New South Wales government passed only


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last year the Health Care Liability Act, which limits damages in some health care cases. Theobjective of that legislation is to keep the cost of medical indemnity premiums sustainable.

Since its inception the council has approved schemes to cover members of the Institution ofEngineers Australia, the Association of Consulting Engineers Australia, the College ofInvestigative and Remedial Consulting Engineers Australia, the Law Society of New SouthWales, the Institute of Chartered Accountants in Australia, CPA Australia, the National Instituteof Accountants, the Professional Surveyors Occupational Association of New South Wales and,most recently, the Institute of Consulting Valuers.

A strategic goal under the scheme is to improve the professional standards of members of theoccupational association and protect consumers who utilise the services of those members.Underlying this are three strategic objectives: to improve the quality and competency ofassociation members, to improve the ethical conduct of association members, and to makeassociation members accountable for their work and conduct. The associations apply strategiesto meet these key objectives. Some common strategies are entry qualifications, codes of ethicalconduct, continuing education, quality assurance, technical standards and guidance, advisoryand support services, complaint and disciplinary systems—and with that we encourage anelement of transparency—and claims monitoring. Part of the council’s role is to provide adviceon these matters. Therefore, the council has explored, consulted and published on the following:whistleblowing in the professions, industry based complaints and discipline systems andstandards—and there again we look at transparency—and, most recently, the model code ofethical principles and insurance standards.

Since the inception of schemes associations have improved their complaints and disciplinesystems, and others have established systems where none existed. We are making them moreuser-friendly for the consumer—that is, for people in the community who are using theprofessionals’ services. The levels of compulsory insurance have risen, continuing professionaldevelopment programs have been enhanced by including risk management as a compulsorycomponent, quality assurance has been adopted and practitioners are being subjected to riskmanagement audits.

The Professional Standards Act creates statutory schemes. The schemes specify liability caps.The court is bound by these caps, provided the person is covered by the scheme and hasprofessional indemnity insurance of not less than the amount applicable by the cap. The personis required to disclose to clients that the person has a limited liability, and we ask them to putthat on their letterhead.

There are a number of controls in the process of approving schemes. Public notice ispublished of a proposed scheme and the community is invited to comment. The council canhold public hearings. Schemes are gazetted and thus can be disallowed by parliament. A schemecan be challenged in the state Supreme Court. Schemes are subject to monitoring and review,and they can be amended or revoked if necessary.

Schemes have had an impact on professional indemnity insurance costs for some of theparticipating groups in those schemes. Our submission, which you have got a copy of, points tothose reductions. However, not all associations have been successful in this regard. In part, thatmay be because the Professional Standards Act is state legislation. That leaves a gap in


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coverage. Proceedings can be brought in another jurisdiction and claims can be made formisleading and deceptive conduct under the federal law of the Trade Practices Act. It is thecouncil’s view that schemes would have a more sustainable impact on the cost and availabilityof professional indemnity insurance if these gaps were closed. I would be pleased to assist theinquiry with any further information on these issues.

CHAIR—Mr Wilkinson, could you give us some examples of what limits have been put inplace under these acts?

Mr Wilkinson—Yes. The accountants’ scheme is a varying one, depending on theengagement fee, and that ranges from a $500,000 cap to a $20 million cap. The cap is 10 timesthe engagement fee. The scheme that we have in New South Wales for solicitors is between$1.5 million and $20 million, depending on the number of principals in the law firm. However,a firm can elect a higher cap—up to $50 million—if it so desires. By the way, these schemeshave been worked out with the professional groups putting forward their idea of best handlingthe setting of caps et cetera and then we have reviewed them. For surveyors, it is between $1million and $5 million, depending on the firm’s annual gross fees. For forensic engineers—andthey are very specialised small group—it is $500,000. However, a firm can elect a higher cap ofup to $3 million. The most recent one, for valuers, is $500,000 for residential valuations;otherwise, the cap is $5 million. Those are examples of some of those.

CHAIR—Aside from caps, are other limits available through legislation? Are there otherways of limiting, aside from caps, that can be drawn upon?

Mr Marden—No.

CHAIR—You touched briefly on the issue of the Trade Practices Act. Could I ask you tocover that in a little bit more detail.

Mr Wilkinson—There has been concern in relation to the Trade Practices Act which comesunder the aspect of misleading and deceptive conduct under section 52. There has been a viewthat that could have an impact on the operations of our act. I am having a bit of difficulty withmy flu. I might hand some of this over to Bernie to further comment. Would you like to carry onfrom there, Bernie?

Mr Marden—There is concern among the professions that ‘deceptive and misleadingconduct’ provides an opportunity to avoid the caps provided for by the schemes where it mightbe used as an alternative to a pleading in relation to negligence. Because that prospect exists,that impacts on how much insurance the person needs to buy or whether they consider it viableto be in the scheme at all with the threat of the Trade Practices Act overriding the statelegislation.

CHAIR—Is this matter being dealt with under the current review in relation to negligence?

Mr Marden—It is not clear to us whether that is occurring, although I think there is areference in relation to determining the definition of ‘negligence’ and there is some side issueabout trade practice.


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CHAIR—So it could be within the scope of that review?

Mr Marden—It may be, yes.

CHAIR—Have there been any actions to date?

Mr Marden—We are not aware of any particular actions. Recently, a case against a surveyorwas cited to us, but whether that surveyor was also a person covered by the ProfessionalSurveyors Association scheme or not we are not aware. What the associations do tell us,though, is that, increasingly, deceptive and misleading conduct is pleaded when a claim is madeagainst them. It is the prospect of that which adds to the uncertainty.

CHAIR—And the attraction for settlement rather than having it proceeded with.

Mr Marden—I do not know what impact that would have on the tendency to settle.

Senator BRANDIS—Mr Marden, I do not quite follow that. The measure of damages is thesame for a breach of section 52 as for a negligence claim. So why would the addition of asection 52 claim increase the potential exposure?

Mr Marden—Because the Professional Standards Act limits the liability—so you can besued for whatever amount.

Senator BRANDIS—I am sorry; I understand that, yes.

CHAIR—Is there any limitation in relation to the professions that can come within thisscheme?

Mr Wilkinson—No. We should perhaps talk to the committee about the fact that, for a periodof time during the bipartisan development of the legislation, the legislation was known as‘occupational’, because we wanted to get away from ‘professional’. So there is no limit. In fact,we have had discussions with the real estate institutes from time to time in the various states.We have had a number of inquiries from other than what you might call the traditionalprofessions.

Mr Marden—Because the legislation does not cover personal injuries, there is no benefit forthe medical profession to participate in a scheme.

Mr Wilkinson—As I mentioned earlier, that was taken out of the scheme when they thoughtthere was comparative legislation going hand in hand with it. As I said in my introductorystatement, that concept fell away, unfortunately, and the medical and health professions werenot then carried forward in that act. In 1991 it was envisaged as a personal injuries and damagesbill, but it never got past being a bill. It did not come to fruition, for a number of reasons that Iwill not go into now.

Senator RIDGEWAY—I note in your submission that you encourage us to have a look at theProfessional Standards Act in New South Wales, and presumably in Western Australia as well. I


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am happy to go away and do that, but Australian Business Ltd appeared earlier today,representing a number of groups, and they spoke about a survey conducted of 400 differentsmall businesses in New South Wales. One of those covered was the Institution of EngineersAustralia. I presume that would also be covered by the Professional Standards Act. They did notmention anything about this piece of legislation in the context of keeping premiums down to thelevels you have described. Is there a particular reason for that? It seems to me to be an odd thingif you are doing a survey and people are responding and they are all saying that premiums havegone up but you are saying that, under the Professional Standards Act, premiums have comedown; I am a little lost between those two arguments.

Mr Wilkinson—As we mentioned in our submission, some of the premiums have comedown, and we have given you some examples of that. That does not cover all of the professionsand, as we said, one of the reasons for that is the overlay and the concern and confusion thatarises from the trade practices implications. Also, another issue that has affected some of theengineers in their approach—and I think you mentioned Australian Business—is that some ofthe state government instrumentalities have not been aware of their government policies andhave sought to encourage firms that were not involved in the professional standards process tobe successful in tendering. That is mainly an internal—if one might make the observation—bureaucratic approach. Traditionally, they want to make sure their particular department orprocess is going to be covered. Therefore, the engineers have not had the support, particularly inthe areas of state and local government tendering, that they might have had; therefore, thenumber in the engineer scheme has not been as great as we would have hoped.

That might be then reflected in the fact that their wider grouping—and I think I have seen inthat ABL submission, and I noted what you have noted—did not take up the issue much there. Ithink that is possibly because the engineers had some ambivalence about their own experiencesin the building arena. If you have engineers in the consulting arena, such as the forensicengineers, it is a different matter. There is only a very small group in that one, but I think mymemory serves me correctly that they had a reduction—small as it was—in premium formembers of their organisation that had joined the scheme. But, in the institute membership, I donot think there had been such an indication of reduction.

Senator RIDGEWAY—That answers my question.

CHAIR—Does the council have any data collection role?

Mr Wilkinson—Data collection is a difficulty. We do have data collection processes forwhen we are developing the cap for a scheme, obviously, and we look at claims, but we havehad to respect the confidentiality of some of those sources, although we do have some. Mainly,we have to rely on the individual professions we are dealing with to give us some information.

Mr Marden—That is supplemented by case judgments and anecdotal stuff like mediareports. The source of the data is the insurance industry, and the professions also survey theirmembers. It is a mix of all that information. But we do not have an ongoing role of collectingdata in relation to claims.


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CHAIR—But, if I understood Mr Wilkinson earlier, he was suggested that, in relation to riskmanagement, one of the components is related to reporting and information management—Iassume—but that there is no secondary level of that information being collated. Is that correct?

Mr Marden—No. There is a responsibility on the associations to monitor claims, and theyhave had varying degrees of success in relation to that. Typically, we do not require them toreport that on to us; the purpose of collecting that data is to identify risk areas so that they candevelop their various strategies, like continuing professional development, to respond toparticular areas of risk.

CHAIR—Is there any feedback mechanism in terms of reviewing whether a cap has beenplaced at an appropriate level?

Mr Marden—The initial schemes were for a period of three years and so were reviewed atthe end of that; the current schemes are on a five-year basis and will be reviewed at the end ofthat period. But, for the intervening period, we have a project under way: we have engagedTillinghast-Towers Perrin to look at the issues of the nature of the data required, sources of thedata and how arrangements for the monitoring of claims might be improved.

CHAIR—So, to some extent, it is early days. But by the time you are reviewing some ofthese schemes you will have, you would hope, access to more than anecdotal data.

Mr Marden—We have access to more than anecdotal data already. We use anecdotal data totest the veracity of some of the information that is put before us, but information coming fromthe insurance industry is regarded as reliable. The issue goes to the proportion of that data thatcovers the population to be covered by a scheme so, if people are buying their insurance from anumber of insurers and data is not available from a large proportion of the insurers, we look forsome supplementary information.

CHAIR—It was put to us by the audiologists earlier today that they were having difficultyreinsuring because, as it turned out after they pursued the information from their insurancecompany, their risk was being assessed on the basis of people who should never have been putinto the group scheme since they were not members of the professional association that thescheme was designed for. Have you had cases similar to that?

Mr Marden—We have not had any problem in relation to that, no.

CHAIR—In one sense I am querying that you seem to accept that the information from theinsurance companies is reliable, whereas in a number of quarters through submissions therehave been questions raised about this and also about the reliability of data that APRA has beenutilising.

Mr Marden—Because we are looking at a micro-level rather than at the more macro aspectsof the operation of the insurance industry, the information provided is in relation to a particularprofession for claims, so we do not expect there to be gaps in the data.

CHAIR—Are you aware of it having been challenged?


ECONOMICS

Mr Marden—No.

Mr Wilkinson—We were not aware of the audiologists.

CHAIR—They have been operating a group arrangement through a broker with theirinsurance company that they have not been able to renew recently. I doubt that they have hadany engagement with your council. They only represent about 1,000 audiologists. But it wasinteresting to hear, at least from their end, their experience with getting information about theirgroup and their claim that the insurance company had lumped non-members into theirprofessional group.

Mr Wilkinson—We have had definition of members and we have had classes of memberswhich we try to define, so when we do get some statistics we hope to be able to have it fall intothat. Overall, the data collection process has become more sophisticated as we have movedalong. We have also had success, as I have mentioned, in an awareness of risk managementrequirements that the profession should be undertaking. We have taken examples from oneprofession and been able to put that into another profession that has got a scheme as asuggestion that they might like to follow that particular approach. So we have followed thepattern of our legislation, which requires us to have a more competent professional oroccupational person there by bringing forward these different experiences. There is a greaterunderstanding now of risk management and the need for it than there was before we started,naturally enough.

Mr Marden—The data that the council is provided with would contain claims againstmembers of an occupation who are not members of the association. That is not separated out.

CHAIR—But with respect to data relating to a particular scheme, and where that scheme ismeant to be established on the basis of membership of a professional association, it would befair to assume that the risk is calculated on the basis of those participating in the scheme. Maybeothers were put into the scheme, but on the basis that they were not members of the professionalassociation they should not have been.

Mr Marden—The consequence for capping would be that the caps may be set at a levelinitially that is perhaps a little higher than might otherwise have been set had the data beenconfined to members of the association. One of the purposes of monitoring claims by theassociation is to refine that data so that over time the cap can be better refined to not only reflectthe exposure of the members of the association but target it more particularly to the types ofrisks that they would be exposed to.

Senator RIDGEWAY—Could you clarify something for me. I am trying to understand whatthe Professional Standards Council is as a body. Are you a statutory corporation—a part of theNew South Wales government?

Mr Wilkinson—Yes, and the Western Australian government.

Senator RIDGEWAY—Were you involved in the recent changes put forward by the Carrgovernment on tort law reform, capping and a range of other initiatives? Does this legislationfeature as part of the package?


ECONOMICS

Mr Wilkinson—The council reports to the Attorney-General, and we have had our input. Asto whether we have been party to the development of the new legal processes, that is a policyissue which I do not think we have been involved in. I would like to make one further comment.I have brought along a disk, which is our new method of communication, and I will leave itwith the staff. It is the Model code of ethics principles, which we commissioned to be developedby Professor Seamus Miller, from Charles Sturt University. That is one of the issues that Imentioned in our other task of education. It does have a list of our other CDs, which include theComplaint and disciplines system and Whistleblowing in the profession. We are trying to getdiscussion of those issues, but obviously we have to give priority to the issue we are involvedwith.

CHAIR—Thank you for your appearance.

Committee adjourned at 5.01 p.m.

COMMONWEALTH OF AUSTRALIA Official Committee Hansard · Monday, 8 July 2002 SENATE— References E...

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Transcript of COMMONWEALTH OF AUSTRALIA Official Committee Hansard · Monday, 8 July 2002 SENATE— References E...