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Understanding Insurance In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer’s promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.
Australia has a sophisticated and well-developed insurance market, which can be divided into roughly three components: life insurance, general insurance and health insurance. These markets are fairly distinct, with larger insurers focusing on only one type, although in recent times several of these companies have broadened their scope into more general financial services, and have faced competition from banks and subsidiaries of foreign financial conglomerates.
Life Insurance Life insurance products sold in Australia include term life insurance, disability income insurance. Australian insurers are unusual in providing a lump sum Total and Permanent Disability insurance. Life insurers also sell superannuation investment products.
Life Insurers
Some of the life insurance companies which operate in Australia are:
In addition, life insurance is also sold by friendly societies and credit unions.
General Insurance
General insurance products sold in the Australian market can roughly be divided into two classes:
Certain types of insurance, such as CTP and worker’s compensation, are statutory (i.e. are required by law), and can differ considerably by state.
General Insurers
The three large general insurer groups are:
Other Insurers are:
Health Insurance
The Australian Government provides a basic universal health insurance, Medicare. Private health insurance in Australia is limited to those services not covered by Medicare or to services provided in private hospitals.
The Australian Taxation system encourages middle to high income earners to take out Private Health Insurance. While most taxpayers pay a 1.5% Medicare Levy, an additional 1% Medicare Levy Surcharge is payable by those taxpayers who earn more than $76,000 and do not have Private Health Insurance.
Industry Structure
Life insurers were traditionally mutual companies, but in the 1980s and 1990s many of them demutualised and with a few large exceptions are owned by banks. The large remaining insurers have become “financial services” organizations and now derive the majority of their revenue from superannuation investment products. General Insurers have a more diverse ownership structure, with more stand alone independent general insurers (although some life insurers do own general insurers).
Health insurers are still predominantly mutuals. The notable exception is Medibank Private, the largest private health insurer in Australia, which is owned by the Australian government.
Regulation
The prudential aspects of general and life insurance (solvency etc.) are regulated by the Australian Prudential Regulatory Authority (APRA). Matters relating to advice or disclosure of insurance products sold are regulated by the Australian Securities and Investments Commission (ASIC). The Australian Competition and Consumer Commission (ACCC) also has a regulatory role with respect to competition law.
In certain states, various bodies also have powers in regulating certain types of statutory insurance. For example, in New South Wales the Motor Accidents Authority [1] regulates Compulsory Third Party motor liability insurance. In many cases these bodies have powers regarding premium rating and reinsurance rules.
Private health insurers are regulated by the Private Health Insurance Administration Council (PHIAC)
The primary federal legislation is:
Industry Bodies
The main industry bodies are:
Australian Insurance Law
Australian insurance law is a term which refers to the body of law which regulates the insurance industry and insurance contracts within Australia. Commonwealth Parliament gains authority to make laws with respect to insurance and insurance companies under section 51 XIV and XX of the Australian Constitution. Generally, the Insurance Act 1973 and Insurance Contracts Act 1984 are the main acts to which the body of law refers, however there are a number of other pieces of legislation enacted by the states, private codes and volumous case law all of which forms this body of law.
Australian Insurance Law
Legislation
The Insurance Act 1973 (Cth) requires minimum levels of capital and solvency for companies wanting to enter the insurance market and for insurers in the market.
Chapter 7 of the Corporations Act 2001 (Cth) regulates the way in which insurers and insurance agents and brokers carry on business and how they deal with the people they do business with and intend to do business with.
The Insurance Contracts Act 1984 applies to most insurance contracts with an Australian connection and is intended to ensure that a fair balance is struck between the interests of the insurer and the insured.
Regulators
Legislation
The Australian Prudential Regulation Authority (APRA) has the power pursuant to the ‘Insurance Act 1973 to investigate a general insurer, freeze its assets or direct it to take specific action (for example, stop writing new business).
The Australian Securities and Investment Commission (ASIC) is responsible for the general administration of the ICA