Australian Panel Says Taxes, Regulatory System Hinder Nonlife Insurance Growth
The Australian Financial Center Forum, a government-appointed panel, has suggested lifting all state taxes and levies on the nonlife insurance sector to improve insurance penetration and industrial development in Australia.
The rang and diversity of state traxes and levies such as stamp duties, insurance protection taxes and fire service levies are adding to insurance costs, said the forum, which includes representatives from financial services, in a report on Australia as a financial center.
Total state taxes on insurance amounted to A$4.25 billion (US$3.9 billion) in the financial year 2007-2008. The panel said such taxes and levies have led to underinsurance in the business and consumer sectors. Further, there is no consistency in tax application across the states, the panel found.
Australia's insurance companies are generally profitable and well-capitalised, and a number of leading nonlife insurers have significant offshore subsidiaries. However, the report said "domestic business has been affected by high indirect taxes and, to a lesser extent, by nonharmonised state regulation."
James Cullen, media adviser at the Treasury of Australia, told BestWire the report is up for public discussion. As some of the recommendations are tax-related, the government will put it rhough an indipendent tax and budget review. It will take about six months or more for the government to respond to the recommendations.
"In the curren fiscal enviornment, the government is obviously cautious about things which have a substantial cost, but we'll be working that through and we'll be considering it in that budgetary context," said Chris Bowen, financial services minister of Australia.
Australia's tax system,. with high withholding tax rates, has partly hindered the promotion of Australia as a financial services center. "Australia has long had the slogan of being a financial services center but there hasn't been the policy backup," said Bowen, in a statement.
Australia has the fourth-largest pool of funds under management in the world, but it only exports about 4$ of that. "So only 4$ of the funds we have under management coes from offshore. It's much higher in many other Asian nationals," said Bowen.
"I just don't think there's been a focus from government in identifying and removing barriers to the export of Australia's financial services," added Bowen in a statement.
The industry's first priority is with domestic policy issues, said the Insurance Council of Australia in the report." If our members can operate their business profitably, this puts them in a strong position to compete for offshore business," said the council. Taxation and nonprudential state regulation are primary policy issues faced by insurers.
Differences in state regulations, such as with motor vehicle license rules, workers' compensation and builders' insurance, increase costs for national insurers and subsequently for consumers. "The complexity of these regulations may also act as a barrier to entry and therefore limit competition," said the forum in its report.
State regulations for the insurance sector should be standardised for a broader view at the national level, said the forum.
Australia's nonlife sector accounted for about 60% of the insurance market, according to the report. The nonlife sector is dominated by domestic players including Insurance Australia Group Ltd. , Suncorp Metway Ltd. [87834) and QBE Insurance (Australia) Ltd. , who between them have about 60% of the overall market share. Foreign companies have about 26% of the nonlife market share.
Australian nonlife insurers' growth strategies vary substantially, between those focused on domestic growth and those heavily into developing offshore business, according to the report.
"Looking at the three dom,inant domestic general insurers, the proportion of premium revenue from offshore operations in 2008 rangd from 10% to 80%," said the forum.
The forum suggested resolving the tax and regulatory issues will provide the basis for a more competitive and efficient domestic insurance industry, contributing to growth opportunities, economics of scale, lower administrative cost and less compliance complexity.
The government will consider the recommendations in the report before responding later in the year, said Bowen in a statement. A considerable amount of consultation already went into the preparation of the report.
"We are committed to ensuring that our financial sector is well-placed to make the most of those opportunities that will emerge as the economic recovery takes hold," said Bowen. There are opportunities to expand the exports and imports of Australia's financial services, along with the promotion of Australia as a financial services hub.
The forum is comprised of five panel members and industrial associations from the financial services sector.