Any sustained lack of responsiveness by regulators to the impact of declining bond yields on Compulsory Third Party (CTP) insurance will send schemes into deficit and create market instability.
As detailed in a Suncorp “Insurance Insights” white paper released today, the drop in bond yields over the past 18 months is putting unavoidable upward pressure on all insurance premiums, but is particularly pronounced for the personal injury classes of CTP and Workers Compensation.
“These developments in the bond market present considerable challenges to regulators of personal injury schemes, especially when containing the cost of living is a priority for all governments,” said Mr Chris McHugh, Executive General Manager Statutory Portfolio with Suncorp Commercial Insurance and author of the white paper.
“The Queensland government has kept its promise to freeze the vehicle registration component of keeping a car on the road but, as the government has acknowledged, the CTP insurance component is not part of this price freeze.
“The reality is that personal injury insurance schemes are not immune from the impact of international financial markets – indeed they are the most severely impacted by the fall in bond markets.
“An unresponsive regulatory framework reduces competition and undermines confidence in a private insurer’s ability to operate sustainably in a CTP scheme.”
As detailed in the white paper, whilst regulators in NSW and the ACT have responded by cautiously approving appropriate CTP price rises, to date changes in the CTP upper pricing limit by the Queensland regulator have not been commensurate with declining bond yields.
“Maintaining a healthy CTP insurance industry requires the ability to adapt to market conditions,” said Mr McHugh.
“It’s important to act before the market is distorted to the extent that every time an insurer writes a CTP policy they’re losing money. Clearly that would be unsustainable.”
The white paper, “When Markets Hit Motorists”, describes the relationship between bond yields and personal injury insurance premiums and examines recent CTP price fluctuations in NSW and Queensland.
“For the last three quarters, all six insurers in Queensland have filed at the Class 1 upper price limit, meaning that there is effectively zero price competition in the Queensland CTP Class 1 market,” writes Mr McHugh.