{"id":58423,"date":"2021-11-04T12:56:15","date_gmt":"2021-11-04T01:56:15","guid":{"rendered":"https:\/\/riskinfo.com.au\/news\/?p=58423"},"modified":"2024-10-30T08:44:16","modified_gmt":"2024-10-29T22:44:16","slug":"when-the-music-is-playing-you-have-to-keep-dancing","status":"publish","type":"post","link":"https:\/\/riskinfo.com.au\/news\/2021\/11\/04\/when-the-music-is-playing-you-have-to-keep-dancing\/","title":{"rendered":"When the Music is Playing, You Have to Keep Dancing"},"content":{"rendered":"\n
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Specialist actuarial services firm, Retender<\/a>, has released a paper which considers the sometimes opposing forces of regulatory reform and competition within Australia’s insurance and superannuation sectors.<\/h3>\n

In concluding that the pendulum may have swung too far in the direction of regulatory reform in recent times, the paper reflects on circumstances past, present and future in offering a simple solution – a first step – in how the law-makers can address the conflict between stability and competition for the benefit of all stakeholders…<\/h3>\n<\/div>\n<\/div>\n

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The paper, called When the Music is Playing, You Have to Keep Dancing<\/a>, commences by referencing conventional thinking that there is usually an invisible hand at play that brings markets into equilibrium:<\/p>\n

…there are certain situations where the market cannot be relied on<\/p><\/blockquote>\n

This thinking was behind the concept of laissez-faire, the favoured policy in the lead up to the 2007-2008 financial crisis whereby governments should interfere as little as possible in the workings of the free market and rely on the market to self-correct. What\u2019s clear in hindsight, and a lesson that repeats itself over time, is that there are certain situations where the market cannot be relied on, where the laws of competition and rational choices don\u2019t behave the way that simplified economic or actuarial models predict.<\/em><\/p>\n

Drawing on the analogy of music and dancing, the paper argues that when the music stops, things can become complicated, but as long as the music is playing, there’s a need to keep dancing. This is the picture that is painted in describing how insurers and reinsurers, despite having to continually set aside billions of dollars in reserves which impacted returns year after year, continued to write loss-making products until APRA’s IP intervention emerged as a circuit-breaker.<\/p>\n

In doing so, however, the paper asks whether the pendulum of government policy has swung too far in the direction of regulatory intervention.<\/p>\n

The solution to the conflict between stability and competition<\/strong><\/p>\n

The paper asserts the unintended consequence of having the competition pendulum swing too far to the side of regulatory intervention is the cost which is ultimately imposed on consumers when both supply and competition is reduced.<\/p>\n

The paper calls for a solution to what it considers the imbalance between free market forces and regulatory reform currently impacting both the life insurance and superannuation sectors:<\/p>\n

This paper calls for an annual report for government that measures the levels of competition<\/p><\/blockquote>\n

This paper calls for an annual report for government that measures the levels of competition in these two industries, as a way to transparently reflect how the objectives of prudential stability and competition are being balanced in practice<\/em><\/p>\n

Why were they dancing?<\/strong><\/p>\n

Drilling deeper into cause and effect – and what sometimes might be considered illogical behaviour or decisions, the paper endeavours to articulate a rationale that has seen the life insurance companies continuing to write loss making insurance business – to keep on dancing – while all the profitability and sustainability warning signs were obvious. The answer rests, at least in part, with the implications associated with first-mover status:<\/p>\n

…the one who did nothing would end up stealing the other\u2019s customers<\/p><\/blockquote>\n

To give a simplified example, consider two organisations faced with the following choices in respect of a loss-making product:<\/em><\/p>\n