The next pages highlight some important issues facing IAG, and our industry as a whole. We believe that, from a customer’s perspective, it is important that we address these issues.

WHY A PROFITABLE INSURANCE INDUSTRY IS GOOD FOR CUSTOMERS
The past year has been the third consecutive year in which insurers, including IAG, have performed strongly. For the previous 10 years, insurers recorded significant underwriting losses.

Our return to profitability has enabled us to reclaim stability and security for our customers, shareholders, the community and the people who work in our industry.

Importantly, we’ve been able to achieve this while keeping premiums affordable for customers. NRMA Insurance NSW CTP prices are now as low as they were 10 years ago, comprehensive motor insurance premiums have been reducing relative to average weekly earnings and CGU has cut commercial public and product liability rates by more than 10%.

There has been some debate in the community about what has driven this turnaround. There are many reasons insurers are more profitable today than they were four or five years ago.

First, there has been significant cost reduction driven by consolidation of the industry in the last decade, through demutualisation, privatisation, acquisitions and integration of organisations. Today, the top five insurers provide approximately 95% of personal lines insurance, whereas five years ago, the top five represented less than 35%.

Second, insurers’ commitment to a more disciplined approach to underwriting has ensured pricing has returned to sustainable levels. Rogue underwriters have failed and reforms to prudential regulation have meant the industry as a whole has adopted a more judicious approach to managing capital, risk and reinsurance.

Third, we’ve had an unusually long period of dry weather. That has meant fewer than average claims from customers because, for example, there are proportionally less car accidents.

Fourth, strong investment markets, particularly the equity markets, have significantly contributed to the bottom line of insurance companies. For example, in the past year, IAG generated a pre-tax return on shareholders’ funds of $479 million. In contrast, when the equity markets were underperforming in 2002, the Group reported a $234 million loss on this portfolio.

Some commentators say that the profitability of the insurance industry has come through the tort law reforms which were put in place by the Government to make public liability insurance more available and affordable. The reality is that public liability makes up less than 8% of insurers’ total revenue, hardly a figure on which to build company profits. The industry’s underwriting losses in liability classes for the four years up to 2001 were $2.1 billion.

Tort law reforms are delivering what governments, communities and insurers set out to do. Premiums have fallen, injured people continue to be compensated and legal costs are reducing. The real winner from these reforms has been the community at large, as was always intended. Insurers are keen to work with governments to ensure that these improvements continue over the next few years.

Being profitable has lifted the bar. It means that now, more than ever, insurers need to demonstrate to customers the value of insurance, how it works and how premiums are priced.

Insurance is a community product which is necessary for economies to function. With more than 41 million insurance policies in force in Australia, the industry as a whole pays more than 98% of claims, and this equates to an average of $55 million paid every working day.

But the stark reality is that there is a huge number of Australians who do not have insurance or are underinsured. More than one in five homes in Australia are underinsured and a staggering one third of small businesses have no insurance or are underinsured.

Australia needs to maintain a strong and profitable insurance sector. Customers must have certainty that insurers have the financial strength to pay claims. At the same time, shareholders require returns commensurate with the risks associated with their investment.