IAG supports regulation that enhances competition, protects consumers, encourages efficiency, and promotes and sustains public confidence in insurers and their products. The role of regulation should be to support and enhance competition, not interfere with it.

Operating in a number of international markets means that we engage with a number of different regulators and political scenarios. Australia's insurance market, where the majority of our operations are based, is highly regulated and quite complex. It is the 14th largest in the world and the sixth largest in the Asia-Pacific region behind Japan, China, South Korea, India and Taiwan1.

In Australia, we are regulated by the Australian Prudential Regulation Authority (APRA). The Australian Securities and Investments Commission (ASIC) deals with matters relating to advice or disclosure of our products. The Australian Competition and Consumer Commission monitors compliance with competition law. In addition, in some states, various bodies have specific powers to regulate certain types of statutory insurance, for example, in New South Wales the Motor Accidents Authority regulates compulsory third party motor vehicle insurance.

There are a number of regulatory issues to consider and we continue to work with the Insurance Council of Australia, federal and local governments and other stakeholders to deliver maximum consumer benefit, and protect long term sustainability. For example, we are engaging on a number policy areas of regulation and prudential supervision, including consumer protection and taxation.

In New Zealand, the introduction of the prudential licensing regime for general insurers is shaping the broader operating environment. This will require all insurers to comply with governance frameworks, for example, an independent board, fit and proper requirements, and a minimum solvency standard. Our New Zealand operations already meet these requirements, which at a time when the industry in New Zealand is facing its largest loses, provides us with a great source of competitive advantage. In addition, at the beginning of June the New Zealand government released a discussion paper on the reforms to the Accident Compensation Corporation (ACC) to open this market to competition. We will be involved in strategic discussions and will look to see if the terms for participation are commercially acceptable.

In Asia, IAG's existing operations (in Thailand, Malaysia, India, and China) and target markets (Indonesia and Vietnam) operate in varied political landscapes. The regulatory environments are at various stages of development and are continually evolving. We have an active program in place to understand and engage with the various regulatory regimes in which we operate through continual regulatory engagement and active participation in proposed regulatory reform. For example, when the Office of the Insurance Commissioner (the Thai insurance regulator) wanted to introduce risk based capital reform, both Safety Insurance and NZI Thailand participated in the 'pilots' to better understand - and influence - the impact of the changes and assist in the development of the risk based capital regime.

Beyond regulation, there are other market and economic factors that confront the insurance industry that its members must address and manage to ensure they are sustainable.

1Austrade's Financial Services Benchmark Report 2010 (September)

Bodily injury claims are now estimated to account for 50% of UK motor insurance claims costs, compared to 20% a few years ago 2, partly as a result of the fact that the number of firms registered to offer personal injury claims services has grown by nearly 60% from 1,409 in 2008 to 2,500 in 20103. The Ministry of Justice did, however, shut down nearly 350 unscrupulous or unauthorised claims management companies in the year to 31 March 2011, a ten-fold increase over 2010.

Analysis of insurers' Financial Services Authority (FSA) returns suggests a 2010 combined operating ratio (COR) for the market in the region of 119%, little changed from 2009.

Industry fraud also remains a serious concern. The Association of British Insurers (ABI) estimates that GBP930m of motor insurance fraud went undetected last year, whilst staged accidents involving several people, all of whom claim for minor injuries supposedly caused by the crash, now cost the industry GBP350m per year. In response to these pressures, the majority of insurers have significantly increasing their rates.

There are some encouraging signs in the UK government's response to recommend greater controls over insurance claimants seeking unacceptable bodily injury settlements.

Other signs of improvement in the UK insurance market include:

• further rate increases;
• the continuous enforcement regulations which came into effect from June, which should reduce uninsured driving;
• positive trends such as a reduction in road traffic accidents and vehicle theft; and
• ongoing high fuel prices which reduce business and commuting mileage.

Against this backdrop, the UK business has accelerated its change programme by continuing to vigorously review all products and distribution channels, targeting rate increases on underperforming business and focusing on improving key capabilities such as pricing, claims management and fraud detection. We have also taken out reinsurance cover to limit exposure to claims across the 2001 and 2010 underwriting years.

The extensive programme of actions underway in the UK is beginning to deliver signs of improvement and the business is determined to realise its stated objective of restoring profitability as soon as possible.

2Source: Towers Watson - Transport Select Committee: The cost of motor insurance
3Source: Ministry of Justice Claims Management Regulation Annual Reports: 2010/2011 - Page 20

Recent events have underscored the importance of a strong insurance market in assisting communities recover from events and this will ultimately present opportunities for insurers. Sharing our risk expertise with our customers and the communities that we operate in simply makes sense.

IAG has its own Natural Perils Research team that conducts forward modelling based on detailed data analysis to ensure we are positioned to understand how long term risks may be changing. This allows us to develop sophisticated models for the assessment of weather-related risk; for example, from hailstorms and tropical cyclones, where modelling allows us to examine the most vulnerable areas, the types of risk we have in each area and likely losses. This information helps us to assess risk and can be fed into our pricing. It also allows us to focus our efforts on adaptation and greater community resilience, such as providing input into stricter new building requirements in cyclone-prone areas that reduce the damage inflicted.

A very topical weather-related issue is that of insurance coverage for flood events, subsequent to the terrible flooding in Queensland.

All water damage is not the same. Water damage from flash-flooding or the sudden excess run-off of stormwater is a different type of risk.

Water run-off from heavy rain during a storm is a risk that applies more or less evenly to the vast majority of properties across Australia. This sort of risk can be fairly and evenly distributed.

On the other hand, riverine flood - caused by water rising out of a river or body of water bursting its banks, often quite some time after the rain has stopped - is a certainty that affects only a small proportion of properties in Australia.

In some locations, particularly on floodplains, such riverine flooding is not a risk; it is a guaranteed event every few years. Insurers need access to detailed riverine flood mapping, especially accurate digital elevation data, before they can price a flood product in a way that is fair to all customers.

This year, IAG made a submission to the Natural Disaster Insurance Review (NDIR), putting forward our views that the private market must be allowed to increase the take-up of flood cover in Australia and that over-regulation is not the answer.

IAG has always said that we would offer a product if appropriate flood mapping data was released. This commitment is borne out by the fact that we already do provide flood cover in states where this information has been made available, such as NSW. In Queensland, this data - which is the responsibility of local councils - has largely been unavailable.

We have invested significant time and resources this year into collecting data, with pleasing cooperation received from some local councils, and are working to extend the availability of flood cover in 2012.

We realise for a small minority of people who have properties built in areas of extremely high flood risk flood cover is likely to be unaffordable. For this group, we believe there is scope for insurers and governments to work together to make premiums more affordable, with the government potentially offering a subsidy or incentive for high risk households. We are actively working through this with the government and other stakeholders.

In our submission to the NDIR, we also state the government needs to address the core issue of building Australia's resilience to natural disasters. More flood insurance products will not prevent floods recurring in the future, and we need to reduce the community's exposure to these events.

Continuing our focus on adaptation and community resilience is energy well directed. However, it is crucial that the government's policy response goes beyond insurance, to not just focus on flood but consider all potential natural disasters. This requires long term thinking with governments, planning authorities, builders, developers, the business community and individuals working together.