Insurance has room to grow

What is more, of the two thirds who do insure, the Council suggests that most tend to underinsure and that only 20% of small businesses insure for cash flow continuity. Even with 160 licensed insurers in Australia, that shows plenty of room for straightforward growth without a need for newfangled products.

Blurred distinction

This leads to the question, what happened to the much-trumpeted new trend in financial services - the blurring of the distinction between banks and insurance companies – the era of allfinanz?

In one corner, we have major banks clambering to imitate one another and in the other the three major insurance companies could not be more different if they tried.

Talk about diversity - one likes the domestic market (NRMA), one sniffs out targeted acquisitions in any insurance market (QBE) and one's not quite sure if it likes general insurance at all (AMP).

As mentioned before, the HIH debacle won't do this sector any favours either in PR or in attractiveness of the stock.

The general public is already apprehensive of the financial services sector and now will undoubtedly encounter higher premiums next renewal - as has already begun with car insurance.

In a Catch-22, when higher premiums or industry dissatisfaction further discourage renewals, premiums will again increase to cover the industry's fixed costs.

Two years ago this industry was spruiking an open and self-regulating environment yet it will now face the prospect of a substantially more regulated model.

Reforms are likely to include greater capitalisation requirements and increased regulatory powers. This will be short-term pain for long term gain – a public increasingly accustomed to higher premiums and a more robust industry.

Cross selling

An early casualty from HIH will be the industry's allfinanz aspirations, dissolving cross-selling opportunities as the public loses interest in a single basket for their financial eggs, effectively taking the all out of allfinanz.

In an ironic twist, the prime beneficiaries of the HIH demise will be its former brethren, the major listed insurance companies who will divvy up HIH's two million disillusioned customers.

It's also plausible that some quality HIH assets will become available to this sector at fire sale prices and mostly at Australian taxpayers' expense. Insurance should be a steady industry full of cash-rich unsexy products where the tortoise usually beats the hare - in the long run.

As such, the most pressing issues for the NRMA, QBE and AMP will be the diverse effects of the post HIH environment, maintaining strategic cohesion and their approach to diversification. We'll cover AMP this issue with QBE and NRMA in the next.