Last week's announcement that Australian banks could face a 0.05% levy to cover the government guarantee on bank deposits up to $250,000 came as a shock to investors and sent jitters through the share prices of banking stocks.
Over the weekend, the Australian Financial Review reported that it had "learned the Reserve Bank of Australia and other financial regulators have recommended insurers face a similar fee to protect policy holders against a collapse."
Until more details surface it is hard to ascribe a cost to this potential fee, however, Australia's three major general insurers — Insurance Australia Group (ASX: IAG), QBE Insurance (ASX: QBE) and Suncorp (ASX: SUN) would likely foot the lion's share of any insurance protection levy.
It's not overly surprising that the government and regulators are looking to offload the risk of providing both implicit and explicit guarantees to banks and insurers. American International Group (NYSE: AIG), one of the world's largest insurers, found itself in significant trouble during the Global Financial Crisis when credit protection it had sold on collateralised debt obligations turned out to leave the insurer exposed to the impending sub-prime crisis. The consequences of AIG failing were considered too great by the US government and ultimately it provided the enormous sum of US$85 billion to bail AIG out of its mess.
Foolish takeaway
While no one is suggesting the general insurance market in Australia is facing any significant impending issues, no doubt the government and regulators are keen to learn from the USA's experience and put in place additional safeguards for the future.
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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.
