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Premium affordability key issue for Australian industry

Source: Asia Insurance Review | May 2015

Insurance affordability, particularly in cyclone and flood risk locations, is a key issue for Australia’s insurance industry. It was firmly on the radar for a group of senior executives who spoke to insurance journalist Kate Tilley about the industry’s challenges and opportunities.

Premium affordability is a difficult issue in a nation with heavy exposure to natural catastrophes like floods and tropical cyclones.
A government-backed reinsurance pool for cyclone and flood insurance is favoured by some executives as a means to overcome the issue. Others see increased mitigation and adaptation as the desired response. Most agree it is difficult to get consensus on a resolution.
Pool for extreme weather events
Mr Robert Kelly, CEO of the Steadfast Group, supports a pool for extreme weather events, like floods and cyclones, which could offer a cheaper alternative than insurers. However, he was dubious about the likelihood of a pool eventuating, saying: “I don’t think it will happen, because it would need the full co-operation of the industry and government support.”
Mr Kelly added that there is a need for increased flood mitigation, such as the cost of building levees around some flood-prone central Queensland towns which would be cheaper than the cost of evacuating all the residents when a flood approaches.
Government’s subsidy for a pool needed
Mr Nicholas Scofield, General Manager Corporate Affairs at Allianz Australia Insurance Ltd, also backed a pool. “There needs to be a mechanism that can deliver a subsidy to [affected] policyholders.” Allianz supports a reinsurance pool with some injection of financial subsidy from the Federal Government so the final price is affordable.
He argued it would be “a fairly modest fiscal impact” for the Federal Government.
“Cyclone risk is now producing unaffordable premiums, so a reinsurance pool could resolve that. And the government is now looking seriously at [the concept].” 
Mr Scofield noted the 2011 Natural Disaster Insurance Review, chaired by John Trowbridge, had said some perils could be addressed with a model like the Australian Reinsurance Pool Corporation (ARPC), established for terrorism insurance when cover became unavailable after the September 11, 2001, attacks. 
Reducing premiums
On 30 March, the Federal Government announced a taskforce to examine options to reduce premiums in northern Australia and the Insurance Council of Australia (ICA) had welcomed it, saying it is “a positive [move] in the development of policies that address cyclone risk, community resilience and insurance”.
Mr Scofield said the taskforce was likely to examine a pool, “but probably just for cyclone risks because that’s the political pressure point” although he noted flood insurance affordability “will have to be addressed at some point in the future too, because politicians will be under pressure when claims are denied”.
Saying that the pool should be government funded rather than via a levy, Mr Scofield added that Allianz modelling which showed a pool that operated in a similar way to ARPC, could see the final price to homeowner and residential strata policyholders in cyclone and flood-prone areas reduced by 50%.
Flood insurance affordability
After 2012, Allianz’s renewal notices had included the option of flood cover, which in some cases was as high as A$20,000 (US$15,600). Most policyholders elected to opt out.
Mr Scofield said only a few other companies went down that same route. Most brands introduced mandatory flood cover, which “absolutely” increased business for Allianz.
There was “nervousness” in the industry because those with serious flood risks could not afford cover. “It means when the next big metropolitan flood occurs, for example in Brisbane, the scenario will be the same and claims will be denied.”
Learning from each catastrophe
Mr Tim Plant, Executive General Manager of Corporate Partners & Direct for QBE Australia, said: “There is no doubt the industry learned from the 2011 floods and continues to learn from each catastrophe that occurs.”
He said QBE was always seeking to refine its response plan, which had significantly improved customers’ experience during the past five years, in part due to the quality and immediacy of information available from the Insurance Council of Australia’s disaster team. 
Consumers need to know the cost of insurance and its importance
Mr Plant said general consumer information about the availability of insurance and different product offerings, particularly in far north Queensland, was important.
“There needs to be recognition of the cost of insurance and the importance of the role it plays, particularly during disasters.” 
Weather-related events quadrupled since 1980
Mr Heinrich Eder, Managing Director of Munich Re Australasia, said weather-related events in Australia had almost quadrupled since 1980. 
He said there was an urgent need for Australian communities and industries to better plan for, and respond to, the threat of natural catastrophes. Munich Re, as one of the six founding members of the Australian Business Roundtable for Disaster Resilience (ABRDR), believes having resilient communities that could adapt to extreme weather events is of national importance. 
A key ABRDR finding was a forecast of the cost of natural disasters in Australia rising from $6.3 billion a year now to about $23 billion a year in 2050 “even without any consideration of the potential impact of climate change”.
Mr Eder said the Federal Government spent an estimated $560 million every year on post-disaster relief and recovery compared to an estimated $50 million on pre-disaster resilience.
He added that combining expertise and knowledge in finance and insurance, telecommunications, property infrastructure and humanitarian expertise, and by working together with government, it was possible to save lives, reduce damage to property and vital national infrastructure, and free up taxpayers’ money to spend on essential public services and communities.
Combined ratios under fire
While natural disasters and the insurance industry’s response to them was at the forefront of the senior executives’ minds, Mr Kelly was critical of insurers’ pricing regimes, warning that increases were inevitable.
Despite it having been a relatively benign year for natural catastrophes, he said insurers’ combined operating ratios (COR) were “terrible”. 
“Fire and Industrial Special Risks (ISR) was 107% and CTP 106% [in FY14]. Other classes were 92% to 96%. Insurers are using capital made in the last few years to gain market strength and bring in profits, so they are not operating efficiently. Eventually their balance sheets will diminish and they will have to put prices up,” he warned.
Householders was the only profitable class, but examining prior years’ CORs showed insurers now were simply “catching up” after floods and cyclones.
Rate pressures remain
Mr Mark T Lingafelter, CEO of Chubb Insurance Company of Australia, said headline results remained relatively strong in 2014, but it was a challenging year at the trading level for many of Chubb’s business units. 
“We face an extremely soft market for many corporate products. Rate pressure remains and it can prove difficult to profitably grow a book in this environment,” he said. 
“I think many underwriters are challenged to achieve technical rates on specific risks. Throughout the past year, we were observing and defending against some aggressive moves to take share – even in segments that have fallen short of return targets across the last five years.” 
Industry structure to change?
Executives were asked about the continuing growth in cluster groups for both brokers and underwriting agencies.
Mr Lingafelter said the growth in underwriting agencies under the management of brokers or broking groups had been significant.
“The growth in agencies creates a competitive threat. It raises the bar for a specialist company like Chubb to ensure we deliver the right service proposition. Over the longer term, there are important questions that remain on the overall expense load carried under the agency model and the capital return that will be achieved through the proliferation of agencies.”
He agreed there is always room for specialist brokers or underwriters capable and focused on delivering a high level of service.
“Professional brokers or underwriters now have more choice. For example, more individual brokers are choosing to operate within one of the Authorised Representative (AR) networks. For many of the successful ones, this is simply a choice, they weigh up the costs and benefits and have elected to work within an AR network. The model is clearly successful.” 
Mr Kelly agreed underwriting agencies were doing well and would continue to service niches. “Steadfast uses 22 agencies that have expertise and capacity in areas mainstream insurers don’t necessarily want to support. There are some great agencies being run by guys with great expertise and they are making money.”
He said Steadfast, which has been active in purchasing agencies, had been involved with agencies for 16 years. He predicted a strong future for small, independent brokers, saying they could exist in their own right, but being part of a cluster group provided an “umbrella of help when they need it”.
Regulation – Is there too much?
Australia’s regulatory system is frequently criticised as being a compliance burden, but senior executives now seem more willing to accept its presence with fewer complaints.
Mr Kelly said regulation for regulation’s sake was not appropriate, but regulation that provided a clear pathway to operate in the financial sector was worthwhile. “You must factor compliance costs into your underwriting structure.”
Mr Plant said QBE, as one of the few domestic, Australian-based financial institutions operating on a global scale, recognised the necessity of engaging with and adopting consistent international regulation.
“Clearly we need a financial system and regulatory framework that provides system stability and supports our [domestic] economy. It is also clear though that we need a system that strikes the right balance between providing stability and enabling global businesses, including Australian-owned companies, to operate productively and efficiently so they can compete and innovate in our changing world.”
Mr Plant said it was important to learn lessons from the past and ensure Australia’s financial services sector, including the general insurance industry, was competitive with other advanced economies and emerging competitors.
Cyber risk insurance
The executives explored technology’s role in the industry and particularly insurance for cyber risks.
Mr Heinrich Eder, Managing Director of Munich Re Australasia, said companies’ core risks change as communication channels become more numerous, enabling news and rumours to snowball at ever-greater speeds. 
“Cyber attacks against companies directly lead to costly first-party and third-party losses. This creates new risks, and the insurance industry needs to innovate to remain relevant and able to cover new and emerging risks,” he said.
“There is a growing importance of good risk management and correspondingly coordinated insurance cover.
Management must be extensively prepared for attacks to avert damage to the company and protect themselves.” 
“Millennium’s asbestos”
Steadfast Group’s CEO, Mr Robert Kelly, warned cyber security is “the millennium’s asbestos”. “You can transfer the risk to an insurer, but cyber risk is growing daily and I’m not sure how much longer it will be insurable, because [hackers] keep finding new ways to break through [firewalls and other security systems].
“It’s almost an all-risks policy and insurers are trying to build a pool, but real problems will occur, probably within three years.”
Mr Kelly also warned that big losses in the class would see insurers walk away or only insure cyber risk with massive deductibles.
Take-up rate still low
Noting that there was no groundswell of organisations buying cyber risk cover, Mr Kelly said this is possibly because they were unaware of the magnitude of the risk, given most organisations that were affected were not keen to see attacks publicised.
Mr Mark T Lingafelter, CEO of Chubb Insurance Company of Australia, agreed, saying the take-up of cyber security protection and market penetration in Australia for stand-alone cyber products remained relatively low.
“But the interest level with clients and brokers to understand the coverage remains high. We expect to see demand continue to grow for extensions under existing policies to pick up some cyber perils, and growth in the purchase of stand-alone cyber policies covering first and third-party exposures. We are encouraged by a higher rate of take-up of cyber policies in markets such as the US.”       
He sounded a warning though, saying the industry faced multiple threats because of the large amount of data and information in insurers and brokers’ control. 
Issues of interest
The executives raised a range of other issues of key interest to them in today’s market.
Social media’s impact
Steadfast Group’s CEO Mr Robert Kelly, was concerned about social media’s impact on brand reputation. 
“It makes people change their point of view quickly and become more circumspect. But social media can rob a circumstance of the true facts. I have had experience of people going to social media with claims and showing only a small part of the facts.”
Asia learning from Australia
Mr Mark T Lingafelter, CEO of Chubb Insurance Company of Australia was asked about lessons the Asian market can learn from Australia. He said Australia had the benefit of scale, so a lot of ideas around placement facilities and structuring panels of underwriters in the commercial and corporate space continued to find their greatest take-up Down Under. “Over time, we have seen these structures grow into Asia, and that trend continues.” 
Reinsurers stepping into direct market
Mr Kelly called on reinsurers to “rethink their capital base”. “They are stepping into the direct market and some are backing providers with their capital base. As primary insurers’ balance sheets get stronger, risk transfer to reinsurers declines, and reinsurers step further from the flame.”
“Reinsurers [must then] either reduce prices [to make themselves more attractive] or put some of their capital to work to get closer to the flame,” he added.
Under-insurance still a challenge
Mr Daniel Fogarty, CEO, General Insurance, with Zurich Australia Ltd, said under-insurance remained a challenge. 
“Business customers that get good advice from brokers are best placed to have the right insurance programme. We are still surprised at the lower-than-expected take-up of business interruption insurance in the small and mid-market space. When disaster strikes, business interruption cover can be vital in getting a business back on track as soon as possible.” 
Glimmer of light for taxation
Mr Nicholas Scofield, General Manager Corporate Affairs at Allianz Australia Insurance Ltd, raised taxation as an issue, particularly state governments’ stamp duty on policies. He pointed to a glimmer of light at the end of the tunnel.
“State governments are very reliant on stamp duty revenue, although the Australian Capital Territory Government is phasing it out on insurance. It’s only a small jurisdiction, but it’s a crack in the wall,” he said.
“We’re keeping an eye on the South Australian Government’s tax review. They are taking a different approach, for example privatising CTP, so they’re willing to take on some hard issues. 
Subdued growth expectations in many economies
Munich Re Australasia’s Managing Director, Mr Heinrich Eder, said the global economy is marked by a high level of geopolitical risks and subdued growth expectations in many economies. The ongoing low-interest rate environment would continue to have an impact on the entire insurance industry. 
His key success factors for 2015 would be:
Excellence in cycle management;
Discipline in underwriting;
Ability to innovate;
Find solutions for emerging risks; and
Anticipate and meet clients’ changing requirements.
Everyday insurance advice for consumers 
Mr Kelly said it will be good to have an independent, central location where consumers can find every-day advice about insurance – “something that’s written in layman terms, using pictures and diagrams, to tell consumers what’s reasonable to expect from their insurers and brokers”.
Technology influencing the industry
Executives spoke about the way technology has influenced their businesses.
Mr Daniel Fogarty, CEO, General Insurance, with Zurich Australia Ltd, said they were developing innovative ways to make it easier for brokers to do business with the company. In March it launched Commercial allowing brokers to offer clients single or bundled solutions for ISR, liability and motor risks.
Zurich had also developed online tools like the Risk Room app, which helped managers analyse and evaluate macro risks in a holistic way across more than 160 countries.
A myZurich web portal gave global corporate clients online access to view risk data, monitor international programmes, see overviews of claims history and proactively manage risk improvements online. 
Telematics the way of the future?
Executives were asked whether telematic devices were important to reduce motor vehicle accidents and encourage safer driving.
Mr Robert Kelly, CEO of the Steadfast Group, said telematics and driver-less cars were “fantastic ideas”, but it was hard to see them work long term in a nation of 23 million people. “It’s great if the infrastructure’s there to support them, but we need 300 million people and shorter distances between major cities.”
Mr Heinrich Eder, Managing Director of Munich Re Australasia, said telematics and usage-based products in motor insurance were not completely new to the industry, but the relatively young technology was experiencing a huge boost in many insurance markets around the globe.
“Telematics is providing a wide range of new rating criteria and allows for redesigned approaches in pricing, which significantly improve on existing rating criteria and provide unrivalled accuracy. It helps efficient emergency management and will assist insurers in claims management. With its potential for adding value to insurance products and reducing claims-handling costs, telematics will rapidly develop in coming years and still offers opportunities for early adopters,” Mr Eder said. 
Mr Fogarty sounded a note of caution, warning that a Zurich-commissioned report in the US highlighted the potential for “connected vehicles” to be hacked.
Telematics-related products
QBE Australia’s Executive General Manager of Corporate Partners & Direct, Mr Tim Plant, said QBE’s Insurance Box product, which won a technology innovation award for Asia, was an Australian-first in telematics for retail car insurance. 
He said telematics-related products would become a more standard part of motor vehicle insurance over time, particularly as manufacturers continued to introduce telematics-based functionality in new cars. “Demand for these products will increase as consumer awareness builds.”
Mr Plant said Insurance Box helps drivers pinpoint areas for improvement and become safer on the roads and could reward safe driving behaviour through lower premiums. 
“The device has no ability to issue commands to the engine management system or enter the gateway so Insurance Box can’t be used by hackers for any purpose.”
Improved risk profiling
Mr Nicholas Scofield, General Manager Corporate Affairs at Allianz Australia Insurance Ltd, saw technology as both a challenge and an opportunity. “The capabilities with use of data are getting more sophisticated. It’s a bit of an arms race; it will be difficult if you get left behind.
“Risk selection continues to get more sophisticated. We are now working on extending the capability to rate at the individual address level, which is a prerequisite to price highly locational risks, like flood, to other perils.
He described improved risk profiling as “a game changer in a slow-moving game”.
Inevitable to continue on path of improving technology
Mr Scofield also sounded a cautious note on telematic devices in cars. “It can be useful with risk selection if you can identify safe driving practices. The trick is how to interpret the data and what you do with it.”
“It’s inevitable we will continue down that path. If technology is available to find out more risk-related information so you can better price, you will do it otherwise your competitor will do it first and you will lose better drivers to competitors. However, there will be errors made and lessons learned along the way,” he said.
Asked if brokers were hamstrung by legacy systems, Mr Kelly said current broker systems “do a great job in meeting back-office requirements and legislative compliance, but they’re not dynamic. It’s like a 10-year-old car, it can still do the job, but …”.


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