Rebuilding trust in the industry and being more consumer centric are key goals for the Australian insurance industry.
That was the consensus among nine senior industry executives who gathered for the annual Asia Insurance Review breakfast roundtable.
The discussion was moderated by Clyde & Co Partner John Edmond, who guided the group through an array of topics in a free flowing and at times robust exchange of views.
He launched the discussion saying industry data showed Australian insurers and reinsurers’ net profit fell 42.2% to A$2.4 billion (US$1.8 billion) in 2015 as claims from storms and bushfires took their toll.
“Combined ratios are weakening and investment returns are negligible. Is that a worrying trend?” he asked.
Mr Robert Kelly, CEO of the Steadfast Group, said he did not understand why insurers continued to drop prices. “I’d be sent packing if that happened in my organisation. I couldn’t go into the boardroom and say we’re running at 136% [loss ratios] on fire and ISR.”
He was a staunch advocate for change, and said current pricing was “insane” and “reinsurers are almost paying people to do business with them”.
Primary insurer retention
Mr Nicholas Scofield, General Manager, Corporate Affairs, for Allianz Australia Insurance Ltd, said it was important to look at both sides of the market – domestic and commercial.
“CAT events last year played a role for primary insurers; there was a lot of retention on the balance sheet for CAT events not passed onto reinsurers.”
The soft market in commercial business was “a concern for us and everyone else”, he said. There were also challenges ahead with the introduction of new terrorism reinsurance rates and reforms to the NSW emergency services levy (ESL). When the Victorian fire services levy reform was implemented from 1 July 2012, insurers sought to “taper up a bit beforehand to offset under-collection later in the transition year, but that may be harder for NSW ESL reform in the current commercial environment”.
Mr Rajbir Singh Nanra, Zurich CEO (General Insurance) for Australia and New Zealand, who was appointed in January after four months as interim CEO, emphasised the overall importance of sustainable underwriting.
He said Zurich, at the end of 2015, had examined its internal cost structures in response to market conditions and implemented a strategy that emphasised driving sustainable underwriting profit. “This has seen investment and focus placed in areas of core strength,” he said.
Available capacity continues to impose pricing pressures
Mr Jason Clarke, Executive General Manager, Intermediary Distribution, for QBE Australia and New Zealand, said: “There needs to be a correction, but I don’t believe we will see a significant change. A slowing would be optimistic when you look at the available capacity globally and that capacity will continue to impose pricing pressures.”
He said insurers had to examine costs and “how we deliver to the market; that’s where the focus really has to be”.
Mr Nanra agreed, saying insurers wanted a market that was sustainable and predictable but there was too much volatility in the stock markets and big investment returns could not be expected.
2015 global insured losses were below 10-year annual average
Mr Heinrich Eder, Managing Director of Munich Re Australasia, said 2015 was not a volatile year for reinsurers in terms of claims, particularly compared with the “extreme” years of 2010 and 2011. Last year was benign, apart from some large man-made losses.
The August explosions at the Port of Tianjin, in China, are estimated to have cost insurers more than US$3.5 billion, and the collapse of two dams in south-eastern Brazil in November have been estimated at up to $700 million in insured losses.
Mr Mark Senkevics, Managing Director and Head of Australia & New Zealand at Swiss Re, said the company’s latest sigma report on 2015 natural catastrophes and man-made disasters showed the year’s insured losses were $37 billion against a 10-year average of $62 billion. He said that had driven reinsurance profit because Nat CAT premium was “falling straight to the bottom line”. “It’s a substantial gain, but if it moves back to average, reinsurance profit is largely gone,” he said.
Traditional cycle dead?
Mr Edmond asked if the traditional insurance cycle was dead.
Mr Robin Johnson, XL Catlin’s Country Manager – Australia, Insurance, said annual results showed competitors were being affected by headwinds, however XL Catlin posted a healthy 92% combined ratio in 2015. “That’s partly due to the $300 million in efficiencies we’re aiming for by the end of 2017 through bringing two companies together, and partly because, as specialty underwriters, we’re better able to risk select.”
But he warned insurers to prepare for the worst. “At the March renewals, a lot of insurers were walking away from business, not renewing and that may be the signal that things are turning. I’m not sure we’ll ever have a real long-run hard market again, because capital can come into the market so quickly now.”
Mr Kelly said during a soft market insurers ignored loss ratios and sought to increase gross written premium (GWP). But when poor risks were being corrected or rejected, his four decades of industry experience suggested that signalled the start of a hard market. “It is happening,” he said.
Mr Senkevics said in the past it had taken “a profound event to shift market dynamics because capital was sucked up by that one event”. Today it was “death by 1,000 cuts”.
False dream to think there will be no big CAT events
Mr Eder warned it was a false dream to think there were no big CAT events on the horizon. “In our business, we must expect the unexpected.” For example, there was potential for a category five cyclone, similar to Tropical Cyclone Winston that hit Fiji in February, to affect the Gold Coast and Brisbane.
“Earthquakes also occur in Australia and we have a magnitude six quakes every five years. Are we kidding ourselves? And, with climate change, as the temperature gets hotter, there will be more bushfires,” Mr Eder said.
Participants questioned what it would take to shift rates upwards when there had been no real movement, despite catastrophic events in the past 12-18 months, including the Brisbane and Hunter Valley storms. The November 2014 Brisbane hailstorm’s losses are estimated at A$1.1 billion and Hunter Valley storm losses at A$500 million.
On top of those events, the Insurance Council of Australia (ICA) said the combined cost of the four catastrophes it has declared since November 2015 has passed A$550 million. Those events were South Australia’s Pinery bushfires (26 November), the Sydney tornado (17 December), the Great Ocean Road bushfires in Victoria (26 December) and the bushfires in Western Australia’s south west (8 January).
Mr Senkevics said the latest catastrophes had not reached insurers’ reinsurance levels “but it’s hitting the profit & loss accounts for primary insurers”.
Capital still moving into industry
Mr Scofield said with “the amount of capital in the reinsurance market globally, we would need two or three Hurricane Katrina-sized events to absorb enough of that capital” to see reinsurers forced into a hardening. “It’s hard to see anything short term that’s going to move the dial,” he said.
Mr Tony Gallagher, CEO Pacific Region for Guy Carpenter & Co Pty Ltd, said the hard market-soft market cycle was over. “We have technology changes and capital changes. Reinsurers are coming into insurance. Capital is moving. With a benign global CAT environment, capital will continue to come back into the market. There are some big players moving into insurance.”
Inefficiency in the business is a key problem to resolve
He said if rates hardened it was “a bonus” but structural issues, like technology, “how we transact business”, and inefficiency were key problems to be resolved.
“It’s a clumsy business in many ways; we have just hung on in the past and waited for the hard market. Investment income is the [sticky] tape that hides a lot of stuff. To get combined ratios where they should be, that is, below 90%, is achievable, but [some] companies won’t survive, there’ll be a bit of a shake up and more merger and acquisition activity,” Mr Gallagher said.
Mr Johnson said brokers’ use of technology had driven “massive change in distribution models as they’re increasingly able to aggregate information to enable portfolio deals to be done, creating efficiencies for both sides”.
Mr Kelly said: “If you’re going to run [underwriting agencies] without being cognisant of the capital provider, then we’ll disappear.” He criticised insurers for being inefficient and employing too many people to perform functions technology could do. “It’s so inefficient to do business that way when technology can smooth and expedite the process.”
Mr Edmond said: “Aren’t relationships the fun bit? Doesn’t that fundamentally change if distribution is computer generated?”
But Mr Gallagher said technology, particularly mobile devices, had generated “a different type of relationship”.
Big Data impact
That led the discussion into the field of Big Data and its impact on the industry. Mr Clarke said technology played “a huge part” in giving insurers massive amounts of data, but the issue is how it was accessed and analysed. “We can look at the numbers more quickly than in the past; we need to use the available information to increase speed to market.”
Mr Gallagher said: “Big Data is real data. It gets into real time and that’s where technology is going.”
Mr Kelly agreed. “We look at data monthly not annually; we know exactly what’s trending in the sales area monthly.”
Mr Eder said: “It’s not just about the data – it’s what you make of the data. Those who make the best use of data will get the trends right and can then move ahead of the trends.”
Mr Scofield added: “In personal lines especially, better technology potentially allows insurers to adjust rates more than once a day. There’s always been data but, for insurers, it has been all over the place. Data needs to be better managed to draw information together quickly and act on it.”
Mr Kelly was blunt about data’s value. “In a competitive market, if you’re behind, you’ll lose GWP.”
Insurers’ use of data
Mr Nanra was curious about Australian insurers’ use of data on consumers’ buying patterns. “That can give you a different lens on the data,” he said.
Mr Scofield said supermarket chains selling insurance could analyse data to correlate insurance purchasing patterns with other consumer products. “For example, is a person who buys red meat on a Tuesday a better-than-average car insurance risk? Those correlations can be done.”
Noting that behavioural analytics was playing out across the globe, especially in the US, and in the auto market, Mr Senkevics said: “However, I believe we need to further explore what is the natural partnership for insurance purchased through non-traditional channels.”
Credit worthiness of customers
Raising the point on the difficulty Australia’s privacy laws create for insurers and their inability to conduct credit checks on customers, Mr Scofield said: “We know credit worthiness directly correlates with risk, but we can’t use credit risk information in the same way overseas insurers can.”
“It’s more difficult for us because we don’t have credit card information like banks do or the data of a supermarket to view people’s buying patterns across a range of products.”
More uses for data
On what else insurers can do with the data they have, Mr Scofield said capabilities exist now for better risk selection at individual customer level. Insurers had to assess client retention factors and what offer was required to ensure they stayed. “We can lower the price to retain profitable customers and raise it to discourage unprofitable ones.”
Mr Senkevics raised the need for portfolio optimisation and dynamic pricing to reach the required demographics.
Mr Eder said customer satisfaction was vital. “We know the product is good, but customer perception is often that it’s not. We must use behavioural economics and data to demonstrate product benefits. A satisfied customer is prepared to pay more.”
TV exposes unscrupulous tactics
That sparked debate among the participants about an ABC Four Corners television programme that had aired in March. The ABC said its programme exposed a life insurer for “unscrupulous tactics to take consumers’ money and avoid insurance payouts, leaving customers paying money for nothing at the most difficult moment of their lives”. It cited examples of claimants whose total & permanent disability and trauma claims were denied on spurious grounds.
The programme has generated an Australian Securities & Investments Commission (ASIC) inquiry into life industry practices.
Industry’s reputation is a problem
Roundtable participants agreed the industry’s reputation is a problem. Mr Scofield said: “The customer perception is that the product is overly complicated and there are too many outs; they are losing faith. Insurers need to [re-examine] their products.” Consumers received 40 pages of terms and conditions and exclusions with a policy, which they viewed simply as “ways we can work out how not to pay”.
“We need to be able to price the risk and have a handle on the exposure but, in current consumers’ minds, are they losing faith? We need something simpler and with more certainty,” Mr Scofield said.
Mr Gallagher agreed. “It should be simple. It is awful, even for just insuring a house. The customer is finding renewal a pain; it should be really simple. We have lost the customer along the way.”
Mr Kelly echoed his thoughts. “Even a home policy is complex; it should be straight forward. But it’s the most complicated policy around.”
Mr Edmond lightened the mood, saying: “Let’s not be too hasty about getting rid of terms and conditions. You’ll kill my practice.”
Balance hard to achieve
That raised a few laughs, but Ms Suzanne White, Head of Life, Accident & Health Australia, for Beazley Underwriting Pty Ltd, swung the discussion back to a serious element, saying the issue is customer perception.
“It’s hard to achieve the balance, especially when you get into discrimination – we open the floodgates with mental illness,” she said. The most recent changes to section 54 of Australia’s Insurance Contracts Act were aimed at treating consumers more fairly.
Mr Edmond said the UK’s new Insurance Act was “the Poms catching up with us on consumer-focused legislation; it’s mirroring the legal position we have had since 1985”.
Mr Clarke said insurers now received far more feedback, particularly via digital platforms and social media. “Perhaps we haven’t used feedback sufficiently in the past. We should be able to change the customer experience quickly. As an example, we still have the same renewal process for our customers; I’m sure that can get frustrating at their end.”
Mr Edmond said insurance was a grudge purchase and “bad stories get a lot of air time” in the media. Mr Senkevics agreed, saying “the media doesn’t like good news; trust is continually eroded because you’re not stacking up the positive stories”.
However, he cited some consumer credit products with associated insurance as examples of poorly designed products and agreed with Ms White that the industry “needs to get ahead of the curve with mental illness”.
Mr Edmond shifted gear to find out what the future held for the Australian market.
Ms White said new entrants would not stop, but queried whether they would be around in five years’ time.
Mr Johnson said it was an easy market to enter and familiarise, but people expected it to operate in the same way as international markets and that was not the case. “It’s hard to penetrate, a difficult market and hard to make money, even with a lot of resources. Long-tail liability can really bite you.”
Given the status of the Australian dollar and interest rates, Mr Nanra said it was likely new players would “want to put their foot in here until the global economy picks up”. “We have a robust framework and it’s easy for people to bring capital in. We are an attractive, stable market; opportunistic people will come in.”
Mr Kelly noted some had “already been and gone”.
Ms White said there would always be new Lloyd’s coverholders and syndicates moving into the Australian market and it would become more competitive. “No one’s scared off by Australia.”
New entrants had to be “nimble and have flexibility”. Lloyd’s is seeking continuous improvement, including through an initiative called Project Tomorrow, which aims to streamline coverholder reports.
More consolidation and new entrants
Mr Gallagher said personal lines are seen as profitable business in Australia. He too, predicted more consolidation and new entrants into the market.
Mr Scofield said some new entrants to the Australian market had been very successfully growing premium, but had massive marketing budgets so profitability was “a different story”.
For Mr Kelly, he said Steadfast is not scared of new entrants or a trend for small-to-medium enterprises to buy direct. “Competition is the DNA of the business, bring it on, competition is terrific. Direct SME business would create more competition.”