Lee Garvey: Looking ahead

Lee Garvey:

Looking ahead in 2021

Lee Garvey, who has worked for all three major global brokers, was recently appointed as Willis Towers Watson’s head of financial solutions for Australia and New Zealand.

Garvey talks to Covernote about the credit, non-payment insurance, political risk and lenders’ insurance advisory markets, and his predictions for the wider market

What are the main challenges for insurance brokers in New Zealand at the moment?

Specialist brokers participating in the trade credit space, like Willis Towers Watson, are facing pressure to secure competitive new and renewal terms for clients, from participating insurers.

Covid-19 is still having an impact on the market. Insurers remain quite conservative in their approach and in the way they protect risk commitments to existing policyholders. We have also seen insurers seeking to increase premium rates and imposing more restrictive policy conditions – something which we are working very closely with our clients to address.

You are responsible for Credit and Non-Payment insurance, Political Risk insurance, Commercial Surety, Terrorism and Political Violence, and Lenders Insurance Advisory within the Financial Solutions line of the WTW business. Which of these lines are experiencing the greatest changes in the current market, and why?

Many insurers consider that more insolvencies will eventually come when government support measures are rolled back. As a result, some insurers in the Trade Credit space have stayed away from taking new risks in the industry sectors most affected by the crisis such as air travel, hospitality and the private obligors that have a noninvestment grade rating. Instead, they have focused on betterrated entities and sovereignowned entities.

How has the pandemic and economic downturn affected the Credit and Non-Payment insurance market?

Claims in the Trade Credit and Non-Payment insurance market have increased compared to

last year, as we have seen in loss ratios (measuring claims incurred against premiums) reported by the big three insurers. In their 9M 2020 publications, Euler Hermes, Atradius and Coface reported loss ratios being 15 points higher than in 2019, at around the 60% mark.

To a great extent, this moderate increase has been achieved thanks to the government support measures implemented in various countries to avoid a massive wave of insolvencies, including providing reinsurance to these credit insurers through public schemes.

In Asia Pacific, trade credit insurers have experienced an increase in smaller frequency claims, but the level of large claims remains limited. Coface, for instance, has published a loss ratio of 51% YTD in Asia Pacific – a very healthy level.

As a result, trade credit insurers have remained profitable for most of 2020 in Asia Pacific and globally.

They have managed to maintain healthy top lines by increasing premium rates at renewal to reflect the deteriorating credit environment. And they have withdrawn cover on the weaker portions of their portfolios, with overall exposure now being 10% lower than at the end of 2019. While these cuts have affected clients who rely on credit insurance coverage for managing risks or for financing purposes, some of the reductions were accepted as a reflection of lower overall trade volumes in 2020.

Will general insurance capacity and coverage narrow in the year ahead, and if so, in which lines?

The New Zealand insurance market is open for business and in good health.

The property market has been largely insulated from direct losses due to COVID-19 but insurers are increasing their scrutiny of risks. There is a focus on profitable underwriting because of the global economic uncertainty.

Increasing emphasis is being placed on risk control, safety, contractual risk management, cyber security and governance. Core coverage terms and conditions that have been relatively stable are now also under the spotlight; it’s becoming commonplace for insurers to impose absolute communicable disease exclusions to avoid future debates over unintended cover.

We also see another year of challenging conditions for D&O capacity and rates, as well as reduced capacity and rate increases for larger Cyber placements, as claim frequency and severity continues to rise.

Apart from the Construction sector which faces its own set of challenges, General Liability rates remain stable in NZ compared to the rest of the world where rate increases and tightening of coverage is evident. We were expecting global insurers to push down rate increases to NZ insurers after their latest round of treaty negotiations, however this has not been as evident outside of the Construction sector.

When will the insurance market return to normal in the Pacific, assuming a vaccine puts an end to the year ahead?

Tourism has always been the lifeblood of Pacific Island economies. All of these countries share similar challenges and opportunities and the abrupt end to visits by ships and planes carrying much needed economic input has had an impact. For obvious reasons, credit insurers have taken a conservative stance on credit risks associated with travel and tourism related industries, although guarded support remains across sectors that support local communities such as supermarkets, hardware and food retailing.

A phased approach to resuming international travel in the region is being implemented, but economic activity across the Pacific Islands could remain a challenge for another 12-18 months meaning insurers will continue to remain cautious.

What lessons have you learned during this economic downturn?

While 2020 will be remembered for the pain inflicted on populations by the pandemic, the economic disruption and the challenges to the insurance market, it is very encouraging to see that the credit insurance market has remained resilient and has continued to support clients throughout the crisis. How do you view the outlook for the year ahead?

Positively, certain industry sectors have weathered the storm reasonably well. The infrastructure and telecommunications sectors for instance, have proven extremely resilient and we hope this will continue for the year ahead.

And finally, some sectors have even emerged stronger, such as e-commerce and data centres. Again, these continue to be well supported by insurers.

New regime looms on March 15

Following a Covid-related delay, the new financial advisers’ regime is finally here. Brokers are confident the changes will be good for the industry By Sadie Beckman

After a nine-month delay due to COVID-19, the financial advice industry is gearing up for the implementation of new regulatory requirements on March 15.

The new regulations have been implemented through the Financial Services Amendment Act (FSLAA), which passed into law in April 2019, and was due to come into play in June last year. However, as the pandemic took hold, the decision was made to extend the timeframe — a move which has seen a mixed reaction from those in the industry.

The crux of the changes can be boiled down to the key aspects of licencing, the implementation of a professional code of conduct, disclosure regulation and oversight by a regulatory body, although it is a lengthy and intricate piece of legislation.

For insurance brokers, licencing may be the big issue to consider.

From March 15, anyone giving financial advice to retail clients must hold either a Financial Advice Provider (FAP) licence or be covered under a FAP’s licence as a Financial Adviser or a Nominated Representative.

Both businesses and individuals can apply for a FAP licence under the new regulations, but which to choose depends on plans for the business. Holders of an FAP licence can engage others to work under the umbrella of their licence as Financial Adviser. Either way, being registered on the Financial Service Providers Register will be mandatory.

Many advisers and businesses have been considering their options under the new legislation for some time. They have been

aware of the transitional nature of the regime’s implementation where both people and businesses have been able to apply for a transitional licence which lasts for two years, and enables them to continue legally practicing while moving towards meeting any new competence, knowledge and skills standards needed to comply.

There has been good uptake of this option in the broker industry, but applications for this ‘safe harbour’ close on March 15th, so anyone who hasn’t already completed their application for a transitional licence by then will have to immediately comply with the new legislation - by having a full licence, otherwise they cannot practice. The one workaround for this however, is providing financial advice under another provider’s full licence.

Steadfast CEO Bruce Oughton says the many brokers they look after have got through the transitional licencing phase and have everything in place.

“We gave them guidance on what was incoming, and produced guidelines for our brokers, not just on disclosure, but on all aspects of the legislation,” he says.

Oughton says the changes provide some important safeguards for brokers and clients, including identifying vulnerable clients and transparency. He says most are supportive of the new regulations.

“They understand what the government is trying to achieve,” he says.

“Although this is legislation aimed at the financial services industry and we are just one arm of that. Our industry is slightly different and there have been some complications for us around what is required in terms of disclosure, such as implementing new computer systems and technology upgrades - but we can overcome it.”

Oughton says the government’s terminology and definitions of brokering in the legislation are slightly different to those used inside the industry, so matching those up will be important, however the result will definitely be an improvement.

“There will be a teething period but in six to 12 months after it’s implemented it will have settled,” he said.

Oughton said that when the FSLAA was announced there was concern that it would result in brokers nearing retirement leaving the industry rather than go through the compliance requirements. However, he says this has not been the case to date.

“We didn’t see the retiring exodus in Australia [when regulatory changes were brought in] and we’re not seeing it here. One broker in his late sixties rang me a couple of months back to say he was proud to be newly qualified under the new regulations, as his previous qualifications were very old and out of date.”

While the new regime aims to ensure a solid, credible and qualified workforce, Oughton believes his industry already has that.

“It’s about changing public perception,” he says.

“The public have to learn as well as us.”

Insurance Advisernet director David Crawford says the new regulation changes are actually long overdue.

“Our industry escaped in 2011 when the Financial Advisers Act came in - we thought that we’d be highly regulated then,” he adds.

new regime, there had been little oversight of the industry.

“You could have been a plumber yesterday and an insurance guy tomorrow,” he says.

“Now the government has set the bar - but not so high that you can’t attain it.”

He says the aspects being put in place by the new regime are simply the things good businesses already did, so there should be little scope for those in the industry to be wary or opposed to the legislation if they were already operating with best practice.

“Yes, there has been a cost burden on the industry and it has taken time and effort to get ready for the changes - which has been felt across the industry, but we were going to have to do it sometime,” he says.

“There is enough guidance out there [on the new regulations] if you look for it. As with any change there will be the early adopters, the mass, and then some who come kicking and screaming.”

As for the Covid-related delay in implementing the new legislation, there has been a mixed reaction from brokers.

Before the pandemic and subsequent delay was known about, the financial advice industry was urged to get cracking ahead of time to prepare for the regulations. This may have left some early-movers frustrated, according to law firm Dentons Kensington Swan.

“They will now need to put their planning on hold, and in some cases will need to reverse out systems changes and training programmes that are already in place,” the firm states in an opinion piece on the changes. However, it may also be a case of an early investment taking more time to pay off, than an early investment being wasted, or causing more costs to be incurred, they say.

Dentons also believed the Ministry of Business, Innovation and Employment (MBIE) which is the government department responsible for the new regime, needed more time to get the disclosure regulations right.

At the time the delay was announced MBIE reiterated that the draft regulations needed to have their ‘workability’ revisited, citing wide criticism at the time of their release last October.

However, at that time Dentons said the delay meant “all stakeholders have a one-off golden opportunity to ensure the new financial advice regulatory regime, and their participation in it, is optimal”. There seems to be little comment now on those disclosure regulations, indicating the delay was useful in that regard.

As the start date approaches, perhaps the best way brokers can get ready then, is to pause and evaluate the moves they have made towards compliance already, and consider their business planning in a world that now unfortunately knows the effects of Covid-19.

The industry’s leaders seem to agree there has been enough warning about regulation being brought in as well as precedentsetting in other places, such as across the Tasman and in earlier regulation moves.

There is also plenty of guidance and resources available to help with the transition. While the delay may have thrown some plans and scheduling, it has also been a chance for brokers to get all their ducks in a row and, probably, to have made some new decisions thanks to our unwelcome viral visitor.

Covid-19 leaves us in an uncertain world with a business environment that has been on a rollercoaster ride, but with the new regulations aimed at providing more security and transparency for both financial advisers and customers. That should be a welcome piece of solid ground.

NZ’s only medical malpractice policy to include commercial contract dispute cover including pursuit Covers exemplary damages and privacy breaches Caters for everyday risks practices face Local Claims team with 30+ years of MedMal experience

Medical Malpractice & Legal Expenses Defence & Pursuit Cover