BREAKING THE CODE: WHAT WILL INSURERS AGREE TO?
GOING FOR BROKERS: BIBAʼS STEVE WHITE TELLS IT LIKE IT IS
IT’S ALL ABOUT SME: MARSH SHIFTS FOCUS FROM THE TOP END
Agent for change Lloyd’s Chairman John Nelson is leading the market into a brave new world
August/September 2013
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Contents 6 Newsmakers » 10 Agent for change » Lloyd’s Chairman John Nelson is focusing on a future where growth comes from new markets and fresh approaches to risk.
18 Can Steadfast deliver? »
Life as a public company means a great deal more scrutiny, and questions remain over Steadfast’s float strategy.
22 Bucking the global trend »
Australia’s catastrophe risks keep premiums rising faster than most other markets.
26 Cracking the Code »
Without a copy of the code of practice review to fall back on, here’s our assessment of what it might contain.
30 Renaissance man »
Stephen Catlin may have built a multi-billion dollar enterprise but this entrepreneur remains keen to learn and is never afraid to try something new.
36 Extinguished at last »
It’s been a bumpy ride, but Victoria’s fire services levy on insurance is finally consigned to history.
40 Game, Set, Marsh »
Marsh Australia’s John Clayton outlines the multinational’s plans to play hardball in the SME space.
46 Man on a mission »
British Insurance Brokers’ Association chief Steve White is wrestling with a mass of converging regulatory and market pressures.
56 Been there, seen that »
lawNEWS
54 D&O: Closer to clarity » Insurers, company directors and executives now have more certainty about D&O cover following a NSW court decision.
companyNEWS
66 Making an impact »
68 68 70 70 70
Suncorp is banking on its new smash repair strategy to deliver savings and reshape the repair industry.
CGU removes crop guesswork » AIG sails into the pleasurecraft market » Calliden moves into new markets » Zurich targets travel » To be absolutely sure »
peopleNEWS
72 60 years and not stopping » John Duncan embraced change early to put a diamond shine on a distinguished career.
74 Vero serves up brokers to Lions » 77 Zurich scores big for autism charity » 78 Queensland professionals mark their success » 80 Allianz welcomes new Blue Eagles » 82 UAC expo draws big broker crowds » 84 500 brokers visit Melbourne expo » 86 maglog »
Berkley Re’s Peter Nickerson reflects on a long and influential career in the Australian reinsurance market.
60 A long road back »
The Volkswagen recall saga appears to have damaged the company in Australia. Some insurance and PR experts say it doesn’t have to be like that.
August/September 2013
Cover image: John Nelson, Chairman, Lloyd’s of London
newsmakers at
Gianotti gets the nod:
Wesfarmers has today announced that Anthony Gianotti is the new Managing Director of Wesfarmers Insurance, effective immediately. Mr Gianotti has been acting in the role since the former managing director Rob Scott moved to Coles as Finance Director in late February. Wesfarmers Managing Director Richard Goyder says “Mr Gianotti has done a terrific job to drive the improvement of the performance of the insurance business in a very challenging environment”. Gianotti confirmed in the top job at Wesfarmers Insurance, 12 July
NSW FSL reform stalls: New South Wales will defer plans to end its emergency services levy on insurance while it assesses similar reforms that started in Victoria this month. The State Government has previously made a number of statements about reforming the funding system for emergency services. But Police and Emergency Services Minister Michael Gallacher told a recent Rural Fire Service Association (RFSA) conference that Victoria’s transition away from a funding system based on insurance premiums for its fire services levy – which came into effect on July 1 – will be examined before NSW makes any final decisions. “We’ve taken a decision as a result of the submissions that were made, both verbal and in writing, to look closely at what is happening in Victoria.” The State Government is prepared to hold further talks about the levy “over the next one to two years” after issues were raised by groups including the RFSA, he says. NSW proposes replacing the levy, which provides about 75% of funding for the emergency services, with a broader property-based arrangement. Victoria has introduced a charge based on property tax to replace its insurance-linked fire services levy. “We have made it clear we need a funding model for our fire and emergency services that is
sustainable and fair,” a spokesman for Mr Gallacher told insuranceNEWS.com.au. “That is why it is so important to closely examine the implementation and operation of the Victorian reform experience.” NSW puts brakes on emergency services levy reform, 15 July
Seymour back to broking:
“It’s a bit of a rhetorical question really, like how often do you beat your wife?” – Insurance Council of Australia Chief Executive Rob Whelan at a CTP roundtable on whether insurance companies are fit and proper organisations to take care of injured people
McIvor returns:
Retiring Macquarie Premium Funding Chief Executive Gary Seymour is returning to broking as chief executive of mid-market specialist PSC Insurance Group. Mr Seymour will finish at the premium funder at the end of this week. He elected not to continue at the Macquarie Bank/Steadfast joint venture following its acquisition of Pacific Premium Funding from GE in December. He was the joint venture’s chief executive from its inception five and a half years ago. Prior to that he was managing director of Willis Australia for seven years after the global broker bought his mid-market brokerage, Bradstock GIS, in 2001. Mr Seymour told Insurance News the opportunity to work with PSC Managing Director Paul Dwyer “just feels right. It’s a growing business and Paul approached me to join his executive team to support their ambitious plans for the future”.
Former OAMPS chief executive Keith McIvor has been recruited by Austbrokers to be its first Chief Broking Officer. Mr McIvor, who left OAMPS in October after three years as chief executive, is one of two major appointments announced by Austbrokers today. CGU National Operations Manager Sunil Vohra has also been recruited, becoming the broker group’s first chief operating officer from September. McIvor joins Austbrokers, 22 July
Seymour returns to broking, 24 June
6
insuranceNEWS
Austbrokers snaps up InterRISK:
Ace promotes Sullivan:
Last week’s acquisition of broker InterRISK demonstrates the strength of his group’s “owner-driver” model, Austbrokers and Chief Executive Mark Searles says. The model allows Austbrokers to grow and diversify income streams and gives brokers a succession plan that lets owners retain a shareholding. As reported exclusively by insuranceNEWS.com.au in a Breaking News bulletin last week, Austbrokers has bought 77.1% of InterRISK for shares and cash, valuing the company at about $15.7 million. Listed conglomerate Washington H Soul Pattinson sold its 40% share of InterRISK and Paul Cave parted with 20%. Managing Director Dennis Guy says the company had been considering its future strategy for some time, and decided Austbrokers’ tailored approach best met the needs of all shareholders.
Ace Group has named Damien Sullivan as its new Asia-Pacific Chairman, to focus on governance, strategic planning and senior customer relationships. Mr Sullivan joined the company in 2002 and has served as country president for Ace New Zealand and Ace Australia. He will return to Australia from Singapore and continue to report to Ace Vice Chairman and Chief Executive John Keogh. Juan Luis Ortega will succeed Mr Sullivan as AsiaPacific Regional President, overseeing the general management and business results of the commercial, personal property and casualty and personal accident operations.
InterRISK purchase ‘proves Austbrokers’ strength’, 17 June
Ace appoints Asia-Pacific Chairman, 22 July
August/September 2013
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Wellington calculates quake costs: New Zealand’s Earthquake Commission (EQC) has received 2101 claims arising from the series of quakes that shook Wellington a week ago. A 6.5-magnitude quake in Cook Strait on July 21 caused damage to CBD buildings and injured four people. There have been more than 1500 aftershocks since, including a 5.4 tremor last night, but no further damage has been reported. The EQC says its claims figure covers the period from July 19 to 21, with 75% of claims from the North Island.
FIGURE THIS
Credit Suisse estimates insured losses from the Cook Strait quakes to be below $US1 billion. Insurance Council of New Zealand Chief Executive Tim Grafton says damage is still being assessed. “Our expectation is that it would be well, well below that, but it is too early to put a figure on it,” he told insuranceNEWS.com.au. “This has been a wake-up call more than anything else,” he said. “It was very different to Christchurch.” EQC receives 2000 claims after Wellington quake, 29 July
9 Percentage of the new stamp duty on general insurance products in Queensland after the State Government increased the level from the previous 7.5%
13.8 BILLION
Australian dollar cost of natural disasters in the state of Queensland since 2012
4.21 BILLION
Combined profit in dollars of insurers and reinsurers in Australia for the year to December 31, 2012
23
BILLION Predicted annual cost in dollars of natural disasters in Australia by 2050, up from $6.3 billion now
5 NZ Herald
Number of years New Zealand’s Insurance and Savings Ombudsman believes complaints related to Canterbury earthquake claims could continue
Slippage: Wellington is still counting the cost of the recent 6.5-magnitude earthquake which damaged commercial property including this container wharf on reclaimed land
10
BILLION Amount in US dollars of new capital that has entered the global reinsurance market through catastrophe bonds, sidecars and collateralised structures over the past 18 months
Coates returns amid Dual fraud crisis: Operations at underwriting agency Dual Australia are operating normally after a tumultuous fortnight involving a $17 million internal claims fraud, the resignation of its managing director and changes at the top of the global company. Chief Executive Asia-Pacific Damien Coates says the financial lines fraud – allegedly committed by Dual Australia’s former national claims manager – has now been fully contained and a review by Ernst & Young of the company’s “control environment” has also been successfully completed. “Most of the assets involved in the fraud have been recovered, and I’m confident we will manage a full recovery,” he told insuranceNEWS.com.au. Mr Coates announced last week that he
has returned to Australia permanently to resume his role as Chief Executive Asia-Pacific after a two-year stint as chief executive of Dual International, during which he substantially restructured the global company. The new Chief Executive of Dual International is his former deputy, Shane Doyle, who joined Dual in London last year after resigning as chief executive of Zurich Australia. Dual Australia Managing Director Peter Bailey left the company last week, and Mr Coates says the company will now recruit a chief operating officer. He says the local broker market has been “incredibly supportive” since the fraud was revealed. Dual puts fraud trauma behind it, 8 July
insuranceNEWS
August/September 2013
1.15 Price in dollars of Steadfast’s shares issued under its initial public offering following the completion of its bookbuild on July 30
3
MILLION Amount in NZ dollars being paid by insurers each day in residential claims settlements from the Canterbury earthquakes 7
newsmakers at
Catastrophe costs on the rise:
UK insurers and Government agree on flood cover, 1 July
Natural disasters to cost $23 billion by 2050, leaders say, 24 June
Reuters Insurers will pay an annual charge of £108 million, equating to a levy of £10.50 on annual household premiums. The ABI says this represents the estimated level of cross-subsidy that exists between lower and higher flood risk premiums. Deloitte UK Insurance Partner James Rakow says 200,000 British households are at “very high” risk of flooding. “A key challenge for insurers is to ensure their risk models and flood data are accurate enough to make effective pricing and underwriting decisions,” he said.
The annual cost of natural catastrophes in Australia will soar from $6.3 billion to $23 billion by 2050 because of population growth and increasingly extreme weather, a new report claims. A new focus on prevention and mitigation is needed, according to the Australian Business Roundtable for Disaster Resilience and Safer Communities. The roundtable – comprising the chief executives of the Australian Red Cross, IAG, Investa Property Group, Munich Re, Optus and Westpac Group – was formed last December to champion resilience investment. It says governments spend $50 million each year on pre-disaster resilience, compared with $560 million on post-disaster relief. Investing $250 million a year on resilience would cut relief spending by more than half and generate savings of more than $12 billion by 2050. The group says building more resilient homes in cyclone-prone areas of Queensland would reduce the properties’ risk by 66% and save $3 for every $1 spent. Raising the wall of NSW’s Warragamba Dam by 23 metres would cut flood costs from $4.1 billion to $1.1 billion by 2050, saving more than $8 for every $1 spent. Bushfire mitigation in Victoria, including vegetation management, would have a positive cost-benefit ratio of three to one, the group claims. The report recommends appointing a national resilience adviser and establishing a business and community advisory group. It says a commitment to long-term funding of pre-disaster resilience is required, with priority given to investment activities that deliver savings. IAG Chief Executive Mike Wilkins says in the report that governments carrying out mitigation works are “enhancing the economic and personal wellbeing of all Australians, as well as enabling a reduction in insurance premiums for those exposed to natural perils”.
All at sea: residents of a German village are evacuated following flooding in central and eastern Europe which could result in insurance losses as high as $4.9 billion
Summer floods inundate Europe: Insurance losses from flooding in central and eastern Europe could be between $US3.5 billion and $US4.5 billion, according to Swiss Re. The company estimates its own share of claims at about $US300 million. The floods affected large areas of Germany, the Czech Republic, Austria,
Hungary and Slovakia in May and June, but Swiss Re says prevention measures helped protect many areas from worse damage. Munich Re estimates overall insured losses will be at least €3 billion. European flood costs may hit $4.9 billion, Swiss Re, 15 July
UK strikes Flood Re deal: The UK Government and the Association of British Insurers (ABI) have signed a memorandum of understanding to develop a flood insurance pool. Flood Re will be run and financed by insurers as a non-profit fund to cover the cost of claims from high-risk homes. It is expected to be operational by mid-2015. “Insurers’ priority has always been to ensure flood insurance remains affordable and available for everyone who needs it,” ABI Director-General Otto Thoresen said. When insurers receive claims from highrisk households they will pass the flood risk element to the pool. Premiums for flood risk will be calculated based on council taxes.
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Agent for change Lloyd’s Chairman John Nelson is focusing on a future where growth comes from new markets and fresh approaches to risk By Terry McMullan
THE VIEW FROM JOHN NELSON’S London office looks south, taking in the Thames and the bustle of a major city hard at work. It’s fortunate the Lloyd’s Chairman’s office looks in this direction, because the iconic Lloyd’s building is being surrounded. To the east, just a few metres away from the unprepossessing entrance to the Lloyd’s building on laneway-like Lime Street, the 125-metre Willis building embraces its neighbour with a curved, black-glassed façade. Its giant foyer is dominated by an equally impressive “Willis”. To the north, just across Leadenhall Street, the new Aon Centre rears 137 metres higher than the 88-metre high Lloyd’s building. Dubbed “the Cheesegrater” by Londoners, it might just as easily – and more aptly – be nicknamed “the Wedge”. Because Lloyd’s is under pressure from the mega-brokers. Investors have been pouring money into the reinsurance market over the past year – a report by Aon Benfield says global reinsurer capital grew 11% last year to about $US505 billion – and the reason for that is obvious. Reinsurers are making “solid earnings”, which is attracting hedge and pension funds seeking healthy earnings in a dormant investment climate. All the global brokers dealing through Lloyd’s have special arrangements with the market’s underwriting syndicates. Many of these take the form of sidecars, opportunistic short-term financial arrangements in the reinsurance market that are run by existing market players but are separately capitalised, often from external sources. But no-one has ever seen a sidecar quite as big – or as opportunistic – as the one announced in March by Aon. Using capital supplied by US investment giant Berkshire Hathaway, its sidecar is globally available across all but a very few industry classes for Aon-brokered retail business placed at Lloyd’s. 10
Berkshire Hathaway has given Aon’s managing general agency at Lloyd’s delegated authority to grant cover on its behalf, providing a 7.5% layer of most Aon retail insurance risks that are transacted through Lloyd’s. In effect, Berkshire Hathaway is using Aon to undercut Lloyd’s underwriters on business being transacted through the Lloyd’s market. Aon accounts for around 23% of total business placed at Lloyd’s, so the deal has caused shockwaves through the London market. Yet the Aon-Berkshire Hathaway facilities deal may be merely the tip of the iceberg. Willis Group and Marsh are involved in similar arrangements with investors, although the detail of their arrangements is not as clear. The Aon-Berkshire deal is said to be worth up to $US250 million in annual premium volume, but London market sources suggest Marsh already has considerably more than that tied up in as many as 10 facilities ranging from energy to space. And Willis’ new 360 Global project – also heavily backed by Berkshire Hathaway – is said to be backed with premium volume of more than $US600 million. The situation is a two-edged sword for John Nelson and Lloyd’s Chief Executive Richard Ward, who need to welcome any new source of capital to the market, but also ensure the primacy of Lloyd’s in the way the risk transfer is performed. Sitting in his top-floor office with Willis’ and Aon’s overshadowing monoliths blessedly out of his sight, Mr Nelson would be justified in seeing this new play by his biggest suppliers as a sideshow – albeit a significant one – to the main game. “We are at the moment probably the global hub for specialist insurance and reinsurance,” he tells Insurance News. “We have the only insurance market in insuranceNEWS
the world. Over the last few years there’s no question that the underwriting disciplines, the standards, all of that, have been strengthened very considerably.” Mr Nelson moved into the chairman’s office in October 2011. A chartered accountant with a background in banking and a string of high-level directorships, he replaced Peter Levene, who during his nine-year stint broke down the London-centric nature of the market by giving it a more international image and re-establishing its reputation following the troubled years of the asbestosis wars and the bankruptcy of thousands of Lloyd’s Names.
“We are at the moment probably the global hub for specialist insurance and reinsurance.”
August/September 2013
Like Lord Levene, Mr Nelson is an insurance outsider, and like his predecessor he intends to make a difference. He is chief spruiker of Lloyd’s “Vision 2025” strategy, which promotes a bigger Lloyd’s market with a more diverse capital base and a greater focus on key developing countries [see Lloyd’s in 12 years, page 16]. The future direction of the Lloyd’s market is important to the Australian insurance industry, which is now the market’s third-largest customer after the US and the UK. The Australian market’s growing reliance on Lloyd’s is due to a number of factors ranging from the need to spread catastrophe risks to
insuranceNEWS
August/September 2013
11
Surrounded: the Willis logo is front and centre outside the Lloyd’s building’s entrance (above) while Aon is building a massive new headquarters next door (right)
major players’ cautious risk appetite. Where once they were peripheral to the main game, underwriting agencies in Australia are now on many insurance brokers’ books as primary underwriters of specific risks. But the growth of Australian business at the market is more a “nice to have” for Lloyd’s than a centrepiece of its growth strategy. Australia is a mature market, and Mr Nelson is driving a greater concentration on the world’s developing economies. “Our business in the developing world, particularly the BRIC [Brazil, Russia, India and China] countries, is growing significantly, but from a very low base,” he says. “So it seems to me that if Lloyd’s is going to survive as the global hub for specialist insurance and reinsurance, we have got to increase our footprint in those countries. “And we’re in a very good place to do it, because many of these countries are seriously underinsured.” Mr Nelson says most of the government leaders he has spoken to in the emerging economic powerhouses “are very clear as to the role that insurance plays in terms of supporting economic growth and economic security, and they’re also signed up to the point about diversifying internationally their risks”. He says this realisation is leading to the BRIC countries opening up their insurance markets to foreign companies, although he admits he has concerns about India’s ability to get with the program. “Well, they’ve got this problem,” he 12
says with a grin. “The Indian Government would like to do it, but the Indian Parliament is sort of frozen at the moment. “But the opportunities are there.” He says the Lloyd’s hubs in China and Singapore are “helping Lloyd’s push itself out” to the developing world, while also attracting good quality carrier capital into the Lloyd’s market. “We’ve got to be able to do both these things,” he says. In other words, keep the established business flowing while building new footholds in countries that are rapidly catching up. The sort of change he envisages will change the nature of Lloyd’s quite dramatically – and that change would have to be from the ground up. For example, while he doesn’t express the view in so many words, Mr Nelson makes it obvious he would like to see a greater diversity of nationalities on the floor at Lloyd’s. Most of the antipodean or North American accents heard at the market belong to brokers visiting the market to do business, while the underwriting booths are in the main stolidly English and predominantly male. For now it’s a very Establishment establishment. “I would want to see much greater nationality diversity in the Lloyd’s market among the carrier capital, and most importantly in people too,” Mr Nelson says. “If you look around the Lloyd’s market, the brokers are pretty international, but the underwriters are not that diversified. They will need to be…” The modernisation program at insuranceNEWS
August/September 2013
Lloyd’s has now been running for many years, starting with the “Reconstruction and Renewal “ strategy of 1995 that saved the market from collapsing under the weight of its inability to change. The Vision 2025 strategy is the latest, and while Lloyd’s strategies no longer have to focus on survival, they do have to pursue growth. Prior to Vision 2025 the emphasis at Lloyd’s was on becoming more efficient and “modern” – a program that brought Richard Ward to the market in 2006 fresh from a complete modernisation of the London Petroleum Exchange. As Chief Executive at Lloyd’s, the former chemical engineer was charged with getting the market into technology. Today there are fewer paper files than there used to be, and computers now dominate the market floor, but the pace of change apparently hasn’t been fast enough for Mr Nelson. According to one London newspaper report the need for speed has been the catalyst for Mr Ward announcing his decision last month to leave Lloyd’s by the end of the year. While he gave no reason for his decision, the article noted that Mr Ward had pledged on his appointment in 2006 that most of the market’s main activities would be carried out electronically by 2009. Most major functions have since been made electronic, and the market is now far more efficient and timely in its operations. And while the sudden growth of the Bermuda reinsurance market caught Lloyd’s by surprise, Mr
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2012 Lloyd’s premium growth: by class
301.2 79.5 50.7
774.0
449.9
500.4
70.4
84.8
112.4
2008
2009
2010
Property Treaty Property (D&F) Overseas Motor
798.5
627.4 240.7 2011
Marine Energy Casualty Treaty
183.9 2012
Casualty Aviation PA & Health
-20 -40 -60 -80
56.8 Property Treaty
0
126.8 230.1 58.0 49.5
3.8 6.7
0.0
0
Property (D&F)
500
97.9 237.6 59.7 62.5
127.2 72.2
Overseas Motor
1000
86.1 65.5
20
29.5
28.8
24.5
Marine
349.1
158.3
447.9
41.1
40
Energy
1500
60
Casualty Treaty
284.7
80
Casualty
314.2
98.8
100
Aviation
2000
120
Accident & Health
Gross signed premium in million $US
2500
Gross signed premium in million $US
Lloyd’s premiums in Australia by class
Source: Lloyd’s/Xchanging
Ward is credited with doing much to “keep Lloyd’s relevant” in the insurance world. But Mr Nelson is impatient to see more modernisation, more quickly. “One of the big pushes I’ve made since I’ve been here is to try to accelerate the modernisation program,” he tells Insurance News. “The claims transformation program has cut our claims times by up to 50%, which is absolutely vital to our reputation and everything else. “The area where we are now really focused is a program to modernise our processing, so we process policies, claims, premiums, centrally for the market. “But we are, like many organisations, relying on legacy systems. We have COBOL and all of that. “It’s taking time to change because we’re a market. We’re not a company so you can’t just dictate. But I think we are making progress.” Mr Nelson agrees the market will need efficient systems if the Vision 2025 strategy is to be successful. “We have a large global network now, but it’s got to be more user-friendly – it’s got to be easier to build on, more scalable. That’s something which I think we’ve been a little bit behind on and we need to catch up. “The other thing, I think, is efficiency generally. One of the things about Lloyd’s and the insurance industry is that there has not been enough attention on controlling costs. I come from other industries, and I think their 14
cost control is very good. Insurance? To put it politely I’m not so sure. “We’ve taken 8% out of the costs of Lloyd’s in the past 18 months here and service levels haven’t suffered at all, and we’ve probably got a bit further to go. We need to keep the pressure on.” Expansion requires capital, and a larger, more diverse Lloyd’s market will need lots of it. Innovations like the mega-brokers’ various facilities obviously cause unease among the Lloyd’s hierarchy even as they offer cautiously enthusiastic praise. They can see the Aon-Berkshire Hathaway deal will lead to new business being placed at Lloyd’s, but the fact that a 7.5% share of that business will leak out of the market to Berkshire Hathaway doesn’t sit comfortably. Apart from Lloyd’s becoming a virtual cash conduit for the US company, there’s also the question of Lloyd’s hardearned reputation and the risks implicit in brokers managing facilities without underwriting controls. Stephen Catlin, the head of the largest syndicate at Lloyd’s and a highly respected London market figure, says sidecars like the one being used by Aon and Berkshire Hathaway are very different from traditional binding authorities which have clear parameters and controls. Lloyd’s has also pointed out to the parties that the sidecar arrangements involve the delegation of underwriting authority to the broker, so Lloyd’s regards the sidecars as binding authorities. As such they will be subject to the insuranceNEWS
August/September 2013
market’s regulation and compliance requirements. Cautious as he is about the situation, Mr Nelson says it’s really just another symptom of low interest rates. “There’s a lot of capital around looking for returns. And obviously we offer pretty good-looking returns. “The nervousness I have about that sort of transaction, is this: the insurance industry’s been pretty good at keeping the capital fairly well nailed to the transfer of the risk, to the underwriting process and so on. “The aim of the Berkshire Hathaway deal is [to be] basically a tracker fund written across the top on the whole of the Lloyd’s market, and it obviously has a potential just to take business away from Lloyd’s while relying on Lloyd’s itself. That isn’t a very comfortable place to be. “But what is even more uncomfortable is that if you take a line off the banking industry, you will see it has suffered exactly the same thing, where gradually more and more capital came in. It was well above the transaction, it was slicing and dicing on derivatives, just like what’s beginning to happen in the insurance industry. And what happens is, it eventually blows up. “The insurance industry has survived incredibly strongly through very difficult conditions, and I think part of the reason is because the capital has remained nailed to the transaction, and that is something which I feel very strongly we need to encourage, to keep and to continue.” He believes the regulator, the
J417
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Lloyd’s in 12 years Even as it celebrates its 325th year, Lloyd’s is widening its horizons as it plans for growth over the next 12 years. Vision 2025, a strategic document launched last year and refined since, sets out how Lloyd’s must “take advantage of the opportunities presented by the world’s developing economies” while acknowledging the need to maintain its most important customers – which include Australia. The strategy sees Lloyd’s in 2025 as larger than today, targeting profitable growth both from developed and developing economies.
It wants the market to remain the global centre for specialist insurance and reinsurance through such means as encouraging a more diversified capital base with a greater contribution from high-growth economies; supporting a “truly internationalised” underwriting community; remaining a broker market; and having a small number of powerful overseas hubs in “certain major overseas markets”. Lloyd’s has now analysed potential opportunities offered in the large highgrowth economies and applied a number of factors to prioritise them, including managing agents’ appetite, broker
Financial Conduct Authority, will have to get on top of the issue quite quickly, because of the possibility of conflicts of interest. There is also, of course, a chance the regulator will find itself opening a troublesome can of worms involving all the big brokers. “What the regulators don’t want in the insurance industry is what happened in the banking industry,” Mr Nelson says. “They should want to keep the capital nailed to the business, because otherwise you create huge systemic risks.” But he agrees the market is developing new ways of distribution and new ways of placing risk “and Lloyd’s will have to adapt to that and it will”. “Historically it always has, but I think you have to watch very carefully the fundamental issue of capital getting away from insurance.” While he nominates catastrophe bonds as an example of a new way of transferring risk, he cautions that even then an understanding of the risk is vital. “Call me old-fashioned, but I think you’ve got to be careful. What you want to make sure is that while the market is very competitive, there’s proper evaluation of risk going on.” For now, it’s a case of riding out the storm and weighing up later just how much of a game-changer the AonBerkshire Hathaway initiative really is. Like many London City leaders, Mr Nelson believes thing will settle down once economies turn up and investors have more diverse opportunities. But Lloyd’s also can’t go back to a comfortable world where the market was sure and steady and change was a very slow process. Diversification of sources of capital, new business models, new approaches to risk
all have to be understood and embraced. “That’s what Vision 2025 calls for,” Mr Nelson says. “We don’t want to do it too quickly because we don’t want to just hit the market, and we want the capital to bring business we otherwise wouldn’t do into the market. “So we have got a very high level of interest from capital-providers and I think over the next three or four years you will see quite a few big names coming in [to the market].” While the Lloyd’s brand is “helpful” in attracting new business, “the key thing is we have to have the energy and the ambition as a market to be prepared to wear out the old shoe leather”. “What is interesting is I think when you talk to the managing agents, their attitude has subtly changed since I’ve been here – probably the last 18 months, two years – where they now see the necessity because if they don’t do it, others will.” And while he is supportive of a tough prudential regulation regime because “it helps a market like Lloyd’s”, he is cautious of the influence of the various national regulators which operate in the countries Lloyd’s does business in. “If you’re not careful these regulators can become somewhat protectionists for their own country.” He believes the British regulators had a “knee-jerk reaction” after the 2008 banking crisis, which saw them “look down in the weeds, which was exactly the wrong thing”. “The systemic issues at the top are the problem. What could go wrong to destabilise this market? An example is exactly what we have been talking about – capital getting away from transaction. [The regulators] should be very focused on that.”
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penetration, local business environment, business mix and catastrophe exposure. “This analysis suggests that China, Brazil, Mexico, India and Turkey are Lloyd’s current higher priority countries,” the document says. But it warns that while the Corporation of Lloyd’s can assist by becoming more efficient in its support facilities and attracting more high-performing professionals to the market, “much of the work of realising the vision will fall to the market”. “It is managing agents’ appetite for growing Lloyd’s in new markets which will ultimately govern the success of the plan.”
Lloyd’s Australian gross signed premium trend 28% 2012 $US2.0bn
42%
30%
24% 2011 $US1.9bn
44%
32%
24% 2010 $US1.4bn
40%
33%
24% 2009 $US1.1bn
38%
38% Source: Lloyd’s/Xchanging
Direct Reinsurance Binding authorities
Can Steadfast deliver?
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Life as a public company means a great deal more scrutiny, and questions remain over Steadfast’s float strategy By Jan McCallum
STEADFAST HAS TRANSFORMED ITSELF by acquiring businesses in the lead up to its stock market listing – but can it make it the conglomeration of brokers work? That’s the question being asked by investment analysts who will be advising clients on whether to buy the stock. Analysts like to see companies lay out growth strategies, but Steadfast’s “growth by acquisition” strategy comes with some risks. While the market will welcome the right acquisitions, most investors have witnessed first-hand how companies were brought down by buying the wrong ones. This nervousness explains why, as the Steadfast float documents were published, analysts began to wonder whether the broker could pull off its ambitious transformation plan. Steadfast aims to have equity in 62 brokers, four underwriting agencies and two ancillary businesses at listing, giving their owners a succession mechanism or a chance to realise some capital, while at the same time building the group into an owner rather than a facilitator. Commonwealth Bank analyst Ross Curran is among those who has his doubts on whether the strategy is quite as clear-cut. “It is more challenging to integrate 30 businesses,” he says. “It’s easy to say but hard to do. This is not a couple of bolt-ons. This is a game-changing bunch of acquisitions.” Another analyst, who declined to be named, agrees that transforming Steadfast from a service-provider to an owner involves some risk. “You need to make sure the equity brokers still feel they have skin in the game, that they are still hungry and ambitious and don’t feel they have an over-arching owner holding them back or forcing them to do things they don’t want to do. You need to lead with a carrot and not with a stick.” Some of Mr Curran’s fears are eased by the strength of Steadfast’s board and management team. For example, Chairman Frank O’Halloran has many years’ experience in building and running QBE as its group chief executive, while Managing Director Robert Kelly has 44 years’ experience as a broker and was cofounder of Steadfast. The group’s management can also point to how well they know the businesses being acquired.
“These are not greenfield acquisitions – they are businesses that already work with Steadfast,” one insider told Insurance News. “There are systems and relationships in place. “The network is tried and tested; it has worked well for a long time.” There are plenty of other features of the company and the market that excite analysts. For example, one cites Steadfast’s exposure to rising premium rates and the potential for further acquisitions. “There should be a pipeline [of acquisitions] over the next few years given their pool of existing members.” But not all of its “network” brokers – members who have chosen not to sell equity to Steadfast – may remain with the group. Rival consolidator Austbrokers has already lured some Steadfast members away this year as both firms move to lock down acquisitions. Mr Kelly tends to steer enquiries from analysts and media away from the disappointing June float of iSelect and points to Austbrokers as a better example – an action that is known to annoy Austbrokers executives. They say the A&I Member Services (AIMS) joint venture with independent broker group IBNA is a better model to compare with the Steadfast plan. Austbrokers members average around 50% equity in their businesses under the “owner-driver” model, while IBNA members are strongly independent. IBNA Chairman Gary Gribbin and Austbrokers Chief Executive Mark Searles have made no secret of their willingness to attract Steadfast brokers looking to remain independent or sell equity. Steadfast has earmarked $25 million of funds from the float for general corporate purposes and acquisitions, although its prospectus assumes no further acquisitions or equity purchases during 2013/14. It aims to buy more brokerages in the future, but says acquisitions must add to earnings per share within a year, assuming at least 85% of the acquisition is funded with equity. But it will apply this irrespective of the actual level of equity funding, and expects in the first year after listing that any acquisitions will be primarily funded by debt or cash. insuranceNEWS
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Contributions to revenue:
Steadfast Equity Brokers
70%
Steadfast Network
13%
Steadfast Underwriting Agencies 6% Premium Funding
6%
Ancillary Businesses
5%
Total revenue: $193 million (Proportionally Adjusted)
The acquisitions that are vital to the restructure will give the company a considerable amount of goodwill on its books, forecast at $236.4 million on completion of the initial public offer, or 36% of its total assets of $665.3 million. Steadfast will, however, have barely any debt in its total liabilities of $164.2 million and analysts are fairly relaxed about the strength of the balance sheet. “They are pretty much debt-free and have a conservative debt strategy, so they have capacity to make acquisitions using a modest level of debt while retaining earnings (to pay dividends),” one analyst told Insurance News. “It’s a nice balance and fairly consistent with Austbrokers.” Steadfast also plans to establish “hub brokers” to enable small and medium-sized brokers to consolidate into larger firms. 19
Geographic spread: Steadfast network and equity brokers
4 2 METRO 2 REGIONAL
47 41 METRO 6 REGIONAL
88 67 METRO 21 REGIONAL
33 27 METRO 6 REGIONAL
121 99 METRO 22 REGIONAL
107 96 METRO 11 REGIONAL
Source: Steadfast prospectus
And acquisitions aside, Steadfast says there is significant opportunity to expand and diversify through other channels, and this growth may come through its Steadfast Life business and additional product offerings from its underwriting agencies. Further efficiencies will also be found, with the company working with its back-office administration firm White Outsourcing and other service partners to develop a common back-office capability, and plans for a common operating platform
7
4 14 12 METRO 2 REGIONAL
NORTH ISLAND
5 SOUTH ISLAND
will reduce operating costs for both its brokers and its underwriting agencies. Some of Steadfast’s other numbers are likely to further attract investors, but due to its transformation from a broker network to a broker owner with an associated network business, historical data on the company’s financials is largely meaningless. Steadfast is forecasting earnings before interest, tax and amortisation of $56.4 million at June 30 this year and $60.6 million in 2013/14, with a net profit of $27.2 million
and $30.1 million respectively. No dividend will be paid for the 2012/13 financial year but the board intends to pay out between 65-85% of profit annually, forecast to be between 3.6 cents and 5.2 cents per share for the 2013/14 profit, fully franked. The brokers Steadfast owns or has equity in will contribute 70% of revenue while the network brokers will contribute 13%. The company has broadened its income base in recent years and underwriting agencies Altiora, Miramar and Sterling will contribute 6% of revenue, its half-share of Macquarie Premium Funding another 6% and ancillary businesses such as Meridian Lawyers will account for 5%. The float will raise $334 million, based on a price of $1.15 a share. Following the float, existing broker shareholders are expected to hold 12-13% of the company, vendors 25-28%, directors and management around 2% and with the public accounting for the remaining 57-61%. The public offer plus other shares issued for acquiring brokerages and to existing broker shareholders under the restructure underpin a market capitalisation at the upper end of its $545 million to $587 million forecast. With Austbrokers and insurers such as QBE and IAG outperforming the market so far this year, the outcome of the Steadfast float is highly anticipated. The inevitable comparisons between Steadfast and Austbrokers will only increase as Steadfast adapts to life as a public company, and time will tell whether its new direction will pay dividends for investors, its brokers and for Steadfast itself.
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Sign of the times: an excavator shifts sand following severe erosion on Gold Coast beaches in the wake of Tropical Cyclone Oswald
Bucking the global trend Australia’s catastrophe risks keep premiums rising faster than most other markets By Wendy Pugh
22
AUSTRALIA’S GENERAL INSURANCE premiums are likely to keep rising thanks to the country’s unique local market conditions, even as the global industry continues to travel a slow road to economic recovery. The latest Swiss Re Sigma study on global insurance points out that Tropical Cyclone Oswald in January and the Tasmanian bushfires of November/December have maintained insurers’ sensitivity to Australia’s catastrophe risks. That risk-sensitivity should help keep local market premiums on the rise, Swiss Re says. “The trend of favourable pricing is likely to continue due to better disaster awareness after the continuous run of natural catastrophe in recent years,” the report says of the Australian market. “Stable growth is expected in Australia, although growth in New Zealand will likely moderate from a relatively rapid pace.” Australian non-life premium volumes rose 4.9% in real terms last year to $US42.53 billion, while New Zealand volumes rose 2.9% to $US8.81 billion. The two countries, described by the Sigma report as part of the Oceania insuranceNEWS
August/September 2013
region, account for 2.58% of the global market. Price gains and benign claims levels in key lines helped Australia’s underwriting rebound from a $US343 million loss in 2011 to a $US2.6 billion surplus in 2012. Investment income also improved and, overall, Australian non-life insurers’ net profit surged by 85% to $US5 billion. The report says Australia’s premium growth is outpacing global gains as the international market makes a slower than expected recovery from the global financial crisis, with economic troubles in Europe persisting. Global non-life insurance gross written premium rose 2.6% last year to $US1.99 trillion following a 1.9% gain in 2011, but growth rates have yet to reach average precrisis levels. “A gradual rate hardening which began in 2011 is expected to continue and broaden in scope,” Swiss Re says. “However, rate increases will necessarily only be moderate since there is no capacity shortage and the weak economic conditions will constrain demand for additional insurance cover.”
News Ltd
% of global non-life premiums 100% 4 4 90% 13 35 8 11 9 4 80% 23 11 11 70% 30 10 30 60% 30 50% 26 40% 30% 20% 10% 74 57 52 41 36 0% 1962 1982 2002 2012 2023
forecasts
Premiums written by regions (1962 – 2023)
China Emerging Asia, excl China Non-Asian Emerging Markets Advanced Asia Western Europe North America, Oceania
Source: Swiss Re, sigma No 3/2013
insuranceNEWS
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23
Swiss Re describes Europe as “the problem child”, with European premiums declining again in 2012, driven by contractions in the UK, the Netherlands, Italy and Spain. Exposure growth was muted in Western Europe because of the weak economy. In the core markets premium gains came mainly from motor and property lines. The outlook is stronger in emerging markets where there is more economic optimism and increasing insurance demand. Emerging market premiums grew 8.6% last year, while advanced markets increased only 1.5%, but the slow pace still marks four consecutive years of gains since the financial crisis turbulence of 2008. In contrast to the west, Asian gross written premium is growing strongly, both in emerging economies and in developed markets such as Hong Kong, Japan and South Korea. Latin American premiums also made significant gains while in North America, which accounts for 39% of the world market, premiums increased 1.6% in the US and 2% in Canada. “Moderately increasing economic activity and improving primary insurance rates drove premiums up,” the Sigma report says. In 17 out of 29 advanced markets, premiums increased more than economic growth. The peripheral Eurozone countries underperformed the most, while the AsiaPacific markets overperformed.
Global industry profitability has lagged behind Australia’s turnaround, reflecting the weak international environment, particularly in Europe. Swiss Re believes stimulus measures introduced by governments to promote consumption are depressing interest rates. While profitability improved in 2012, underwriting results were still negative, with the average combined ratio globally 102%, compared to 105% in 2011. Underwriting results will continue to improve on rising premiums and subdued claims increases, while reserve releases are expected to taper off, according to Swiss Re. But the low investment returns will keep profitability under pressure. The report forecasts a brighter picture for insurance over the next decade as demand is bolstered by increasing urban populations, an expanding global middle class and rising wealth. Emerging Asia will substantially boost its share of the global market to 17% and China may become the second largest nonlife market behind the US with around $US480 billion in gross written premium. Taking an even longer view, Swiss Re says Africa may become an important part of the global insurance markets in the next 50 years. The rise of Asia will also continue, although the growth rate may slow and momentum shift from China to other emerging economies.
Non-life: real premium growth in 2012
No data -20% -20% to -10% -10% to -5% -5% to 0% 0% to 5% 5% to 10% 10% to 20% > 20% Source: Swiss Re Source: Swiss Re, sigma No 3/2013
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Blowing hot and cold Insurance leaders like some parts of the code of practice review, but certainly not all of it By Terry McMullan THE GENERAL INSURANCE CODE OF PRACTICE HAS BEEN A thorn – albeit a necessary one – in the side of the insurance industry since it was first mooted by the Insurance Council of Australia (ICA) 21 years ago. A code of practice is supposed to set the benchmarks of behaviour that companies agree to abide by. In effect, the participants regulate their own behaviour, and it’s that very important role which is a code’s greatest strength and its most obvious weakness. The simple fact is that no insurance industry leader is going to relinquish too much power to any central body, least of all one he can’t set the rules for. And if the central body is controlled by a cabal of his peers, every point in any proposed code is going to be poked, prodded, dissected and nuanced almost to the point of death. So it has been with the general insurance code. An example is the code clause that allowed insurers to ignore the rules on claims response periods in the wake of a catastrophe. But industry leaders change and are replaced by younger people with fresh ideas. Although it retains a number of long-serving stalwarts, the ICA board has undergone considerable change over the past few years, reflecting the generational change taking place across the industry. That may be why the latest review of the code is as interesting as it is. Certainly the reviewer, lawyer Ian Enright, enjoyed a looser rein than his two predecessors in 2006 and 2009. But then again, that may have been because the industry, under pressure after the Queensland floods of 2011, was more amenable to considering new ideas. This review report – the third since the code first appeared in 1994 – was launched without fanfare by ICA on August 2. Compiled after a 12-month review by Mr Enright, it goes further 26
insuranceNEWS
than any of its predecessors in making radical proposals that would – if they were to be accepted – move the code into being something that really could change the industry. Most notable of the 60 recommendations Mr Enright proposes is the replacement of the code compliance committee, a low-profile group that says little, with a far more powerful organisation to be called the Code Governance Body (CGB). But in setting out the required powers of the new body, Mr Enright appears to have gone a step too far even for the more adventurous members of the ICA board. Certainly the release of the report came with an ICA statement attached that attempts to spell out just what the insurers are prepared to concede and what they will dig in their heels over. Mr Enright says “code governance” emerged as the single most important over-arching issue for his review. “It is essential for the code to be set in a governance framework in which the governance body is independent, expert, informed and resourced,” he says. “The framework must be visible and accountable.” The proposed CGB would have a central committee made up of three independent members and one insurance industry and one consumer representative. It would have a “sanctions committee” comprised of three independent members only; a “promotion, education and training committee” made up of the CGB committee members plus representatives from industry and consumer groups, ICA, the Financial Ombudsman Service (FOS), the Australian Securities and Investments Commission (ASIC) and Federal Treasury; and a “policy committee” comprising the CGB members plus representatives from the industry and consumer groups, ICA, FOS, ASIC and Treasury. August/September 2013
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The governance body would source the resources and services it needs for its work under its charter from FOS. ICA’s opposition to the idea of a powerful independent oversight body is wrapped in praise in the same way that the fictional public servant Sir Humphrey Appleby would enthuse over a ministerial report moments before consigning it to the basement furnace. “ICA and its members agree that an enhanced and more independent governance body is an appropriate vehicle for compliance monitoring and sanctions,” the ICA statement says. “The separation of powers is a fundamental tenet of any well-functioning governance model, and ICA believes the general insurance industry’s framework for self-regulation of service standards is no different.” So far, so good. But then: “Taking into account Mr Enright’s comments on improving governance, ICA sees value in separating the roles of monitoring and enforcing code compliance from ICA’s role of developing the content of the code and attendant policies.” In other words, the industry will continue to set the direction and therefore the full effectiveness of the code. “ICA’s members believe it is important for ICA to retain the responsibility for developing industry policy, including code content. ICA has the experience, relationships and resources to enable it to consult widely with its members and external stakeholders, and to determine the appropriate framework for industry self-regulation under the code.”
“Concern is growing about access to general insurance for all members of Australian society.” Mr Enright’s reasoning behind a committee overseeing promotion, education and training gets short shrift, despite his observation that “the terms of the code are a clanging symbol only, if the performance of code participants… who work with customers and the community do not understand and implement the spirit and the standards in the code”. While he doesn’t point out that insurers have had nearly 20 years to get it right, he makes it plain he thinks a lot needs to be done. “The education and training that is currently being carried out is clearly not adequate for its purpose. I recommend an enhancement in the quality and quantity of education and training, including on financial hardship and assistance for those who are traumatised by natural disaster. “The Code Governance Body should also be tasked with involving and guiding code stakeholders in such programs.” But ICA says it has the resources and knowledge for the council and its members to “continue to take responsibility for financial literacy programs and staff education and training”. “ICA has already put in place significant projects to address consumer needs, including forming a Financial Inclusion Committee of industry representatives, developing the Understand Insurance campaign which is due to launch later this year, and operating the Consumer Referral Service.” Mr Enright identifies education and training as one of the three most pressing issues facing the industry. The others are financial illiteracy and financial hardship. “The breadth and depth of financial illiteracy in our community is one of our greatest challenges,” he says. “Recent research supports 28
insuranceNEWS
both the concern and the importance of progress to a solution. “Findings in recent reports that the insurance product disclosure regime has significant shortcomings are credible and persuasive.” He says relying on a different type and presentation of a disclosure is merely “an inadequate solution to a problem of an inability or unwillingness to read”. “I have recommended that the code standards should reflect a fuller commitment to financial literacy. The Code Governance Body should be tasked with involving and guiding code stakeholders in such programs.” The issue of financial hardship was the subject of a number of consultations and forums during the year-long review process. A working group took the development of the issue from those forums and worked with Mr Enright and advised him on a draft Financial Hardship Guideline which he is confident will receive widespread approval. In recommending a refurbished code written in plain English “that has principles, standards, guidelines and service levels” that would “give all stakeholders more consistency and quality of experience with general insurance”, Mr Enright emphasises that big challenges lie ahead for the Australian insurance industry that are “gravely more significant than the issues covered in my code review”. He lists them as: • Developing a built environment that reduces hazard exposures in the community, leading to a reduction in claims value and volume. • Changes in disability and accident compensation schemes. • Access to insurance and its affordability. “This issue has never been more problematic nor its solution more vital in the context of significant community risk but significant underinsurance,” he says. “There is a related and growing demand for simple products. “With greater public and political attention being given to equity issues and the larger numbers of people who are seniors or disabled, concern is growing about access to general insurance for all members of Australian society.” • The impact of regulatory change also concerns Mr Enright. He says the industry has been through more than two decades of constant regulatory change in prudential and consumer protection or market conduct regulation. “The number of reforms attempted simultaneously over a long time has stretched the resources of all stakeholders. It is time, in my view, for a reassessment of the business of regulation.” Two of the major reforms recommended by Mr Enright relate to enhanced service levels for dealing with claims and an improved internal complaints process for consumers. They are hardly surprising recommendations, and just as unsurprisingly ICA has embraced them with some enthusiasm. The council says its Code Review Working Group will use Mr Enright’s recommendations “as a basis for discussion of processes that are acceptable to both insurance companies and consumer representatives”. A draft revised code will be released for consultation by October. ICA says it will also consult with its members over the appropriate transition period, “to allow the general insurance industry time to put in place new systems and processes and provide proper training to employees and agents on their enhanced responsibilities under the revised code”. We may never know what debates and battles preceded the release of this report, but the up-front declaration of what the insurers won’t accept suggests Mr Enright’s preference for a code system more independent of the industry was as unexpected as it was unwelcome. The code the industry finally gets will be better than the one it replaces – government, public and regulatory pressure has already ensured that – but it’s hard to shrug off the suspicion that perhaps we’re missing an opportunity to do some things that would be really meaningful and game-changing. August/September 2013
Renaissance man Stephen Catlin may have built a multi-billion dollar enterprise but this entrepreneur remains keen to learn and is never afraid to try something new By Michelle Hannen
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August/September 2013
“What’s happened in Catlin is a group of people have worked together as a team. They respect each other, like each other’s company, are determined, creative and won’t take no for an answer.”
STEPHEN CATLIN IS EMBARRASSED TO discuss being crowned the UK’s Entrepreneur of the Year in 2011 – a fact that wouldn’t surprise those who know him. In a bid to downplay the accolade, the founder and Chief Executive of speciality property and casualty insurer and reinsurer Catlin says that meeting the other national winners in the World Entrepreneur of the Year final was a “humbling experience”. He adds – “just for the record” – that he did not win the global award, “nor did I ever expect to. Nor should I have, by the way.” Those familiar with Mr Catlin and the business he has built would also acknowledge that his award is both unsurprising and entirely deserved. They may not, however, know that it is all a bit of an accident – that Mr Catlin fell into a career at Lloyd’s in 1973 after a failed attempt at dental school, that his initial impression of the industry was that it was “a jolly great gambling casino” and that he used to walk into Lloyd’s “scared out of my wits every day”. After rising to deputy underwriter at Anton Underwriting Agency he founded Catlin Underwriting Agencies in 1984, a move prompted by the forthcoming sale of his employer. Mr Catlin says he could see himself becoming “a pawn in a rich man’s game”, and wanted to take control of his own destiny. So, at the age of 30, with capital of just £25,000 and a loan of a similar amount, plus a wife, a child, and a £45,000 mortgage, he struck out on his own. Today, with his business capitalised at around £1.75 billion, Mr Catlin is that rich man, though he is careful not to treat his employees as pawns. He says dealing with people with dignity “up the line, across the line, down the line, internally and externally” is a key requirement for all who work within his business, from the top down. The entrepreneur is also a strong advocate of intrapreneurship, a concept that encourages employees to operate as entrepreneurs within a company. “If you can employ people who have that attitude, it’s amazing what can happen. I mean what’s happened in Catlin hasn’t happened because of me, I can assure you of that. “What’s happened in Catlin is a group of people have worked together as a team. They respect each other, like each other’s
company, are determined, creative and won’t take no for an answer.” What has happened at Catlin is remarkable, and for a man in the business of mitigating risks, Mr Catlin is certainly not afraid to take them. At start-up, the business faced numerous risks, not least his lack of experience. “As each challenge comes your way you think, ‘oh my god, is this going to take me under?’ Then you find a way of it not taking you under and the company becomes stronger.” The business grew steadily but remained small, though Mr Catlin says “the first 15 years of the company’s life – albeit insignificant in terms of where we are today – are where we really laid the foundations”. Those foundations would set the business up for the massive global expansion that followed. In the mid 1990s, he recognised long before his contemporaries that London may not retain its historical position as the centre of the insurance world forever. “The attitude in London, particularly in Lloyd’s, is that it is your god-given right to seek business from around the world. It seemed to me to be entirely inappropriate and arrogant beyond belief. “It seemed to us if you wanted to be a player globally, rather than being selected against either on price or distress business or both, then you had to go local. So we decided 15 years ago that that’s what we would do. “We were probably writing $US250 million [of premium] at that stage, and I think most people thought we were completely barking mad.” He says the mindset of the company has always been one of embracing change, “so the concept of us not embracing change was almost unforeseeable”. The global expansion began with the establishment of offices in Singapore, Kuala Lumpur, Houston and New Orleans in 1999, but really hit its stride after the September 11 2001 terrorist attacks, using private equity capital ahead of an initial public offering on the London Stock Exchange in 2004, and taking full advantage of the post-9/11 hard market. The result is that Catlin’s “rest of the world” business now outstrips its London insuranceNEWS
August/September 2013
A scenario that keeps Stephan Catlin awake at night “Armageddon probably is something you and I have never thought of. Not just frequency, but nature. I mean what happens if you have the most appalling medical ailment to go through the entire world, and all air transportation is stopped, all shipping is stopped? “Therefore everybody has to start living off the resources they have to hand, both at a government level and at an individual level. What happens to currencies? What happens to stock markets? What happens to people? And can the insurance industry cope with that on its own? No, it can’t, any more than the banking system can or the taxman can or the government can. Is that likely to happen? Probably not. Is it vaguely possible? I think you’d have to say yes, it is – we just hope to god it never happens!”
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“I’m having to come to terms with people calling me a senior member of the marketplace. I still regard myself as a 35-year-old maverick.”
Tips from a top entreprenuer: • The good thing about life is you can learn from past experience. • Don’t ignore preconceived wisdom, but don’t be solely driven by it. • As each challenge comes your way you think, ‘oh my god, is this going to take me under?’ then you find a way of it not taking you under and the company becomes stronger. • Good businesses aren’t built in a day, and great businesses take even longer. • The concept of us not embracing change was almost unforeseeable. • If you can’t explain it to me from a commonsense perspective, I’m going to say no. • You have to lead from the front, and that means you’ve got to be there. • I learn more [about the business] by doing my day job in an office than I ever do by having a meeting.
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operations, with 58% of Catlin’s business written outside of London as of the first quarter of this year. “Prior to 9/11 we wrote $US430 million worth of premium, we had less than 100 staff, 97.5% written in London with three or four tiny little offices round the world. “Today we’ve got $US5 billion premium, 2250 people, and 60 offices in 22 countries. So it’s a different business to the one that was there 10 years ago.” While he acknowledges that many of the risks he has taken along the way have been “massive” he says that if Catlin had not expanded “we would have just been a runof-the mill Lloyd’s syndicate, probably wouldn’t have an insurance company at all; we’d just be part of the flow, desperately trying to differentiate ourselves”. Instead, Mr Catlin now finds himself at the helm of the largest syndicate at Lloyd’s, and his “hub and spoke” approach to going global is being imitated by none other than Lloyd’s itself, as part of its Vision 2025 project. Catlin’s joint venture at Lloyd’s with China Re – which incredibly was the result of a cold call he made to China Re Chairman Li Peiyu – has pioneered a way of doing business in the much-feted Chinese market that is also ripe for replication. When Mr Catlin speaks, the London market listens, a fact evidenced by the recent kerfuffle at Lloyd’s over the co-insurance agreement between Aon and Berkshire Hathaway. Mr Catlin was particularly vocal in his concerns about the underwriting controls in place under the deal, views subsequently echoed by Lloyd’s management who had initially welcomed the arrangement. It’s no wonder they listen. In his distinguished career Mr Catlin has held the positions of the Lloyd’s nominated director of its 1990s run-off vehicle Equitas, was chairman of the Lloyd’s Market Association, a member of the Council of Lloyd’s and a member of the Lloyd’s Franchise Board. Not bad for a once long-haired upstart with a penchant for quirky, animal-print ties, who landed his first job in the market through a sailing acquaintance. But he is clearly uncomfortable with the idea that his every move is widely watched, his every word widely regarded. “I’m having to come to terms with people calling me a senior member of the marketplace. I still regard myself as a 35-year-old maverick.” insuranceNEWS
August/September 2013
When Insurance News last interviewed Mr Catlin following the 2011 natural disasters in Japan, Australia and New Zealand, he expressed a hope that the market would handle the losses in a mature rather than a knee-jerk manner when it came to pricing. Reflecting on that hope, he says now that while “there were one or two quirks around, in the main I think the market did respond maturely and sensibly”. But while he says the market is displaying much greater discipline than in the past, he does not go so far as to characterise it as having grown up. “We’re under the microscope as an industry much more than we used to be, both by the regulators and the rating agencies, and by our investors as well,” he says. The prevalence of excess capital is a much-discussed factor keeping a lid on reinsurance pricing, but Mr Catlin is accepting of the reality that a range of investors play in the reinsurance space, attracted by potentially high returns. “I think too much is made of it. They run when it’s bad and they’re there when it’s good. The capital markets cut out the peaks and the troughs actually, and if they take out some of the volatility within the market, I don’t see that as being a bad thing.” He says the strength of support shown to cedants in some parts of the world following the recent catastrophes highlights the fact that the relationship continuity that underscores more traditional forms of reinsurance is not under threat from the fly-by-nighters. While hedge funds have had a presence in the reinsurance market for more than 10 years, pension and retirement funds are the latest investors to dip a toe in the waters, attracted by the potential for yield in today’s low interest rate environment. “I can see the argument why a pension fund should have some catastrophe exposure within its investment portfolio,” Mr Catlin says. “The nature of a pension fund is one of longevity. They have the ability to look at life that way, whereas a hedge fund doesn’t, so the dynamics of capital from pension funds is quite different to the capital that might come from a hedge fund.” Ever the opportunist, he says Catlin may even work with these alternative capital providers in future. “We would use them when we deem appropriate for some things.
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“I don’t want us to be known as being the best company in the world or the biggest company in the world. I want us to be known as a great company in the world.”
We don’t yet, but we might, as a company, act as a manager for them.” Mr Catlin says the lack of investment return is the “biggest strain” on the (re)insurance sector today, comparing a time where investment income would contribute roughly half of a company’s earnings to the current rate of around 15% – “if you’re lucky”. What this smaller buffer means for insurance companies is that they actually have to excel at their core business of underwriting, unlike in days gone by when Mr Catlin says some businesses were making their money “almost entirely on their investment income, and as long as they didn’t blow 105% combined [operating ratio] they could still make money because the investment rate was so high”. He says the low yields change the dynamics of the entire market, a reality that some businesses have yet to accept. “You cannot survive over time in the current environment unless you make an underwriting profit, full stop. It’s a marketplace and that means you’re going to have winners and losers over time.” But due to increased levels of industry scrutiny, he is not predicting an industry armageddon. “I think one of the differences now compared to say 10 or 20 years ago is the ability to cover up the fact you were losing money. “The regulators, the rating agencies, the investors are much more savvy now. The transparency is much higher too, which is a good thing in my view. The issues will surface more quickly, so hopefully they’re less serious at that stage.” Nevertheless, despite this gloomy market outlook, Mr Catlin does not subscribe to the view that today’s economic realities are here to stay. “I think interest rates will go up at some point, but it’s not going to be any time soon.” Modest about his success, he says much has been accomplished by being prepared to put common sense into action. “I have two very simple rules in life,” he says. “One is when you’re trying to decide whether something is right or wrong, how would you feel if it was on the front page of The Wall Street Journal or the Financial Times and you’re reading it in front of your mother-in-law at the breakfast table? If 34
42.4% UK 19.3% US 11.3% Bermuda 27%
International (Asia Pacific, Europe and Canada)
Breakdown of Catlin Group GWP by underwriting hub for the three months to 31 March 2013
you’re not going to feel good about that conversation, you probably shouldn't do it!” His second rule is to do nothing in business that you don’t understand. “If you can’t explain it to me from a commonsense perspective, I’m going to say no. If you can’t do that, how do I know whether you understand it or not?” In the two years since Mr Catlin last spoke to Insurance News, his Australian operation has grown “in staff, top line and bottom line” by about 50%, “which is about what I would’ve expected, frankly”. There are no upper target limits for the Australian operations or, indeed the entire company. “I wouldn’t want to limit its ability to go in any direction.” And the targets are not all financial. “I don’t want us to be known as being the best company in the world or the biggest company in the world. I want us to be known as a great company in the world. “Frankly, if Catlin can be perceived to be a great company I’d be very happy.” Change is a constant at Catlin, but to become a great company is “beyond embracing change,” Mr Catlin says. “It’s a mindset of: ‘Am I prepared to be creative, innovative? Am I prepared to question perceived wisdom? Am I prepared to think about doing something differently?’ That’s what makes a great company. “Good businesses aren’t built in a day, and great businesses take even longer.” insuranceNEWS
August/September 2013
To ensure success in a disparate global operation, he believes instilling a common culture and good communication are key. “If you’re going to be global and deal with a whole range of different cultures, backgrounds, race, religion, you need to have something which is common to all of you – which is the glue that holds you together.” At Catlin, that’s its core set of values: transparency, accountability, integrity, dignity and teamwork; and, of course, Mr Catlin himself. “You have to lead from the front, and that means you’ve got to be there,” he says, admitting to spending most of his time on planes these days. And, he adds, being there is not just about meetings. “When I’m travelling I spend 50% of my time on my day job. And the interesting thing about that is, people see me work, and I see them work. I learn more by doing my day job in an office than I ever do by having a meeting.” While many would tire of the travel, Mr Catlin says it’s “not too bad”. Luckily, he has a genuine interest in other cultures. “It’s very interesting going to see the world for yourself, because what you read in the newspapers and see on TV is not necessarily reflective of what is really happening. You need to see for yourself, and that’s a real privilege in itself.” So, some might say, is spending an afternoon in the company of Stephen Catlin.
Extinguished at last It’s been a bumpy ride, but Victoria’s fire services levy on insurance is finally consigned to history By Jan McCallum and Elizabeth Redman
VICTORIAN PROPERTY-OWNERS ARE IN FOR A SURPRISE OF sorts in September. Their council rate notices will contain a new levy to fund the state’s fire services, bringing to an end the era of insurance customers footing the bill. It also marks the end of two tortuous years for the insurance industry. People with home and contents insurance in Victoria’s country areas will save $120 a year on average, while those in metropolitan reas will save $50, following the abolition of Victoria’s fire services levy (FSL) on insurance from July 1. The State Government has run an advertising campaign explaining the change and emphasising that every Victorian property-owner will now pay their fair share. Much of the commentary has focused on households, but the removal of the levy from insurance will provide significant relief to businesses – particularly those outside metropolitan Melbourne who have, in the past few years, paid for major investment in the Country Fire Authority. The difficulties faced by insurers in managing the phase-out of the FSL have attracted much less – in fact, hardly any – public attention. Thanks to the lack of time allowed by the Victorian Government to manage the transition, much of the two-year changeover was dominated by confusion. Insurers introduced tapered rates, attempting to walk the tightrope between ensuring they collected enough FSL to cover their obligations while avoiding accusations of overcharging. The state’s Coalition government sometimes seemed more interested in sowing mistrust of the insurance industry than in setting a reasonable transition process. Rather than follow the results of similar transitions in Western Australia in 2003 and South Australia in 1999, where falling property premiums followed, the Victorian Government appointed former Australian Competition and Consumer Commission chief Allan Fels as the “FSL Monitor”. It backed his role with onerous measures designed to penalise any insurer that attempted to profit from the transition. In June Professor Fels called a public hearing to question insurers on premium rises – seemingly ignoring the fact that premiums around the country were rising in the wake of massive natural catastrophes, the adoption of near-universal flood cover, building cost inflation, rising reinsurance rates and falling investment income. Most of the insurers had already removed the levy altogether prior to July 1, and industry representatives vigorously defended their approach to the phase-out, with one explaining that they had, in fact, under-collected the levy required in recent years. IMA – a joint venture between NRMA Insurance and RACV Insurance – told the hearing that before the levy’s removal its building 36
insuranceNEWS
How premiums have changed for metro and rural insureds April 2012 (just after 10 percentage point rises in the levy) Country insureds
Metro insureds
Commercial Base premium Commercial rate
Plus GST
Plus stamp duty
$1,000.00 95%
10%
10%
TOTAL COST
$950.00
$1,000.00 54%
$540.00
$1,950.00
$1,540.00
$195.00
$154.00
$2,145.00
$1,694.00
$214.50
$169.40
$2,359.50
$1,863.40
$1,000.00
$1,000.00
Household Base premium Household rate
Plus GST
Plus stamp duty
46%
10%
10%
TOTAL COST
$460.00
28%
$280.00
$1,460.00
$1,280.00
$146.00
$128.00
$1,606.00
$1,408.00
$160.60
$140.80
$1,766.60
$1,548.80
From July 2013 All insureds Base premium Plus GST
$1,000.00 10%
$100.00 $1,100.00
Plus stamp duty
TOTAL COST
10%
$110.00
$1,210.00
(The above figures are based on rates charged by most insurers) August/September 2013
“It was just a stage-managed stunt to take the pressure off the Government for an ill-conceived transition between insurers and rates.”
insurance customers had already experienced 30% increases in premiums, and these are expected to continue. It expects contents premiums will decrease, while home and contents combined will decrease in most cases. This means 40% of customers will pay more in the next year, despite the levy’s removal. Insurance tax abolition campaigner and LMI Group Managing Director Allan Manning says that historically, “the FSL was so high it was preventing insurers from getting the rate increases they needed, particularly in farm insurance”. He told Insurance News the levy caused the withdrawal of two insurers from the farm insurance market because they couldn’t impose the 50% premium increases they needed to make the class profitable due to the high FSL charged on country businesses. Dr Manning describes the June hearing as “a government ploy”. “It was just a stage-managed stunt to take the pressure off the Government for an ill-conceived transition between insurers and rates,” he says.
Decisions made by the Victorian Government in the years leading up to the phase-out only exacerbated the confusion, he says. The Government had traditionally told insurers how much to collect in total, and the Insurance Council of Australia (ICA) would then commission an actuary to calculate the levy figure to add to premiums. This changed in May last year after the State Government warned ICA that this could be viewed as anti-competitive behaviour – a claim which compounded the phase-out confusion by deterring the insurers from managing the transition in a uniform way. Insurers were told to set their own rates, while the Government – in response to the recommendations of the 2009 Black Saturday Bushfires Royal Commission that were accepted by the former ALP government – significantly increased its investment in the Country Fire Authority and Melbourne Metropolitan Fire Brigade. Insurers’ contribution to the fire brigades increased by 17% in 2011/12, although the total figure masked much higher increases paid by country policyholders, with much of the investment used to fund new fire stations and fire trucks in rural and regional areas. The increases, which came in the years after the announcement that the FSL was to be abolished, further confused the issue, making the tax a difficult proposition for insurers, as well as for brokers who had to explain huge premium rises to clients who were getting no equivalent increase in their insurance coverage. Brokers are optimistically hoping that the removal of the FSL will help address the chronic problem of underinsurance, and there are some signs this is happening. Dr Manning cites the example of a plastics factory in Melbourne’s southeastern suburbs that was paying $30,000 a year in FSL because its high risk meant high premiums, which translated to a high FSL levy. It will now pay $3000 in property rates instead, Dr Manning says, adding that the company “used a good portion of the saving to get their insurance right”. But rather than spending their savings boosting their levels of coverage, many clients will simply pocket the difference, relieved to see one business cost reduced. The confusion surrounding the Victorian FSL transition has been blamed for a decision by the New South Wales Government to postpone its plans to reform the state’s emergency services levy, which provides about 75% of the services’ funding. Police and Emergency Services Minister Michael Gallacher told a Rural Fire Service Association conference that “we’ve taken a decision as a result of the submissions that were made, both verbal and in writing, to look closely at what is happening in Victoria”. He says further talks about the levy will be held “over the next one to two years”. “We have made it clear we need a funding model for our fire and emergency services that is sustainable and fair,” a spokesman for Mr Gallacher told Insurance News. In a discussion paper in July last year on the removal of the NSW levy, the state’s bureaucrats looked to Western Australia as an example of how to transition away from the tax. The paper suggests requiring insurers to reduce their surcharge on premiums by 1/365th per day to avoid incentives for consumers to delay the purchase of insurance. Tasmania continues to fund its fire services through levies on insurance, property and motor vehicles. New Zealand also collects an FSL.
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Game, Set, Marsh Marsh Australia’s John Clayton outlines the multinational’s plans to play hardball in the SME space By Michelle Hannen
MARSH IS ON THE MOVE. IN WHAT SHOULD RING AS warning bells in the ears of independent brokers, the multinational giant is gearing up for an assault on the small end of town with the imminent launch of a new SME brand, Marsh Advantage. A business which traces its origins back more than 10 years, Marsh Advantage was created as an internal business division when the company wanted to become more efficient at transacting the SME business it had on its books but had not particularly targeted. “We were actually transacting it the way we’d transact any other business, and it was pretty dumb,” says Marsh Australia Chief Executive and Pacific Region Head John Clayton. He was instrumental in building the SME model 10 years ago using a contestable web-based trading platform to transact with insurers. He says once it became more efficient, the SME broking business proved to be “quite profitable”, but it lacked a sales and distribution arm. “We were still essentially order-takers, with people internally servicing this business. But they weren’t proactively 40
going out there, pitching for new business.” An authorised representative model was chosen, and Marsh has quietly gone about building it to its current state of 60 authorised reps. Now the company is gearing up to get more serious in the SME space, with plans to double the number of authorised reps in the network and significantly grow its market presence. “That business has essentially been built from almost nothing to be quite a significant piece of our business today, but it’s still relatively small in terms of its overall market share,” Mr Clayton says. “We’ve proved we’ve got a good business model. We’ve proved we know how to do it. We’ve proved the profitability of it.” As a result, Marsh Advantage Insurance has now been established as a separate entity and sister company to Marsh, with a mandate for growth. The company is looking at its geographic footprint to ensure it is present in future high-growth local markets, such as those benefitting from the mining boom, rather than
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“This company will grow organically and, hopefully through some acquisitions, be a national brokerage in its own right, serving that SME lower-end to mid-market business and affinity business.”
legacy business centres. Strategic organic growth may involve the addition of complementary business models to the business, Mr Clayton says, and building the geographic presence it wants could involve “greenfield” start-up sites or even acquisitions – but not, he adds, at the prices brokerages are commanding at present. “It’s a strange environment out there at the moment, and our corporation has a view that this market is probably overheated in terms of the expectation of venders on pricing,” he says, attributing the situation to the acquisition activity by Steadfast. The Marsh SME offering is not aimed at micro-SMEs, which Mr Clayton characterises as businesses with less than 20 employees who need basic covers and little in the way of advice. Instead, Marsh Advantage will focus on SMEs that require a “fair amount of advisory”, he says. “This company will grow organically and, hopefully through some acquisitions, be a national brokerage in its own right, serving that SME lower-end to mid-market
business and affinity business.” The new entity and its Marsh Advantage brand – which Mr Clayton describes as “less corporate, more mumsy and dadsy” – will officially launch later this year. “It’s all designed to be very, very different from the Marsh corporate, high-end broking and consultancy approach,” he says. Of the high-end broking space in Australia, Mr Clayton has watched with interest the movement among broking staff, particularly from Aon to JLT. “I see all of that as a bit of a recipe for significant pressure on insurance pricing, and that’s probably not a bad thing from a client perspective but I’m not so sure how great it is for the broking sector.” While he sees the motivation behind some of the personnel movements as simply winning new business, he questions the likely success of the recruitment drive. “The motivation is to try and build some grunt in the large client or the corporate client space, and one of the ways they’re choosing to do that is to recruit some folks who have got some DNA associated with that.
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The Christchurch Effect The Christchurch earthquakes have undoubtedly had an impact on all companies operating in that market, but none more so than Marsh. Prior to the quakes its Christchurch office was housed in the Pyne Gould Corporation building, which collapsed in the February 22 2011 quake, killing three Marsh employees, with many more having to be rescued from the wreckage of the building. Mr Clayton is somewhat understated when he describes to Insurance News a “difficult period” for the company. “I’ve been in the meeting rooms, having a cup of tea and cake with people who were pulled out of that building. “Some of them saw stuff that no one should ever see in their lives. I saw the bruises on some of the people and I could see how they were battered mentally as well as physically. “It was very, very hard.” He applauds the resolve of the company’s Christchurch staff and says employee retention since the disaster has been good. Understandably, staff were concerned about the safety of the company’s new offices in the industrial area of Riccarton, but Mr Clayton says he and other senior staff use the offices and that has helped. Marsh has also conducted independent engineering reviews of all of its offices in New Zealand as a consequence of the disaster, which has also helped ease frayed nerves. “We believed we needed to do that just to get some level of understanding and comfort.” In terms of the company’s immediate response to the crisis, Mr Clayton says its business continuity plan “actually worked pretty well” – albeit not exactly to script. Communications were redirected to other offices almost immediately, allowing Marsh to be proactive in getting in touch with clients. And as earthquake claims began to mount, the company imported help from Australia and beyond. In terms of the insurance market, Mr Clayton says much has been learned about the potential complexity of claims following such an event. He says business interruption has been a particular challenge due to the prolonged period of disruption many businesses have faced – something that was unexpected. A lack of preparedness of businesses large and small in terms of their response to emergencies and their business continuity plans was also revealed. “I get surprised about the stories that come out and how unprepared people were,” Mr Clayton says. He says the demands on the industry were “enormous” during the quakes and in the period after, as the price of cover shot up and terms and conditions tightened. But Mr Clayton reports that the situation is changing and insurers’ risk appetite is returning to what was previously an extremely competitive market. “It’s still tight but at least it has relaxed to some degree and insurers are now writing property business more than they were previously.” Somewhat ironically, Mr Clayton says the Marsh Christchurch office is booming thanks to the increased risk awareness following the disasters. “We’ve got a unique problem that we’d actually like to continue to invest a bit more in [the Christchurch office], but getting people to go there is not easy.”
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Very, very hard: Mr Clayton reflects on the Christchurch earthquake which killed three Marsh staff
“What the return is, time will tell.” Marsh has largely sat the game out, as Mr Clayton is “delighted with our placement professionals and the folks we’ve got”. Senior Marsh staff have been approached in the recent raids, but the company has emerged largely unscathed thanks to its retention programs – although the price to be paid has at times been steep. He says current salaries and retention bonus have become “a bit silly. I just don’t think it’s sustainable.” Not one to shy away from difficult subjects, Mr Clayton has also recently been a voice of dissent in the flood insurance debate that emerged in the aftermath of the 2010 and 2011 flood events. He called for a flood reinsurance pool to help solve the problem of offering flood cover to high-risk properties. That approach was considered by the Federal Government but ultimately shelved. Mr Clayton says that while recent announcements about increased spending on flood mitigation programs are welcome, in his view the problem is far from fixed. “If we had the floods again we’re going to have the same problem, apart from the fact that people are now more aware of whether they do or don’t have flood cover – and perhaps they’ve had an option to buy it but they can’t afford it.” It’s understood his call for a reinsurance pool was supported by a couple of insurance company chief executives, but it seems they were unable or unwilling to break industry ranks and say so. He describes the Insurance Council of Australia’s 10point plan, released following the Brisbane floods, as “good, logical stuff”. But, equally diplomatic as he is no-nonsense, Mr Clayton concludes: “None of it actually gets to the heart of the problem. And the heart of the problem is you can’t take those existing assets and put them up on a hill.”
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N O I S S I M A N O N A M
e is wrestling it h W e v te S f hie ’ Association c rs e k ro B e c n ra et pressures rk a m d n a British Insu ry to gula f converging re o s s a m a h it w lan By Terry McMul
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insuranceNEWS
August/September 2013
AUSTRALIAN INSURANCE brokers feeling weighed down by the regulatory burden should spare an occasional thought for Steve White, the recently appointed Chief Executive of the British Insurance Brokers’ Association (BIBA). He’s a man who deals with the tough new regulatory regime in the UK and understands the subtleties of eurocrats. Every week he has to deal with a mass of inter-locking broker organisations, as well as regulators and politicians. He fights his battles on many fronts, dealing with a regulator that sometimes seems hell-bent on feeding brokers to the lions, while also dealing with a market experiencing dramatic change. When Eric Galbraith retired in May after a 10-year stint running BIBA, Mr White had been working in the association for nine years, most recently as head of compliance and training. As one board member involved in his selection told Insurance News, “we couldn’t find anyone nearly as knowledgeable and switched on as Steve; he was the benchmark through the whole search process”. A plain-speaking professional who has experience on both sides of the track – he has worked at major insurers as well as the General Insurance Standards Council and the Financial Services Authority – he understands what is motivating the new UK regulators, but doesn’t always agree with them. Consider this comment on the UK’s broker regulator, the Financial Conduct Authority (FCA): “They have an appetite and enthusiasm for supervision that’s pretty well unheard of around the rest of Europe.” He has a point. The FCA started operation on April 1, a
month before Mr White stepped into the top job at BIBA. The FCA is one of two new agencies replacing the Financial Services Authority. The other is the Prudential Regulation Authority. The new “twin peaks” approach pioneered by Australia means the two new authorities do much the same job as Australia’s ASIC and APRA. The FCA is responsible for the supervision of all regulated financial firms and the prudential supervision of those not supervised by the PRA. The FCA has taken to its role with considerable gusto, handing out multi-million pound fines to erring financial services companies. As BIBA explains in a recent circular to its members, the authority has set out to be “more judgement-led, forwardlooking and interventionist, with a focus on firms' business models and the potential risks that their activities pose to consumers and financial stability”. Mr White would probably feel more kindly towards the new regulator – last month he awarded it a B+ or C- for its first 100 days in operation – if the cost of compliance wasn’t so expensive and sometimes off-target. “The costs are direct and indirect,” he explains. “Direct costs of course are fees and levies. There are no actual indirect regulatory costs – it’s not an exact science and you’re never actually comparing apples with apples. “So the indirect costs are the costs the regulator forces upon you to do what he wants you to do.” The tough new approach to financial services stems from the 2008 global financial crisis, which was centred around financial houses of cards manufactured by London-based investment and banking houses. The implications of their activities slipped past the then-regulator.
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August/September 2013
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“The commissions model is under threat. I wouldn’t say it’s on the way out but there’s a threat it could be.”
Professionalism: To be or not to be… Professionalism and market recognition of the broker’s role are interlocking topics that preoccupy UK insurance brokers as much as they do their Australian counterparts. Mr White says brokers have to decide whether to lift their standards above the “minimal” regulatory requirements that govern them at present. Some 13,500 UK firms are licensed to sell personal lines insurance, and have the same basic licence as brokers – “despite that fact that most of them are motor dealers and caravan parks and boat yards, and so on”. “If we don’t lift our standards, then we have to say to our members, you’re no better in the eyes of the public than all the other people who sell insurance.” Coupled with that is the global problem of people not knowing enough about what brokers do. “The minute motor insurance pricing went from a pile of guides by your chair to a computer screen that guaranteed the price, the broker mindset changed to signs on their front window saying things like, ‘Cheapest prices in town’. “They stopped selling on what they were good at – that is, advice and all the other services they provide.” Mr White says a generation of potential customers “has never had any knowledge of what a broker does. We’ve been saying to our members for seven or eight years that there’s an education gap there for us to fill.” BIBA is also “holding ourselves up to the light” with a sixstream examination of its activities as a 21st century trade association. Research has established members believe BIBA has a role in helping to raise standards. “Professionalism in the UK is on the agenda, but the professional body, the Chartered Insurance Institute, has a chartered broker status now, which of course they’re promoting. “Our members are saying to us, we think it should be the trade association leading the raising of standards in our sector, not the professional body that covers insurers and loss adjusters and anybody else.”
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Today the barriers to entry to people wanting to work in financial services are higher and more tightly policed. What rankles with the British brokers is the fact that constantly developing regulation is an ongoing feature of working in the industry. “Look at the German market, for example,” Mr White says. “They have a registration process. So to use a nightclub analogy, they have a pretty tough door policy, but once you’re in there’s no floor policy. “Here we have a pretty tough door policy and the most draconian floor policy on the nightclub circuit.” In the tough new world of UK financial regulation, about 13,500 UK firms are licensed to sell insurance, but only 3500 of those are insurance brokers. Some 8000 others are mortgage brokers, independent financial advisers and even banks. The products each sells may be defined as insurance, but the types of products are very different. The insurance boundaries are therefore ill-defined. In March insurance brokers were hit with a £16 million levy from the Financial Services Compensation Scheme to pay for compensation claims for botched payment protection insurance claims – a class of business that is primarily sold by mortgage brokers, not insurance brokers. What BIBA members and Mr White face in the UK is a scenario Australian brokers whose memories go back as far as 2001 will remember, when the muchadmired Insurance (Agents & Brokers) Act 1984 was replaced with the “one size fits all” Financial Services Reform Act. But it’s when the discussion turns to the wider impacts of regulation that the feeling of déjà vu begins to really creep in. Mr White raises the subject of commissions, which since February have been banned in the UK for intermediaries who give advice on investment products. Much of the reasoning behind it is similar to Australia’s new Future of Financial Advice (FOFA) reforms, and just as in Australia, regulations intended
for financial advisers have the potential to affect insurance brokers. “The commissions model is under threat,” Mr White tells Insurance News. “I wouldn’t say it’s on the way out but there’s a threat it could be.” Complicating it all is the role of the European Parliament in Brussels and the enormous variety of views across the European Union’s 27 member countries. “The big threat obviously is Europe,” he says. “If Brussels passes a directive we have to follow it.” And in the 27 nations there are no two whose markets look identical. “You’ve got the northern Scandinavian countries, Finland and Denmark, which have banned commissions. But those bans weren’t anything to do with consumer protection; it was done at the behest of the insurers. It was totally in contravention of European competition laws, but they’ve gone ahead and done that anyway. “So that’s one extreme. On the other extreme you’ve got the likes of France, Germany, Italy and Spain – four of the five largest markets – who when it comes to general insurance are silent on how you are remunerated, let alone how much you are remunerated.” He points out that regulatory changes in the UK in the 1990s – when life insurance was placed under new controls and general insurance sales weren’t – led to the splitting up of most life and general agencies. “In large parts of mainland Europe you’ve got the same firm selling both types of product,” Mr White says. “And in some of those markets the supervisors think it makes more sense to have one set of rules that applies across the whole lot.” He points out that companies selling both life and general insurance products would logically tend to make their businesses work in a certain unified way. “And that’s where [a ban on commissions] may seep across. If you’ve got 8000 brokers over in Europe doing it one way, they
August/September 2013
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“If they lump all the conduct together into one place, then the argument comes forward that if you’ve got one conduct supervisor, why don’t you just have one set of conduct rules?”
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can go to the regulator and say, those 3500 [British brokers] in that corner over there, they’re not playing by the same rules.” There are three different European supervisors for financial services: the insurance and pension supervisor, the banking supervisor and the investment supervisor. That arrangement is up for review, and Mr White fears they may follow Australia and the UK in adopting the “twin peaks” model, which splits financial services regulation into prudential and conduct. “If they lump all the conduct together into one place, then the argument comes forward that if you’ve got one conduct supervisor, why don’t you just have one set of conduct rules?” While the commissions model is under threat, Mr White says the British Government is defending the UK’s “disclosure upon request” position, presumably because it works. Another example attracting some interest in Australia is the banning within Europe of gender as a guide to calculate insurance premiums. But Mr White points out that this wasn’t, in fact, a regulatory matter. “It came out of a European Court ruling based on the wording of the EU’s Gender Directive,” he says. “No one ever sat down and said, we’re going to ban gender rating on insurance.” A Belgian consumer body used the directive to challenge the way a policyholder’s gender could be used to set premiums. “The court which heard the case couldn’t judge whether it’s right or wrong to base insurance premiums on gender. All they can judge it on is the wording in the directive. And the wording in the directive was enough for them to say, no, it actually breaches the directive. So it wasn’t a political or a policy decision.” Nor does he regard the British regulator’s sudden interest in brokers’ conflicts of interest as anything particularly sinister. On July 2, Mr White said BIBA members had nothing to fear in a decision by the FCA’s Head of General Insurance and Protection, Simon Green, to August/September 2013
conduct a “thematic review” into conflicts of interest. He says BIBA has been expecting such a review “for a number of years”. Then there’s the issue of life insurance specialists moving back into general insurance. Just as in Australia, the qualifications required for selling life insurance and associated products are higher than that for general insurance. And the rules are tougher and more intrusive. That makes the general insurance market attractive to life insurance specialists. It’s a lot for a humble general insurance broker to cope with, but Mr White says UK brokers nevertheless are still the leaders in personal lines insurance distribution – although pressure from direct sellers is intensifying. BIBA is prepared to get on the front foot on behalf of its members. For example, several years ago the increasingly influential UK aged lobby identified problems with the elderly being able to obtain travel and motor insurance. The association “got heavily involved in that process” and told the Government the system wasn’t broken but older people would be unlikely to find what they wanted via a direct market source like a price comparison site. “There are plenty of places out in the world where you can get them insured, so we said to the Government that this is a sign-posting issue, not a case of the market being broken.” BIBA then developed a “Find A Broker” service, which points customers that are struggling to find insurance to a broker in their area who can help them. The service handles around 400,000 enquiries a year – 90% via a website and the rest via a call centre. “It’s quite an impressive setup,” Mr White says. “Typically they’ll get an older person with a serious medical condition who wants to go on a holiday. “The mainstream insurers, if you go to them directly, won’t really entertain that. But obviously we’ve got specialist members that can step in and help.
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“We need to get back to that ‘trusted adviser’ status, and that’s the direction we’re travelling in.”
Taking over the meerkat British brokers still hold 45-50% of the country’s personal lines market, but their dominance is under attack from a meerkat named Alexandr Orlov. The highly entertaining computer-generated cartoon character, created for the Compare the Market online comparison site – which is ironically owned by broking company (and non-BIBA member) BGL – has “destroyed all the other personal lines direct brands”, Mr White says. The meerkat campaign has been running in the UK since 2009 and has gained massive recognition. Mr White says research conducted by one major UK personal lines insurer found its own brand recognition in the UK had collapsed in the face of the meerkat campaign. “When kids go to the zoos in the UK now, the only animal they want to see is a meerkat. The ad wasn’t aimed at kids, but this is the power that it has. “Brokers couldn’t afford the money to compete with that sort of advertising so we have to play it more subtly.” Subtlety included complaining to the regulator which eventually produced “quite a lengthy piece of guidance on these sites”. “The comparison sites would say they’re not selling insurance, they’re just displaying prices for customers to then go off and deal with. But the regulator decided they were arranging insurance and some of them were also advising because they had a star-rating system that equates to the suitability of the product to the customer’s details. “That guidance has been all the way round the European supervisors now.” BIBA believes the comparison sites skew consumers’ decision-making because policy features are often unclear and can result in people having to pay large excesses they weren’t aware of. It also believes says the sites produce inaccurate claims experience statistics and are more open to fraud. Mr White says the swing to consumers buying personal lines policies based entirely on price makes it very difficult for brokers to compete.
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“We’re now looking to try and expand the service because it’s worked incredibly well with older travellers and older motorists, and now we think it could help with flood insurance and young drivers, for example. “We don’t advertise this as just being for old people – this is for any risk that you’re struggling to place.” When it comes to commercial lines, Mr White admits he’s concerned about the increasing commoditisation of insurance for SME businesses. “The cover isn’t going to be anything like as good as it could be if you went to a broker. In the UK we’ve seen packages now being punted directly and online with 12-month indemnity periods on consequential loss. No broker would sell a 12month period – it should be 24 months minimum. In the personalised market, the broker’s first use of technology was around quotations.” He says that brokers must invest in technology and systems that will make them more efficient and therefore more capable of competing with the direct market. And they must adapt to the changing world of the customer. He says the FCA is providing some lead in this by making the point that sellers have to deal with customers “as they are, not as we want them to be”. FCA Chief Executive Martin Wheatley uses the example of eBay to illustrate this point. He says eBay customers setting up a new account have to agree they have read and understood the terms and conditions. “If you actually print out the terms and conditions they are almost as long as War and Peace,” Mr White says. “Nobody, bar a complete nutter, will have printed it out, read it and understood it – so why do we persist in the ‘I read it and understood it”? That wouldn’t stand up in any court of law. “And this is the problem we’re having. The UK regulator is waking up to the fact that the more information you give the customer, the less inclined the customer is to do anything with any of it. August/September 2013
“Whereas the European view is almost the opposite – it’s give the customer everything and let him pick out what he wants. “We need to get back to that ‘trusted adviser’ status, and that’s the direction we’re travelling in.” He also believes the pace of change in the UK broker market will accelerate, especially as principals in their 60s and even 70s retire. “Some of them have a succession plan, some don’t. Some of those brokerages will be acquired by some of the consolidators.” But he also sees brokers who have been absorbed by consolidators or other brokerages eventually “bursting out” and forming new brokerages. “In terms of professionalism, yes, there is that move forward towards being more professional. It really depends what you mean by professional and who’s going to be judging it, I guess. Will the customers perceive us as being more professional? That’s the litmus test. “Brokers in this country are pretty entrepreneurial; they do react to situations, they reacted to the growth of direct selling, they reacted to the growth of aggregators. “But the worry is what happens to [brokers] in the commercial space – how that aligns with ombudsman views and court decision on disputes. What we do have in the UK is the situation where insurers are getting tougher and tougher on claims, and that inevitably leads to a test of the brokers’ [professional indemnity] insurance.” He says the ideal for brokers is to be “ring-fenced” from other intermediaries by the regulators. In return brokers would have to make sure that they comply both in spirit and in practice. “We did some research in the UK two and a half years ago which showed that insurance brokers in the UK make a direct and indirect contribution of 1% to UK GDP. That figure carries an awful lot of weight with the politicians. “It does add weight to your case.”
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D&O
Closer to clarity
Insurers, company directors and executives now have more certainty about D&O cover following a NSW court decision By Jan McCallum
A FRAUGHT PERIOD FOR THE insurance industry moved a step closer to its conclusion in July when the New South Wales Court of Appeal ruled that insurers can pay defence costs under directors’ and officers’ liability (D&O) policies ahead of any third party’s claim on the policy. The action stemmed from the collapse of plantation company Great Southern, which has led to two separate shareholder class actions against directors and executives of the company. Lawyers for both groups asserted a charge over the insurance held by eight of Great Southern’s directors and executives, arguing defence costs should not be paid because they would erode any payment that may become due to the shareholders. This led to a dispute between the eight executives and their insurers, as well as with the Great Southern claimants. The insurers asked the court to clarify who was entitled to any funds payable. They were prompted by the 2011 Bridgecorp decision, when the New Zealand High Court ruled that a receiver had first claim on D&O funds when the claim might exceed the amount of cover. Versions of New Zealand law have been adopted in NSW, the Northern Territory and the Australian Capital Territory so the impact of the Bridgecorp decision immediately spread here and forced insurers to redraft D&O policies to provide separate funds for defence costs. The Great Southern executives held cover in primary and excess policies with Chubb, Liberty Mutual, Allianz, AIG, Axis, QBE and Wesfarmers/Lumley, bro54
kered by Aon’s Perth office. The insurers asked the court for declarations on the interpretation of section 6 of the NSW Law Reform (Miscellaneous Provisions) Act that would enable them to pay defence costs. The primary policy covered both D&O liability and professional indemnity with a maximum liability of $30 million each, or $60 million combined. In ruling for the insurers, the five judges say a third-party claimant should not be in a more favourable position than an insured when an insurance policy is intended to cover defence costs as and when they are incurred. “An insured should not be required to wait until after the question of its liability to a claimant has been determined before it can be indemnified for such costs,” the court ruled. Allens Partner Andrea Martignoni says the Great Southern judgement gives insurers, brokers and directors confidence that policies will operate as intended. Insurers can provide defence costs without the risk of eroding any third-party right and later having to pay out twice. The decision means there will be less money available to pay out any legal settlements or judgements in favour of third parties – the concern that led to the legislation being written in the first place. The judgement describes the provisions of section 6 as “somewhat enigmatic”, but says the law was enacted to prevent insureds receiving a payout and either disappearing or frittering away the money, or entering a corrupt arrangement with an insurer to deprive a third party of a payment to which they were entitled. But the court says it has to weigh this against whether section 6 operates to deprive an insured of a “vital benefit” of having defence costs paid to defend a claim. It says the insurers would not be acting reasonably if they did not allow the executives to incur costs to defend themselves. Although the insurance money could all be spent on defence costs, if the insured is found liable they will still have to pay the claimant out of their own funds. insuranceNEWS
August/September 2013
AIG Commercial Institutions Manager Jeremy Scott-Mackenzie says the judgement will allay directors’ fears following Bridgecorp, which raised concerns that people would start refusing to serve on boards. “There are now more than 700 laws in Australia that directors have to traverse that impose liability on directors,” he told Insurance News. “And we have better-funded regulators and the emergence of litigation funders running class actions.” The judges also made an important territorial ruling in favour of the insurers, who argued the case should not be heard in NSW. The shareholder actions are being fought in Victoria and Western Australia, which do not have laws comparable to that used for the NSW case, so the argument about who is entitled to D&O proceeds cannot be run in either of those states. The judgement notes that Great Southern was headquartered in Western Australia and all its executives lived and worked there. It says Great Southern has no special connection with NSW, and section 6 should only apply to claims brought in that state, so it has no application to the Great Southern proceedings. The judges add that even if the NSW law did apply, and there was a charge under the shareholder actions, that charge would not extend to the insurance payable for defence costs before there was any judgement or settlement of the shareholders’ claims. The judges conclude section 6 is “undoubtedly opaque and ambiguous”, and that the NSW law on which it was asked to rule “should be repealed altogether or completely redrafted in an intelligible form” in order to achieve its original purpose. A spokesman for NSW AttorneyGeneral Greg Smith told Insurance News the minister is aware of the issue and is being briefed before deciding whether to take any action in response to the court’s call. Meanwhile the original Bridgecorp decision, which has since been overturned, is set for its final avenue of appeal in the Supreme Court of New Zealand, with the hearing due to start on October 17.
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Been there, seen that Berkley Re’s Peter Nickerson reflects on a long and influential career in the Australian reinsurance market By Michelle Hannen
“I USED TO WALK INTO A ROOM AND I’D know everybody at the function. I go along now and I might only know 50%.” Such is the change that Peter Nickerson has witnessed in the Australian reinsurance market over his 35-year tenure in the industry. Mr Nickerson – who helped found Berkley Re in Australia almost six years ago and was formerly the company’s chief executive – says his recent elevation to Executive Chairman of the company is, in effect, the company’s succession plan in action. After turning 60 in April, he says, “it just hit me one morning – it’s time”. In his new role he will be removed from the dayto-day operations and spend more time mentoring younger staff. “We’ve got some terrific people,” he says. “We’re really pleased where we’re positioned.” Aside from mentoring, generating growth is on the agenda in his new role, with a focus on product and market development. And following a recent fact-finding mission to the UK and US to visit other Berkley businesses, Mr Nickerson is brimming with new ideas. “The plan was to see what they do; see if we could learn things from them. I was particularly looking for new products, new ways of doing things, new processes.” Now, he says, it’s time “to put some meat on those bones and see what we can change here from the things that I learned on that trip”. He is coy about revealing details of the new products the local business may introduce, but says they will be “predominantly in the casualty space”, which is the market that Berkley Re focuses on in Australia. On the state of the local reinsurance industry today, Mr Nickerson has seen enough during his time in the market to be philosophical. He says things have settled down considerably since the 2011 Australian floods and the Christchurch earthquakes. “Those sort of events have always been around. They’re things that we always think at the time [are] game-changers and they’re not,” he reflects. “Markets tighten for a period and then they soften. “It doesn’t matter what gets thrown at this industry, we bounce back and we bounce back very, very quickly.” He says that following the catastrophes of 2011, companies changed their attitudes to risk in the 56
region, models were updated and in some cases capacity was restricted. But the local reinsurance market has now returned to normal, with prices coming off at the recent July 1 renewals. “The losses were horrendous, but you’d never know that they had them,” Mr Nickerson says. He says brokers that placed property and casualty treaties at the June 30 renewals “didn’t have any difficulty at all, placing the programs to 150%, 200% and more at times”. “That just gives you an indication of how much support there is out there.” Some restrictions still remain in New Zealand around earthquake exposure, and Mr Nickerson says that “maybe New Zealand hasn’t bounced as well as it should”. “But all the big players over there can access treaty capacity and, in fact, there’s some discounts on renewal this time around even for New Zealand.”
“There’s nothing like old-fashioned broking and I think at some point the broking houses will recognise that and start to get their people out and about again.” On the casualty side of the business Mr Nickerson says there is “price adequacy”. “We think we’re still getting fair money for the exposure that we assume,” he adds. At the recent renewals, that translated to reductions of around 5%, “maybe a bit more in some cases”. But he says this must soon come to an end, due to reserve releases starting to dry up and the persistently low interest rate environment. “The discounts are still going on but I would hope they’d stop fairly shortly. I would hope that we don’t see some naive capacity come along and slam the programs. I hope that we’d have a chance to get a fair price for our product.” insuranceNEWS
August/September 2013
Berkley Re’s new Executive Chairman Peter Nickerson: reinsurers bounce back very, very quickly after catastrophes
Peter Nickerson’s career timeline 1972-1979
1979-1992
1992-1996
1996-2006
2006-2007
2007-2013
2013-
Manager, Marine, Engineering and Construction, GIO of NSW
Treaty Manager, ReCOA (General Re)
Executive Director, Minet Burn & Roche
Chief Executive Australia and New Zealand, Employers Re
Head of Client Management, Swiss Re
Chief Executive Australia and New Zealand, Berkley Re Australia
Executive Chairman, Berkley Re Australia
“Excess capital in the reinsurance sector will stay there for as long as the returns in our business are better than other places that they could put their money.”
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grams on price. That’ll put strain on everybody and the end result will be some loss of jobs.” And while business is not migrating to JLT Re – yet – “it’s early days”. Mr Nickerson also laments the lack of service he believes brokers are currently providing in the local market. “It’s become all too easy to send in submissions via email. Even in a small market like Sydney, brokers have decided not to get off their bums and come in with the slips.” He attributes the change in working habits to convenience, laziness and the drive for efficiency, but warns that brokers get better deals “when they get out and about”. “The good brokers are a dying breed. There’s nothing like old-fashioned broking and I think at some point the broking houses will recognise that and start to get their people out and about again.” He says that old-fashioned approach is something that continues to be instilled in staff at Berkley Re Australia. “We tell staff, ‘Shake the tree, shake the tree, shake the tree’! It’s amazing what you get when you go out and see someone.” It’s not the only old-school thing about the way Berkley Re does business. Mr Nickerson says the Berkley strategy of having a local presence in the market rather than servicing markets from offshore locations is “a very old-fashioned model”, but it is exactly that which attracted him to the organisation in the first place. “It’s the reason I joined them,” he says. “That’s what I’ve been used to in my career, and it’s been an absolutely fabulous fit.” Perfect match aside, Mr Nickerson is looking forward to his semi-retirement, where he can continue to do business, inspire younger reinsurance staff and even sit back a bit and contemplate what has been – by any measure – a stellar career. “Most of my mates are retired,” he says. “It’s time I spent a bit of time with them on golf courses.” insuranceNEWS
August/September 2013
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Mr Nickerson says the well-documented excess capital in the reinsurance sector is affecting rates, but again, he’s seen it all before. “It’ll stay there for as long as the returns in our business are better than other places that they could put their money,” he tells Insurance News. “Maybe this year it’ll get tested at some stage if the losses occur.” Having witnessed much market change, Mr Nickerson remembers that 20 years ago there were more than 30 reinsurers licensed and based in Australia. But takeovers, corporate collapses and market exits have taken their toll – and not necessarily for the worse. “We now have fewer than 10, but we have more capacity.” He says despite the loss of two-thirds of the reinsurers who used to operate here, the local market remains well serviced. Some business is still necessarily written offshore, either due to its size, companies seeking diversity to spread their reinsurance risk or as a part of global programs. “You can’t get away the big cat programs here in Australia – that’s not going to happen. The smaller ones always could, but they like the diversity and the brokers like the diversity as well.” One recent development in the local reinsurance broking market that has him scratching his head is the recruitment drive undertaken by JLT Re to rebuild its treaty broking team, which has resulted in a defection of staff from other major brokers. “It’s created a domino effect where the other traditional broking houses have to replace those people, but for me the economics in this don’t work,” he says. With a finite market for reinsurance in Australia, Mr Nickerson says the only way JLT Re’s new team is going to be able to attract business is by reducing fees. He says the result will be “having to attack pro-
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A long road back
The Volkswagen recall saga appears to have damaged the company in Australia. Some insurance and PR experts say it doesn’t have to be like that By John Deex
“I JUST DO NOT HAVE CONFIDENCE IN this brand any more,” says Associate Professor Joy Chia, a public relations expert who was about to drive onto a freeway when her Volkswagen suddenly lost power. She is far from alone. The German car manufacturer has faced a barrage of criticism for the way it handled the recent recall of more than 25,000 vehicles in Australia. Complaints about certain models using the direct-shift gearbox (DSG) have been rumbling for years. Volkswagen issued two recalls in the United States in 2009, but it was the inquest a few months ago into the death of 32-year-old Melissa Ryan in Melbourne that made the issue front-page news here. The hearing was told the victim’s car, a 2008 Volkswagen Golf, inexplicably lost speed on the Monash Freeway and was hit by a truck. Although Ms Ryan’s car had manual transmission, not a DSG, reports of the inquest sparked hundreds of other drivers to come forward with similar complaints. The inquest into Ms Ryan’s death was in May, two months after Volkswagens in Japan and China were recalled. But Volkswagen Australia initially resisted calls to do the 60
same – and was hit by an outpouring of anger as a result. A recall was eventually announced on June 11, but for Volkswagen it appears to have been a case of too little too late. Recent figures from the Federal Chamber of Automotive Industries show Volkswagen sales in Australia were down 19% in June, compared to the same month of last year, while the overall car market was up by 5.5%. Some models, such as the Golf and Jetta, were down more than 50%. And the repercussions could be wider still, according to insurance industry experts. AIG Australia Liabilities Manager Andrew Spurr says the recall will be “very expensive” for Volkswagen Australia. “Following the recall of hundreds of thousands of vehicles around the world, Volkswagen’s seeming lack of consideration for Australian drivers experiencing the same issues has had a severe impact on the organisation’s local reputation and indeed its bottom line,” he told Insurance News. He says car companies typically hold significant self-insured retentions for product liability and recall insurance, but “safety has insuranceNEWS
August/September 2013
to be their number one consideration”. “Volkswagen will no doubt come under scrutiny to determine whether the cause might be traced back to the vehicle being defective, and whether they were aware of the defect in these models and failed to recall them in Australia. “There are obviously implications for product recall coverage, but also personal injury claims under the product liability coverage.” Mr Spurr says insureds need to fully understand their product liability exposure from an injury or property damage perspective, and manage the risks associated with it. Consideration should be given to the type of product they manufacture and distribute, usage and target market, and geographical spread. Regulatory issues such as labelling, warnings, ingredients, origin of ingredients and parts, batch-testing and quality assurance also need to be taken into account, because what may be legal in one country may be banned in another. “Quality control is essential,” Mr Spurr says. “The risk management process is critical to ensure safety, quality and consistency,
Reuters Volkswagen Chief Executive Martin Winterkorn warns shareholders the company is facing another tough year ahead. The carmaker began recalling certain models in 2009 but recalls in Australia did not begin until 2013
whether on a single or multiple product risk.” He says recall and product liability covers are “important considerations for an overarching risk management strategy for any business”. “From AIG’s perspective, it is important to ensure the client has the right coverage and crisis consultants in place to provide specific advice regarding exposure. “A pre-incident review of recall plans and procedures can assist in minimising the potential impact of any adverse publicity and subsequent reputational damage in the event of an incident occurring.” Russell Toll, the National Manager Placement Services for Willis Australia, says the Volkswagen recall issue is a reminder of “the importance of having a well-considered insurance program with adequate breadth of coverage and sufficient policy limits”. “Many manufacturing companies consider and purchase product liability insurance which will indemnify them for their legal liability to compensate a third party who suffers a personal injury or property damage arising from the use of their product,” he says. insuranceNEWS
August/September 2013
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“It is one thing to have a loss paid for by your insurer, but quite another to ensure that your brand, image and reputation are not damaged in the market – damage that could take years to overcome, if it can be overcome at all.”
But fewer purchase insurance that covers their own loss should they need to repair, replace or recall a product from the market. These product recall/guarantee policies can be designed to cover the manufacturer’s costs resulting from recalling products that are in the market – as well as the cost to repair or replace the defective products. In some cases loss of profit suffered by the manufacturer can be covered, and financial loss suffered by third parties or customers. “Based on media reports it appears that Volkswagen faces potential exposure to both third-party loss and first-party loss,” Mr Toll says. He says problems may arise in terms of indemnity being granted under a product liability policy if a knowingly defective product is sold. “Many product liability policies in Australia also require the insured to take reasonable precautions to trace, recall or modify any products containing any defect or deficiency the insured has knowledge of or has reason to suspect,” he says. “Such issues can also become underwriting considerations for future insurance policy renewals. “There is also then the question of whether punitive and exemplary damages could be awarded against the manufacturer. Generally these damages are not covered by insurance.” Mr Toll says insurance cover is “vitally important” to the continuity of a business when an event occurs that causes a loss. “It is intended to soften the impact on the balance sheet and is generally extremely effective in doing so,” he says. “However, all insurance policies contain terms, conditions, exclusions, deductibles, limits and sub-limits, and to this extent there is always the possibility for the balance sheet to be impacted to some extent.” He agrees with Mr Spurr that there is no substitute for good risk management and quality control and that this sits hand-in62
hand with a well-structured risk transfer program. “It is one thing to have a loss paid for by your insurer, but quite another to ensure that your brand, image and reputation are not damaged in the market – damage that could take years to overcome, if it can be overcome at all. “When purchasing product recall insurance, the insured should carefully consider which products are to be covered by the policy to ensure that a recall doesn’t occur on a product that is not covered,” Mr Toll says. “A lack of sufficient insurance coverage has the potential to influence the way in which an insured conducts a recall program, which could be in a less than desired manner.” Craig Rowsell, the Regional Manager for Lloyd’s specialty insurer Newline Australia, says understanding the role of car distributors is crucial when underwriting such risks. “Local distributors in Australia typically enter into a distribution agreement with an overseas manufacturer,” he told Insurance News. “It is absolutely vital to understand this distribution agreement to know whether there are any insurance implications that may materialise and be assumed by the distributor as a direct result of this distribution agreement. “Distributors might have agreed to indemnify the manufacturer for all claims relating to the sale and distribution of the products – and the exposure for distributors here could be very significant. “We do see a lot of these overseas manufacturers with appropriate liability insurance in place. They can usually extend the policy to provide vendor’s cover for the distributor. “Any claims that come out of the sale of the product would then be directed back to the manufacturer’s insurers. “We need confirmation that the manufacturer has cover in place, the limits are adequate and that coverage has been extended to provide cover for products sold by the distributor.” insuranceNEWS
August/September 2013
Timeline August 2009
Recalls of more than 65,000 DSGequipped Volkswagen vehicles in the US after owners reported a loss of power while driving.
March 2013
Almost 400,000 Volkswagens recalled in China following an exposé by China Central Television.
May 2013
The recall was extended to Japan, affecting another 91,000 cars.
May 2013
The inquest of Melissa Ryan, who died after her Volkswagen stopped suddenly on the Monash Freeway in Melbourne, takes place. The hearing leads to a flood of complaints from other owners.
June 2013
More than 25,000 vehicles are recalled in Australia.
July 2013
Figures show Volkswagen sales for June slump 19% compared to the same month last year.
But Mr Rowsell says problems occur if local distributors see an opportunity to enhance sales with a new product, and focus purely on top-line growth without properly considering the additional responsibilities now assumed via the distribution agreement. “When we are insuring these risks we make it a mandatory requirement to go through a process to understand all exposures that exist for the local distributor. “If we are insuring them from a fullblown manufacturing perspective, we certainly want to know about it.” He says understanding such information is critical for the insurer to be certain it is always providing the broadest possible cover.
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“We needed to see the chief executive make a statement with heartfelt concern and genuine intention to deal with the situation.”
AIG’s Mr Spurr says effective handling of public relations in a product recall situation is also paramount. “Honest, prompt and informative communication with stakeholders is key to managing the situation successfully,” he says. “Toyota did a great job in managing their reputational risk when they were faced with multiple global recalls on numerous models a couple of years ago. Toyota’s reaction led to the regaining of consumer trust, allowing the company to return as a marketleader. “Volkswagen, on the other hand, will have a very challenging time trying to alter the public’s perception of their brand, which can be a very difficult thing to do.” Professor Chia, who lectures in public relations at Melbourne’s Monash University, has experienced the Volkswagen crisis personally and professionally. She was driving her Volkswagen Polo home from work and was about to enter a major highway near the university when the car “lost power”. “I managed to chug to a service station and after some time the car seemed to work again. But it was not a good experience, and even the best defensive driver would have had little hope.” She says a worldwide recall of all Volkswagens with the problem should have taken place as soon as the problem was identified. Professor Chia told Insurance News Volkswagen should have also communicated far better with owners of its vehicles. “The most important decision would have been to apologise, be prepared to support and compensate loss, and be honest about what has happened, what has been done to overcome the problem and to assure customers that they are safe on the roads,” she says. “We needed to see the chief executive make a statement with heartfelt concern and genuine intention to deal with the situation. Take care and value your customers – then 64
the reputation has soul and substance. “Reputation is going to suffer when people’s lives are in danger, and any company that does not realise this will lose market share.” David Hawkins, the Managing Director of Melbourne-based strategic communication consultants Socom, says Volkswagen has forgotten the guiding principles of crisis management: be prepared, be proactive and be proud. “You have to make sure you have a crisis plan in place – a decision-making framework,” he says. “Then, if there is a crisis, the most important thing is to be proactive. That way you have a far greater chance of managing things through the media. If people start finding out things from other sources it can spiral out of control. “And finally, you have to be proud of what you are doing.” Mr Hawkins says Volkswagen “didn’t seem prepared” for the DSG crisis; nor did the company seem prepared to deal with the extent of the crisis. “They didn’t heed the warning signs. They were not proactive. They might have been able to deal with this through regular services, but instead they were forced into a recall. “I certainly don’t think they can put their hand on their heart and say they are proud.” Volkswagen spokesman Kurt McGuiness insuranceNEWS
August/September 2013
confirmed the costs of the recall would be covered by self-insurance. “The recall process for Volkswagen vehicles globally is initiated by Volkswagen AG in Germany, and the cost is covered by the factory,” he said. “Of course, concerning any actual repairs to recall-affected customers’ vehicles, there is no cost to the customer for this.” In response to suggestions the company’s brand and sales had suffered, Mr McGuiness said: “Our focus is on our customers and the future. Volkswagen has been operating in Australia for 60 years now and customer safety and satisfaction have always been our highest priorities. “We understand the recall process may be inconvenient for some of our customers and we apologise for that. “With regard to June sales figures, while we noticed a drop in Volkswagen passenger vehicle sales, Volkswagen Commercial Vehicles had its best month on record.” From those comments it could be inferred that Volkswagen’s response is far from contrite, and the company may still be underestimating the impact of the recall. A long-time Volkswagen customer, Professor Chia exemplifies the issue. “I am now no longer keen to have another Volkswagen, and this was my third.” If others feel the same way, it is this loss of trust which holds the greatest potential for long-term damage to the brand.
companyNEWS
Making an impact Suncorp is banking on its new smash repair strategy to deliver savings and reshape the repair industry By Michelle Hannen
Q-Plus in numbers 150 cars per week $500 per car average saving 10 days average processing time
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SO REPRESENTATIVE OF THE SUNCORP cost-saving, efficiency and simplification strategy is its latest motor repair innovation, Q-Plus, that the company recently held an investor day at the facility. Stockmarket analysts, who are far more used to seeing the inside of conference rooms, were given a tour of the facility’s operations, from mechanical pits to painting bays, to put a more human face on the organisation, Suncorp says. But the numbers would have also been hard for the investors and analysts to ignore. Q-Plus – which at 1600 square metres is about the size of the Melbourne Cricket Ground – is able to repair 150 cars a week with an average saving of $500 per car, thanks to the effective use of the latest technology, slick, streamlined processes and seamless workflow management. Sitting in the southwestern Sydney suburb of Riverwood, the facility opened in April. It fixes “heavy hits” – non-driveable, structurally damaged cars. The business is a Suncorp majority-owned joint venture between the insurer and smash repairer Daniel Zammit, who previously ran New South Wales’ largest smash repair business, Scientific Motor Body Works, which was founded by his father. Q-Plus came about after Mr Zammit approached Suncorp with his plans for the facility, following the insurer’s earlier joint venture in the scratch and dent sector. Capital SMART (Small and Medium Accident Repair Technique) Repairs, a Suncorp majority-owned joint venture with insuranceNEWS
August/September 2013
smash repairer Jim Vais, was launched in 2010 and now has 23 locations around Australia. Suncorp Personal Insurance Chief Executive Mark Milliner says that in both cases, the joint venture approach is no accident. “One of things we recognised with this was that we’re an insurance company, we’re not a smash repair business,” he said. “If we try to own it and operate it, then we probably wouldn’t be very good at it.” In developing its new approach to the smash repair business, Suncorp has focused on the end customer’s key desire – to get their car back faster without compromising on the quality of the repair. “Our customers told us they wanted more consistent, quality repairs with faster turnaround times,” Suncorp Group Chief Executive Patrick Snowball told the analysts. “This joint venture and investment in the smash repair industry delivers for customers as well as providing scale and cost savings for the group.” Capital SMART Repairs turns around cars in an average of 1.5 days, compared to a wider industry average of three to five days. “It’s quicker now to get your car fixed than your dry-cleaning,” Mr Milliner says with a grin. The business achieves an average saving of $400 per vehicle and repaired 90,000 cars in the year to June 30. At Q-Plus, standard repairs will be completed in an average of about 10 days – around half the time taken by other repairers. The Q-Plus process sees cars assessed for suitability by the Suncorp claims team when
companyNEWS
Revolutionising smash repairs: Suncorp’s new heavy hit repair facility is around the size of the Melbourne Cricket Ground
a claim is lodged, based on the brand they are insured with. The facility only handles repairs for Suncorp’s general motor brands AAMI, GIO, Suncorp, Apia and Bingle. The team also assesses the type of damage that has occurred, whether the policy features a choice of repairer option, and the brand of car. Once suitability is determined, the vehicle is towed to the facility, the damage is assessed in detail and if the vehicle is repairable, a repair plan is devised. Parts are then ordered, the repairs carried out and the vehicle either collected by the customer or returned to them at no additional cost. Suncorp is the largest user of smash repair services in Australia and the new approach to its smash repair supply chain is part of a simplification program that will see it deliver $225 million in savings in 2014/15. But the efficiencies and cost savings are not at the detriment of staff development. There is a strong emphasis on training in both businesses, with Capital SMART Repairs to open a training academy later this year and Q-Plus set to employ 50 apprentices once it is operating at full capacity. That will make Q-Plus the largest employer of smash repair apprentices in the country. The approach throughout the new facility is one of environmental consciousness, with Q-Plus collecting rainwater off its vast roof to recycle for washing cars, while there are on-site cardboard compactors for recycling packaging. Scrap metal is also recycled. Suncorp organises the repair of 500,000
cars a year and the Capital SMART Repairs and Q-Plus joint ventures will account for around 22% of that volume. The remainder is still outsourced to the wider $3 billion-plus car repair industry, a market typified by around 5000 small businesses and – occasionally – shonky practices. The struggle to reduce smash repair supply chain costs and find efficiencies has been a source of constant frustration to insurers. Some independent smash repairers held a small protest last year against Suncorp’s increasing push for faster and cheaper repairs, and inevitably, Suncorp’s strategy will divert business away from existing repair-
ers, a fact that Mr Milliner does not shy away from. “We’re now probably the biggest smash repair business in the world in terms of turnover,” he says. “I think we’re reshaping the smash repair industry.” While there are no plans for other QPlus sites yet, Mr Milliner does not rule out expanding the concept to other Australian cities. “If things go well and they function properly it makes sense to continue to do it, but we’re fairly conservative. We make sure things work and get the results first, then roll it out.”
Driving efficiencies: the site can process 150 cars a week
insuranceNEWS
August/September 2013
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companyNEWS
CGU removes crop guesswork: After Harvest cover gives farmers peace of mind when calculating yields CALCULATING CROP INSURANCE coverage can be as hard to predict as crop yields themselves. There’s a fair bit of guesswork involved each growing season and farmers have to buy their crop insurance based on expected yields and then hope that factors such as the weather deliver the expected result. Even with the opportunity to make two or three revisions during the season, the risk of underinsuring or overinsuring the crop remains. But CGU, which is a veteran rural insurer that built its reputation in country areas working closely with farmers, has put some deep thought into making crop insurance more aligned to the actual result at harvest. The result is an extension to its existing crop insurance cover. After Harvest cover provides the option of an adjustable provisional crop yield estimate. CGU Head of Sales and Distribution Andrew Beer says After Harvest allows producers to amend their final provisional declaration to what they actually harvested. “They don’t pay a premium if they declare more and the crop isn’t as good as they thought it would be,” he told Insurance News. “If they have a better year they are able to adjust upwards, so it works both ways.” Mr Beer says the product matches the sophistication of modern harvesting equipment, which can report crop details down to yield per paddock, so producers have accurate data quickly. It enables farmers to select an agreed value per tonne for each crop – within reason – and CGU guarantees the value will be paid in the event of a claim, even if the market value of the commodity has dropped. “This is one way in which the CGU policy provides certainty to customers and is a considerable benefit for those growers who have forward sold their crop,” Mr Beer says. The option also reduces the potential for underinsuring or overinsuring, as final figures are based on the achieved result, subject to limits. CGU designed the cover extension after discussions with farmers and brokers. 68
Anchored in Australia: AIG now offers its flexible yacht insurance cover for local clients
AIG sails into the pleasurecraft market: The global insurer’s new Australian yacht policy offers customised protection AIG PRIVATE CLIENT GROUP CUSTOMERS in the US, UK, Hong Kong and United Arab Emirates have been offered yacht insurance for some time. Now it’s Australia’s turn. Targeting high net worth individuals, AIG’s new Australian policy covers all types of yacht and watercraft risks. Recognising that customers’ needs vary between different types of vessels, AIG offers customised protection, and also considers clients’ cruising plans – whether it’s for trips close to home or around the world. “We saw a significant opportunity with the introduction of a specialist yacht insurance solution to the Australian market,” AIG Australia Head of Private Client Group Neil Shackleton said. “So many high net worth clients want comprehensive cover across all of their assets including home, jewellery, art, wine collections and, of course, watercraft.” The main sections of cover are property, protection and indemnity, and uninsured boaters coverage for bodily injury caused by an unidentified or uninsured vessel. But AIG says if a peril isn’t specifically excluded, then it’s covered. Property covered includes the yacht – meaning its hull, machinery, fixtures and fittings – its contents, all other items used in insuranceNEWS
the operation or navigation of the vessel, fine arts and personal effects. Additional product features include large limit coverage capacity, the capability to provide worldwide property and liability coverage and access to the group’s concierge-level claim services. “Combining cover in one bespoke portfolio has tremendous benefits for both client and broker, including exceptionally broad tailored protection, one key underwriting contact and a single renewal date,” Mr Shackelton says. “This is backed by the high levels of personal claims service our clients and broking partners have come to expect.” There are no limits on the size or value of vessel it can insure. And the value is not subject to depreciation at the time of claim settlement. In fact, AIG agrees on a value with clients at the start of the policy, rather than settling claims for the yacht’s market value at the time of loss. It also provides art collection management and loss prevention consultations at the client’s home. “We have already had some great early success and are looking forward to building on our existing worldwide reputation in this specialist market,” Mr Shackleton says.
August/September 2013
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companyNEWS
Calliden moves into new markets: The insurer’s agency business introduces fresh ISR and A&H product THE TEAM AT CALLIDEN’S AGENCY business has been busy lately, with new products hitting the market in both the industrial special risks (ISR) and accident and health space. For the commercial middle market, the company has launched new ISR Mark IV modified property insurance policies and general liability wordings. Calliden will use the brand names Domain, Stronghold and Merchant to initially target property-owners, warehousing and wholesaling businesses, and retailers. Once established, it will expand to other industry sectors. The products were developed in consultation with LMI Group, are underwritten by Great Lakes Australia and will be supported by a dedicated middle market team. Group Executive Agency Services Mike Hooton says the launch of Calliden’s middle market products “provides intermediaries with a genuine alternative to the traditional ISR players”.
“Our modern approach means brokers will have access to both property and liability through the one underwriting team, supported by access to pre and post-sales online tools.” Calliden has also teamed up with Ace Insurance to add corporate accident and health products to its portfolio. It has launched five new products into the space: business travel, group personal accident and sickness, individual personal accident and sickness, journey accident and voluntary workers insurance. Ace will underwrite the products, and Mr Hooten says the arrangement “brings further choice to the Australian intermediated accident and health insurance market”. Calliden will directly manage any queries or requests from its intermediary network, while the products will be distributed to brokers via Ace’s e-placement online insurance solution. Claims will be managed by Ace.
Loaded up: warehouses are among Calliden’s target markets for its ISR Mark IV policies, under the new Stronghold brand
To be absolutely sure: Austagencies and CGU team up to offer a new product in the surety bonds space INSURANCE WAS BUILT ON A PROMISE to pay, and that promise lies at the heart of a new underwriting agency established by CGU and Austbrokers-owned Austagencies. NewSurety has opened for business to underwrite non-bank surety products, which cover the purchaser should a third party fail to fulfil a financial obligation to them, such as fulfilling the terms of a contract. Although the surety bonds market in Australia is still relatively small, CGU’s Chief Underwriting Officer Darren Maher says the product has a big future. The joint venture between Austagencies, which will manage NewSurety as an authorised representative of CGU, which will underwrite 70
the products, was developed in response to an upswing in the use of surety bonds over the past two years, particularly in the construction and engineering sectors. Products will include bid bonds, performance bonds and maintenance bonds specifically tailored to each customer. Bid bonds cover a bid or tender process to ensure that a client will actually enter into a contract if their bid is accepted. Performance bonds back up obligations during a contract period, providing security against default or non-performance. Maintenance bonds are used to support a client’s post-completion obligations during a warranty or latent defects period, usually lasting for 12 months post-completion. insuranceNEWS
August/September 2013
Mixing business and pleasure: Zurich’s new SME travel policy can be added to any of the company’s business insurance products
Zurich targets travel: New SME product recognises that smaller businesses have different needs SMALL BUSINESSES CAN NOW BENEFIT from real-time travel documentation and instant cover with Zurich’s new SME travel product – Business Travel insurance – being available online through Z.streamXpress. The travel product can be taken out as a stand-alone policy or added to any business insurance policy. The online platform also allows businesses to extend the pure leisure travel cover to other insureds at the touch of a button. Michelle Hay, the Head of Zurich’s SME Xpress Underwriting Centre, says the innovation saves those who are covered under the policy from the expense and inconvenience of taking out further individual retail travel policies at different times through the year. The policy includes cover for unlimited overseas medical expenses, personal accident and sickness, loss of deposit and cancellation and curtailment expenses, lost, stolen or damaged baggage, and political and natural disaster evacuation. It also includes a vehicle excess waiver and access to Zurich Assist, and is serviced by a dedicated local claims team. Ms Hay says the SME travel product was developed in recognition of the fact that smaller businesses have different needs when it comes to travel insurance. But it’s based on Zurich’s Corporate Travel policy for mid-market and corporate customers. “We have been able to use it to tailor an offering which targets just about any business where travelling either domestically or overseas is necessary, with a focus on the SME customer,” she says. “The cover is very easy to place and comes at a competitive price.” While it was developing the SME product, Zurich took the opportunity to speak to brokers about its corporate travel offering. Based on their feedback, many of the SME product features will be incorporated into the corporate policy.
peopleNEWS
60
years and not stopping
John Duncan embraced change early to put a diamond shine on a distinguished career By Michelle Hannen
John Duncan: joined the insurance industry in 1953 and still going strong Opposite: Changing times: father and son compare rating technologies
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insuranceNEWS
August/September 2013
peopleNEWS
PERHAPS ALMOST AS REMARKABLE AS JMD Ross Chairman John Duncan’s longevity in the insurance industry is the fact that in that time he has only ever worked for two companies. After beginning his career with Farmers & Graziers Insurance in 1953, Mr Duncan left in 1982 to join the-then JMD Insurance Services, a brokerage that was established in 1979 by Mr Duncan’s wife, Mary Anne, after she got an agency with F&G. Mrs Duncan ran the office while he went out on the road to see clients, and at that stage the brokerage had 85% personal lines business – a far cry from the commercial brokerage and Lloyd’s coverholder it is today. The couple’s two sons, John Jnr and Michael, both followed their parents into the insurance industry, despite – Mr Duncan says – his best efforts to dissuade them. JMD Ross Chief Executive John Jnr joined the family business in 1988, after stints in London as a Lloyd’s broker and at an international brokerage. Michael is based in Singapore as the Chief Executive of Global Specialty Lines for Asia and the Middle East for UK insurer RSA Group. Mr Duncan is clearly proud of their achievements and admits he’s now pleased with their chosen careers. The business became JMD Ross in 1988 when director Tim Ross joined and bought out Mary Anne’s share of the company, followed by his brother, fellow director Sandy Ross, who bought into the company in 1991. In 1994, JMD Ross joined Austbrokers, a move Mr Duncan describes as “outstanding” as it gave the brokerage the capital it needed to continue to grow. “Without that, JMD Ross would be entirely different,” he says. “We would have merged with somebody.” Mr Duncan, who still goes to the office daily, oversees a portfolio of commercial and high net worth domestic business for the company, in conjunction with account manager Claire Wakeham. His chairman’s duties – which he describes as “onerous” due to the “unbelievable” level of compliance and regulation – also take up considerable time, a far cry from days gone by. “When we kicked off it was just open slather, we didn’t really worry about compliance,” he recalls, with board meetings held at home around the dining room table. He keeps fit by attending the gym twice a week and playing the occasional game of golf, and stimulated by reading and travel-
ling with Mary Anne, who retired from the company in 2007. He says that when he turned 60, the then standard retirement age, “it didn’t really cross my mind to retire”. “I loved what I was doing and I still do,” he proclaims. In 60 years, Mr Duncan has seen a lot of change in the world of insurance. Aside from the broking of personal lines, he remembers the days of tariff-rating, a brokered workers’ compensation market and a time before package covers, when multiple risks had to be insured using separate policies. Mr Duncan singles out the Insurance (Agents & Brokers) Act of 1984 as something that changed the face of broking, by legally requiring the separation of broking and operating bank accounts for the first time, a move that “weeded out” a lot of unscrupulous competitors. He also provides a fascinating insight into the evolution of technology in the insurance industry, recalling the introduction of the telex machine. It was not the most sophisticated of devices, where a misplaced number could see information land in the wrong hands, such as the time a top secret US Air Force document strayed into his office and ASIO came to collect it, seeking reassurances that he had not read its contents. The fax and then the computer superseded the telex, with the brokerage early to embrace the new technology in 1984 as the proud owners of a $25,000 Onyx computer system. Mr Duncan says technology has been beneficial in freeing up brokers’ time to focus on growing the business and servicing their customers, and cites the advent of electronic placement services as the biggest change in broking he has witnessed. In a statement that may go some way to explaining his longevity in the workforce, Mr Duncan says change must be embraced because “otherwise you go backwards”. Still up to date with technology, he is active on email and Facebook. But he says it is old-fashioned values, rather than modern advances, that are the secrets to his success in the broking world. His first golden rule, to “always treat clients not as a policy number but as a person”, is the reason he has some clients he has looked after for 45 or 50 years, John Jnr says. He says his father has an excellent memory for names and important events in insuranceNEWS
August/September 2013
clients’ lives, such as marriages and births. But despite the longevity of the relationships, Mr Duncan Sr says these long-term clients are not friends, and he always takes care not to blur the line between business and friendship. His second golden rule, to “always be available for clients, 24 hours a day, seven days a week”, marks out a man who had a basic modern business truth worked out well ahead of the field. While an around-the-clock approach to work is commonplace these days, it has not always been the case. But even when work was considered strictly a 9-to-5 pursuit, Mr Duncan always gave clients his home number for after-hours access with the small concession that “we’d take the phone off the hook for dinner”. With insurance products having become increasingly commoditised, he attributes much of the company’s success to a serviceoriented approach – an ethos he has instilled across the JMD Ross business, in a world where far too many clients “only hear from their broker five minutes before renewal”. As for the future, Mr Duncan has no plans to retire. But he says he intends to be “sensible” about his eventual exit from the industry. “I have an arrangement with my wife and son that they’ll tap me on the shoulder when it’s time,” he explains. Let’s hope that’s no time soon.
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Vero serves up brokers to Lions Lucky Queensland-based brokers were treated to a chance to train with the Brisbane Lions AFL team, thanks to Lions co-major sponsor Vero. In May, 30 brokers, along with Vero business development managers, engaged in practice drills with Lions representatives including coach Michael Voss and senior players Jonathan Brown, Jed Adcock and Daniel Rich. The brokers also had the opportunity to mix freely with the footy stars as they exercised at the Gabba ground. Vero National Manager Market Management Gabriele McDonald says the day was a huge success and Vero is hoping to make the training experience a regular event.
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Zurich scores big for autism charity Zurich and its business partners raised $90,000 for autism awareness at a function in June. The night was organised by Zurich Head of Commercial Distribution Anthony Pagano, with the proceeds going to the Ricky Stuart Foundation. Zurich’s executive team joined about 200 business partners for the cocktail function. Celebrity guests included rugby league luminaries Ricky Stuart, Andrew Johns, Steve Roach, Paul Sironen, Brett Mullins, Ben Elias, Dean Pay and Mark Coyne. Funds were raised through a charity auction which included Zurich corporate member hospitality for game three of the NSW v Queensland rugby league State of Origin at ANZ Stadium; a celebrity Pro-Am at Terrey Hills Golf Club with former Australian cricket captain Mark Taylor; lunch with “the Wolf of Wall Street” Jordan Belfort at a Sydney restaurant and a radio 2GB advertising package.
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peopleNEWS Queensland professionals mark their success Ah, Queensland – beautiful one day, catatstrophic the next. Brokers and insurers working in the state have been through the good and the bad together, and the Council of Queensland Insurance Brokers’ (CQIB) traditional Queensland Day celebration is a time to relax and reflect just how much has been achieved. Some 260 guests enjoyed a cocktail evening and the panoramic views from the Brisbane Convention Centre Sky Room. President Sean Bemrose thanked guests who had travelled from interstate, north Queensland and the Darling Downs. “The industry should be proud of its support of Queenslanders, especially in their time of need,” he said. Mr Bemrose also acknowledged the CQIB Young Professionals team for the evolution of their Career In Insurance program, which involves visiting schools to introduce insurance as a career option. “While in its early stages, this ongoing work is very important for our industry.” The night was topped off by awards presentations. The Allrounder Insurer of the Year Award, voted on by CQIB members, was won by Allianz Australia for the third year running, while the runner-up was Vero. Allianz also took home the Claims Service Award, CGU won the Domestic Insurer Award and UAA the Underwriting Agency Award. The Mick Lambert-Barker Award, a new prize to recognise an individual for outstanding service, went to Heidi Brasell from CGU.
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Allianz welcomes new Blue Eagles Allianz thanked its premium brokers at Blue Eagle roadshows around the country between April and June. Ten new brokerages were welcomed into the Blue Eagle fold, including three each from Victoria and Queensland, two from New South Wales, and one each from South Australia and Western Australia. Guests enjoyed cocktails and canapés at Kings Park in Perth, Ayers House in Adelaide, and pitch-side at Allianz Stadium in Sydney. In Melbourne, brokers enjoyed dinner at Bluestone Restaurant, while in Brisbane brokers had dinner and a tour of the historic XXXX Brewery and Ale House. In total,127 brokers had the chance to meet Allianz staff who run the Blue Eagle program, as well as learning about enhancements to the Young Eagle program. Information about the company’s workers’ compensation and marine and transit offerings was also provided.
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peopleNEWS UAC expo draws big broker crowds The Underwriting Agencies Council (UAC) is breaking records around the country with its expos, which showcase to brokers the wide range of alternative and specialist insurance products the agencies offer. Held in conjunction with the National Insurance Brokers Association (NIBA), the Brisbane expo last month featured more exhibitors than UAC has ever previously achieved, surpassing even the Melbourne and Sydney events. More than 300 brokers came to meet 60 exhibitors. Prior to the expo, 82 young professionals attended a special breakfast. The expo concluded with a lunch, at which NIBA named the winners of the state finals of the Broker of the Year award and the Warren Tickle Memorial Award for young professionals. Beenleigh’s Parmia Insurance Brokers took home the double, with director Danny Gumm being named Queensland’s broker of the year and his colleague Natasha Burr taking out the young professionals award. They are pictured right and below. Both will now go on to be judged for the national finals at the NIBA Convention in Melbourne in October.
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peopleNEWS 500 brokers visit Melbourne expo Melbourne’s Crown complex played host to the National Insurance Brokers Association-Underwriting Agencies Council (UAC) joint expo in May. The event attracted more than 500 brokers who visited the 58 exhibitors, and also included a young professionals breakfast. A lunch which followed the expo featured advertising creative Dan Gregory, a regular panellist on ABC-TV’s The Gruen Transfer, whose wit proved a winner with the sellout crowd of 480 professionals. UAC says it has received great feedback on the expo. “All our members have said it’s the best one there’s been in Melbourne for a few years,” Chairman John Iles said.
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maglog »
Sam Pentecost Contributor
EXHIBIT 1: Lloyd’s of London is a hotbed (I use the word advisedly) of over-sexed and over-paid brokers and underwriters getting it on and carousing through the night, according to a racy new novel by former Lloyd’s broker Victoria Neville. Thursday Nights, Monday Mornings reveals the racy underbelly (pardon the use of that word) of the London insurance market. It’s a kind of 50 Shades of Lloyd’s, peopled by such characters as Tony the Philanderer (a broker, natch) and underwriter Sarah “Shagger” Smith. When these characters aren’t living it up at posh restaurants they’re appreciating each other in long paragraphs of panting purple prose. There are also some handy technical hints offered by Ms Neville from her 21 years as a Lloyd’s broker. A textbook it’s not, but.
Maybe there’s something to be said for the way most people end up in insurance. Very few of us finished high school with a burning ambition to work here. Yet once you’re in, you’re usually in for life. Because there are so few barriers to entry and because there are so many different ways to join, we’re a varied bunch. As individuals we mainly suit the jobs we do, and collectively we do a very good job. There are very few posers in insurance (Oh, okay, there are a few… you know who you are, Figjam!); we understand each other pretty well and there’s plenty of respect among rivals. So while we’re all hardedged and gritty with the business of transferring risk, we’re also a bunch of soft and gentle spirits who appreciate the support of others. The following snippets are offered as supporting evidence:
EXHIBIT 2: We all love a good office romance story, and few people could see these two together at the AIMS Conference in Honolulu in May without feeling the need to smile. Broker Casey Hall moved to Melbourne from Perth in 2009, joined Austbrokers Phillips, and after many hesitations about office liaisons eventually agreed to a date with director Mark Van Der Haar. She recently became Ms Van Der Haar. While they’re both busily pursuing their business ambitions – Casey has set up shop as an authorised representative of Austbrokers Phillips – they still have plenty of time for each other. Nice.
EXHIBIT 3: Here’s IBNA Chairman Gary Gribbin and Austbrokers Chief Executive Mark Searles getting up close in Honolulu, proving yet again that partnership is also about friendship, especially when the venture is joint. It reminds one of that Karen Carpenter song about “strangers in many ways”. No, on second thoughts perhaps you’re right – it doesn’t.
EXHIBIT 4: As we’ve already established with Exhibit 1, insurance people are horny little devils. These Aon types made that abundantly clear recently when they shed their office clobber for more interesting gear as part of a scavenger hunt organised by CGU. This exhibit merely illustrates what we already know: the insurance industry knows how to have fun. Our hellish types from Hades are Najibi Bisso from CGU and Brett Batson, Kylie Moody and Giselle Levens from Aon.
EXHIBIT 5: Brokers go to lots of conferences where they absorb words like energy, dynamism, action. Sometimes all that seizing of the day clashes with the energetic seizing of the night that preceded it, at which point the presence in the Steadfast Convention exhibition hall of NTI’s Heavy Recovery vehicle suddenly makes complete sense – as does a soft and sympathetic shoulder.
The moral of all this? Insurance people like (and occasionally love) other insurance people. That as individuals we don’t take ourselves too seriously. That we enjoy working and celebrating together. And that, all in all, we’re pretty much like everyone else out there. Just better-looking. 86
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