GOLDEN AGE: Opportunities for insurance as Asia booms LONDON LIFE: Australians at the centre of insurance REINSURANCE: Will the glut of capital harm the industry?
The long road back How QBEâ€™s John Neal is turning the global insurer around October/November 2013
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Contents 6 Newsmakers » 10 On the road to recovery » QBE Global Chief Executive John Neal talks to Insurance News about the insurance giant’s tough journey back to growth.
20 Capital, catastrophes and champagne » The reinsurance industry’s Monte Carlo talkfest is over for another year and the impact of excess and alternative capital was the hottest topic in town.
22 The case for resilience »
Investing in safer communities that can live with extreme weather remains a hot topic – but is all the talk actually getting us anywhere?
28 Against the tide »
While its competitors are banking on new underwriting facilities to build wealth, JLT remains set on putting clients first.
60 Opening the floodgates? » Insurers may be forced to tighten acceptance of flood risk following a Queensland court decision.
62 Flexibility for the building industry » SUA relaunches iConstruct.
62 Easy does it »
Updating policy documents has never been easier.
64 Towering achievement »
30 That sinking feeling »
It’s not a new risk, but the potential costs of liquefaction have been largely ignored – until now.
34 Taking it slow »
With much of its remediation work complete, Lumley is ready to bulk up again with the right kind of brokers.
38 The Asian opportunity »
Has the golden age finally arrived for insurers venturing into Asia?
42 Global power, local focus »
AIG’s Asia chief puts his faith in the strength of relationships and a long-term view.
48 Life and work in London »
To many Australian professionals it’s the centre of the insurance universe, the place where the big deals get done. Meet some successful expatriates who work in the Square Mile but still call Australia home.
56 Caught in the middle »
Sandwich panels are being increasingly used in houses, but many insurers won't cover them. So are the panels safe or not?
QBE’s Parramatta office opens the door to a new way of working for 1000 staff.
peopleNEWS 66 68 70 72 74 76 78 80 82
84 86 88
AILA stars shine in Sydney » Under the sea with Catlin » Elders professionals let their hair down » CQIB convenes on the Sunshine Coast » APIG spotlights indemnity issues » Quill Club lunches for autism charity » Allianz breakfast hits the mark » Sydney adjuster shows award-winning way at CC13 » Allianz scores a hat-trick at ANZIIF awards » AILA finds a safe harbour » UAC expo a hit in Adelaide » AIG goes All Black »
90 maglog »
Cover: John Neal, Group Chief Executive, QBE Image: Cameron Ramsey
Joe’s new job: New Federal Treasurer Joe Hockey will take responsibility for financial services and insurance in the Coalition Government. In one of his first tasks as Treasurer, Mr Hockey visited Indonesia last week to sign the landmark Asia Region Funds Passport deal, which will allow funds to be traded among participating economies. A spokesman for new Finance Minister Mathias Cormann says a further breakdown of portfolio responsibilities will be announced soon. Arthur Sinodinos is the new Assistant Treasurer, Steven Ciobo is Parliamentary Secretary to the Treasurer and Michael McCormack is Parliamentary Secretary to the Finance Minister.
Actuaries Institute Chief Executive Melinda Howes has resigned after four years in the role to take a position with AMP. She will become Director of Business Operations, Banking and Wealth Management at AMP from November. Institute President John Newman says she is “enthusiastic, passionate and made a very valuable contribution” to the actuarial profession. “The recruitment process is underway and we hope to make an announcement in the coming months,” he said. Ms Howes’ position as a director of Hollard Insurance will not be affected by the move, Hollard Managing Director Richard Enthoven says.
Former QBE global head of distribution Terry Ibbotson has returned to the local market as Group Commercial Director at Arthur J Gallagher Australia. Mr Ibbotson is best known for his work building QBE’s local business, most recently as Australian operations chief executive. As insuranceNEWS.com.au reported in a Breaking News bulletin last week, Mr Ibbotson began working at Gallagher’s north Sydney head office last Monday. He will oversee the company’s growth strategy, with particular focus on the development of culture, structure, operational practices and processes, and future acquisitions. Arthur J Gallagher Australasia Chief Executive Andrew Godden
Howes steps down as Actuaries Institute Chief Executive, 26 August
says Mr Ibbotson has extensive experience from the “ground floor up” and will help align the company’s business culture and objectives. “The opportunity of getting someone of Terry’s experience and quality should make us stronger and better at doing that,” he told insuranceNEWS.com.au. Ibbotson returns with Arthur J Gallagher, 23 September
“If you are eating an elephant, best do it one chunk at a time.” – QBE Chief Executive John Neal describes his strategy in turning around the company
Hockey assumes insurance role, 23 September
Son of Wallis: The general insurance industry is likely to face another inquiry under the new Coalition Federal Government, which was elected at the weekend. Treasurer-elect Joe Hockey says he wants a “son of Wallis, root-and-branch inquiry” into the financial services sector. Changes to the Future of Financial Advice reforms will be largely directed at the financial advice industry. Mr Hockey told the Queensland Media Club in July that he wants “a high-level review of the overall financial system”. “What I have in mind is a wide-perspective look at where we want the financial system to be during the next decade and the steps we will need to get there.” Coalition prepares for ‘son of Wallis’ inquiry, 9 September
Floods of misery: last month’s Colorado flash flooding swamped cars, caused eight deaths, destroyed 1500 homes and damaged 17,500 more. The losses of more than $2 billion are largely uninsured
The high cost of catastrophes: Disasters have killed 7000 people and led to insurance industry losses of $US20 billion in the first half of this year, according to Swiss Re. Natural catastrophes – mostly flooding – accounted for $US17 billion, while $US3 billion was paid on man-made disasters. Insurance covered less than half the total economic loss of $US56 billion, down from $US67 billion in the first half of last year. Floods led to $US8 billion in insurance claims, meaning this year is already the second most expensive for flooding. In June, floods in eastern Europe caused economic losses of $US18 billion and claimed 22 lives. Insurance industry costs of $US4 billion make it the second most expensive fresh-water event on record. In the same month floods hit Alberta, Canada, insuranceNEWS
generating insured losses of $US2 billion, the highest ever for the country. Cyclone Oswald hit Queensland and New South Wales in January, creating $US1 billion in insured losses. And in May, a tornado outbreak in the US Midwest killed 28 people and led to insured claims of $US1.8 billion. “Flooding continues to wreak havoc across all areas of the world,” Swiss Re Head of Flood Risk Jens Mehlhorn said. “While we cannot stop future floods, we believe preventative actions can be taken to mitigate the overall impact of extreme weather events.” Swiss Re Chief Economist Kurt Karl says while this year has been below average for losses, the North Atlantic hurricane season and winter storms in Europe “could still increase insured losses… substantially”. Industry pays $22 billion as floods ‘wreak havoc’, 26 August
Reuters From handsome to hulk: the battered Costa Concordia sits upright
Sighs of relief as costly Concordia surfaces: The wreckage of the Costa Concordia has been hauled upright, completing a delicate stage in the biggest-ever marine salvage operation. The “parbuckling” of the 114,000-tonne cruise ship, using cables and steel boxes filled
with water, took place last week after months of preparation. The cost of salvage has spiralled to more than €600 million, according to reports, with total insurance losses estimated at €820 million. The wreck will be refloated
Aon promotes Lambrou:
Aon Australia has split the roles of chief executive and chairman, and appointed Lambros Lambrou as chief executive. He will replace Steve Nevett, who will continue as Chairman, Pacific Region. The changes will take effect in January. Aon says Mr Lambrou’s appointment will let Mr Nevett focus on the company’s broader strategy across the Pacific region
and towed away, but this will not take place until next year. The ship capsized in January last year after running aground off the Italian island of Giglio, killing 32 people. Costa Concordia pulled upright, 23 September
Steadfast consolidates agencies:
and “work to further build a number of key client and market relationships”. Mr Nevett says the move will strengthen the Australian leadership team. “Our clients can expect to benefit from [Mr Lambrou’s] outstanding understanding of global insurance markets and we’re very much looking forward to cementing his expertise into our business here,” he said. Mr Lambrou is currently Chief Executive of Aon’s London global broking centre and Chief Broking Officer for Europe, the Middle East and Africa. He worked in Australia from 1992 to 2008 in reinsurance and retail broking roles. Lambrou becomes chief executive as Aon Australia restructures leadership, 23 September
Steadfast has consolidated its underwriting interests into a new agency business called Steadfast Underwriting Agencies. The operation will include the wholly owned Miramar Underwriting Agency and Altiora Insurance Solutions and Steadfast’s 80% share of Sports Underwriting Australia. Steve Gilbert is the new Managing Director and will
also continue as Sports Underwriting Managing Director. Simon Lightbody becomes Chief Operating Officer, while remaining Chief Executive of Miramar. Steadfast’s 39.5% share of Sterling Insurance is not included in the new company, which will have gross written premium of about $120 million. Mr Gilbert says Steadfast Underwriting plans to develop new
and enhanced offerings. Steadfast group Managing Director Robert Kelly says the operation will capture growth opportunities “through its ability to develop and market insurance products in niche segments”. He has invited shareholders to “town hall” meetings next month. Steadfast launches underwriting arm, completes acquisitions, 12 August
Tragedy at Zurich: Zurich Chairman Josef Ackermann has resigned following the death of Group Chief Operating Officer Pierre Wauthier. Mr Wauthier’s body was found at his home last Monday, and Mr Ackermann was reportedly named in a suicide note. On Thursday Zurich released a statement from Mr Ackermann expressing shock at the death and saying he would resign to avoid
damage to the company’s reputation. “I have reasons to believe the family is of the opinion that I should take my share of responsibility, as unfounded as any allegations might be,” he said. Such claims could raise questions over successful board leadership, Mr Ackermann says. Zurich’s chairman quits after CFO’s death, 2 September
Winners celebrate at 10th annual ANZIIF awards: Allianz has been named large general insurer of the year for the third time in a row at the Australian Insurance Industry Awards. The company also won the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) Women’s Council Employer of the Year award. National Transport Insurance also won two awards – small/medium general insurance company of the year and claims service
provider of the year. The event, run by ANZIIF, took place in Sydney. Other winners were: • Small broker – IBL Limited • Medium broker – Roderick Insurance Brokers • Large broker – Aon • Law firm/practitioner – HWL Ebsworth Lawyers • Life insurance company – AIA
not change, has worked with Marsh for more than 25 years. Marsh Advantage Insurance (MAI) will launch as a national brokerage later this year, serving the SME segment. It will include the Schemes & Affinity, Private Client Services and Retail Life Advisers divisions. Travis Kemp, previously General Manager of the Employee Benefits division and Marsh’s authorised representative business, has been appointed MAI Executive Director. Marsh restructure creates new leadership roles, 2 September
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Steve Ball has been appointed Chairman of JLT Australia following two high-profile retirements. He will take over the duties of Holdings Board Chairman Brian Coppin and Australian Executive Chairman Brian Carpenter. “I’m sure all of us will be proud to have Steve as our Chairman,” Chief Executive Leo Demer said in a message to JLT staff. He says Mr Ball has an “enviable profile and reputation” thanks to his time as president of the National Insurance Brokers Association and “the many years he has contributed to the growth and development of the industry in this country”. Mr Ball will take up the position
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on September 1, while continuing to serve as Chairman of Enterprise Solutions and a member of the trading board. Nick Harris will replace Mr Ball as Enterprise Solutions Managing Director. “Nick was managing director of Benefits Solutions, our employee benefits business, and did a really outstanding job in growing and developing that business into the No. 2 broker in the market,” Mr Demer told insuranceNEWS.com.au. Mr Harris continues as Chairman of Benefits Solutions, with Stuart Whitbread taking an elevated role in the business. Ball becomes JLT Chairman, 19 August
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Allianz secures awards hat-trick, 19 August
Ball bounces into JLT chair:
Marsh moves in new direction: Marsh Australia has announced two major appointments as part of a restructure. The company will “realign its core business” under three entities: Marsh, Marsh Advantage Insurance and Marsh & McLennan Agency. Executive Director Scott Leney has been appointed to lead Marsh, which will continue to comprise risk advisory and insurance broking operations, serving corporate and middle-market segments. Specialty practices and Marsh Risk Consulting will be retained. Mr Leney, whose title will
• Underwriting agency – Brooklyn Underwriting • Service provider to the insurance industry – Recoveries Corporation Group Limited • Innovation – BT Financial Group • Reinsurance company – Swiss Re • Insurance leader – Terry Towell • ANZIIF lifetime achievement award – Ian Brown, Jim Minto, John Richardson, Lach McKeough and Joan Fitzpatrick.
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17/05/13 2:00 PM
On the road to recovery QBE Global Chief Executive John Neal talks to Insurance News about the insurance giant’s tough journey back to growth By Michelle Hannen
JOHN NEAL HAS DISAPPOINTED A LOT OF people since he took over the reins of QBE in August 2012. Shareholders, analysts, employees, brokers – the list of those who feel let down by the global insurance behemoth, and by extension its Group Chief Executive, is long. But with the party well and truly over by the time Mr Neal arrived in the top job in August last year, disappointment was his only option. The company had to change. His predecessor, Frank O’Halloran, for so long a share and insurance market darling, had pushed his grow-by-acquisition strategy too far, and Mr Neal inherited an unwieldy, inefficient jigsaw of a company built by more than 100 acquisitions in two decades. When he came on board QBE was struggling to grow at a time when record low investment returns and a flat global insurance market left it with nowhere to hide. “The complexity of our business [after] a plethora of acquisitions made it harder to grow the business than would naturally have been the case,” he admitted to Insurance News during an exclusive interview. So Mr Neal did the only thing he could; he rolled up his sleeves and began tackling the hard work required to position the company for future profitable growth. This involves properly integrating the acquisitions, fixing the troubled US business, cost-cutting and consolidating shared services to take full advantage of QBE’s global reach. He was candid in a recent speech about the magnitude of the task at hand, describing his approach as “taking it relatively slowly and treading carefully, on the basis that if you are eating an elephant, best do it one chunk at a time”. While QBE’s latest set of numbers again disappointed the market, on the upside there’s plenty of upside to be had, and Mr Neal is optimistic about the company’s future. As he explained to Insurance News, 2013 should be viewed as a year of transition with a new QBE set to emerge in 2014. “I’ve seen this year as a year to make absolutely certain that we can meet the performance expectations of QBE as an insurance group as a whole
and in each division,” Mr Neal says. “The board and the executives see QBE as a business that can grow and can grow globally. So that’s our expectation and that’s really where our focus will be as we look out to 2014/15.” The new-look QBE Mr Neal describes sounds remarkably similar to the old QBE. It will remain a global insurer and reinsurer, with a similar global footprint, which Mr Neal says is “as expansive as it needs to be”. Similarly, he says the group’s product set “is also pretty complete”. Divestments of businesses deemed “non-core” are on the cards, while future expansion will come from organic growth in emerging markets, in particular in Asia, and – once again – growth by acquisition in other parts of the world, including Australia. “Once we’ve stabilised the businesses this year we’d be quite happy for the right opportunity to look at acquisitive or organic growth here in Australia,” he says. “I think when we start to see price movements in the European markets, particularly in the London market, we’d be quite happy to look at growth in that marketplace again, acquisitive or organic. “And our business model in Latin America has been predicated around acquisitive growth so I think our best opportunities for growth there really are acquisitive,” he told Insurance News. But under Mr Neal, growth by acquisition will be a different beast, with acquisitions quickly slotted into QBE’s new streamlined operating systems and inefficiencies stripped out.
QBE Group’s 2013 half-year results Gross written premium: $US 9.45 billion Net earned premium: $US7.33 billion Underwriting profit: $US 530 million Combined operating ratio: 92.8% Insurance profit: $US790 million Insurance profit margin: 10.8% Net profit after tax: $US 477 million
He may have had to live with many of Mr O’Halloran’s business decisions, but Mr Neal has taken a broom to his predecessor’s executive team during his first year. The preference to promote from within was overturned when QBE North America President and Chief Executive John Rumpler was replaced by outsider David Duclos, while another outsider, David Fried, was brought in to replace Mike Goodwin as Asia-Pacific Chief Executive. Mr Neal’s former London colleague, QBE Europe Chief Executive Steven Burns, will move to Sydney as group chief financial officer from early next year on the retirement of a stalwart of the O’Halloran era, Neil Drabsch. Mr Neal told Insurance News it is these changes that have been his hardest decisions to date. “The hardest decisions are always around people in any business. “We’ve made some pretty significant leadership changes at the top of the organisation. “While that has the excitement of bringing quality new leaders into the business… it also means that you’re making some pretty harsh changes as well.” QBE’s operational transformation program, which involves offshoring work from each of its divisions to a group shared services centre in the Philippines in order to save at least $US250 million by the end of 2015 (see side story) has attracted its fair share of controversy. But when reflecting on the business decisions he has had to make, Mr Neal is more clinical. “The reason for embarking on the operational transformation program was to position the business for future profitable growth. “As far as business decisions are concerned… you’ve got to be very clear strategically in the direction you want to take the business and what the implications of those decisions are,” he told Insurance News. “You’ve got 17,000 people you’re asking to execute a plan so it does take real clarity.” Hard decisions and plenty of clarity are also required to tackle the company’s North America business, referred to earlier this year by Mr Neal as a “problem child”, which it remains today. “The underperformance of this division has understandably caused concern to many of our stakeholders and, in the short term, has detracted from the progress being achieved generally across the group,” Mr Neal wrote in the company’s half-year report. As a consequence of this underperformance, in August QBE cut its full-year gross written premium (GWP) target for the North America business by $US600 million to allow for further remediation to take place. The division, which is roughly evenly split between property and casualty (P&C) business and specialty businesses including crop insurance and lenders’ mortgage insurance (LMI), was particularly dragged down by “performance issues” in the LMI business in the first half. The US LMI segment, which in large part is comprised of the Balboa business QBE bought from Bank of America in 2011, was affected by the bank’s decision to sell one-third of its loans portfolio during the period. 12
Trouble in America: QBE’s lenders’ mortgage insurance business has hit hard times after booming during the US housing crisis
Changing the company: the Operational Transformation Program QBE’s Operational Transformation Program (OTP) is in full swing, with the Australian business on track to complete the transition of functions to the new Group Shared Services Centre (GSSC) in Manila by the first quarter of next year. And so far, the program is tracking ahead of expectations, Mr Neal said in a recent market update. The OTP is aiming to leverage the opportunities that come from having a global business by simplifying and standardising processes and centralising functions in finance, HR, operations, IT and procurement in its offshore service centre. It also includes – most controversially – centralising some claims functions, with back-office claims roles offshored and expert teams established in each division to manage complex claims. The implementation and restructuring costs associated with the OTP total some $US310 million over a three year period, but costs savings are expected to hit an annual run-rate benefit of at least $US250 million by the end of 2015. Cost savings of $US25 million are expected this financial year, increasing to $US190 million in 2014. These figures exclude estimated global claims procurement savings of at least $US90 million by 2015. “The substantial proportion of those cost benefits are really driven from taking a global perspective around procurement so the way in which we contract in the IT space, the way in which we contract with telecommunications providers, the way in which we contract for some of our claim supply chain line. So the real cost benefits are more around procurement,” Mr Neal told Insurance News. He says the program is also aiming to reduce administration work, improve the quality of documentation and optimise service quality across the group. To that end, service metrics are a key focus, with service-related key performance indicators being measured twice daily. Another key benefit is to make QBE “acquisition-ready”, as streamlined back-office processes should enable new businesses to be efficiently integrated, and equally, to make the company more scalable in order to handle volume growth in existing businesses. In terms of timing, the Australian business led the OTP with the majority of the local project to be completed by the first quarter of next year. The planning phase for the North American division has concluded, and the OTP will commence in that business in the last quarter of this year, continuing until the second quarter of 2015. The European division’s participation in the OTP is currently being planned, with work scheduled to begin in the second quarter of next year, running through until the second quarter of 2015. QBE Australia and NZ Chief Executive Colin Fagen says the implementation of the OTP will lead to annual run-rate benefits of at least $US85 million for the Australian business by the end of 2015, with the biggest saving – $US36 million – to come from operations. Of 521 Australian staff whose jobs were affected by the OTP as at mid-June, 39 have been made redundant, with 364 either redeployed or in the process of being redeployed. The remainder were contract staff and those that have left as a result of “natural” turnover. Mr Fagen says Australian motor claims are “fully live” in Manila, with property claims and underwriting processing at the centre scheduled to scale up. The company reports that efficiencies are already being realised and improvements in operational metrics are also being recorded, with a kick up in finalisation rates for motor claims and response times to quotes.
QBE Manila average staff member: • • • •
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This led to less business for QBE, but new North America Chief Executive David Duclos has described the fall in premium income as “far more rapid and severe than previously anticipated”. The situation wasn’t helped by a $US40 million acceleration in claims associated with the bank selloff. A controversial product that has attracted much regulatory attention in the US in the past two years, the LMI business also came under pressure due to banking consolidation, fines, legal fees, an improvement in the US housing market and lower premium rates – down 8% this year and 9% next year – which are set in advance through negotiations with US state insurance commissioners. Mr Neal says the company has “taken two steps back on the book” and plans to address these challenges with changes in its LMI product design and by forging relationships with new lenders, a number of whom it is in “conversations” with. “We’re confident that we’ll win some good new business through the second half of the year,” he says, while declining to divulge further details. He characterises the business as one that can “perform once again as well as it has done in the past”. The crop insurance result was affected by delayed crop-planting limiting premiums in the first half, but Nr Neal says all indications are that crop will produce a “better than average” performance in the second half. He says QBE’s North American P&C business is “improving”, but after several years of rate increases he wants to see an improvement in its attritional claims ratio before letting the business grow. In addition, he alludes to “one or two good initiatives running through the second half of the year” that should provide “some good topline opportunities”, although these may not become evident until 2014. He remains steadfast that the road back for the North America business is not a long one. “There’s been a lot of focus of attention around the North American business and I’m confident that the actions that we need to take can be completed this year,” he told Insurance News. The European business is fundamentally sound, according to sources close to the operation, but Mr Neal acknowledges that growth in the European market is increasingly hard to find. Premium increases averaged 2% over the first half, and were revised down from 2.4% to 2% on average for the second half. “In terms of pricing it’s a tough marketplace. It looks unlikely that there’ll be any significant rate increases looking out 12 to 18 months. “That’s why you’re seeing little growth in topline as we’re really concentrating on the existing business, the clients we hold, and just making sure that we manage our returns over the short term. “It’d be great to see some price increases, but I don’t think we’re going to see them for a little while.” The remediation of most of QBE’s underperforming portfolios has been completed, but the benefits are “materialising slower than expected”, according to the group’s half-year report, which goes on to suggest that further action could be required. QBE Europe also revealed last year that ambitious plans to more than double GWP in continental Europe over five years have been put on hold because of the Eurozone crisis, lack of attractive acquisition opportunities and poor pricing and performance – particularly in property and motor. New Europe Chief Executive Richard Pryce – who took over from Mr Burns on October 1 – 14
The analysts’ view: Insurance News analysed the contrasting views on QBE from an investment perspective following its half-year results in August. NO M UR A One of the more bullish outlooks on QBE is held by Nomura, which has maintained its “buy” rating on the stock. In a report following the results, Nomura analyst Toby Langley wrote that the consensus opinion on QBE in the financial markets “remains focused on QBE’s previous misgivings, ignoring the group’s potential to deliver earnings upside with declining risk in FY13 and beyond”. But with the half-year figures below market expectations, even Nomura says it was “disappointed” and “surprised by the sheer range and size of charges and adjustments”. It also acknowledged “investors are right to question whether QBE is still on course to deliver anticipated performance improvements over the next few years”. Mr Langley’s bullish outlook is based on continued premium rate rises in Australia and the US, the continued strength of the Australian business, the improving strength of QBE’s capital base, and the benefits of both rising interest rates and a falling Australian dollar. On the full-year outlook, he says QBE’s redistribution of its catastrophe allowances, which are now skewed to the second half when its exposure to cat risk is greater, mean it could absorb a loss similar in size to Superstorm Sandy without impacting its second-half insurance margin. Mr Langley warns that “further noisy claims development or unforeseen catastrophe costs” could impact the results going forward, but he concludes that “QBE continues to head in the right direction at an underlying level”. He told Insurance News that while QBE’s strategy was previously focused on “growth by acquisition”, John Neal is looking to highlight the considerable value inherent in QBE's existing businesses, which is “the right thing to do”. “It’s a more disciplined way of running the group, better suited to the current environment,” he says. “We would expect few investors to support a material acquisition by QBE.” Analysts and investors have long viewed QBE as opaque when it comes to financial details. It is a perception that Mr Neal is aiming to reverse and on releasing the half-year results in August, he expressed his keenness that the financial markets view the company as “transparent”. “We don’t want our divisional results to be a puzzle – they don’t need to be,” he said. Mr Langley told Insurance News that at the half-year results briefing, QBE went to “significantly greater lengths” to improve disclosure around reserving adjustments, and the impact of interest and foreign exchange rates. It’s “evolving”, he says. “The proof of the pudding is going to be in the full-year results.” BA NK OF A M ERIC A M ERRILL LY NC H In stark contrast, Bank of America Merrill Lynch (BAML) is more bearish on QBE. While maintaining a neutral stance on the stock, BAML analyst Andrew Kearnan lowered the outlook for a number of key indicators in a report following the results, including its premium revenue forecasts, margin forecasts and earnings per share forecasts for QBE. “QBE is making ground but our sense is that it is hard-fought yards,” Mr Kearnan said. Pointing to the prior-year reserve development, particularly in the US business, as a key issue with the results, he warns there may be more to come. “We estimate QBE still needs another $100 million to get risk margins back above the target 90%.” Mr Kearnan also cites the lower full-year premium guidance as a key marker in the results. “We expect QBE to continue disappointing as it transitions and de-risks the business on the top line,” he said. But BAML described the combined operating ratio and insurance margin as “a reasonable outcome… all things considered”. Mr Kearnan is cautious about QBE’s estimates on continuing premium rate increases going forward, particularly in the local business, at a time when “commercial rates (+80% of the book) are clearly trending down and terms and conditions [are] rolling over”. He is also limited in his support of QBE’s plans to get back into the acquisitions game in the coming years. “We understand the group plans to step back into M&A activity with the desire to do one large acquisition every other year. Given the M&A history in the more recent years the first deal will likely need to be highly attractive to QBE.” On the outlook, Mr Kearnan concludes that as a year of transition, 2013 “was always going to see mixed trends”. But he continues to predict “a range of headwinds mostly coming through in 2014 and later years”.
recently revealed a decision to re-align the European operations under two new divisions, international and retail. The company says the new structure will provide “improved support to meet the different demands of wholesale, specialty, subscription and retail”. Some pundits say it’s also likely to change the way in which the European division accesses distribution, leading to further market competition. The international division will include the marine, energy and aviation portfolios plus all nonEuropean property and non-specialty casualty business. Retail will comprises two separate business units, UK and Ireland, and Continental Europe, and will cover property, casualty and motor along with financial lines and specialty casualty. QBE says the new structure will enable the division to “maximise its profitable growth potential
when market conditions improve”, but it has come at a cost. The plan is reportedly behind the sudden departure of Chief Underwriting Officer Property, Casualty and Motor for QBE Europe, Ash Bathia, earlier this year. The highly regarded Mr Bathia had been the driving force behind QBE’s highly successful Lloyd’s Syndicate 386. He was described by one London broker as “QBE’s best underwriter in the London market” and “a huge loss” to QBE. The Australian and New Zealand business, which represents 27% of the company in GWP terms, has been the engine room of the group over the past few years thanks to strong premium growth following Australia’s flood and cyclone losses and NZ’s earthquakes. But with rate increases locally now slowing, growth here may also be increasingly hard to find (see story below).
Engine Room: QBE Australia and New Zealand
QBE’s local chief Colin Fagen: the division’s growth can continue
After years of trumpeting its status as a global insurer – and reminding the local market that it’s not just all about them – it’s ironic that QBE has probably never been more reliant on its local business. The Australia and New Zealand division was the standout performer in the insurer’s half-year results and has provided a much-needed cushion for the company to rely on with its other major divisions – the US and Europe – dragging their heels. But Australia and New Zealand Chief Executive Colin Fagen says he is not feeling the weight of responsibility that seems to rest on the local division’s shoulders. “I don’t view it as pressure,” Mr Fagen tells Insurance News, adding that everyone within the group has a responsibility to perform well. On an average premium rate uplift of 6.5% – driven by strong rate increases in SME, motor and home insurance – the local arm posted GWP of $US2.51 billion in the first half of this year, up 4% on the first half of 2012 before the impact of currency movements. The GWP growth was largely driven by market share growth in New South Wales compulsory third party due to QBE’s competitive pricing strategy, wages and rate growth in Western Australian workers’ compensation and controlled growth in the local lenders’ mortgage insurance (LMI) business. Its insurance profit margin of 17.3% is impressive, as is the combined operating ratio, which came in at 89.9%. The retention rate across the division was 82% for the half, with the local arm continuing to write less business in catastrophe-prone areas of Queensland, Victoria and Northern NSW, and declining some business due to risk profile or price as portfolio improvement work, which has now come to an end, continued. Mr Neal concedes the result benefitted from both a minimal impact from natural disasters and higher rate increases than he had anticipated, but nevertheless characterises it as “excellent”. And Mr Fagen says the local business can still achieve further topline growth in the future, despite rate increases predicted to fall back towards inflation over the next six to 12 months. Mr Fagen says the GWP growth in the first half came from a wide range of QBE products and will continue to do so. “I’m pretty comfortable we can keep getting that sort of growth,” he told Insurance News. “We anticipate growing at a little above gross domestic product.” The Australia and New Zealand division is targeting full-year GWP of $US4.8 billion, with $US2.2 billion to come from brokers, $US1.8 billion from corporate partners and direct business, $US400 million from LMI, $US100 million from credit and surety and $US300 million from the New Zealand market. Mr Neal told Insurance News he believes the relationship between the insurer and its local brokers and end customers is sound. “I think the relationship between insurer and broker, from our point of view, is in good shape. We’re very focused on it, so for us, getting that servicing proposition right for the brokers is of paramount importance.” He says QBE has worked hard to ensure its claims service has continually improved, pointing to “much better” recent claims settlement ratios from Cyclone Oswald compared to those from the floods and cyclones two years before.
Concentrating on the existing business: John Neal speaks to Insurance News Editor Michelle Hannen
The broker view: Insurance News spoke to brokers across the local market for an assessment of QBE. M ULTI NAT IO NA L BRO KE R: “I’ve got the upmost respect for John Neal and Colin Fagen and I think what they’re doing is right for the business,” says Leo Demer, Australia and New Zealand Chief Executive of JLT. “They’ve taken stock because they’ve had this major acquisition strategy and with difficult financial times ahead I think they’re doing exactly what a smart businessman would do.” Mr Demer describes Mr Neal and Mr Fagen as “two very good operators – they understand the numbers and they understand the business”. “They’re looking at all their lines, as you’d expect them to do. If you’re going to get knocked around on a particular line of business, you change it.” On the controversy in the local market over QBE’s offshoring plans, Mr Demer says he was “surprised by the criticisms”. “Why should brokers tell an insurance company how to run their business? They’re smart people. They’re making the right decisions, and they’ll get the right people to carry out those tasks.” On the whole, Mr Demer sees QBE as a business heading in the right direction. “We couldn’t be happier with the relationship and with the way things are going with QBE. What we have found recently is that they’re very easy to talk to. That is different.” Mr Demer says this change in the local business has come about due to Mr Fagen, who he describes as “a lot more accessible”. N AT IO NA L BRO KE R: “Some improvement off recent lows”, was how one local broker boss, who declined to be named, described QBE’s recent performance as a business partner. He says the company “was number one in the market for a long period of time – probably wrongly so – which resulted in a tremendous amount of arrogance”. The broker, a capital city-based, mid-sized corporate specialist with a national client list, says QBE is an example of a company that “forgot about their customer base – insurance brokers”. “We grew a business with them many years ago. They don't do that today.” The broker sees QBE as a company that continues to struggle to find the right balance between technical pricing and sales-led underwriting. “For years they were sales-focused and were making money hand over fist. Then came the rise of the underwriters, who ceased to be commercially minded and became overly technical. “Now the sales focus is back, with business development managers (BDMs) being pushed to write profitable business. But they’ve disenfranchised their intermediaries.”
He characterises QBE as strong in small business and getting rate increases on electronic placements, “but they just don't write as much corporate as they used to”. “At the end of the day, they’re still good, but other insurers have now caught up to them. They used to be our number one underwriter and now they’re one of three.” The broker says a lack of product development over the past 10 years has compounded the problem, with stale products and out-ofdate wordings costing QBE business. He says talented staff are being lost to its competitors and the insurer needs to bring more outsiders in with fresh ideas and approaches to break open what he describes as “the QBE culture – the mould”. R E G I ON A L B R O K E R : “They’ve always been an arrogant insurance company,” was how the chief executive of one small regional insurance broker described QBE. “They’ve got the attitude that they’re that big that they can do what they like.” His comments – shared on the condition of anonymity – include QBE “not playing fair” by offering one set of rates for new business and another for renewals, and holding back their best renewal terms until the “eleventh hour”. Another serious concern surrounds QBE not disclosing endorsements put on renewals to the broker’s staff. “They alter renewals at the last minute and don’t tell us. They cut cover with no notice.” Consistency is much desired but often lacking, the broker says. “If they’re down on new business one month they’ll start undercutting towards the end of the month. There’s no consistency.” He says the situation would be greatly improved if QBE joined the Steadfast Virtual Underwriter. On the claims side, the broker says he has first-hand experience of QBE’s offshored claims-handling in Manila. His staff say they have found the Manila centre is taking too long to process motor claims, failing to follow up where required, closing claims without payment being made, and complain of claims getting lost in the system. “We’ve had claims that sit there for weeks and weeks.” The Manila centre staff are also described as “not fully up-to-date with QBE processes” and while their spoken English is commended, he says their understanding of some concepts is not at the same level. Aside from the impact of the offshoring, the broker says he has seen little change in the organisation under Mr Neal’s leadership to date. For him, the more important relationship is with their BDM. While he rates the current BDM they are dealing with, this hasn’t always been the case. “Our GWP with them has fluctuated over the years as a result. “We’re starting to build with them again, but we have some reservations particularly on they way they are approaching renewals.”
The group’s other divisions, Latin America and Asia Pacific, are growing steadily, albeit off a smaller base, with GWP of $US733 million and $US400 million respectively for the first half of 2013. Equator Re, QBE’s internal reinsurance captive, is largely impacted by the performance of the other divisions and saw GWP fall 10% in the first half, in part due to higher divisional catastrophe retentions across the rest of the group. IF YOU ARE LOOKING FOR A SCORECARD against which to mark QBE’s success along the road to recovery, you could do worse than the company’s new, group-wide vision released earlier this year. It outlines the group’s aim “to be the most successful global insurer and reinsurer in the eyes of our customers, our people, our shareholders and the community”. In quantifying “successful”, Mr Neal says the measure is different for each group of stakeholders. For shareholders it’s about delivering a superior share price than its competitors; for its staff, it’s about fair reward and recognition for effort, and the development of meaningful career paths, which has resulted in the launch of a global leadership academy this year. For customers, Mr Neal says it’s a promise to remain innovative in both its product offering and service proposition. More widely, it’s about a corporate responsibility to ensure both QBE and its employees are adding to the community. Readers may observe that the company has some way to go on all of these measures, but Mr Neal remains certain that the business is on the road to recovery. He says the half-year results reveal “a couple of bumps along the road but… they’re no more than that”, with “most things going at or ahead of plan” and an underlying performance “that’s at or ahead of expectations”. “I think 2013 sets us up quite well,” he says. “I think it’ll give confidence in each of our stakeholders and certainly our shareholders that we’re ready to grow, and by 2014/15 we’ll be trying to do that.” Each year is a milestone in any position, all the more so for a global chief executive. But far from popping champagne corks, Mr Neal did not celebrate his first anniversary in the top job. He commented to Insurance News that with the hard work that still lay ahead, any such celebration may be premature. Indeed, the jury is still out on whether Mr Neal can turn disappointment into delight. 18
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Capital, catastrophes and champagne The reinsurance industry’s Monte Carlo talkfest is over for another year and the impact of excess and alternative capital was the hottest topic in town By Michelle Hannen
CAPITAL WAS THE WORD ON everyone’s lips this year at the champagne fest that is the annual Reinsurance Rendezvous in Monte Carlo. The low interest rate environment has attracted new alternative capital to the reinsurance sector on an unprecedented scale. Its investment currently sits at around $US40 billion and in just a few years it could total $US100 billion a year – accounting for 30% of the global property catastrophe reinsurance market. The sheer scale of the likely investment led Aon Benfield Executive Chairman Michael O’Halleran to comment on whether the word “alternative” was becoming a misnomer. “I don’t think we should call it alternative any more. [The convergence market] has become a very big part of what we are and what we will continue to be.” A name is just a name, but what does the influx actually mean for the reinsurance industry? Aon Benfield says traditional equity capital will account for less than 50% of the total capital in the reinsurance market in five years, while Willis Re warns of “profound” consequences, with up to $US40 billion of traditional equity capital to be displaced. This could either be returned to shareholders or redeployed elsewhere in the (re)insurance market, the broker says. Lloyd’s Chairman John Nelson goes further, saying the rise of non-traditional capital could lead to “systemic problems” similar to those seen in the banking industry. “Some of the structures being used could undermine some of the qualities of the insurance model,” he said, adding that insurance “can be a 20
dangerous business to those who do not understand it”. It has not escaped the attention of regulators, with the UK’s Prudential Regulation Authority reported to be “paying close attention” to the insurancelinked securities (ILS) market. The old guard of reinsurance, however, appears unmoved. Swiss Re, for one, does not see the changing dynamics as a threat. “We take the inflow of alternative capital seriously, but we are not alarmed by it,” Group Chief Underwriting Officer Matthias Weber says, adding that problems may lie ahead for “smaller, less-diversified reinsurers”. “Swiss Re can take advantage of its capital markets expertise and at the same time compete successfully as a full service provider,” he says. The second-largest global reinsurer is also banking on rising demand for natural catastrophe reinsurance – where the bulk of the alternative capital is focused – to temper the influx of capital. It is forecasting demand for nat cat cover will double in highgrowth markets and rise about 50% in mature markets by 2020. Munich Re’s Reinsurance Chief Executive Torsten Jeworrek has questioned the longevity of the alternative market, noting its commitment to the sector has yet to be tested by major catastrophe losses or by increasing bond yields that would make other asset classes more attractive investments. His question is one that the rest of the reinsurance establishment also seem to be asking: “How sustainable is this market? We don’t have the final answer here.” But in a note released following the Rendezvous, JP Morgan analyst Matt Carletti warned that traditional rein-
surers’ future success will hinge on their ability to adapt to the new market reality. “Traditional reinsurers can’t keep their heads in the sand. They need to adapt to the changing world around them that is seeing a sustained and sizable influx of capital from alternative sources,” he wrote, adding that their ability to do so would be “the key differentiator” between them in the future. The Monte Carlo meeting is considered a staging ground to set the scene for pricing for the upcoming January 1 renewals, and this year was no different. The US property catastrophe reinsurance market, where much of the new capital is focused, experienced significant softening at the July 1 renewals, and the trend looks set to continue. An AM Best report says US pricing was down 20% mid-year, with Florida rating a special mention for its declining rates. In its half-year report QBE says that while Superstorm Sandy late last year initially “muted talk of price reductions on reinsurance and US property catastrophe pricing… recent renewals have seen significantly more competition”. It says the increase in alternative capital in the market “has placed particular pressure on US property catastrophe reinsurance rates and is now impacting other reinsurance lines”. Guy Carpenter President and Chief Executive Alex Moczarski confirms that the US natural catastrophe market is where the pricing impact has been most dramatic. “For the first time, the ILS [insurance-linked securities] market offered prices comparable to or lower than those of the established reinsurers, ending the general stability and
consensus of post-Katrina catastrophe pricing, especially in Florida. “Strong appetite tightened spreads for US hurricane catastrophe bonds, forcing the traditional reinsurers to react by cutting Florida risk-adjusted renewal prices by about 15% at the June 1 renewal. “It was a tipping point for the reinsurance industry.” Looking out to January 1, predictions are being made that average property catastrophe rates will be down 15%. Aon Benfield says clients “will benefit materially from an excess of traditional reinsurance capacity and new alternative capital flows over light demand growth for reinsurance capacity”. In a comment that cuts to the sheer scale of the excess capacity in the market, the reinsurance broker adds that it expects a competitive renewals season at January 1 “even if a moderate hurricane season should develop” this year in the US. But despite talk of the bottom beginning to fall out of the US catastrophe reinsurance market, Munich Re says it expects largely stable renewals for its portfolio on a global basis, while Hannover Re expects “to achieve conditions that appropriately reflect the risks”. It feels recent floods in Europe and Canada should have a stabilising effect on rates in other regions. Swiss Re says that while prices for natural catastrophe covers have declined this year, they should stabilise next year. For catastrophe business in Australia and New Zealand, Hannover Re says a “good price level” was maintained in this year’s renewals and it “does not expect to see any changes on the pricing side or structurally in the year ahead”. insuranceNEWS
The case for resilience Investing in safer communities that can live with extreme weather remains a hot topic – but is all the talk actually getting us anywhere? By John Deex
RECENT FLOODS, CYCLONES AND bushfires have hit Australia hard, and the warnings are that climate change is only going to make a bad situation worse. To tackle this threat, the consensus is that we must build more resilient communities. It’s a critical issue – for communities and for the insurance industry – but to date we have seen more talk than action. The Insurance Council of Australia (ICA) has been lobbying governments about the issue for years. And IAG has adopted it as a pet issue more recently through its membership of the Australian Business Roundtable for Disaster Resilience and Safer Communities, and the group’s recently published paper on the issue. But for all the talking, how much progress is being made on the ground? And are there too many disparate efforts in the mix? ICA’s General Manager Policy Risk and Disaster Karl Sullivan has been at the centre of the council’s resilience program from the start, and believes the various views are beginning to draw closer to consensus. “It is a complex field and it has taken some time to get positions settled with government,” he says. “We’ve been pushing since 2006, and insuranceNEWS
most of the industry has now followed on and assisted with the message and backed that up with pricing. “Insurers have started to send a price signal that is tied to resilience, which is important because it tells people when they are getting it wrong. “It gives an impetus for government to build more resilient communities.” Such action is beginning to pay dividends, particularly in the case of flood and cyclone risks. Bushfire is a much harder risk to mitigate against. But it took embargoes on coverage and astronomic premiums reflecting the level of risk before governments reacted with increases in mitigation spending. Projects that have languished on the drawing board, some for many years, are finally getting the green light. A case in point is the Queensland town of Charleville, where flood mitigation work led Suncorp to announce a review and reduction in premiums. The Queensland Government has since announced a further $50 million package of mitigation work, with insurers once again pledging to respond if the risks are reduced. ICA says property developers are also getting the message.
Man at the centre of the resilience program: ICA’s General Manager Policy Risk and Disaster Karl Sullivan
“Developers now call us to ask how they might do something to make sure developments are going to be insurable in 80 years’ time,” says Mr Sullivan. “That has never happened before. “They know clients will have their eye on the insurance premium – and flood insurance premiums in flood-prone areas are significant, sometimes $20,000 a year.” Mr Sullivan says a crucial step in the process is to make insurers aware of mitigation work already done. “Mitigation is of no use to insurers unless they know about it,” he says. “If you build this infrastructure you have to remap the data. We are only now starting to close this gap.” At the end of last year the Flood Exclusion Zone database was launched by ICA. Combined with the National Flood Information Database (NFID) – developed by ICA with state and territory governments and funded by the general insurance industry – insurers now have some form of flood information for about 10.4 million addresses nationwide. But further breakthroughs are now being made, with local governments coming on board to hand over the information which is so desperately needed. “Insurers’ ability to price flood risk has
increased significantly in 2013 with large areas of Queensland and Victoria added to the new ICA Data Portal,” Mr Sullivan says. “Although commentary after the 2011 floods suggested that some local governments were reluctant to hand over data, ICA has found a personal call to the mayor has almost always had a positive response. “We haven’t struck a mayor yet who doesn’t get this. “Most councils have some data, and while some might be reluctant to provide it, those attitudes are changing rapidly, driven in part by the price and availability signals sent by insurers. “Maps are available for all 104 major Queensland population centres with risk after the state government earlier this year ordered all data to be supplied.” This progress “is a direct result of ICA’s advocacy work on flood mitigation”, Mr Sullivan says. Another project that is fast coming to fruition to help with the resilience battle is ICA’s Building Resilience Rating Tool. ICA has been investing in the tool for residential buildings in Australia since 2010. It aims to provide a rating of the ability of a building to withstand extreme weather events and is designed to encourage homeowners, homebuyers, homebuilders and insuranceNEWS
property professionals to adopt improved material selection and design. Beta testing for version 2.0 of the tool started in September, with a public version of the tool planned before the end of the year. Mr Sullivan does not join critics who attack the government for permitting building on flood plains. “If you take a map of Australia and cross out all the flood plains, there isn’t much left,” he says. “In this country communities have grown up around water sources. That is where we live. “But if you are going to build on a floodplain, then you need to build in a resilient way. “It is about adopting a world view that we should spend more in advance to save money later. “Government needs to help people that have been hit hard by disaster but we need to help people not get hit in the first place.” Mr Sullivan does not believe that the efforts of others on this issue are a distraction from, or a reflection on, the work of ICA. “IAG has carried out a brilliant piece of work. We worked with them throughout that whole process. 23
“Mitigation is of no use to insurers unless they know about it.” – ICA’s Karl Sullivan
“We look to work with all our members and where synchronisation is available we should work like that. No single entity owns this issue. “A lot of money needed to be spent. IAG saw an opportunity to put some of their resources into it. It can put many millions of dollars on the table. It has helped move this issue along.” IAG’s Chief Strategy Officer Leona Murphy told Insurance News the company wants to be a leader in the proactive management of risk “to help prevent loss and enable people to make more informed decisions about risk and insurance”. This is important for both social and business reasons, she says. “Floods, fires and cyclones have a significant impact on people’s lives. Even people not directly affected still pay a price whether through tax dollars being spent on recovery or through higher premiums. “But there is a good business case too. “Safer communities mean fewer claims, which in turn means more affordable premiums. Everybody wins.” IAG pulled together 60 people for its first risk summit last year to challenge its thinking and come up with a clear direction. “We then developed a program of work to roll those things out,” says Ms Murphy. “The Business Roundtable was a key part of that.” She accepts “some people feel that we have been talking forever” but adds she is “quite inspired by the progress we’ve made”. “Anything as big as this is a long-term game,” she says. “But the issue is firmly on the national agenda like never before.” Ms Murphy believes she has concrete examples to back up this claim. “About 60 people attended our whitepaper briefing. Not only are stakeholders very engaged but they are also very supportive. “The Greens plan for adapting to climate change adopted all of our recommendations.” Then there is the recent Senate report on climate change, which Ms Murphy says shows “direct correlation” with the Business Roundtable whitepaper recommendations. The report into extreme weather events from the Standing Committee on 24
The Australian Business Roundtable for Disaster Resilience and Safer Communities – comprising the chief executives of IAG, the Australian Red Cross, Investa Property Group, Munich Re, Optus and Westpac Group – was formed last December to champion resilience investment. Its recently released whitepaper, Building our Nation’s Resilience to Natural Disasters, found the economic cost of natural disasters in Australia last year was more than $6 billion. By 2050 this figure will rise to a staggering $23 billion a year as the population grows and the frequency and severity of storms, cyclones, floods and bushfires increases. The group says there is a need for a new co-ordinated long-term nationwide approach – and focusing efforts and resources on prevention is the key to success. Currently, the Federal Government spends $560 million on post-disaster relief each year, compared with $50 million on pre-disaster resilience. But the report says spending five times that amount on resilience – $250 million a year – would ultimately generate savings of more than $12 billion by 2050. The roundtable acknowledges there is a lot of positive resilience and disaster management activity already underway, with work taking place under different policies, departments and agencies. However, it believes there is an opportunity to do better, and the white paper contains three key recommendations for the future. 1. A “national resilience adviser” should be appointed and a business and community advisory group established to improve co-ordination of pre-disaster resilience. 2. A commitment should be made to long-term annual consolidated funding for pre-disaster resilience. 3. Pre-disaster investment activities that deliver a positive net impact on future budget outlays must be identified and prioritised. The roundtable believes that by following these key recommendations, “a safer Australia can be created”, economic costs can be materially reduced and pressures on government budgets relieved.
Going up: how resilience can combat rising premiums Some residents on the eastern seaboard of the United States are making their homes to make them more resilient to the threat of tidal surge caused by increasingly fierce hurricanes like last year’s Superstorm Sandy. This home in Greenwich, Connecticut, has been raised after the local council adopted revised flood maps that show much higher water levels caused by hurricane-borne storm surge. The US Government has added more than five metres to predicted storm surge heights in the Greenwich area, threatening residents with the risk of being cancelled out of the National Flood Insurance Program (NFIP), which provides flood cover for communities. Over the next few years, Government surveyors will produce about 350 revised flood maps along the east coast. They have already added thousands of homes in the New York City-New Jersey conurbation to areas now designated as flood plains.
The owners of this home and some of their neighbours have reacted to the new situation by simply raising their houses to meet the new official levels. While the price of going up is steep – this one cost a reported $300,000 – it will help them avoid massive flood insurance premiums. The house was 1.9 metres above the official sea level, but ended up underwater as Sandy went past. Its owners, Peter and Patricia Ekvall, raised it by 4.7 metres, slightly higher than the Government’s revised flood tide height. Now, much like a traditional Queenslander house, floodwater will flow under the house and the Ekvalls have a new place to park their cars. The Government’s new approach to flood insurance follows the NFIP running up a $US24 million deficit. Critics have accused the program of subsidising people who build on flood-prone land.
Environment and Communications recommended the removal of taxes and levies on insurance products and recognised many of the issues advocated by the Business Roundtable. The message, Ms Murphy believes, is getting through. “There is more work to do, but we are making an impact and this is just the beginning.” Like Karl Sullivan, she feels the more voices, the better. “I’m firmly of the view that to achieve systemic change you need everyone pulling in the same direction. “We are continually talking to ICA and exploring opportunities to work together. We have a united stance on this issue. “The more people that are shouting from the rooftops, the more change we can drive.” Critics sometimes say that insurers’ demands for governments to spend money on mitigation are hypocritical when they are one of the main beneficiaries, and could easily dip their hands into their own deep pockets. But Ms Murphy disputes this view. Firstly, she says there are no demands on government – simply an explanation of the beneficial outcomes if money is invested more wisely. Secondly, IAG “currently makes substantial community investment that goes under the radar”, funding community organisations such as the State Emergency Service in New South Wales, the Australian Capital Territory and Queensland, as well as the Queensland Fire and Rescue Service. “We also reduce premiums when mitigation is achieved, and we reward customers who have more resilient homes,” she says. “We work with government to identify high risk areas and ways to reduce risk and are more than happy to share data.” So is the talking working? Yes. And is there more to be done? Absolutely. Mr Sullivan agrees, telling Insurance News: “It will take decades and decades of work. “A levee takes a long time to build and you might not see the benefits for many years. “I am encouraged by the amount of money being spent, but it needs to be sustained over decades.”
Against the tide While its competitors are banking on new underwriting facilities to build wealth, JLT remains set on putting clients first By Michelle Hannen
WHAT MAKES A CLIENT-FIRST organisation? Leo Demer, Chief Executive of Jardine Lloyd Thompson (JLT) Australia and New Zealand – who uses the phrase frequently during his interview with Insurance News – says it involves “tailor-making programs to meet each client’s needs”. Surely that’s just simple, oldfashioned insurance broking, but it runs contrary to the winds of change currently blowing through the business models of JLT’s global insurance broker competitors. “The big brokers, both here and overseas, are putting together all sorts of facilities, and the client has to fit in,” Mr Demer (pictured) says, referring to the Aon sidecar deal launched earlier this year where Berkshire Hathaway automatically underwrites a 7.5% share of each risk the broker places at Lloyd’s. Willis is working on a similar facility, to be called Global360, while Marsh also has various facilities in place. JLT Group Chief Executive Dominic Burke has described the arrangements as “not sustainable” and says they “usually crash and burn”. Mr Demer says sidecars “are not part of the JLT strategy at all”. “We’ll continue to sit down with a client and tailor-make a 28
product. We’ll pick the underwriters that are best for their risk. “We’re not committed to having to place a portion of our business with particular underwriters whether they suit the client or not.” A mega-broker sticking to its knitting and putting the client first is not the only thing that has led to JLT being the talk of the town recently. Locally the company has invested heavily in its specialty corporate business, including creating a national placement division, in a play that has seen it take a number of senior staff from both Aon and Marsh over the past 18 months. The biggest names to move across to JLT were four senior Aon brokers – Bob Mann, David Stanborough, Jeremy Rowsell and Wayne Holcombe – who commenced in their new roles at the start of this year. Mr Mann is Chairman of both JLT’s new national placement division and the specialty business, while Mr Stanborough is Managing Director of the national placement division. Mr Rowsell is Managing Director of casualty placement and Mr Holcombe has become Managing Director of reinsurance, supporting the placement division. insuranceNEWS
Much has been said about the strategy, but Mr Demer says there is nothing cloak and dagger about it. “Three of our four business units are either market-leading or close to it, and the corporate space has not been the strongest part of our business.” With JLT a top-two player in public sector business, enterprise solutions (its SME, schemes and regional commercial business) and employee benefits, Mr Demer has a mandate to invest in the specialty corporate business to ensure it can make the same claim. “We want to be the leaders in certain market segments. That’s what the ambition is.” As for the motivations of those who joined JLT, Mr Demer puts to bed speculation they were lured by vast sums of money. “I’ve got a set of results for the past six months that show our revenues are up by 7% and our profit is up by 10%,” he tells Insurance News. “It shows the misinformation that our competitors are throwing around, because if we were paying massive money our numbers would have really sucked.” Instead, it was a case of “good, client-driven” professional brokers simply wanting to be able to do their jobs; a reaction he October/November 2013
“We’re not committed to having to place a portion of our business with particular underwriters whether they suit the client or not.”
implies goes against the sidecar strategy of its competitors. As for the specialty expansion, within which there is a focus on construction, mining, energy, and financial risks, it’s a case of so far, so good. “We’ve acquired 62 new accounts in the first six months [of this year] which is probably more than in the past three years put together.” And due to the strength of its new corporate placement team JLT is now being included on more tenders. “More and more people want to talk to us because they are the best team in the country.” Of course, JLT’s existing clients have also benefitted. “These guys have spent a lot of time looking at our larger accounts and a lot of the programs have changed quite significantly. They’ve bought a whole new vision to the programs.” And JLT may not be done yet, with no staffing embargos preventing it from further bulking up its specialty corporate division. “Three or four years ago this probably wasn’t the place people wanted to come but there’s a lot of people want to join us right now,” Mr Demer says.
The financial strength of the local business may be another of JLT’s attractions. While not the biggest player in the Australian market in revenue terms, in the six months to June 30 the division posted solid organic growth, with revenue up 6%. “That indicates that we’re taking market share from the others,” he says. The first half saw JLT’s Australian and New Zealand risk and insurance division record a trading profit of £25.4 million, which represented 28% of JLT Group’s entire trading profit. And during his six years in the chief executive’s seat, Mr Demer has quietly gone about building a profit margin the envy of his peers both internally and externally. At 35%, it is the highest of any division group-wide, but he says there is no great secret behind how the figure has been achieved. A lower head count equals lower overheads, and rather than “a lot of highly paid people here who sit around and think about strategy all day”, all of JLT’s senior executives in the region look after clients. This extends to Mr Demer. He’s walking the talk of a clientfirst organisation, personally broking half a dozen of JLT’s major accounts himself. 29
PRIOR TO THE CHRISTCHURCH EARTHQUAKES, liquefaction was a risk most insurance professionals
Christchurch street scene: liquefaction results when soil loses strength and water is forced to the surface to fill the space
That sinking feeling It’s not a new risk, but the potential costs of liquefaction have been largely ignored – until now By Jan McCallum 30
knew little or nothing about. But not any more. Liquefaction in Christchurch was something of a black swan. It came largely as a surprise to insurers and reinsurers, and had a major effect, with Catlin Chief Executive Stephen Catlin telling Insurance News that “Christchurch cost far more money than anybody thought, because of liquefaction”. Head of Cat Perils at Swiss Re, Andreas Schraft, confirms it was both unexpected and had a major impact. “The surprise in Christchurch was that liquefaction can add significantly to an individual earthquake loss.” The industry, he says, “learned that the cost of demolishing a building can actually be higher than constructing a new one. This especially holds true if the building is affected by liquefaction.” But while black swan events are inappropriately rationalised with the benefit of hindsight, instead of trying to diminish its significance the industry is on a mission to improve its knowledge of liquefaction, so that the risk it poses is not underestimated again. Liquefaction is not new, and nor does it only occur in New Zealand. There was significant liquefaction as a result of the 2011 Japan earthquake, although it received few headlines after the devastation of the tsunami. For liquefaction to occur, three factors are required. The first is an earthquake large enough to trigger severe shaking. The others are geographical – namely that the area has fine grained soils such as loose sands and silts, which do not stick together, and that it has a high water table. The phenomenon occurs when severe shaking causes the soil to lose strength and decrease in volume, forcing water to the surface to fill the space between the grains of soil, turning the ground into liquid. Roads and houses sink and underground pipes warp. The complications for insurers include the necessity to investigate whether structures can be rebuilt on the same site and, if so, what sort of foundations or ground remediation is needed. Christchurch sits on the Canterbury Plain, a rich farming region that is formed mainly from sediment carried down from the Southern Alps by wide, sweeping rivers. It has the exact conditions required for liquefaction, which also caused land near the rivers to move sideways towards the water. Geological agency GNS Science says almost all moderate to large earthquakes in New Zealand have exhibited some degree of liquefaction and that several New Zealand cities and towns are built on susceptible land. But although town planners are paying closer attention to liquefaction risk, GNS says they may be unduly concerned because all three factors are needed, and these may not occur within planning timeframes. The insurance industry, however, is not so sanguine. Mr Catlin has called for catastrophe modellers to do more on the risk and its likely costs to the insurance industry, while Mr Schraft says liquefaction should be included in earthquake models because it can add significantly to total loss. Although the risk has been implicitly present in the models, Christchurch showed that more needs to be known about exposure, he told Insurance News. “The key challenge is that most existing methods for modelling liquefaction require in-depth knowledge about the local conditions, such as depth to groundwater table and local soil composition. Datasets that provide this information are rare, and limited to a handful of cities around the world.” As insurers move into new markets, models are October/November 2013
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increasingly limited by the availability and quality of data but Mr Schraft says liquefaction risk can still be modelled. To that end, Swiss Re has just developed its own global approach to quantify liquefaction risk in regions with limited data availability. The risk modellers are also responding, and are now giving greater weight to the risk when upgrading their earthquake models. AIR Worldwide this year updated its Japan earthquake model, using knowledge gained from the experiences in both Japan and Christchurch. It is currently collecting data for the next update of its New Zealand earthquake model. An AIR Worldwide spokesman told Insurance News that in addition to capturing the complex seismicity of Japan and the changes that took place as a result of the Tohoku earthquake, the updated Japan model includes explicit modelling of liquefaction. “Widespread areas of the Kanto Plain, especially around Tokyo Bay and along the Tone River, exhibited deformed streets, sidewalks and train tracks as well as damage to underground pipes,” the spokesman says. AIR Worldwide has also updated its Australian earthquake model. It now features a new liquefaction module covering major urban areas that have high liquefaction potential, large exposure concentration and sufficient groundwater depth data. “These areas are Greater Melbourne, eastern New South Wales, including Sydney and Newcastle, the southern part of South Australia including Adelaide, southwestern Western Australia including Perth, and Brisbane.” RMS Director of Model Product Management Patricia Grossi says the modeller already has in place an approach that looks at susceptibility of underlying soils to levels of shaking. She says that although Canterbury has raised awareness of extreme liquefaction, there are many examples, including from Japan’s Niigata earthquake of 1964, which caused multi-storey buildings to tilt and topple over. The San Francisco Bay area and Mexico City are other centres that are susceptible. “There are many examples over time,” she says. Liquefaction was so pronounced in Christchurch not only because of the soil conditions but also a high water table, and Dr Grossi says more work is being done to understand groundwater conditions and their impact in a quake. Although Christchurch losses have focused attention on liquefaction, Dr Grossi says the insurance losses reflected many factors, such as the sequence of events over a period of months and the involvement of the Earthquake Commission. Meanwhile, New Zealand insurers have also begun adding soil analysis to hazard models. Insurance Council of New Zealand Insurance Manager John Lucas says technology is cutting the cost of getting information and can provide enough detail – down to an individual site – to tell insurers whether the soil is vulnerable, and to what extent. The industry is also waiting to see how the Government restructures the Earthquake Commission, which provides the first layer of cover for land in New Zealand. Key questions include how much land remediation the Government should be expected to provide and whether it will be able to buy cover in the reinsurance market. As New Zealand grapples with the dilemmas posed by its geography, Mr Lucas says insurers are working hard to understand the vulnerability of soils. “Insurers are going to be factoring that into risk in the future,” he told Insurance News. “We have seen how challenging it is to resolve claims from Canterbury, and how costly it is.” 32
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Taking it slow With much of its remediation work complete, Lumley is ready to bulk up again with the right kind of brokers By Michelle Hannen
LUMLEY INSURANCE HAS KEPT A low profile over the past three years. Chief Executive John Nagle says it has been an intentional move to fly under the radar while Lumley gets its house in order. But with the bulk of that work now complete, Lumley is ready to tell its story and to take its first tentative steps towards growth. “Lumley has gone through a period over the last three years of quite strong remediation, so we’ve been restructuring our portfolios, restructuring our distribution and delivery, investing in systems and basically trying to build a model that delivers the best of local service and local relationships but at the same time bringing in more governance and transparency and control,” Mr Nagle says. It’s a process he says has “gone pretty well”. He agrees there have been a couple 34
of hiccups along the way – “clearly the storms of 2011 delayed us – but in the past 12 months a lot of what we’ve been working on has come to a conclusion”. That is not to say it is over. Mr Nagle believes that fixing a portfolio is more of a continuous improvement program than a short-term project, but things are certainly looking up. “A lot more of our portfolio is now at a stage where we’re comfortable with it,” he says. “The processes and the capability build we’ve been undertaking have started to deliver for us, so we’ve actually got very clear line of sight now around which portfolios are working well and which portfolios still need a bit of tender loving care. “It just needs ‘business as usual’ maintenance versus a few portfolios that still need remediation or final tidying-up.” One such area is its rural business, which Lumley put under review in 2012, insuranceNEWS
maintaining renewals but not actively seeking new business. Mr Nagle says it began taking on new risks in February, after combining “much better governance and portfolio management techniques along with a much better view of our customer profile”. “We’re really only offering that product to customers who have a balanced portfolio with us. “Prior to that we had misaligned portfolios where it was high-hazard high-risk business and we weren’t getting a fair share of the vanilla business, so now we’re really only interested in offering that product to people who want to give us a fair share of opportunity.” Another area the company scaled back its exposure to is Far North Queensland property risks but Mr Nagle says it is a misconception that the company withdrew from that market completely.
John Nagle on brokers John Nagle describes the current state of the broking market as “interesting”. He says the growth in the number of authorised reps has been “quite phenomenal” over the past two years, and he expects that growth will continue. So will broker consolidation. “I don’t talk to one broking house that hasn’t got cash for an acquisition at the moment, so consolidation within the broking market is going to continue.” Another observation is the emergence of younger brokers with a different style of doing business, “who basically don’t want to talk to anyone”. “They want to do everything electronically. They don’t even want to talk to their customers. It’s all done electronically and it’s all done at speed. I find that quite fascinating as a bit more of a traditionalist.” It presents an opportunity for insurers with strong broker relationships, he says. “They don’t actually have time to talk to people, so they go to the underwriters they trust who they have a good relationship with and look for support.” But Mr Nagle says such a scenario also “heightens the risk to both broker and underwriter”. “If you’re doing it at speed and you’re relying on the customer to understand your email or instruction, you are leaving yourself vulnerable to non-disclosure issues. “I think that’s the elephant in the room across the industry.” He says from an underwriting perspective, insurance companies need to find ways to adapt their offerings and adjust to the new way of doing business. In a world of increased customer choice, and the rise of online information and advice, brokers need to be able to clearly articulate their value and show the cost of their advice. For that reason, Mr Nagle is an advocate of commission disclosure. “You’ve got rising consumer sentiment around disclosure,” he says. “You’ve got increased statutory overview around the cost of providing services, and yet as an industry we tend to shy away from it and hope it will never happen. “It would be much better if the industry actually led the way rather than waited.”
“We always maintained some capacity there. We’ve actually looked at various options for Far North Queensland, but every time we feel brave there’s another [catastrophe] event. “So we are again looking at various options to support our customers up there, but it’s a mixture of having the right data and the right relationships to be able to do it safely.” Earlier this year, Mr Nagle spoke out about a “major spike” in large losses in the heavy goods transport industry, with a 23% increase in the average claims cost over the past three years. “You only have to look at the paper to see the number of freighting organisations that are under scrutiny for poor practices, and that continues to concern us. The margins in freighting are still very fine.” Mr Nagle told Insurance News at that time that “if the current rate of acci-
dents continues, there will be no option but to increase insurance premiums/deductibles, or simply stop writing these risks and redeploy capital to other product lines”. But he refuses to be drawn on whether Lumley has any plans to pull out of the area altogether. “We’ve put a lot of emphasis on risk management and risk selection. But trucking is still in our view very highhazard. It is the kind of area that you have to watch like a hawk.” While some product lines will continue to be closely watched, others are viewed as opportunities by Lumley. Mr Nagle says that with growth on the backburner for the past three years the company sees “lots of very good opportunities across our portfolio range”. “Because we’ve been working on our portfolios we haven’t tried to grow over the past three years, so we’re actuinsuranceNEWS
ally in a bit of a greenfields scenario in many respects, where we’ve got a low share of wallet of some relationships. “We’ve got a much better product range and capability that we can offer to the market than we’ve previously had, so we actually see a lot of upside for our product range.” Marine is one such area, with the company adding four senior staff to its marine team in March. It is also looking towards further automation of its marine product. “We felt we were falling behind the market and there was an opportunity for us to secure the services of some very knowledgeable experienced people. We took that opportunity and it’s working well for us.” Mr Nagle highlights business pack, industrial special risks and liability products as other areas that are “going very nicely”. “We think we can add more value to
“We know who are really committed to us and who want to grow with us versus the people who just want to have a casual relationship and are opportunistic.” expertise, they’ll also deal with Fred who they’ve never met in London because he’s got the right price. But we still believe there’s value in local relationships.” On market conditions, Mr Nagle agrees with the consensus that the past year has been good. “I think catastrophes have been back to a more normal pattern and there’s been an absence of very large fires across the industry.” Such stable conditions allow companies to address the expense side of their businesses, he says, but with rate rises easing that is beginning to change across the industry. However, Lumley does not plan to follow suit. “We think that we’ll just stick to our knitting. We’ll just stick to understanding what we do well and delivering that and building with the people who want to build with us.” Mr Nagle agrees with industry commentary that rate increases will fall in line with inflation over the coming year. “I suppose we describe it as softening, but not soft.” But there will be some exceptions. “I think if you’ve still got a higher hazard, poor-performing account you can expect to be struggling to find capacity and anyone’s who’s interested.” Mr Nagle believes the rise of automated underwriting has made a “fundamental difference” to the current insurance cycle. “There’s a lot more portfolio analysis so there’s a lot more ways of putting your price increases into the risks or the hazard areas that truly concern you versus broad-based blanket increases.” insuranceNEWS
Parent company Wesfarmers Insurance reported earnings before interest, tax and amortisation of $218 million for the year to June 30, 2013, with a $136 million contribution from its underwriting brands. It does not release divisional results within its insurance segment, but Mr Nagle says Lumley “made a very healthy contribution to that result”. Wesfarmers Managing Director Richard Goyder said improved risk selection was evident in the insurance division’s results. With its improvement program largely done, Lumley is plotting a course towards 2017, formulating targets and working backwards to determine what “capabilities, systems and advantages” it needs to start building in order to reach them. Mr Nagle declines to reveal its 2017 targets, some of which are still being formulated, only to say that if it can achieve them, the future for Lumley “looks very good”. “It’s an exciting process to come out of remediation and then start looking at the future so strongly.” It has also been quite a journey for Mr Nagle, who joined Lumley in 2009, initially to “help freshen and reposition” the company, before “it turned into a bit more of a deeper remediation turnaround exercise”. “It’s been a fascinating role,” he reflects. “I’m really proud of what our teams have achieved. “Clearly we’ve not got everything right on that journey. There’s a couple of things that in hindsight you regret, be it systems or implementation. “But overall we’ve made steady progress to being a far more relevant insurer in the market.”
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the market with what we’re offering there.” But rather than flinging its doors open to one and all, growth at Lumley is about being tentative and taking it slow. “We’ve closed a number of products or facilities over that three-year period; [it was] a substantial amount of income which we walked away from. “We’ve replaced all of that with better income, but that’s pretty much holding the line. We’re comfortable now that if people want to grow with us we’re happy to talk to them.” The work Lumley has undertaken in the past few years has given the business a clear idea of which brokers “want a good relationship with us”, and that is where growth will be focused. “We know who are really committed to us and who want to grow with us versus the people who just want to have a casual relationship and are opportunistic.” This segmentation of its client base has allowed Lumley to start developing different offerings and differential pricing. Mr Nagle says this knowledge will allow the business to deliver its proposition on “a very consistent basis”. “Probably the thing we’ve struggled with over the past couple of years is delivering that consistency,” he says. In 2012 Lumley unveiled a new regional model, designed to give more autonomy to regional managers, offer a local approach to underwriting and provide improved service. Inevitably such an approach leads to a higher cost base than some of its competitors who are pursuing a centralisation, offshoring and outsourcing strategy. “Our model is built around local touch and feel as we call it – local service. The challenge I put to all of my teams is ‘But are our customers prepared to pay for it?’ If they can’t pay for it we have to look at other ways of delivering those services.” Mr Nagle says the jury is still out to some extent on whether brokers are prepared to pay for better service. “It’s a conundrum of intermediary broking. While our brokers will always ask for local service relationships and
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The Asian opportunity Has the golden age finally arrived for insurers venturing into Asia? By Wendy Pugh
THE PROMISE OF ASIA IS like an alluring siren’s song. Populations are increasing, incomes are rising and a burgeoning middle class wants to protect the homes, cars and businesses that come with wealthier lifestyles. With Asia predicted to take a rising share of the global premium pie, insurers are optimistic that the right time for investment and expansion in the region has arrived. And with traditional insurance markets in Europe and the United States still suffering on the back of the global financial crisis, impressive economic growth in Asia – led by China – is even more attractive. 38
“Global reinsurers are all interested in Asia,” Swiss Re Chief Economist Kurt Karl says. “Swiss Re is very focused on Asia and we will be here to support Australian insurance companies thinking of expanding into the Asian market.” China’s expansion has already lined the pockets of miners, but there are also plenty of warning tales from companies that have come to grief. In reality, there are few quick dollars to be made in a part of the world that has long bedazzled and sometimes burned companies which overestimate the rewards and underestimate the complexities. “The average Australian insuranceNEWS
could be forgiven for thinking that as a nation we are incredibly engaged with Asia; all we need to do is climb on board the gravy train and wait to cash the cheque from its newfound and insatiable demand for goods and services,” IAG Chief Executive Mike Wilkins told the Trans-Tasman Business Circle recently. “As the chief executive of a company that has been in Asia for 15 years, I can assure everyone it is somewhat more complex than that.” Nevertheless, the growth forecasts for the region’s insurance industry are compelling. Premium income from the Asia-Pacific region may double October/November 2013
by 2020, according to Munich Re, contributing an extra €1 trillion. The slice from “emerging Asia” – markets such as China and India – will be about €670 billion, nearly 70% of the total. China is already the world’s fourth-largest insurance market by gross written premium (GWP) in both the general and life sectors, and Zurich AsiaPacific Regional Chairman Geoff Riddell says even the most pessimistic forecasts allow for growth of 5% a year for the next three decades. Standard & Poor’s Director Financial Services Ratings Michael Vine says Asia offers diversification for insurers. A slowing of economic growth,
Why insurers want to be in China: Huaxi village, in Jiangsu province, illustrates how quickly the country’s middle class has grown. The once-tiny village is now a booming market town of 36,000 and the most affluent place in the country. Every family has at least one house, two cars and $US250,000 in savings. Businessmen from other areas have built major factories in Huaxi to earn a residence permit and the right to live there.
most notably in China, has not lessened the appeal relative to other regions. “We still see the positive there in terms of growth momentum in GDP, population growth, industrialisation and increasing property to insure whether it is infrastructure assets or vehicle and home ownership,” Mr Vine told Insurance News. The challenges for foreign insurers include competition from large existing players with established brands and market clout, restrictions on foreign involvement, cultural differences, picking the right products to offer and ensuring strong distribution.
Munich Re notes that the insurance industry must also improve risk assessment in the region, taking account of the way fast development creates new peak exposures and hot spots and can affect worldwide supply chains – a lesson learned the hard way following the 2011 Thai floods. Selecting the right country in which to set up shop is also critical in a region that is culturally and geographically diverse, in various stages of development and with differing levels of regulatory oversight. What has worked in Thailand or Malaysia may not be successful in China, Singapore or Indonesia. insuranceNEWS
Howard Dick, Professorial Fellow at the Faculty of Business and Economics at the University of Melbourne, sees the opportunity but is also aware of the pitfalls. “Without question the insurance market in Asia has enormous potential,” he told Insurance News. “It is one of those industries that expands with income, especially middle-class income, and the growing institutionalisation of financial markets. “But there are also considerable challenges, most notably the regulatory framework and legal system.” The Chinese market was opened to foreign insurers when China joined the World October/November 2013
Trade Organisation in 2001. But 12 years later, foreign insurers hold just a 1% share of the Chinese market. The country’s third-party motor market was opened up last year, fueling interest from foreign insurers seeking to participate in China’s biggest non-life business line. Zurich was the first foreign insurer licensed to operate a general insurance business in Beijing, in 2006, and now writes commercial business for multinational clients, specialty lines where Chinese companies lack expertise, and offers health and personal accident cover. The company also has a representative office in Shanghai, 39
where the motor market alone is estimated to be the size of that of a significant western country, and is considering its expansion options. “We are looking to understand what the regulators are ready to allow us to do,” Mr Riddell told Insurance News. “We want to increase our general insurance licences and we want a Shanghai licence.” The company’s investment in China is regarded as a longterm proposition. Mr Riddell can see Zurich as a leading foreign player there in 30 years but says it is “pretty meaningless” to set goals two or three years out. QBE, which has a representative office in Guangzhou in China and operates in locations including Hong Kong, Singapore, the Philippines, Thailand and India, says AsiaPacific regulatory and solvency requirements are falling more in line with established markets elsewhere. The company has a positive outlook for its Asian business even as markets are increasingly fought over by local insurers and global players seeking growth. “There is keen competition on rates as a number of players focus on top line expansion in the short-term with the expectation of increased profitability in later years,” the company says. “QBE’s approach is to carefully select risks and price 40
business suitably from the outset.” The company’s Asia-Pacific business, which excludes Australia and New Zealand, reported GWP of $US578 million last year, up 24% from the previous year. Its 2013 GWP is forecast at $US730 million, boosted by the acquisition of Hang Seng Bank’s general insurance operations. Michael Vine says expansion in Asia makes sense for QBE and IAG given their size in the mature Australian market. “The investment markets like premium growth, and arguably the Australian and New Zealand markets are relatively lower growth and those companies have reached a critical mass,” he says. IAG’s Asia division reported a profit of $20 million for the year ended June 30, 2013, up from a loss of $62 million the previous year. GWP rose to $295 million from $219 million. The company says it’s focusing on accelerating expansion plans beyond the countries in which it has an existing presence and on achieving the “enormous potential” of its Indian joint venture. IAG wants Asia to represent 10% of GWP by 2016. Mr Wilkins says building relationships and having a well thought-out strategy are critical to success, while employees need sophisticated cross-cultural communication skills and an open mindset. They need to insuranceNEWS
be comfortable with new ways of working. “It is naive for Australian businesses to think that they can just show up and find masses of people clambering for their particular widget,” Mr Wilkins says. “Quite the opposite is more than likely true. IAG had a very slow and deliberate strategy with a view to driving long-term value – success is built around patience and realistic expectations.” But not everyone is joining the Asian stampede. Suncorp, which has business diversity through its banking interests, says it is focusing on Australia and New Zealand, two countries it knows and understands well. “Growth into any other worldwide region has not been a consideration as the group has strong growth opportunities in its existing chosen markets,” a spokesman says. Wesfarmers Insurance is also satisfied with a geographic spread of underwriting and broking operations in Australia and New Zealand, although it does have a significant broking presence in the UK. “We have no plans to look at opportunities elsewhere, including Asia, at present, as we feel there are significant opportunities for us to leverage and optimise the value we bring to customers in the markets in which we already operate,” a spokesman October/November 2013
told Insurance News. There are advantages to entering a market early, particularly in terms of building brand recognition and establishing relationships ahead of rivals, but the potential and allure of Asia is not likely to disappear any time soon as new opportunities continue to emerge. Swiss Re says emerging Asia may increase its share of global non-life premiums to 17% by 2023 and China will become the second-largest market behind the US. It says growth in Asian economies and insurance markets will continue for the next 50 years, although will likely slow. The momentum may also shift from China to other emerging countries, which have low insurance penetration rates but generally stable political and economic systems. Companies lured by the big numbers and growth forecasts will need to do their homework and spend timing laying the groundwork, or they risk having to salvage the wreckage of dashed expectations. Professor Dick adds that any firm interested in a longterm investment in Asia would be well-advised to send an advance group of people to the chosen country first to hone language skills, build connections and “generally wise up”. “If they are not prepared to do that, they should stay home.”
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Global power, local focus
AIG’s Jose Hernandez: competing in local markets using local employees
AIG’s Asia chief puts his faith in the strength of relationships and a long-term view By Terry McMullan
AFTER LIVING AND WORKING IN ASIA FOR 10 YEARS, Jose Hernandez describes himself as “a rookie, a junior” in the region. But AIG’s President and Chief Executive AsiaPacific makes it clear that AIG itself is, even in Asian terms, “an elder”. He’s right. American International Group, the 62ndlargest company in the world with a market capitalisation of more than $US57 billion, traces its origins to the formation of American Asiatic Underwriters in Shanghai in 1919 (it moved its base to New York in 1939). So while its name and its business success tend to identify AIG as an American giant with businesses in Asia, Mr Hernandez sees it differently. “We don’t consider ourselves a US-based insurer doing business in Asia,” he tells Insurance News. “We are an Asian
company, a Japanese company, a Chinese company, an Australian company. We are a global company that leverages global attributes to become better local competitors.” And as far as Mr Hernandez is concerned, the culture of the company isn’t driven from Lower Manhattan, either. “Our success is based around the people we have in the country,” he says. “The majority of our employees are locally based employees. Our competitors, for the most part, are local domestic employers. “Of course, we compete with the international players, but predominantly in Asia we compete in the local markets.” He says local employees have the ability to interpret AIG’s global culture in a way that the local markets the company competes in are going to understand. “We have a long history in this part of the world,” he says. “We’ve been in Australia, New Zealand and Papua New Guinea for many, many years. In each of the markets we compete in we have one or two key relationships that have stood the test of time. They remain the backbone of how we grow.” Throughout our hour-long conversation the importance of relationships arises constantly. While AIG was forced to sell many of its most profitable assets in Asia after its near-collapse in 2008, support for the company from the region has remained strong. Mr Hernandez attributes the relative ease with which AIG changed its general insurance brand in 2009 to Chartis and then back again to AIG late last year “not to the posters, or the public relations activity; it was the fact that before the crisis and through the crisis we had a very good relationship with our customers and our producers”. “It actually grew during the difficult times. That relationship was stronger after the crisis than it was before it. That strength made the communication flow much easier. “If we were to make some brand new change because we wanted to be better than anybody else and try to change in a normal environment, I think we wouldn’t have been as successful. We’ve seen other companies try to do that, and they’ve stumbled, because it’s very difficult to change your identity. That relationship of our people on the ground is what really made the difference.” Based in Japan since 2003, Mr Hernandez has worked for AIG since 1994. A Puerto Rican, much of his earlier work in the group took him through Central and South America. As AIG’s top person in Asia, his area of responsibility is not only politically, socially, geographically and culturally diverse, it’s also vast. Like any other insurer AIG is always seeking growth opportunities, and for AIG much of its global growth is going to come from the rapid development of Asian countries. “Asia is hot right now,” he agrees. “But it is very difficult for any insurer, even a local insurer, to start from the bottom up on the ground, because you have to be there for a good while.” He is enthusiastic about the opportunities in Vietnam and Indonesia, and wants to eventually increase business in Thailand, Malaysia and the Philippines. Other potential long-term prospects in Asia include “five or six other markets that nobody’s ever touched – places like Laos, Cambodia, Mongolia. So we watch those markets very closely, and focus on whether those are going to be growth opportunities maybe 10 years from now. “And what’s not to be excited about Australia, New Zealand and Papua New Guinea? You know, they might be different in terms of their macroeconomic development and their demographic activities, but the opportunities are there.”
“I think the AIG way is not governance, it’s not control – it’s really about innovation and service.” AIG is following a strategy of maintaining a close focus on a small number of potential high-growth markets, with the entire resources of the company capable of being directed on them. China and Brazil are an example of how flexible AIG is being in pursuing its long-term view. It considers the two countries its biggest growth opportunities. Both have consumer-driven markets, relatively low general insurance take-up, large populations with a preponderance of younger people, and growing middle classes – all factors that point to possibilities for direct and commercial insurance. But rather than treat the two countries as separate opportunities, AIG has established cross-functional teams to work on developing opportunities “across the borders”. While AIG is capable of going it alone in developing markets if it’s allowed to, Mr Hernandez says joint ventures “are a great tool to develop relationships in markets”. “We have a tremendous amount of joint venture relationships. For example, we grew in Japan, which is our largest market, through joint ventures. “In China our relationship with PICC, the largest general insurance company in the country, is now expanding. We recently announced support for their IPO in the life insurance side, and we’ve announced a joint venture life sales company. “So rather than the traditional joint venture with an insurance company, we’re creating a distribution company in China. We plan to put 25,000 agents in China to sell all our products. And we will also help PICC Life with expanding traditional products in China. “People think AIG wants to do it ‘the AIG way’. I think the AIG way is not governance, it’s not control – it’s really about innovation and service. “Our partners – the good ones, because there are all kinds of partners – really have embraced that. They have the local knowledge and the relationship, we bring the global attributes. Put that together, and boom!” Mr Hernandez sees distribution as the next big key to growth in Asia and other developing markets. But rather than follow the tried and true path to increasing distribution channels, he is hitching his wagon to building an understanding of the dynamics of social media and what the internet brings to the market – “the fact that the people will shop in multiple venues and media to be able to make an educated decision”. The “human interaction challenge” involves growing multiple distribution channels in a way that makes the customer experience consistent, regardless of which channel is used. “Ultimately people need to have the choice to buy whatever product they want, and to be able to buy it through whatever channel they want,” he says. “The companies that think that way are going to have an advantage.” He agrees the multiple channel strategy is more cumbersome and slows market growth, but adds that because AIG is in any market for the long haul, more balanced distribution actually gives it longer-term flexibility. AIG’s success in Asia is indeed a long-term exercise, but its an inescapable fact that the group’s sheer bulk also
LIKE JOE PLUMERI, THE NOW-RETIRED CHAIRMAN AND chief executive of Willis who achieved “legend” status for his willingness to engage with and enthuse his staff at all levels, Mr Hernandez believes in directly communicating the company’s values and strategies to employees. With so much of Asia to cover – only India is outside his portfolio – he achieves constant contact by being highly mobile. Each year he takes “a big chunk of time” out of his diary and flies around his region to meet employees, brokers and key clients. “We did 12 cities in 20 days last year,” he says. “I started in Papua New Guinea and ended in Moscow. This year I did 13 cities in 20 days. So as an exmarketing guy who believes in constantly improving performance, I’ve got to do 14 cities in 20 days next year.” Mr Hernandez also flies to New York every month, “and I make a point to be in China five to six times a year. I’ve also been in Australia four times.” He admits the brutal schedule is tiring, “but you still get on that plane and you go to the next city. And when you get to the next city, it just goes click. Enthusiasm is infectious.” When Insurance News met him in Melbourne last month, Mr Hernandez had arrived a few hours earlier from Kuala Lumpur with Australian Chief Executive Noel Condon after a three-day regional meeting. All he needed was a shower and a change of clothes and he was ready to run a staff meeting. “As soon as you walk into the room, and there are 150 [AIG employees] sitting there waiting, the tiredness all goes away. It’s an exciting new opportunity right off the bat. And you cannot stop talking about what you just learned over the last three days.” Mr Condon says his boss “just has an amazing internal motor that keeps going”. While he tends to shrug off the challenge of running such a vast regional business, Mr Hernandez also makes the point that it’s the people on the ground like Mr Condon and his team who “carry the weight”. “My role is more about direction, and about making things go better for people by working together.” And he says he can see the positive results of spending time with managers and staff. “More and more the team in Asia Pacific is really stepping up. “So you know, I could be sitting at a desk hating my job, and I don’t. I love it. On a personal basis, I love what I do.”
“I don’t want to be the largest insurance company in Asia. But I do want to increase long-lasting relationships with customers.”
helps in a region where governments are – in some cases rightly – suspicious of what advantage foreign insurers bring to their countries. With a long history of reliability to fall back on, the giant American has a distinct advantage when it comes to negotiating a place in new markets. To quote AIG legend Maurice “Hank” Greenberg: “All I want in life is an unfair advantage.” While Mr Hernandez says he doesn’t expect an unfair advantage, he agrees there are areas of business “where there’s only three or four carriers playing, then the opportunity for us to have a better play does present a great opportunity for return on capital.” He uses the example of Japan, where three large insurers dominate the general insurance market. “It’s the most mature under-served market in the world. We’re the fourth-largest, and we have 8.5% market share. Between the four of us, we control 94% of the market. “I’m not saying we’re better or we’re worse, but we’re the only alternative, because the other three are very traditional in the way they do business. So innovation comes into play in a big way – not only in terms of niche products or coverage, but also the product delivery.” AIG intends to keep building on its Asian success story, using modern thinking on distribution to match its emphasis on long-term relationships. “I don’t want to be the largest insurance company in Asia.” Mr Hernandez says. “I don’t want to have the most markets; I don’t want to say I make the most money. But I do want to increase long-lasting relationships with customers. “If we’re recognised for being an insurance company that has the best affinity and the longest-lasting customer base, we will absolutely be successful.”
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AND A SCENE
ONLY WE’D TOUCH
aturday morning, 8.15am. What do you do when one of your longest serving customers has a rolled B-double spilling 40 tonnes of liquid tallow into a creek that runs into the Brisbane River? When you’re Rob Wass, Manager of NTI Accident Assist, you go out and buy an inflatable boat. “Having worked at NTI for over 27 years, I’d thought I’d seen everything”, Rob said, “but I was wrong. This was a real disaster. With the driver unharmed the focus was on cleaning up the site, and fast.” “The young woman at NTI Accident Assist who took the call was exceptional”, explained Julie Russell from Russell Transport. “Before we knew it, all the necessary emergency services and environmental protection people were on site, along with NTI themselves.” Rob explains further. “We had disposable oil booms in place to stop the tallow spreading into the Brisbane River, but because the tallow had solidified and was breaking up, we needed to find a way to direct it towards the vacuum sucker trucks.” Ken Russell, Julie’s brother and fellow company director, was keen to get in on the action – he too went out and bought a boat. “They were out on the water with poles pulling the solidified tallow towards the sucker trucks”, says Julie. “I guess I shouldn’t have been surprised about the hands-on role NTI took. They’ve always been great, but it was above and beyond what I expected. They managed everything – the clean up, the police, the media – they even arranged for part of the road to be resurfaced.” It’s certainly an event no one will soon forget. And that’s exactly why R.B. Russell Transport has been with NTI for longer than they can remember. Visit truestories.nti.com.au
Insurance products are provided by National Transport Insurance. NTI Limited (ABN 84 000 746 109) (AFSL 237246) is the Manager for National Transport Insurance, an equal-partner joint venture of CGU Insurance Limited (ABN 27 004 478 371) (AFSL 238291) and AAI Limited trading as Vero Insurance (ABN 48 005 297 807) (AFSL 230859). Each insurer is only responsible for its 50% share of the policy.
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LIFE AND WORK IN LONDON To many Australian professionals itâ€™s the centre of the insurance universe, the place where the big deals get done. Meet some successful expatriates who work in the Square Mile but still call Australia home
LIKE IT OR NOT, IN THESE POST-COLONIAL DAYS AN INSURANCE professional’s heart still turns to the centre of the global insurance firmament – London. It’s in the British capital that the Big Stuff gets done, where practically every risk will find someone willing to cover it (for a price), and where new approaches to the insurance business often emerge. London remains the destination Australian underwriters and brokers routinely visit to place business at Lloyd’s, and where ambitious Australians journey to sharpen their professional skills. Despite a savage economic downturn, London remains the place to be for many Australian insurance professionals. The compulsion to accumulate “overseas experience” by working in London has been a feature of Australian life since the 1950s, but there’s a big difference between waiting tables in a café and working at Lloyd’s. For young professionals, a UK working holiday visa allows Australians and New Zealanders aged between 17 and 30 the opportunity to work and travel through the UK. It’s in force for two years and allows travellers to work for half of that period. A much better option for young insurance professionals seeking industry experience in the UK is the youth mobility scheme, which allocates a number of places for each country that participates in the scheme. Australia gets a relatively generous allocation of 35,000 places in the scheme and New Zealand gets 10,000. Canada, by contrast, gets only 5500 and Japan 1000. In effect, the Australian Government “sponsors” its citizens to live and work in the UK. The British Government uses a points system to allocate visas under the scheme, which is open to people aged between 18 and 31. But people are required to leave the country when their visas run out, and the Government says they shouldn't view the youth mobility scheme as a way to establish a long-term career in the country. There is no guarantee that participants will be allowed to return as a migrant, or to work for the same employer in the same job. Life is a lot easier for people who were born in the UK or are eligible to be a citizen through descent, adoption, naturalisation or registration. A British passport not only enables you to work in the UK but also anywhere in the European Union. As our article last year on Australians in New York City (Life and work in NYC, Insurance News February/March 2012) pointed out, the best way to get a guaranteed job overseas is to work for a global company that can arrange the necessary work permits for you.
That was the experience of new London resident Jacqui Ferrier (page 52), who was brought to the UK by her employer, Catlin, to work at Lloyd’s as an underwriter. Broker Paul Butler (page 54) was employed by an international company that valued his skills and experience. Few would recommend the method used by Chris Lavender (page 50), who arrived in London jobless but hopeful. His experience and his contacts gained from working in Australia landed him a prime broking job, with his employer doing the necessary paperwork to keep him there. But Chris’ example does confirm that insurance companies in London are always willing to consider employing outstanding professionals, despite the much-publicised layoffs of thousands of people in London’s massive financial services sector. Australians’ insurance qualifications are similar to their British counterparts’, and Lloyd’s-connected jobs are very hard to secure – and probably impossible without a company backing you. The money an insurance professional can earn in London is in many instances less than a broker or underwriter can earn in Australia, although with the cost of living in London similar to or even less than Sydney or Melbourne the money tends to go further. Just like everywhere else, salaries are based on the job requirements and the level of skill and experience required. A glance through advertised insurance jobs in London shows a commercial motor underwriter outside Lloyd’s will earn around £35,000 and a personal lines broker up to £10,000 less. An experienced senior underwriter outside Lloyd’s can expect up to £140,000. A senior claims manager working at Lloyd’s can expect around £100,000, and a highly specialised underwriter at Lloyd’s can take home as much as £250,000. Check the availability of jobs on employment websites. A good one is www.reed.co.uk. The visitor to London will find a lot more Australian accents in London behind the counters of pubs and coffee bars than they will around the city’s insurance offices and Lloyd’s. But Australian insurance professionals in London are respected for their skills, their knowledge and their work ethic, and there’s plenty of them. So how did they get there? How easy was it to get a job, and how difficult is it to win the acceptance of some of the sharpest operators anywhere? And what’s living in London really like? Insurance News Publisher Terry McMullan interviews just a few of the Australians who made the move and now call London home – for the time being, at least. October/November 2013
CHRIS LAVENDER Divisional Director Casualty Worldwide Arthur J Gallagher (Specialty)
“The person who can make the decision is sitting right there in front of you.”
AN AUSTRALIAN BROKER TURNING UP UNINVITED IN THE LONDON market looking for a job as a Lloyd’s broker is going to find the going very tough. Unless, of course, you’re Chris Lavender. Having made his mark in broking in Australia, Chris arrived in London in February 2010 with plenty of insurance experience but not much else. “Since my very early days in the industry, I’d always dreamed of working at Lloyd’s,” he says. “But I do agree that moving here without a job in the midst of a recession was a bit of a risk.” It was also a year in which London set new records for rain and cold, but Chris found he did have something going for him in the job stakes – people he’d met back in Australia. He’s a gregarious kind of bloke, is Chris. He joined Southern Cross Insurance Brokers in Brisbane at the age of 19 and gained his insurance qualifications over the next four years, followed by commercial underwriting roles at Allianz and Zurich before moving to Austbrokers member AEI Insurance Brokers in 2004. Chris relocated to Sydney in 2006 to work in the transport and logistics brokerage Austbrokers AEI Transport, and quickly found himself immersed in the social and business buzz of the city. “Sydney is the centre of Australian insurance, and it was a fantastic experience to get to know so many people and the market.” Over the next few years he found himself mentored by his managing director, Tim Wedlock – “he was a terrific support to me” – who urged Chris to live up to his potential. Chris also served on the NIBA Young Professionals committee for three years while in Sydney. But London was an itch he had to scratch. Having gone so far as to buy an air ticket to London at the age of 22, he knew when he hit 30 it was now or never. That gregarious nature came to the fore and Chris was able to utilise the London contacts he’d made during his time at Austbrokers, with Arthur J Gallagher in London giving him a prized interview. And so it was that its specialty division helped Chris Lavender realise his
dream, and he’s now a broker pitching business face-to-face with underwriters at Lloyd’s. “It’s a dynamic place to work in,” he says over lunch. “We work with the underwriters to draft policies specific to the risk, so there’s plenty of challenge. The major and most important difference I find is the person who can make the decision is sitting right there in front of you.” He agrees with Lloyd’s Chairman John Nelson that non-British accents are few and far between on the market giant’s trading floor. “There are not many Australians in here, but then it’s a tough place for anyone, even the Brits, to get into. You’re going to find it very hard unless you know someone who can help you.” “You walk in here on day one and you can’t help feeling that you’re a foreigner. The underwriters will test you, but once you’ve established you’re a decent bloke who knows what he’s doing you build relationships quickly. Their sense of humour is pretty close to ours. “And your word is your bond – it’s everything.” Three years after he first walked on to the Lloyd’s floor, Chris says he still has a sense of the tradition and history that makes the 325-yearold market so remarkable and fulfilling to work in. “There’s a huge variety of industries that bring their risks to Lloyd’s. In addition to Australian accounts, I work on global risks from many varied countries that are often facultative reinsurance placements, which is not something I was exposed to in Australia.” While he gets to travel to such places as South America to visit clients, London’s closeness to western European centres means leisure travel is easy and convenient. An annual trip back to Australia for work and pleasure for a few weeks every year helps to keep the pangs of homesickness at bay, and although he loves his life and work in London he says he’ll return to Australia some day. “It’s nice to know Australia is there, and I can come back anytime I want to,” he says. “It’s the best safety net you can have.” October/November 2013
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JACQUI FERRIER Class Underwriter – General Liability Syndicate 2003 at Lloyd’s Catlin Underwriting Agencies
FOR A WOMAN WHO SET OUT TO BE A CHIROPRACTOR, JACQUI Ferrier has ended up in something entirely different. But the Catlin underwriters’ box at Lloyd’s is exactly where she wants to be. London is a long way from the tiny township of Woodburn, south of Lismore in New South Wales, but Jacqui sees her upbringing as being a great grounding for the non-stop buzz of London. “I was a country kid and didn’t really have the expectations or pressure that people from bigger places might have,” she says. “It was left to me to decide what I wanted to be.” Totally immersed in gymnastics as a teenager, injuries and falls “meant I saw a lot of chiropractors and it seemed natural to follow in the footsteps of those great chiropractors who came to my aid so many times”. The country kid moved to Sydney to complete her university degree. Following her undergraduate degree she planned to complete her masters in chiropractic the following year. But while she was waiting for university to start, fate intervened in the form of Swiss Re. Jacqui took an administration job in the reinsurer’s Sydney office to build up the university kitty. “It was in the facultative area,” she says. “It was fascinating.” Personality, a passion for learning and a willingness to do the hard yards resulted in her managers at Swiss Re, Brad Verity and Anne Plumb, deciding she was too qualified for an administration role, within 12 months guiding her into an underwriting position in the casualty area. The HIH collapse in 2001 saw a tidal wave of casualty facultative business opportunities move into Swiss Re. “Our casualty book increased by more than five times. It was a very stressful yet stimulating time.” In 2003, Jacqui was promoted to senior casualty underwriter. The following year she moved to AIG to work in the direct space as a senior liability underwriter, but after a year there, Catlin came calling. Jacqui was 29 and the UK-based underwriter had only recently set up its first Australian office in Sydney. The job scope was to build a direct general liability portfolio and the office comprised just four people. “I was thrown in at the deep end,” she says. “I was told to put a business plan together for critiquing by senior management. “It was hard but incredibly rewarding work. We had to get the Catlin brand out in the market and we had to build the foundations of an insurance and reinsurance business in the Australian marketplace – a marketplace renowned for its volatility of results. “We had to focus on building a long-term profitable insurance offering which would offer ‘value-add’ to the local marketplace. “The great thing about Catlin is that they want your feedback, they listen and they act on what you tell them.” The momentum grew, and Catlin started to sit up and notice the young underwriter from Sydney. The result was an opportunity to move to London and Lloyd’s as a class underwriter with the international liability underwriting team. “The transition to working in London was easy, because Catlin has a ‘one group’ mentality,” she says. “They work the same way as we did in Sydney and there’s a lot of similarity in the way they write business.”
Jacqui underwrites business in all territories, including the developing markets like South America, Asia, Africa and the Middle East. She also writes business in mature markets like Canada and Australia. “It’s certainly a challenge to understand the intricacies of loss trends and jurisdictions, etc, in each of the different territories we underwrite business in,” she says. “Regular travel out to the various regions aids in the process of learning, as does leaning on the team of lawyers, claims adjusters and actuaries that Catlin sees as critical to the business.” She says the Australian market is in many ways “more cut-throat and more volatile than the London market. It gives you a great grounding for London, where the competition is more, well, subtle. “The diversity of risk placement and the expertise within the market makes Lloyd’s an exciting market to work in. I personally encourage aspiring insurance professionals to take the leap and throw yourself in the deep end. It can only make you a better and more rounded insurance professional.” Like most of the Australian insurance professionals we met in London, Jacqui gets home to Australia once or twice a year. And like them she has the occasional twinge of homesickness, although her circle of friends in London is large. “London is a city of orphans,” she says. “A lot of people weren’t born here, and I think that makes us much more open to being social and friendly.” For now, her life with her partner, a market researcher, and their Australian-raised dog Rufus, is focused on living and enjoying London. “The job is great and the opportunities here are endless. So we’ll be here as long as it’s a great experience. “We’ll go home for good one day – it’s a great safety net to have. But not for quite a while.”
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PAUL BUTLER Head of AUSPAC THB Global Risk Division Thompson Heath and Bond Limited
INTERVIEWING PAUL BUTLER IN A COFFEE BAR JUST DOWN THE street from Lloyd’s is made difficult by the fact that everybody seems to know him. The coffee bar is owned and operated by Australians. Even the barista is Australian, while most of the patrons appear to be English insurance brokers meeting clients and contacts over a cup of coffee and some cake. All but a few of them, it seems, know Paul, who heads up the Australia-Pacific section of major Lloyd’s broker Thompson Heath & Bond (THB). The Australian brokers and underwriters we met in London recommended we meet Paul, as did the two other Australians featured in this article. His work history is all big-end stuff. He was a director of Aon in Sydney before relocating to London as a strategic account manager responsible for Australian placements in the London and European markets. He later moved across to Marsh and back to Australia as a senior vice-president strategic risk. A few years later, in 2008, he became principal of Australian Reliance Group. In December 2010 he moved back to London to take up his present position at THB, and it’s obvious he likes it. Not surprisingly, he’s also well known in the Australian market, where many of his old colleagues keep in touch with him and speak
highly of his easy-going nature and his professionalism. “It’s a really rewarding industry to work in,” he says. “If you have the opportunity and the right sort of experience broking can easily take you overseas, to wherever you want to be.” It’s an advantage he is disappointed the industry doesn’t make more of when seeking to recruit Australia’s best and brightest graduates. “The industry could do a lot more, I think,” he says. Thanks to the consolidations of the 1990s Australian insurers and brokers are having to recruit now from a very small talent pool, but he’s complimentary about the hands-on grounding young professionals are getting now. As for work and life in London, it’s pretty good. As a senior manager at a global company, Paul’s hours are occasionally long, and there’s also plenty of travel – but at least a fair amount of it is back to Australia to consult with clients and see family. Home for him and his family is in Essex, although there’s also a flat in inner-city Kensington. Like most London residents, taking a car to work just isn’t possible. He takes the Tube, which is faster, anyway. So how similar is the Australian market to the London market? “They’re very different,” he says. “I’m involved in all classes of business, whereas traditionally London wholesale brokers tend to specialise in a particular class like property, casualty, marine, aviation and the like. “Lloyd’s is a unique trading platform providing product and services to a global market. Its skillset and understanding of different geographies and industry segments that require insurance capacity is amazing. “The market runs really lean but it uses technology like IT solutions and modelling systems when it underwrites risks wordwide.” He says brokers and underwriters at Lloyd’s work closely to put policies together for clients no matter where in the world they are. And the spirit of co-operation, sharing of knowledge and trust in the other party is vital to both the underwriters and brokers. “It’s important to be able to impress a guy whose livelihood depends on the performance of his portfolio,” Paul says. “A fair amount of the business that arrives at Lloyd’s is either in distress, or the domestic market where it originated doesn't have the capacity or appetite to provide cover. “Understanding that opportunity, whether it’s an individual risk, portfolio, binder or otherwise is vital. Lloyd’s prides itself on this and on delivering long-term solutions. “So it requires specialised underwriting. And that’s the beauty of the market. “There’s a lot of niche business coming in – you get a lot of IT stuff, for example. Some business really needs a London footprint to happen.” THB is part of the giant AmWINS group, one of the largest wholesale brokers in the United States, and Lloyd’s is an ideal place for the company to place business. When Insurance News spoke with Paul the news of Aon’s sidecar arrangement with Berkshire Hathaway had just broken, and brokers and underwriters were huddled in coffee bars and pubs just like this one all along Leadenhall Street and in the adjacent market discussing what it all meant. Paul, however, was quite sanguine about it all. “Given Aon’s global business model why wouldn’t they get into a deal like this? “You’d be deficient not to explore all the options a company like Berkshire Hathaway makes possible with all that flexibility.” He says these type of facilities aren’t new and that Lloyd’s, having faced these type of challenges before, will respond proactively. “It’s part of the excitement of working here, where it all happens and where it often seems that anything’s possible,” he says. “You’ve just got to enjoy a place like this.” October/November 2013
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Caught in the middle Sandwich panels are being increasingly used in houses, but many insurers won’t cover them. So are the panels safe or not? By John Deex
The case for sandwich panels in construction: Insulated sandwich panels have been in use for more than 50 years. They have become popular in the building trade because they’re light and easy to handle, significantly shortening construction schedules. Best of all, their thermal properties provide continuous insulation. They have few heat or cold leakage properties. They also require little maintenance and are recyclable and reusable.
The case against: The disadvantage of insulated sandwich panels is their performance in fires. The most common criticisms of panels in fire conditions relate to the delaminating of the outer skins exposing the core, the structural ability of the panels to stay in place and not collapse during a fire, and fire spreading within the panel. There have been improvements over time to panels with the addition of fire retardants and the use of fixings made of metal rather than plastic. – Information supplied by the Insulated Panel Council Australasia
The architect wanted sandwich panels for this wall, the broker said no way: carpenter Taylor Gordon-Worrall finally used cement sheets
A HOMEOWNER IS RENOVATING AND THEIR architect recommends sandwich panels as an external wall cladding, saying they are the ideal product for the job and safe to use. The owner’s broker disagrees, insisting that getting insurance for a home containing sandwich panels will be a major problem. The builder joins the argument, saying the panels will cut building time because they’re easy to handle and they are far less prone to cracking than traditional cement panels. Such standoffs are becoming more common as sandwich panels are increasingly being spruiked to the residential and home improvement market as a cost-effective, resilient material with high insulation properties. But who is right? Sandwich panels – typically factory-engineered units comprising two metal faces and an insulating core – certainly have a chequered past. 56
In the commercial sector, they have been a factor in a number of severe fires that have hit insurers hard. Jonathan Barnett, Technical Director at consulting engineers Olsson Fire & Risk, says they are an attractive option “because they provide a construction and insulation component, and they fit together like Lego”. “The early ones were great – until they had fires. Then there were all sorts of issues. “The insulation was typically plastic, which could melt and run out from between the panels. It was like having someone pouring burning gasoline into your property. “When there was a fire they also tended to come apart at the connections. Before you knew it the panels started falling down. Where you thought you had a wall to act as a firebreak, suddenly you didn’t.” But the technology has moved on. Today, there are a variety of core materials used – and many are extremely fire-resistant. insuranceNEWS
Industry expert Allan Manning has carried out tests on different grades of the material. “Some of it has a fire retardant and in our testing we could not get it to ignite,” he says. Dr Barnett agrees that large-scale tests are needed to stress the panels in the same way a real fire does. US-based insurer FM Global has developed such a test “and with application requirements and testing protocol we can make sure the risks can be managed”. But there are still concerns. “If you have the wrong panels and you don’t follow procedures then there will be a property protection issue,” Dr Barnett says. Professor Manning agrees. “It is very important that any product that is used is fire-rated. “What worries me is, who is making sure that what goes into homes is the fire-resistant product?
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“All it takes is one rogue builder. You wouldn’t know until it was too late.” But both experts are clear about one point – use the right type of panel in the appropriate setting and there is no need for anyone, insurers included, to be concerned. And yet they are. One broker told Insurance News: “In a nutshell, underwriters don’t like them.” Allianz is one insurer that doesn’t like them, with a spokesman telling Insurance News if a residential property is using sandwich panels, “our underwriting guidelines would be to decline”. Reuben Aitchison, Corporate Affairs Manager for Suncorp Personal Insurance, describes it as “a very murky area”. “Sandwich panels are still very much niche products in the home building space, with very few suppliers, so there is little data or experience around how they hold up against various perils. “And as with any other new materials, there are higher costs of repair, due to uncertainties and the current lack of experience or exposure to these types of materials. “We don't ask questions about them at the point of underwriting, but we are working to better understand the risk, repair and pricing implications.” Despite the industry’s caution, insulated panels have their supporters, who say insurers are simply wrong in being so cautious. Ron Lawson, Chief Executive of the Insulated Panel Council Australasia, says sandwich panels have suffered from a “20year legacy of misinformation”. “The perceptions do not relate to the actual performance. Our experience indicates that when properly constructed, regardless of the type of panel used, it is more fire-resistant than much of the existing building stock readily accepted by the insurance industry.” The council is carrying out research with the University of New South Wales and Fire and Rescue NSW, as well as providing input to the Building Resilience Knowledge Database compiled by the Insurance Council of Australia (ICA). “What we’re doing with ICA is some work looking at the resilience of various building materials,” Mr Lawson says. “Our materials are probably more resistant in many areas, not just fires.” He says residential building is a growth market for sandwich panels and the product is used extensively in home improvements. While he agrees it can be difficult to get insurance for buildings using the panels, he says his group “can help people get cover at market rates”. Professor Manning says insurers are inherently conservative, and if they thought the use of sandwich panels increased the risk then they would increase premiums. And while people buying a home would be well advised to find out if panels have 58
The fire properties of the core materials within sandwich panels can vary significantly. Here are five of the main types.
Expanded polystyrene (EPS) The panel that most insurers are (justifiably) afraid of. Expanded polystyrene is a thermoplastic that melts when heated. Chemical flame retardants can be added, but when exposed to sustained flame even retardant polystyrene materials will burn vigorously and produce large quantities of black smoke. Collapse of the facings can occur and accelerate the spread of flame.
Rigid polyurethanes (PUR) These form a “char” when subjected to heat and flame. Char is the solid residue left when heat turns material to gas. The char acts as an insulator that gives some protection to the underlying product. PUR will burn by charring producing significant quantities of smoke, but in large-scale tests there is no hidden flame spread.
Polyisocyanurate (PIR) Modified polyurethanes with the incorporation of much greater heat-resistant structures. The strength of the char is increased and protection to the underlying insulation enhanced. This reduces the damage in fire and the amount of smoke.
Mineral fibre (MRF) Created by bonding mineral fibres together using organic binders. Contains some combustible elements but fire performance is generally very good. They produce less heat and smoke than panels with polyurethane cores.
Phenolic foams Contains a polymeric structure offering considerable resistance to degradation by heat. Like polyurethane products it forms a char, adding a high degree of protection. Smoke production is low. Despite good fire properties, many phenolic core materials struggle to achieve mechanical resistance requirements.
been used in a property, and if so, what grade of panel has been used, he adds that in the case of home and contents cover the duty rests with the insurer to ask the right questions. “If you deliberately mislead an insurer that could invalidate a claim, but if the question does not come up, then that is the insurer’s problem,” he says. This viewpoint is validated by the approach of one major insurer, which routinely asks brokers if panels are used in construction. If they say yes, coverage is declined. But cover for homes with panels is available on its direct market website, because it doesn’t ask about them. Mr Lawson says he is aware that sandwich panels are “sometimes deselected” due to “false information” but that his group is not shy about speaking up when this occurs. “We haven’t been as successful as we might have been in educating the insurance industry,” he says. “We need to present a good case and speak to the right brokers and insurers.” Professor Manning backs up that point. “Insurers and underwriters don’t understand the different grades of this material and assume the lowest common denominator. There is an education issue, and insurers need to keep up-to-date with modern building techniques.” ICA General Manager Policy Risk and Disaster Karl Sullivan believes insurers are adjusting to the new technology, but it will take time before panels are totally trusted. “I am confident these days that sandwich panels are treated much better by insurers,” he says. “But it’s a lot of change for the industry to keep up with. There is no overnight solution. Time is needed to develop a loss profile.” He says that as a free market “we can’t say all insurers will insure all products at all times”. “You might find some insurers who have had a bad experience and don’t want to insure them.” So when it comes to the architect advising the use of sandwich panels and the broker warning about their insurability, who should the client listen to? The answer has to be both. If the right panels are used, in the right way, in the right setting, then they should not pose any particular problems regarding fire resilience. But – rightly or wrongly – many insurers still harbour concerns, and homeowners may indeed find it difficult to find insurance cover. And the situation will most likely persist until ICA can complete its building resilience database, giving insurers a onestop shop to assess the resilience of all manner of new building materials. As Dr Barnett concludes, in this case “a little bit of knowledge is not enough”.
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