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MEET AUSTRALIA’S BIGGEST INSURER
INSIGHTS, ANALYSIS AND INSPIRATION
TAKING LLOYD’S TO THE WORLD
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This is a general description of insurance services and does not represent or alter any insurance policy. Such services are provided to qualified customers by affiliated companies Zurich Insurance Company Ltd, 400 University Ave., Toronto, ON M5G 1S9, and outside the US and Canada, Zurich Insurance plc, Ballsbridge Park, Dublin 4, Ireland (and its EU 5 Blue St., North Sydney, NSW 2060 and further entities, as required by local jurisdiction.
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Contents 6 Newsmakers » 10 Tough times ahead » The insurance cycle is heading down the curve and competition is becoming rampant. What’s in store for the industry in 2015?
20 Moving into a brave new world » Lloyd’s Chairman John Nelson sees progress in the market’s bold plan to modernise and seek out new global opportunities.
26 A volatile world » Geopolitical turmoil and supply chain disruption are among growing threats highlighted in two annual risk reports.
28 Commercial mind, social heart » Ex-Wesfarmers Insurance chief Vivek Bhatia is treading new ground as he guides NSW’s state-owned compensation organisations back to health.
35 Commissions feel the squeeze » As more overseas regulators crack down, is a change of broker remuneration model inevitable?
38 Calliden’s high-calibre turbocharge » The general insurance business plans to expand its current specialties under new owner Munich Re.
42 Share madness »
lawNEWS 62 Executive indecision » A recent court ruling demonstrates a need for precision in directors’ and officers’ policies.
peopleNEWS 64 Making a difference, courtesy of Suncorp » How a simple training program became a mission to help disadvantaged people in the Top End.
66 The golden boy » Steadfast founding member Leo Driessen has notched up 50 years in broking, but he’s not done yet.
70 Sportscover puts achievers in the spotlight » 72 MGA staff learn about the business – and chocolate » 74 Blue Eagles explore Great Barrier Reef » 76 NTI goes to great heights to celebrate » 78 Lloyd’s reps give Nelson an admirable welcome » 80 Rain, hail and cocktails for Centrepoint » 82 maglog »
Collaborative consumption is being hailed as a dream ticket, but it could turn into an insurance nightmare.
46 An eye in the sky » Drone technology offers a new approach to loss management, but flying the things is not without dangers.
52 Material concern » Graphene has been hailed as the next miracle substance – but could it pose a threat to human health, and to the insurance industry?
56 Environmental protection » Brokers may be missing out on a prime opportunity if they don't alert clients to the need for pollution cover.
60 Greasing the wheels for CTP » NSW insurers pay for a system that provides a win-win for them and motorists.
Cover image: Illustration by Krisztina Strzebonski
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The only way is down
Mergers dominate London market
Global reinsurance pricing continued its downward spiral at the January 1 renewals, affecting almost all lines of business and geographic markets, according to Marsh subsidiary Guy Carpenter. The trend is largely attributed to a lack of costly catastrophes last year. Global insured losses of about $US30 billion were the lowest in four years and down 25% on 2013, the reinsurance broker’s report says. Another major driver was the continued flow of third-party capital into the reinsurance market, as institutional investors seek higher yields amid low interest rates. This trend “continues to reshape the reinsurance landscape’s capital structure”, Guy Carpenter says. A common feature of the January 1 renewals was clients’ ability to extract “tailored solutions” from reinsurers. Many achieved broader coverage as a result. The options clients most commonly sought were extended-hours clauses, improved reinstatement terms, the addition of non-modelled lines and greater coverage for terror exposures. “The demand for more state-of-the-art, client-focused strategies will only increase,” Guy Carpenter says. “Clients will seek assistance with the structuring of alternative reinsurance vehicles, entry into new markets and the creation of new distribution channels and new products to address emerging risks.” Meanwhile, Willis Group says “relentless rate reductions”, low investment returns and the continued influx of alternative capital “offer no respite for reinsurers”. In its review of the January 1 renewals, the broker says “reshaping of the global reinsurance industry [is] now starting in earnest”. Willis Group forecasts a year of mergers and acquisitions. “With only a limited supply of attractive target companies, consolidators looking for scale and diversification are moving as company valuations become more reasonable for both parties.” Buyers flex muscles as reinsurance prices fall, 2 February
Movements… Marsh has appointed Scott Leney (left) as Australia Chief Executive, replacing John Clayton, who has become Pacific Region Chairman. Mr Clayton will now be responsible for Marsh businesses in New Zealand, Fiji and Papua New Guinea, and will work with Mr Leney to shape Australian strategy. He also retains responsibility for Marsh’s SME strategy in Asia. Leney steps up as Marsh CEO, 2 February
Large mergers and acquisitions (M&A) have recently occurred in the London insurance market, and private equity groups looking to sell stakes are expected to drive activity over the next year, according to AM Best. “Last month XL Group cited the need to address the meaningful structural changes shaping the property and casualty sector as one of the reasons behind its planned purchase of Catlin Group, the largest managing agent at Lloyd’s… by gross written premium,” it says. While M&A activity has tended to involve smaller London market players over the past few years, the XL deal stands out for its size, according to the ratings agency. XL Group announced in January it will buy Catlin for $US2.79 billion. XL Catlin will become the eighth-largest reinsurer, up from 13th for XL and 19th for Catlin. AM Best says brokers are establishing smaller panels of reinsurers with expertise in particular lines. Bigger balance sheets are seen as strengthening negotiating positions with large brokers, and companies may explore tie-
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Australian Securities and Investments Commission Chairman Greg Medcraft serves it up at the National Press Club in December
Rachael Lavars has become Chief Executive of Macquarie Pacific Funding, replacing Stuart White, who has left the company. Ms Lavars was head of predecessor company Macquarie Premium Funding from 2006-08 and played a key role in the acquisition of Pacific Premium Funding in 2013. She was most recently head of Macquarie Business Banking’s insurance broking segment. Lavars takes over at Macquarie Pacific Funding, 2 February
ups to consolidate competitive positions, particularly in writing property insurance. There have been a number of large deals in the specialty (re)insurance sector in recent months, AM Best says. They include Renaissance Holdings’ $US1.9 billion acquisition of Platinum Underwriters and a merger unveiled by Axis Capital and PartnerRe in January to create the world’s fifth-largest reinsurer, with a market value of $US11 billion. “Given the soft market conditions, particularly for reinsurance, profitable organic growth is hard to achieve and insurers are more likely to turn to M&A,” AM Best says. The trend of third-party capital establishing partnerships with London market insurers is expected to continue. For international insurance groups seeking the benefits of operating in the Lloyd’s market, acquiring a current managing agent remains the most straightforward approach. Private equity sell-offs ‘to drive London M&A’, 16 February 2015
$300m bushfire payout Survivors of the Murrindindi-Marysville bushfire in 2009 have agreed to a $300 million settlement on the eve of a class action in the Victorian Supreme Court. Power company AusNet Services (formerly SP AusNet), maintenance contractor Utility Services Corporation (USC) and the Victorian Government settled on Friday. The action alleged negligence by AusNet for failing to maintain faulty electrical infrastructure before the Black Saturday bushfires of February 2009. The fires claimed 173 lives. Bushfire victims agree $300 million payout, 9 February
Martin McAvenna will retire as General Manager of Austbrokers & IBNA Member Services on June 30 after almost six years in the role and more than 40 years in the insurance industry. But he prefers to call it a “redirection” in life, rather than retirement. “Hopefully I can still make a contribution based on my experience in the insurance market,” he told insuranceNEWS.com.au. AIMS GM to step down, 2 February February/March 2015
Former Lumley Insurance Chief Executive John Nagle has been appointed Executive Director of WorkCover Insurance in NSW. The move comes under a shake-up at the State Government’s division of Safety, Return to Work and Support (SRWS), aimed at instilling a more commercial focus among the workers’ compensation and insurance operations. Ex-Lumley chief to run NSW workers’ comp insurance agency, 2 February
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Siege highlights pool’s Value The Martin Place siege in Sydney has raised awareness of the importance of terrorism reinsurance pools, according to the Australian Reinsurance Pool Corporation (ARPC). Man Haron Monis held staff and customers hostage at the Lindt Café in the Sydney CBD on December 18, resulting in the deaths of café manager Tori Johnson, lawyer Katrina Dawson, and Monis. An inquest last week heard Monis shot Mr Johnson in the back of the head. Police responded by storming the building and killing the gunman, and Ms Dawson was struck by fragments of police bullets. The siege has been classified by the Federal Government as a terrorist event. ARPC Chief Executive Christopher Wallace told insuranceNEWS.com.au the announcement was appropriate, but in practice “only administrative”.
Insurers had already advised they would pay claims, and while the classification in theory gave them the option of claiming from the ARPC, the estimated $600,000 losses were well inside insurers’ deductibles, which are as high as $10 million. The pool was established following the September 11 2001 attacks on the US, which resulted in a global withdrawal of terrorism insurance. Some commentators believe the private reinsurance market now has the capacity and appetite to provide required cover, and a Treasury review of the ARPC’s future is pending. “Schemes like this exist in all major western economies,” Dr Wallace told insuranceNEWS.com.au. “The US scheme was recently renewed, and pools for this type of catastrophe risk have value. “The events of the Sydney siege have created more awareness of the issues.” Sydney attack ‘shows importance of terrorism pool’, 2 February
Investors flood reinsurance Reinsurance capital has grown to a record $US575 billion, including an unprecedented $US62 billion of alternative capital, Aon Benfield says. Financial security in the sector has never been higher, as reinsurers take record low risk per unit of capital, according to the global reinsurance broker’s latest market outlook. The price of traditional reinsurance has fallen due to “disruptive alternative capital”, which grew 25% last year compared with 6% growth in total global reinsurance capital. But Head of Broking for Aon Benfield Australia John Carroll told insuranceNEWS.com.au prices in this region have yet to bottom out. “We are still seeing catastrophe rates in Australia at 10-15% above pre-2011 levels,” he said. “I still feel there is room for rates to come down.” Mr Carroll says the lower rates are technically justified, and reinsurers are starting to embrace the influx of alternative capital. “It is disruptive to pricing levels, but not to the value proposition of reinsurance,” he said. Alternative capital is here to stay and Mr Carroll does not expect any knee-jerk withdrawal, although a spate of shock losses or a rebound in US interest rates would have an impact. Insured global catastrophe losses last year were at their lowest since 2009, declining for the third consecutive year following record losses in 2011. The bulk of alternative capital is deployed in property catastrophe risks, making up 40-50% of capital in this area. The report says fears disruption will spread to other sectors of the reinsurance market are overblown. Meanwhile, AM Best’s latest global reinsurance briefing says disciplined underwriting is more crucial than ever as intense competition leads to lower underwriting margins in an overcapitalised sector. An increase in merger and acquisition activity is expected as companies become increasingly cautious on the business they write, the ratings agency says. “The cultural barriers that have been cited in the past as obstacles to consolidation may become less of a factor if companies shrink to where they can no longer compete in this increasingly global market. “Companies with well-diversified businesses and a global reach will likely only get larger as smaller players put themselves up for sale or seek strategic partnerships to survive.” Reinsurance capital hits record high, 2 February 2015
Global warming boosts la Nina Australia may be ravaged by more La Nina and El Nino events as the impact of climate change takes hold, scientists warn. Research published in the journal Nature Climate Change says the frequency of La Nina events could increase from one in 23 years last century to one in 13 years this century. Previous studies have found global warming may lead to severe El Nino events doubling in frequency. CSIRO scientist Wenju Cai, lead author of the La Nina study, told insuranceNEWS.com.au Australia is one of the countries most threatened by the systems. El Nino, a warming of the central and eastern tropical Pacific, leads to a major shift in weather February/March 2015
patterns and increasing drought, heatwave and bushfire risk. La Nina, which is essentially the opposite condition and often follows El Nino, is associated with severe flooding. “Both are going to increase and we will see more frequent switches from one year to the next,” Dr Cai said. He believes there is now strong consensus that climate change will bring an increase in extreme weather events, and insurers should pay close attention. The World Meteorological Organisation says last year was the hottest on record globally, and 14 of the 15 warmest years have occurred this century. Study reveals rising threat from La Nina, El Nino, 9 February
Cats fall, insurers happy Insured losses from natural catastrophes fell to $US39 billion last year, a five-year low and 38% below the 10-year average, according to Aon Benfield subsidiary Impact Forecasting. The largest single insured loss events were thunderstorms in Europe in June, costing $US3 billion, and the US in May, costing $US2.9 billion. Aon Analytics Chief Executive Stephen Mildenhall says catastrophes accounted for 8.6% of global property premium last year, compared with the 10-year average of 13.9%. Floods, tropical cyclones and severe weather were the top three perils.
Steadfast swoops on QBE agencies
Steadfast is acquiring two underwriting agencies and one insurance broker from QBE for $290 million, as well as buying a major brokerage. Reporting the move on the Australian Securities Exchange (on February 16), Steadfast announced it has also agreed to buy the Australian and New Zealand business of IC Frith, excluding its warranty business, the WA operation and New Zealand-based insurer. The QBE companies are Underwriting Agencies of Australia (UAA), Corporate Home Underwriting (CHU) and Body Corporate Brokers. QBE will remain the underwriter of both agencies. Managing Director and Chief Executive Robert Kelly says the acquisition of the QBE underwriting agencies, along-
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Mr Mildenhall says the industry, with its abundant capital and increasingly sophisticated risk management, is better positioned than ever to provide protection. The report says weather catastrophe losses will continue to increase amid economic growth and more people moving to coastal areas. The global population has surged from 2.6 billion in 1950 to 7 billion in 2011, with 44% living within 150 kilometres of a coastline. Natural catastrophe losses hit five-year low, 2 February 2015
side the acquisition of Calliden’s underwriting agencies, “has created the largest group of underwriting agencies in Australasia and brings tremendous scale and depth to Steadfast Underwriting Agencies”. “On a pro-forma basis, underwriting agencies will make a similar contribution to EBITA (pre-corporate office expenses) as insurance broking,” he said. “The proforma annual GWP from the group will be approximately $765 million.” The acquisitions will be financed through an institutional capital-raising of around $300 million. Steadfast says the annual gross written premium (GWP) of the newly acquired companies is $575 million, and will contribute earnings before interest, tax and amortisation (EBITA) of $40 million. “As the largest broker distributor of UAA and CHU products, Steadfast is the natural acquirer of these businesses. “Furthermore, we are also the natural acquirer of IC Frith, which was a founding member of the Steadfast network in 1996. These acquisitions met our strict acquisition criteria in terms of fit, culture and earnings per share accretion for our shareholders.” Steadfast claims the crown with QBE deal, 16 February 2015
Headline-writers are prone to adopt the cliche “a perfect storm” when describing Australia’s present woes – low interest rates, an uncertain business sector, a static national economy and an unhappy body politic. It’s a term we in the insurance industry could also embrace as we head into a period where investment returns are falling at the same time as premiums. That has to hurt. In this issue we’ve compiled a special report, borrowing heavily from the annual presentation of JP Morgan and Taylor Fry, to show the factors that have led the industry to this point. Gross written premium is growing at the slowest rate in 20 years, the researchers say, and recovery is some years off. In times like this it might be wise to cast your mind back to 1985, when Billy Ocean had a hit with “When the Going Gets Tough, the Tough Get Going” – a ditty with little going for it except a very good concept. In this issue of Insurance News we have interviewed a range of people who, like the singer, believe difficult times call for new thinking and a change of direction. Outstanding among these is John Nelson, the Lloyd’s Chairman who is trying to lead the venerable market into a new era of global expansion and cultural change even as it comes under pressure from a range of external challenges. What he has to say about the struggle to change Lloyd’s is mirrored in many ways by Vivek Bhatia, an insurance and organisational change expert who is running the country’s largest insurance operation, which includes New South Wales WorkCover and the state’s Motor Accidents Authority. Rather than be snowed under by the enormous challenge of change and renewal, he’s having a great time straightening things out. There’s a great deal to talk about in this issue, and the variety of subjects we cover illustrates the enormous amount of change talking place in and around the industry. We need to understand the associated risks and find ways to deal with them. Challenge or opportunity? It seems to depend on your attitude. Terry McMullan
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Tough times ahead The insurance cycle is heading down the curve and competition is becoming rampant. What’s in store for the industry in 2015?
Nominal GDP vs GWP 1994-2014 25 20 15 10 5
Growth in total GWP ex reinsurance Average growth in total GWP ex reinsurance Source: JP Morgan/Taylor Fry 2015 General Insurance Barometer
Normal GDP growth Average GDP growth
THIS YEAR PROMISES TO BE A more challenging one for producers and intermediaries in the general insurance industry. After a period marked by a benign claims environment and positive returns, this year and next year are expected to test the industry’s resilience. According to a major report issued in early February, the Australian insurance industry is facing its most difficult conditions since 2001. While the past few years have been relatively benign, local and international developments are combining to push earnings down, even as the risk environment continues to evolve. Insurers’ ability to raise premiums to counter falling investment returns is being hampered by unprecedented levels of competition in the market, coupled with a faltering national economy that has made customers more price-sensitive. A report compiled by UK-based specialist researcher StrategicRISK says risk and insurance managers in Australia identify the oversupply of capacity and insurance/broker convergence as the major challenges they face. Others include the rapidly changing regulatory environment, ageing infrastructure and the rise of funded class actions after events such as bushfires. These findings bring into sharp relief the generally sombre outlook presented by another detailed analysis of the local market – the annual industry assessment by JP Morgan and Taylor Fry. The analysts who compile it find the “relatively weak” Australian economy is offering sub-par growth prospects for the insurance industry this year. They say growth in gross written premium (GWP) is now at its slowest in the past 20 years, and recovery in the near-term appears unlikely. A confluence of factors led to GWP growth trends in the two quarters to September last year being the lowest in the past 20 years, and “we don’t think there is any respite likely in the quarters ahead”. Their jointly produced 2015
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General Insurance Barometer says premium rates in personal lines and commercial lines will be under pressure. Low investment yields can make a substantial difference to returns to shareholders in the absence of adequate premium rate increases. This is particularly the case for long-tail lines. And investments – which have been presenting insurers with an income buffer for some time – are no longer expected to offset the falls experienced in premium income. Comparing the economic environments dictating major global markets, the JP Morgan/Taylor Fry report says trends in Britain and the United States are strengthening, which should boost premium volumes. But prices are another matter. Rate increases across the market in the US, for example, are trending towards zero. Premium growth remains challenging in Europe, with some reinsurers striking deals with brokers to increase capacity to counter lowgrowth environments. “Australian insurance companies in this environment are likely to receive no favours from the economic cycle for growth or profit prospects,” the report says. Major insurers are also finding their dominance in the commercial market eroded by new entrants from the London market and – more ominously for the established companies – a solid entry by Berkshire Hathaway Specialty Insurance, which has snapped up some top technical managers. The continuing inroads made by underwriting agencies – and the growing emphasis on underwriting agency acquisitions by the major broker companies, most notably Austbrokers, Steadfast and Arthur J Gallagher – also signals the emergence of a new competitive force that will inevitably put further pressure on insurers’ business. Meanwhile, the so-called challenger brands in personal lines are also making inroads into major insurers’ business. They are using heavy advertising to woo customers
“Investments – which have been presenting insurers with an income buffer for some time – are no longer expected to offset the falls experienced in premium income.”
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Australian GWP growth in percentage terms, by class of business 1994-2014 45 35 25 15 5 –5 –15 –25
Growth in public and product liability Growth in fire and ISR Growth in home/contents Growth in professional indemnity
Growth in CTP motor vehicle Growth in employers’ liability Growth in total GWP ex reinsurance Growth in domestic motor vehicle
Source: ISC, JPM interpolation, APRA, Bloomberg. APRA has been inconsistent in its definition of premium (it was prospective contracts at one stage, in between matching the accounting definition of GWP). They also did not collect data between 2002 and 2004 (we have interpolated figures)
who are showing a growing willingness to switch insurers after a short period. One sign of that is rising lapse rates in both commercial and personal lines business. The barometer, compiled by analysts Siddharth Parameswaran and Alvin Liu at JP Morgan and Sharanjit Paddam and Kevin Gomes at Taylor Fry, finds a disturbing rise in the number of consumers and clients willing to move their business. “General insurance is currently the worst financial services product in our view in terms of lapse rates,” the report says. “General insurance is 20%, life is 10%, health is 10%. “So [general insurance] is arguably more vulnerable to changes in consumer behaviour than many peer industries.” The gloomy forecast for this year follows a stellar 2014, with insurers enjoying strong combined operating ratios as a result of previous rate increases, a benign period for natural peril claims and a continuation of reserve releases. The JP Morgan/Taylor Fry report says industry survey respondents reported overall combined operating ratios of 87% last year – the same as in 2013. “For the straight domestic lines that we cover in the survey, the combined operating ratio improved to 86% from 89% in 2013. This is supported by very strong results in householders, offset by some deterioration – though still good results – in motor and tough trends again in New South Wales compulsory third party insurance.” In commercial classes, the combined operating ratio last year was 91%, a deterioration from 90% in 2013. But the pressure is now on premiums, and survey participants say domestic class rates have slowed to 2%, below claims inflation of 3%. They are expected to slow further this year. Householders slowed after five years of double-digit rises to 4% last year, with more softness expected this year. The analysts say householders “had by far been the biggest driver of
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growth in premium in the past few years, so its slowdown should leave a hole in GWP growth”. In commercial lines, rate trends were much weaker as well – a 6% reduction overall on the weighted average basis, falling well short of the flat result expected by participants in the 2013 JP Morgan/Taylor Fry survey. Fire and industrial special risks showed very soft trends for underwriters and brokers, averaging a 12% reduction. The report says negative commercial rates are trending for this year and next. Comments from participants in the survey that accompanies the report show most think the general insurance industry’s growth tracks close to or just below GDP growth. And that attitude overrides consideration of the many new risks and challenges the industry faces in the future. Many of the industry experts who participated in the survey see competition in personal lines as “a near-term headwind” and say growth in the long run will remain locked to GDP. The more bullish among them see higher weather-related claims arising from climate change being offset by improved risk management, new products and privatisation of government insurance schemes. What is clear is there is considerable pressure on premium rates in commercial and personal lines, with participants saying both are in the area of “lapse rates rising, premium rates falling”. Many are also concerned the pressure on commercial lines could lead to irrational rates – a trend that has been evident in previous softening markets. The survey participants predict large capacity increases in domestic motor, householders and fire and industrial special risks (ISR). “In terms of changes in profitability, it seemed that participants were most concerned about growth in capacity in fire/ISR, motor and householders,” the report says. Home and professional indemnity have shown the strongest growth in the past 20 years, with average 14
Retention rates: Commercial classes 90 88 86 84 82 80 78 76 74 72 70 2011*
Fire and ISR (commercial property) Public and product liability Workers’ compensation (TAS, NT, & ACT) Director’s & officers’
Commercial motor Workers’ compensation (WA only) Professional indemnity Weighted average
Source: JP Morgan/Taylor Fry 2015 General Insurance Barometer. Note: 2013 and 2014 use current survey data. *Prior years have been calculated based on historical movements in persistency rates with 2014 as the base
Retention rates: Domestic classes 95 90 85 80 75 70 65 60 55 50 45 2011* Domestic motor
2013A CTP (NSW)
2014A Weighted average
Source: JP Morgan/Taylor Fry 2015 General Insurance Barometer. Note: 2013 and 2014 use current survey data. *Prior years have been calculated based on historical movements in persistency rates with 2014 as the base
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growth in home insurance in the past four years at 1.3% a year, reflecting the extent of rate increases following a spate of natural catastrophes. But for all other classes it has been “at or below long-run averages”. The analysts say the lag in the long-tail classes is influenced by three factors: • Superimposed inflation “that can take a while for insurers to recognise, but is then followed by extremely high rate increases”. • Tort reforms that often follow the rate increases, which then lead to gradual reductions in rates. • Changing investment yields. If they are large they can influence premium rates. One piece of positive news is the continuing flat trend in claims frequency and low claims inflation for most commercial and personal lines business, with survey participants hopeful this will continue. But some insurers “expressed concern around the ability to maintain margins in an environment of premium pressures, and low yields on investment income”. Reinsurance is one area that offers upsides and downsides, reflecting the upheavals taking place in the global industry as reinsurers struggle to cope with the implications of a $US50 billion annual influx of new investor capital. Australian insurers have so far been reluctant to delve too far into the growing alternatives market, where innovative new products are being produced – most notably by smaller Bermuda-based markets but also increasingly through such established markets as Lloyd’s. The report suggests this reluctance to directly use alternative capital is at least partially dictated by regulatory requirements, under which insurers must apply to the Australian Prudential Regulation Authority to have alternative capital instruments recognised in their insurance concentration risk capital calculation. “Nonetheless, the growth in alternative capital has had secondary effects in Australia, with the 16
“Some insurers expressed concern around the ability to maintain margins in an environment of premium pressures, and low yields on investment income.”
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Industry: Australian premium rate index (rebased to 100) 190 170 150 130 110 90 70
Real estate index (domestic lines)
Source: JP Morgan/Taylor Fry 2015 General Insurance Barometer, ABS Note: Personal lines rates adjusted for CPI inflation. Increases to standard deductibles for domestic motor are effective premium rate increases which are not explicitly seen. Commercial lines rates are assumed to be real as they are based on turnover – hence rates are already inflation adjusted
Australian catastrophe loss experience favourable in 2014, but has had increasing trends over the past five years 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 0
1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
increase… leading to increased overall reinsurance capacity, which has in turn contributed to lower reinsurance rates globally,” the report says. “Furthermore, reductions in pricing for alternative capital globally are putting increasing price pressure on traditional reinsurance. Although the observed impacts have been mainly on property classes to date, we may see some spill over into casualty classes over time.” With industry leaders around the world suggesting the influx of alternative capital into reinsurance is not a temporary phenomenon, the report says in the longer term alternative capital may compete for a share of the primary insurance market as capacity chases risk. The JP Morgan/Taylor Fry analysts conclude the general insurance industry’s future may hinge on the development and use of technology. And they warn companies that fall behind may find things a lot tougher. However, the industry’s history has demonstrated that tougher times over the next couple of years – and perhaps longer – will also encourage brokers and insurers to try new approaches and become more entrepreneurial in their approach to the needs of a rapidly changing customer base. Late last year Craig Langham, XL Group’s Head of Asia-Pacific and Country Manager for Australia, told a Risk and Insurance Management Society forum in Sydney that demand for innovative insurance products “has never been greater”. Calling on the industry to “step out of its comfort zone”, he says a closer tripartite relationship between brokers, insurers and clients is needed. Mr Langham says the insurance industry’s ability to reinvent itself “has been demonstrated throughout our history. Rapid technological change and blurring of the traditional business structures presents us with opportunity. Closer relationships, open dialogue, innovative thinking and global networks will * help us make the most of it.”
Trailing 10 year
Source: JP Morgan estimates, ICA. Note: the 2014 figure includes the latest ICA estimate (11/12/2014) of the Queensland hailstorm of $804 million
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Moving into a brave new world Lloyd’s Chairman John Nelson sees progress in the market’s bold plan to modernise and seek out new global opportunities By Terry McMullan
JOHN NELSON IS SMILING again. When he last spoke to Insurance News in London in mid-2013, the Lloyd’s Chairman was facing challenges that threatened to disrupt the market’s place in the centre of global insurance. In Melbourne a few weeks ago, he is a lot more relaxed as he considers the changes that have taken place since then and how Lloyd’s is working to turn challenge into advantage. “We’re in very good shape. Our ratings are at an all-time high – A+ with Standard & Poor’s, AA- with Fitch and A with AM Best. So we’re in good shape. “But I think we are facing some years now of much greater challenge, and also greater opportunity than probably we’ve faced before.” Mr Nelson has been Chairman of Lloyd’s since October 2011. His term will end in 2017, and he jokes that he won’t be around the market in 10 years when his master plan for Lloyd’s, Vision 2025, comes to fruition. Or doesn’t. The former chartered accountant and banker agrees there’s a great deal yet to be done to reach the document’s ambitious target of a truly global Lloyd’s with market hubs in a number of rapidly developing countries and capital sourced almost completely from corporate sources. The focus on brokers and the underlying risk culture remains, but the Lloyd’s of 2025 should be a very different organisation, with a more diverse workforce and, like it or not, less emphasis on the London base. Mr Nelson was lured to Lloyd’s by retiring chairman insuranceNEWS
Lord Levene, the market’s first leader from outside the industry, and has admitted he accepted the offer with some reluctance. While Peter Levene had made a good start in encouraging the modernisation of the market’s more fusty traditions – paper-based documents and a relaxed attitude to claims and accounting, for example – Mr Nelson was concerned about taking up the chairmanship of an organisation that can only encourage its members to embrace change.
had a very good run with performance, obviously influenced by a small number of natural disasters. “But on the other hand, there have been very low premiums and even lower interest rates than we had in June 2013. And I think the outlook for interest rates remains very low. “However, if you look at our performance in 2013 and the first half of 2014, it’s very good. Returns on capital were 15%, our combined ratios were in the 80s and the full-year 2014 result,
“I think we are facing some years now of much greater challenge, and also greater opportunity than probably we’ve faced before.” His early days at Lloyd’s were also overshadowed by a string of natural disasters. The Japan and New Zealand earthquakes topped the list of what he called at the time “the costliest six months on record”. When Insurance News met Mr Nelson in 2013 in his office perched high above London, he was coming to terms with the new reality of global brokers doing “sidecar” deals with investment giants such as Berkshire Hathaway. His focus was on ways to ensure Lloyd’s retained control of the actual risk transfer arrangements. “I think since we met in summer 2013 Lloyd’s has strengthened,” he says. “We’ve
which will be published very soon, will show a very strong performance.” Mr Nelson has been credited with driving the Vision 2025 strategy with Lloyd’s members, and the promise of a larger, stronger market with global grunt is, he says, being taken up with increasing enthusiasm in the market. “In management terms we’ve, I think, upped the case.” He credits new Lloyd’s Chief Executive Inga Beale with increasing the pace of the market’s modernisation initiatives. “She’s doing an excellent job. She’s absolutely executing Vision 2025 and, most importantly, over the past year she has 21
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Thinking globally, looking locally New Lloyd’s General Representative for Australia Chris Mackinnon (above) typifies the market’s desire to encourage the employment of local expertise. The UK-born insurance broker started work at Lloyd’s a few weeks ago, ending a long-standing preference to fill the position from the London workforce. Before joining Lloyd’s in Sydney, Mr Mackinnon had worked since March 2013 as chief executive of Gow-Gates Insurance Brokers. He has replaced Adrian Humphreys, who has joined Steadfast. Reporting to Singaporebased Head of Asia-Pacific Kent Chaplin, Mr Mackinnon has plenty of international experience to add to his wide knowledge of the Australian market. Before joining Gow-Gates he was based in London with Arthur J Gallagher for nearly four years, most recently as executive director strategy and development. Before that he worked as a broker for 21 years at Marsh, Aon, CT Bowring and Gallagher. His new role involves managing Lloyd’s relationships with brokers, underwriting agencies, service providers and regulators, overcoming barriers to placing business with Lloyd’s and identifying new commercial opportunities.
made very good progress on modernisation in the market. “So we’ve got the plan in place, we’ve got the managing agents and brokers collaborating with us now in a very positive way, and I think that’s very, very important. “Now I can see the enthusiasm for Vision 2025 building, and that’s definitely had an impact in the market. “It’s not like command and control – it’s more like herding cats. But we are doing it. I think in a sense we’ve been more successful in herding the cats in the past 12 months than we were in the preceding year. “Because one of the great things we have to do is to make the Lloyd’s platform attractive, as the competition from elsewhere increases. “So end-to-end processing is going to be vital; and it has to be an international strategy. We’ve also got to be user-friendly. “If you look at the challenges – they are pretty obvious with things such as very low interest rates and pressures on premiums. And in the reinsurance area, you’re dealing with alternative capital, and that is something we are watching very carefully.” Mr Nelson believes an equal challenge for the market in particular is the need to concentrate on innovation to deal with emerging risks. “We have got to keep innovative. When you talk to major insurers around the world, including here in Australia, new risks are being created. We have got to provide the solutions for that. The real challenge is for us to keep up. “Funnily enough, I can sort of feel a new spring in the step all of a sudden. I think people realise innovation is an imperative. And it will help reinforce our position as the global home of special insurance. I think in cyber insurance, for example, we are certainly up there.” Lloyd’s certainly is. The size of the global market in cyber insurance has grown from $US850 million in 2012 to an estimated $US2.5 billion last year. Mr Nelson says some insuranceNEWS
Lloyd’s underwriters have reported a tenfold increase in cyber insurance submissions and enquiries. However, Mr Nelson’s time at Lloyd’s has instilled caution in his drive to help Lloyd’s become more reactive to emerging risks. “If you go headlong into a new risk without the data and without the experience, we all know – because it’s happened in the past – what can happen. If you go back 30 years, I used to look at Lloyd’s in horror as one crushing error after another happened.” Such errors included the great asbestos debacle of the 1990s, which resulted in the
set firmly on building strategic presences not just in such economic powerhouses as Brazil, India and China, but also potential high-performers in southeast Asia and South America, where insurance has previously been a low priority. “We’re making good progress in South America,” he says. “We’re just about to open our office in Mexico and at the end of the year we will open an office in Colombia.” India remains a potential insurance powerhouse. Its woefully slow Parliament and bureaucracy will hopefully open up the country more to foreign insurers in the next few months. “In China we’ve secured our
“When you talk to major insurers around the world, including here in Australia, new risks are being created. We have got to provide the solutions for that.” bankruptcy of many individual investors – known at Lloyd’s as Names – who over more than 30 years had gambled on taking up unlimited liability for policies written for companies with asbestos exposures. “Now there’s a very high level of groups building up data on new risks and building modelling techniques,” he tells Insurance News. “I think it’s very important to support it so that it’s a staple.” The Vision 2025 mantra is to go forth and multiply, and Mr Nelson believes Lloyd’s increased exposure in countries with emerging economies is already bearing fruit. A recent survey by the Boston Consulting Group found that more than half of future growth is going to come from emerging markets, and warns that London’s global leadership in insurance “will become increasingly challenged”. Mr Nelson has Lloyd’s sights February/March 2015
licence for a Beijing branch to join our Shanghai office, which is very good news,” Mr Nelson says. “We’re also about to open an office in Dubai. “The point is that countries such as China, India, Brazil, Mexico and Turkey will form the majority of global GDP in the future – and these countries are among the least insured in the world.” Mr Nelson says Lloyd’s research has demonstrated that a 1% rise in insurance penetration in such countries would translate to a 13% reduction in uninsured losses, a 22% reduction in taxpayers’ contribution following a disaster and increased investment equivalent to 2% of national GDP. Another benefit of diversifying Lloyd’s business activities is the impact it would have on its investment spread. “If you look at our capital base at the moment, it’s basically the United States, Bermuda and
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Some concerns about alternative capital: Mr Nelson speaks at a reception in Sydney in February
the UK, along with Europe and Japan. We need to diversify our capital base and encourage capital and business from high-growth economies.” He sees Lloyd’s needing increasing amounts of “good quality, long-term, committed capital, closely attached to the risk it is underwriting” if it is to meet its objective by 2025. While he warns against “inverted pyramid structures” in derivatives, he says Lloyd’s is looking at ways to harness alternative capital. “We do have some concerns about alternative capital being concentrated on a few specific areas, both geographic and in terms of peak risks.” With that drive for more diverse sources of capital comes a drive for more diverse sources of people to work at Lloyd’s. Mr Nelson is now much more optimistic that the “nationality base” of Lloyd’s underwriters is changing and will do so more over time. “We need a market that reflects our clients and customers,” he says. “Where there was some resistance two or three years ago in the market to going more local, people now know that unless we make Lloyd’s more available and easier to do business with on the ground, we won’t necessarily realise our opportunities.” So if the image of the pukka British Lloyd’s underwriter in pinstripes is going to diminish as Lloyd’s broadens its investment and people base, are the old Names also doomed to disappear? Mr Nelson has mixed feelings about this, saying the Names are “part of Lloyd’s DNA”. “It’s interesting,” he says. “Names capital is still about 10% of the market, but it’s diminishing as a proportion, if not in absolute size. We did have a debate three years ago, and my view was that we should continue with them. It helps to encourage the sort of enterprise culture we need. But the future of Lloyd’s will be determined not by them but by the quality of the corporate capital.” The Vision 2025 document is being adjusted as the market insuranceNEWS
and the world changes. “I think one of the things that’s happening is we’re seeing a growth in regulatory overview. So it means there will be some countries where we can operate in a very straightforward way, and there are other countries that are going to become quite difficult to operate in. “We have to adjust. People want Lloyd’s to be there, and as a result we are going more local in our approach. We were always going to, but I think we have to up the pace a bit.” One change seen in recent years is the emergence of Singapore as Asia’s premier insurance centre. Mr Nelson says Australian
underwriting agencies. Lloyd’s wants to introduce “straight-through” processing from Australian underwriting agencies to managing general agents in London – an innovation that would dramatically speed up the underwriting and decision-making processes. Australian market business going through the Singapore platform is also under scrutiny. “We’re hoping in the next couple of months that the Singapore regulator will agree to allow us to give delegated authority direct from Singapore to Australia, for example,” Mr Nelson tells Insurance News. “We expect that will increase the business flowing through Singapore.”
“We now have 18 service companies in Singapore and more than 360 staff, and the platform offers almost the entire breadth of classes written out of London.” underwriting agents, in particular, are taking advantage of the Lloyd’s centre – “platform” in Lloyd’speak – which has been established there. “Our Singapore platform has grown by more than 120% over the past five years,” he says. “We now have 18 service companies in Singapore and more than 360 staff, and the platform offers almost the entire breadth of classes written out of London.” Lloyd’s has already implemented a solution to provide back-office processing functions in the Singapore operation, centralising work such as risk registration, quality assurance of slips and data, premium processing and settlement. Such functions were previously performed separately by each company. Now the market is focusing on its “accessibility and visibility in the increasingly competitive Australian market”, where it has eight service companies and 113 February/March 2015
Mr Nelson says Lloyd’s share of the Australian reinsurance market has risen recently, but is “patchy”. “Our share of reinsurance has gone down as a result of the reinsurance industry’s present conditions, but I imagine at some point that will recover. We would obviously like to increase our reinsurance position. “Australia is quite a sophisticated market, and it’s creating new sophisticated risks. That’s where we want to be. “I suspect you will find in time there will be more physical presence here from Lloyd’s. “Lloyd’s has been here since 1973, so it’s very well established; it’s a very strong brand in Australia and we play a pretty important role here. I think there are great levels of competition interacting with brokers. So it’s all about how we can increase accessibility and visibility. “I think that will make a * difference.”
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A volatile world Geopolitical turmoil and supply chain disruption are among growing threats highlighted in two annual risk reports By Jan McCallum
TERRORIST ATTACKS AND POLITICAL INSTABILITY ARE HAVING an impact on risk managers, with leaders globally starting to rate geopolitical threats among their greatest concerns. Conflicts between states, failure of governments and rising nationalism have pushed geopolitical risks into the top threats in the World Economic Forum’s Global Risks report, overtaking economic threats as the most likely risks for the first time in its 10-year history. Other top risks identified by the forum and other surveys include cyber attacks and supply chain disruption. Allianz’s Risk Barometer, a survey of 516 business leaders, risk consultants, underwriters and claims experts in 47 countries, lists supply chain, natural catastrophe and fire and explosion as top threats. Allianz Global Corporate & Specialty Chief Executive Chris Fischer Hirs says the growing interdependency of many industries and processes “means businesses are now exposed to an increasing number of disruptive scenarios. Negative effects can quickly multiply.” To mitigate loss, managers must identify the impact of interconnectivity on their business. This message is echoed by Marsh Risk Consulting, whose General Manager Pacific Costa Zakis says companies need to manage their exposures to emerging risks, but also be ready to capitalise on opportunities. Managers can assess their company’s vulnerabilities, model scenarios, diversify and develop strategies so they are ready to respond when threatened. 26
Mr Zakis says developing local connections and networks is crucial to overcoming issues such as business disruption. “We are more reliant on others. If there is an interruption, how do we work collaboratively?” Marsh & McLennan is a sponsor of the Global Risks report. David Howard-Jones, a partner in subsidiary company Oliver Wyman, says although the top 10 risks have changed, they have also increased in terms of likelihood and impact. “We should bank on more volatility for the next few years at least,” he told a Marsh forum in January. The Global Risks report’s 900 respondents – leaders from government, business, academia and the community sector – are worried about rising nationalism and far-right, anti-European Union parties. They see state collapse cascading into other risks, and they rate failure of national governance as the third-most likely threat, after interstate conflict and extreme weather events. Governments beset by corruption, illicit trade and organised crime could undo hard-earned gains in economic and political stability and erode trust in leadership. The report says in recent years “the links between many forms of global crime and corruption and their impact on global security, extremism, terrorism and fragile states have only grown stronger, and it is critical to acknowledge and address them through more effective policies that curb illegal financial flows, foster transparent governance and build capacity around anti-crime efforts at the national and local levels”. It notes elections in India, Indonesia and Romania have empowFebruary/March 2015
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ered leaders with platforms to fight corruption and improve governance. The World Economic Forum survey was conducted in July and September last year, and identified the Islamist group ISIS, Ebola virus and high structural unemployment or underemployment as top concerns. Allianz’s Risk Barometer, conducted last October and November, has a more corporate focus. An increasing number of non-property risks to businesses, such as cyber and geopolitical disruption, feature in the fourth annual report. Cyber risk has jumped to fifth place from eighth last year. Australian respondents list business interruption as their top risk, followed by loss of reputation or brand value, for example from a social media attack. They also rate intensified competition, talent shortage and natural catastrophes in their top five. Allianz Australia General Manager Global Corporate & Specialty Holger Schaefer says some managers could invest more in preparing to handle cyber attacks. But he notes boards are taking a greater interest in cyber threats, and he tells Insurance News he expects to see increased investment in risk management and risk transfer through insurance. Despite the doom and gloom found in any risk report, Mr Howard-Jones notes some risks have declined over 10 years of World Economic Forum surveys. Global financial regulation has improved since the financial insuranceNEWS
Rising risk: a ruined city in Syria highlights how conflicts have replaced economic issues as the most threatening risks
“Although the top 10 risks have changed, they have also increased in terms of likelihood and impact.” crisis, and the report lists the Murray-Darling Basin initiative to manage water supply as an example of success through involving a wide range of stakeholders and developing a collaborative response. Elsewhere, the Resilient America Roundtable was formed a year ago to work with communities and has begun pilot projects on identifying and understanding risk and mitigation, strengthening partnerships and sharing information. Risk reports such as those from the World Economic Forum and Allianz provide food for thought for company executives and risk managers. They can be used to identify internal and external risks and prepare for the worst. Mr Zakis says managers have used the Global Risks report to consider how various threats might affect their company. “There is no silver bullet but it is thought-provoking,” he says. * February/March 2015
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Commercial mind, social heart
Vivek Bhatia: using his insurance and transformation experience to â€œshift the cultureâ€?
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Ex-Wesfarmers Insurance chief Vivek Bhatia is treading new ground as he guides NSW’s state-owned compensation organisations back to health By Shelley Dempsey
IT IS ONE OF THE TOUGHEST assignments of his 16-year corporate career, and certainly the biggest by asset size. As the first insurance professional drawn from the private sector to head the New South Wales Government’s Safety, Return to Work and Support Division (SRWSD), former Wesfarmers Insurance chief executive Vivek Bhatia now presides over an operation that is, by any standards, massive. His division encompasses the NSW Motor Accidents Authority (MAA), the WorkCover Authority of NSW, the Lifetime Care & Support Authority of NSW, the WorkCover Independent Review Office, the Workers’ Compensation Commission and the Workers’ Compensation (Dust Diseases) Board. It handles more than 3.1 million insured workers, 5.1 million greenslips and 266,000 employers, has 1500 staff and claims liabilities of $17.3 billion – the largest amount for any Australian insurer. “Our assets invested are like those of IAG and Suncorp combined – about $21 billion,” he tells Insurance News. “It’s a very large business. In fact, we’re the largest insurance company in the country.” Mr Bhatia was appointed chief executive of the division last August and he has worked to split the division’s regulatory function from its insurance and care operations. The largest part of the division is WorkCover NSW, a one-time financial basket case whose fortunes have turned around strongly since state reforms in 2012. Workers’ compensation claims are now down 26%. WorkCover NSW alone is the largest organisation of its type in Australia, with gross written premium of $2.5 billion a year. It’s a politically charged area and subject to considerable public scrutiny, so challenges remain for the agency. For Mr Bhatia it’s just one of many responsibilities he’s juggling. “This role overseeing so many important agencies is as challenging as any of my previous assignments, but it is a new group of challenges,” he tells Insurance News. Managing a large care organisation as well as handling regulation and the commercial insurance business is a complex task. “Dealing with the nuances of the public sector and being accountable to the minister and an independent board (chaired by ex-Macquarie banker Michael Carapiet),
rather than shareholders is also a big shift, and my focus now is very much on finding the right balance to deliver social outcomes that are also commercially sustainable.” Mr Bhatia has hit the ground running, working to fix an organisation the State Government says was “broken” in 2012, with a projected deficit of $4.1 billion, low staff morale and claims of bullying that led to a parliamentary inquiry. “The place was paralysed,” he says. “But now we’re on a cultural and operational transformational journey.” After the reforms of 2012 – including controversial cuts to benefits – WorkCover NSW’s return-to-work rate grew 3% to 88% in 2012/13, above the national average of 86%. The scheme was running at a surplus
“Our assets invested are like those of IAG and Suncorp combined – about $21 billion. In fact, we’re the largest insurance company in the country.” of $2.55 billion, driven by investment returns of $690 million. Mr Bhatia’s appointment signalled a turning point in the history of WorkCover NSW, which was regrouped in 2012 under SRWSD in the Treasury and Finance portfolio. “My appointment hinged on two facets of my experience,” Mr Bhatia says. “One was to bring a wealth of private sector insurance experience into the division and the other was built on me having large-scale global transformation leadership experience.” Change is on the way for all agencies in the group managed by Mr Bhatia. “Our core focus as a cluster of governinsuranceNEWS
ment agencies is that we are very much moving along the lines of a transformative shift to a customer-focused culture,” he tells Insurance News. “For each and every agency we are moving very clearly towards that core focus area, whether that is the Motor Accidents Authority, Workplace Health and Safety or the Dust Diseases Board.” What that means for insurers is that premiums may reduce under the MAA’s compulsory third party (CTP) scheme in NSW, which carries the second-most expensive premiums in Australia (after the ACT). In the June quarter of last year, the average premium paid for all passenger vehicles was $492. Claims, however, have increased steadily over the last few years and may not reduce. The current scheme has cost $11.6 billion since it was introduced in 1999. The MAA had proposed moving to a no-fault CTP scheme, but a bid by the NSW Government to legislate to this effect failed in 2013 due to lack of support from opposition parties. While declining to speculate on whether this will still take place – “it’s a matter for the Government” – Mr Bhatia does say that now changes are being made to the scheme by regulation and by “process efficiency”. “At the moment we are focused on nonlegislative scheme enhancements, as opposed to changing the legislation or design of the scheme.” The main focus is to make the premium affordable, he says. “We will work on enhancements to the scheme which will lower the premium, but at the same time provide excellence in customer service and benefits to claimants as well.” Insurers have been put on notice that they need to lift their game. Mr Bhatia says the MAA has issued new guidelines on claims and premiums and asked insurers to submit business plans on how they will meet the guidelines. “Those guidelines very clearly identify what the code of conduct is, how we want them to interact with customers and claimants, and we’re trying our best to try and shorten the claims durations.” His agency is setting “very clear expectations on how we want them to interact, which is hopefully better than what they are doing at the moment”. Insurer profits are also being examined by the agency and the State Government, in the wake of a NSW parliamentary com29
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mittee report which last year recommended a review of the current high level of private insurer profits. Such concerns “have been raised… during each of the committee’s 12 reviews, including the current review,” the state’s Standing Committee on Law and Justice said. Premium income from the scheme was $2.11 billion in 2013/14, well up from $1.79 billion for the year to September 30, 2012. Benefits were $1.42 billion in 2013/14, again much higher than in earlier years – in 2009/10, benefits were $1.07 billion. Benefits are mostly made up of claims which have been finalised and for accidents that occurred in previous years. Last year the MAA was also directed by the NSW Government to prepare a CTP pricing strategy which may take into account reconsidering its premium model. “We are looking at insurer profits in the scheme and hence we’re looking at different reviews at this point to ascertain competition in the market, as well as pricing,” Mr Bhatia says. Insurers will probably learn the outcome in the middle of the year, after the NSW Government responds to the parliamentary inquiry, he says. There is no indication yet that claims will reduce under the CTP scheme, however. “At this point in time, we are not seeing much of a difference in terms of what the claims trends are, so we are not seeing any circuit-breakers that are going to change trends.” The Dust Diseases Board is another area of significant claims with a long tail. The board is a statutory no-fault scheme which provides healthcare and compensation for financial loss to claimants who acquired their dust disease in a NSW workplace. Last year the board awarded a total of $78.59 million in compensation payments to 3957 customers (including 1400 claimants and 2500 dependents). The award figure has increased from $66.27 million in 2009/10. Mr Bhatia says the number of new claimants has reached a plateau. “However, we expect that many claimants will continue to receive compensation for many years down the track.” The board is moving towards a more customer-focused model and has started helping claimants to fill in documentation and walk them through the claims process. “We are trying to make sure we are easier to deal with.” 30
Mr Bhatia moved into insurance after working at KPMG and PricewaterhouseCoopers as a strategy and change consultant. He worked at QBE from 2003 to 2007, first as corporate program manager for QBE Mercantile Mutual, then as head of the IT, strategy, governance and program delivery group for QBE across Australia and the Asia-Pacific. He joined Wesfarmers Insurance in 2008 as chief operating officer, then served as chief executive at Lumley and as Wesfarmers’ Australian underwriting chief from 2009 to 2011. He was McKinsey & Co regional co-leader for Asia-Pacific from 2012 to last August. Mr Bhatia says WorkCover NSW’s aim is to become “a lot more efficient and effec-
“We have some people in the scheme who are not even a year old. So it’s a very complex business and a very long-tail scheme.” tive”. His appointment is for a year initially, while Treasury and Finance reviews the division’s regulatory functions. He has drawn up a 100-day plan to brand the agency as “a commercial mind with a social heart”, and to be more customer-centric. And he has improved communication with staff, blogging to them every week. One of his first moves was to split the operational and regulatory functions of the WorkCover NSW insurance operation, to avoid confusion over what it does. It now has two parts – WorkCover Insurance, and Workers’ Compensation Insurance Regulation. In February exLumley chief John Nagle was appointed Executive Director of the former, with exComcare executive Caroline Walsh named Executive Director of the latter. insuranceNEWS
“As an insurer we have about 70% of the market, so it’s the dominant player,” Mr Bhatia says. “However, it’s not the only player. So it’s justified that we have a separate regulator that looks at the entire system.” Previously, parties such as specialised insurers seeking licences did not know whether they were talking to a competitor insurance company or a regulator, he says. On the premium front, incentives are being rolled out encouraging medium and large employers to adopt better practices to safeguard staff and return them to work faster after injury. This follows success with small business incentives. More simple, clear premium notices will be sent out in the middle of this year, showing what calculations are based on – with a focus on safety records. Over the past two years there has been a 17.5% reduction in premium for all businesses across WorkCover NSW. Last year the agency reported a 15% drop in the number of workers’ compensation claims against small businesses since the 2012 reforms. The $70 million employer incentive program includes policy renewal discounts for businesses with safe workplaces and a reward system for helping injured people get back to work early. “We’re trying to make sure they link back to their hip-pockets, so it becomes enough of an incentive for them, along with a much more productive and engaged workforce,” Mr Bhatia says. The return-to-work rate among about 260,000 small businesses has improved to 87% from 82% since 2012. “We’re now hoping for more impact with larger businesses.” Mr Bhatia says mental health claims and claims under the Lifetime Care & Support Scheme for the catastrophically injured are growing. About 1000 claimants are in the lifetime scheme, and about 140 new people join every year. “We have some people in the scheme who are not even a year old. So it’s a very complex business and a very long-tail scheme. “Our workers’ compensation average settlement period is about seven years, but for lifetime care it is about 22 years.” No figures are available on mental stress claims, but a recent report from SafeWork Australia says they are the most expensive workers’ compensation cases. Mental health is a “big challenge” for WorkCover NSW, Mr Bhatia says.
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“We’ve decided to invest significant resources in research and awareness and early intervention.” Late last year Mr Bhatia streamlined the number of insurance agents handling workers’ compensation policies, cutting them from seven to five. Three-year contracts took effect from January 1 for Allianz Australia, CGU, Employers Mutual, GIO and QBE. Gallagher Bassett Services and Xchanging were not reappointed. “Our objective was to try to have a narrower band of agents that we can promote consistency through,” Mr Bhatia says. Late in 2017 the agency will go back to the market, and by then it will have “a more customer-centric and consistent agent claims management design”, enabled by new technology and process platforms currently being evaluated. While the bottom line has improved, the 2012 reforms have proven deeply unpopular with some. Law Society of NSW President Ros Everett says costs associated with injured workers have shifted from the State Government to Australian taxpayers, via Medicare and Centrelink. Cuts to benefits and legal rights mean some injured workers have given up, because it is tougher to receive compensation.
NSW Labor and the Greens say the reforms cut too deep, and they question whether a surplus is necessary. Last year the State Government rolled back some cuts for people who made claims before October 2012, but Parliament’s Standing Committee on Law and Justice wants this extended to all injured workers. Last September the committee recommended restoring lifetime medical benefits and legal representation to WorkCover NSW. It wants lifetime benefits for amputees reinstated, along with funds for hearing aids, prostheses and home and car modifications. Under the 2012 reforms an amputated foot is not considered serious enough to qualify for lifetime benefits. Mr Bhatia says NSW Finance and Services Minister Dominic Perrottet will answer the committee by March. It is unclear how many injured workers have been taken off benefits since the 2012 reforms. Mr Bhatia’s office could not supply figures to Insurance News. All he will say is the reforms reflected “what the principle of the scheme was – that it is there to get to the people who are most in need”. It is also unclear if the scheme is heading for a bigger surplus. WorkCover actuary Michael Playford has said it is on target for a $6 billion surplus by 2019, but Mr Bhatia declines to comment.
He argues the surplus has not been determined because the reforms are still young, and it will take a couple of years to see if current claims patterns are sustainable in the long term. He aims to ensure the scheme is not as volatile as in the past 10 years, “moving from surplus to deficit, to deficit to surplus, like a yo-yo”. Changes Mr Bhatia has made are flowing through the system, and he says the culture is improving. One of his first moves was to publicly apologise to Wayne Butler, 18 months after the NSW Industrial Relations Commission found the senior manager was persecuted and bullied by the organisation. While two senior managers have left the agency, Mr Butler is back working in an “important role” in the finance team and in IT procurement. “The apology was very important to make when I came on board,” Mr Bhatia says. “We needed to acknowledge things had not gone right, but more importantly we needed an action plan of how we make it right. “So I very clearly articulated that... as something important to me as the chief executive, but also that it’s something that personally I will drive a million miles * to do.”
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Commissions feel the squeeze As more overseas regulators crack down, is a change of broker remuneration model inevitable? By Jan McCallum
COMMISSION: THE DICTIONARY DEFINES it as “remuneration for services rendered or products sold”. But for many it has become a word associated over recent years with the shady dealings of financial advisers. So is it time for brokers to revisit the commission structure? The future of the commission system is a vexed question that never quite goes away: it crops up from time to time, and will no doubt continue to do so. Legislators mostly feel no need to interfere with broking activities, since brokers do nothing to attract their attention. But despite this, some in the industry believe change is inevitable. National Insurance Brokers Association (NIBA) Chief Executive Dallas Booth says brokers are open and transparent about their remuneration and customers do not care how they are paid, as long as they get good advice and value for money. But he also believes international moves to ban broker commissions, particularly in northern Europe, will eventually spread to Australia. The issue is on NIBA’s radar, and Mr Booth warns that in the next five to 10 years brokers may have to start thinking about alternative forms of payment. “Brokers need to be aware that there are developments at the international level that, if they continue to occur, will put increasing pressure on commission-based remuneration,” he tells Insurance News. The broking industry has picked over the commission versus fee-for-service argument as part of the Federal Government’s Future of Financial Advice (FOFA) legislation, introduced after scandals in financial planning that saw consumers lose life savings because of poor advice. In 2010 there were moves to ban “conflicted remuneration structures”, and warnings from insurers and brokers that banning commissions could discourage SME owners from accessing the advice they need. Brokers, as financial services advisers, were dragged into the FOFA debate and successfully argued for a “carve-out” from the legislation, meaning the ban on commissions does not apply to general insurance advice. insuranceNEWS
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During the debate Steadfast Chief Executive Robert Kelly warned that a ban on commissions could significantly reduce the number of people and small businesses obtaining advice. Mr Kelly tells Insurance News the FOFA process did a good job of analysing insurance distribution networks and refraining from calling for change where there was no conflict in advice. He fears many SME businesses may find the fee-for-service model “a hurdle too high”. Although businesses are used to paying their accountant a fee, he notes the accountant does not go out and find two or three quotes. “You pay a fee and you back that person.” Mr Kelly also sees unintended consequences in removing a fixed cost to the insurer, which under the commission structure can accurately gauge the cost of getting a product onto the market and price it accordingly. “I am fearful that if you were to take commission out of the equation, the consumer would not get a reduction in the base cost,” Mr Kelly says. He notes electricity prices did not fall to pre-carbon tax levels when the tax was repealed. Austbrokers Chief Executive Mark Searles says the commission structure has worked well for many years and general insurance is fundamentally different from life insurance, which first sparked the debate about commissions. Price is only one element of a package of services brokers provide. They are also working as watchdogs for clients on other factors such as insurers’ claims capability and reputation, as well as acting as advocates over claims. The commission structure also provides a level playing field for brokers and insurers and has provided consistency in the insurance market. Federal Treasury and the previous and current governments recognised during the FOFA debates that the insurance remuneration structure provides a community service by giving access to advice to people who might otherwise not seek it. 36
“Consumers understand that if they are getting advice they will have to pay for it at some point and if they are getting value this is not an issue for them.”
Australians are reluctant to pay for financial advice – a relatively new service to many – although business-owners are used to paying their accountants and lawyers a fee for service. Mr Booth says the broker commission structure means people get advice but pay for it only when they buy a product. He says consumers understand that if they are getting advice they will have to pay for it at some point – even if it is not via a fee invoice – and if they are getting value this is not an issue for them. The Insurance Brokers Code of Practice requires brokers to be transparent about how they are remunerated, and Mr Booth is not aware of any change in buying behaviour because of disclosure. Recent debate about the need for a culture of fairness in financial services – following financial planning scandals and reinforced in the Financial System Inquiry report in December – has not touched brokers. “We have a culture of client service and the client’s best interest,” Mr Booth says. Opponents of the commission system argue it encourages recipients to sell more products, or products consumers do not need. Because they sell via commission, the law does not allow brokers to call themselves “independent” advisers – a ban Mr Booth considers misleading. “Brokers take clients’ business to the market and get the best terms and conditions they can for the client. I think it is an oddity and doesn’t make any sense whatsoever.” insuranceNEWS
The Australian Securities and Investments Commission (ASIC) investigated broker remuneration 10 years ago in response to work by then-New York attorneygeneral Eliot Spitzer following complaints that US brokers were steering clients towards policies that earned them higher commissions, and soliciting fictitious quotes to make their preferred insurer’s bid look the most competitive. The ASIC investigation found no evidence that either happened to any degree in Australia. Its report, Insurance Broker Remuneration Arrangements, stated some brokers’ procedures and compliance arrangements could be improved but the regulator did not expect to take any enforcement action. Brokers rarely feature in complaints to ASIC or the Financial Ombudsman Service, which suggests their clients have few issues with the remuneration system or the quality of advice and service. It may also be the case that brokers who are business-owners or managers are dealing with clients who are business-owners and managers, and each party has realistic expectations about the broker’s right to earn a living and does not expect a free lunch. Mr Kelly says that in four decades of broking he has hardly ever been asked about his remuneration. Clients want to know the total cost and, if it is acceptable to them, the remuneration to the intermediary is irrelevant. “They back the service they get, the advice and the relationship, and underpinning that * is the actual cost of the insurance.”
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Calliden’s high-calibre turbocharge The general insurance business plans to expand its current specialties under new owner Munich Re By Jan McCallum
CALLIDEN BECAME PART OF MUNICH Re’s global vertical expansion strategy last year when the local insurer was split up. For new Chief Executive Mike Hooton, having one of the world’s largest reinsurers as a parent provides a chance to “turbocharge” the business. Munich Re bought Calliden’s general insurance operations when broker group Steadfast launched a takeover for the insurer with the aim of acquiring its underwriting agencies. The separation of the two businesses is well under way. The Munich Re-owned managing general agency will soon be renamed Calibre Commercial Insurance and will hold Calliden’s business package and mid-market books. It will remain an intermediaryfocused agency and plans to expand its current specialties, Mr Hooton tells Insurance News in an exclusive interview. The Calliden team that managed the commercial business will move into the new agency. Calibre has been chosen as the new name to retain some familiarity with Calliden, and for the connotations of quality and competence. The new business will relaunch as Calibre Commercial Insurance in the third quarter. Mr Hooton says brokers will not notice much difference. “Brokers are transacting with us in the same way and dealing with the same people.” The $105 million takeover has led some to wonder whether Calibre will favour Steadfast brokers, but Mr Hooton says Calibre is a “distribution agnostic”, dealing with a wide range of brokers and authorised representatives. It is targeting the micro/SME sector, larger SMEs, schemes and the middle market. 38
Munich Re subsidiary Great Lakes Australia provides the security to Calibre, which for business pack will be up to $20 million, while the middle market will have the potential to write larger risks with a minimum sum insured of $10 million. “We have decided to be quite specific in terms of what we write in the current market: property owners, warehouse distribution, retail and professional offices and services,” Mr Hooton says. “We want to roll out additional specialist middle-market sectors each year rather than be a generalist writer, although business pack already covers a
strengths will be carried into Calibre. “Calliden’s scheme and facility business has always been strong. We will target a particular group, association or affinity and work with their broker to develop a tailored insurance program for them.” Calibre intends to remain a “champion” of the intermediary channel, with no intention to move into direct business. “Our success is linked with the success of our brokers and authorised representatives. If they survive, flourish and prosper, then we are going to benefit.” Calibre is undergoing transition, but Mr Hooton says it is maintaining staff in
“We have had brokers who are interested in the opportunity to work with us, particularly because of the strong Munich Re link and the security of Great Lakes.” variety of SME occupations.” The separation of Calliden between Steadfast and Munich Re officially took place in late December, and Mr Hooton says it has been a smooth transition. “We haven’t missed a beat.” The company has kept the Calliden name for a while to provide assurance, and he says brokers have remained loyal. “We have had brokers who are interested in the opportunity to work with us, particularly because of the strong Munich Re link and the security of Great Lakes.” Mr Hooton is confident Calliden’s insuranceNEWS
both its Melbourne and Sydney offices with plans to grow. The market is changing and insurers can no longer rely on having numerous offices and large sales forces working historical relationships, he says. Calibre has invested substantially in technology and data analytics and can now tap into the expertise of the Great Lakes network. Mr Hooton says data analytics is helping the company work with brokers and clients. “It means taking a more sophisticated approach to what is a challenging and competitive market.” The revitalised company is being
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Mike Hooton: looking to grow, but underwriting profit is most important
launched at a time of gloomy forecasts for the insurance market. Mr Hooton says insurer profitability, capital inflows and sluggish business growth provide the ingredients for a competitive market, but the SME sector is somewhat insulated from the price sensitivity that affects the corporate market. “The SME space is more rational. We are looking to grow, but not at the expense of making an underwriting profit.” He says smarter and innovative insurers will still find profitable business. “We have started to use data analytics for more informed decision-making, for how to find and retain profitable business and improve operational efficiencies.” Investment in analytics will help address potential holes in relative pricing and provide a better understanding of what drives loss frequency and severity. “Understanding customer purchasing behaviour is important, as well as understanding what sectors are growing and which are decreasing.” When Munich Re announced its investment in Calliden last year it said the deal would provide Great Lakes with expansion opportunities. Great Lakes has provided security to Calliden’s business package since 2012. In acquiring Calliden Insurance, Great Lakes has gained the opportunity to become the capital provider for agencies sold to Steadfast, including ARGIS Farmpack, which it already supports, and Dawes Motor. This also extends to third-party agencies underwritten by Calliden and not part of the sale, including Community Underwriting insuranceNEWS
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“They like our knowledge, relationships and nimbleness, and our existing relationships... Great Lakes doesn’t want to interfere with that and wants to support it.”
Australia, Arena Underwriting and Sports Underwriting Australia. Mr Hooton says having an existing partnership has made the Calliden split and reinvention easier. “There is a level of intimacy and understanding because we already had a relationship and it is matured into this model.” Calibre will operate as an autonomous business. “They like our knowledge, relationships and nimbleness, and our existing relationships in the Australian commercial market. Great Lakes doesn’t want to interfere with that and wants to support it. “They will retain their role as a wholesale insurer and that’s complementary to what we do. We will be one of a number of specialist agencies they will continue to support.” Calibre will focus on ways to be innovative and develop its product suite and in time consider new territorial opportunities. Mr Hooton sees his appointment as chief executive as a logical career move. 40
Although he has been associated with marketing and operations at Calliden and more recently running the agency business, he does have a mid-market insurance background. Originally from the UK, he entered the industry in 1988 as a graduate trainee with Royal Insurance. He was a branch manager in the Lake District, then when Royal Insurance and Sun merged globally in 1996 to become Royal & SunAlliance, he was appointed general manager of a mid-market operation, considered a pioneering venture at the time. He first visited Australia as group personal assistant to the Royal & SunAlliance chief executive, and on a later trip he accepted an offer to join the management team here and establish RSA’s new SME operations. Royal & SunAlliance floated its Australian and New Zealand general insurance operations in 2003. That led to the formation of Promina, which was taken over by the then Suncorp-Metway in 2006. insuranceNEWS
Mr Hooton had already left by then, joining Nick Kirk in 2004 to start Calliden. This is not the first makeover for Calliden. The insurer was formed from the ashes of Reinsurance Australia Corporation (ReAC) when Mr Kirk, a former Vero executive, saw an opportunity among sole traders, non-profit groups and other niche lines. ReAC’s bank of franking credits and tax losses meant Calliden could attract investors by paying fully franked dividends. However, the company struggled with significant losses from natural disasters, transforming from specialty underwriting to a managing general agent model, with Great Lakes a key partner providing the capital source for its core commercial portfolios. It remained true to its original mission of identifying and serving niche markets, and is set for another transformation under a new owner with the financial backing to add significant * power.
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Share madness Collaborative consumption is being hailed as a dream ticket, but it could turn into an insurance nightmare By John Deex
THE SHARING ECONOMY IS GROWING fast. And that can only be a good thing, right? Well… The power of the internet and social media has allowed individuals to unlock their domestic assets and make some muchneeded extra cash. Consumers also have more choice, able to avoid big businesses that have taken them for a ride for too long – and sharing is great for the environment, too. Whether you want a job done (Airtasker), a ride to work (Uber) or a room to stay in (Airbnb), you can just get the app and get going. You can even access other people’s wireless networks, if you are prepared to share yours (Fon), or invite others into your home to care for your pets while you are away (HouseMinders). New platforms are being launched on a daily basis, and a recent survey declared 68% of Australians plan to use the sharing economy to make extra money this year. It’s all too easy. Or is it? Nobody wants to think about the boring stuff when they are having so much fun, but there is a bundle of red tape to work through in terms of legality, compliance and, of course, insurance. It isn’t easy for sharing companies to get insurance for themselves or their customers, because they do not own the items being shared. And there are a host of ways for those making money from their domestic assets to invalidate policies. 42
Many questions have not yet been fully answered. Will recipients be covered if the items or services shared are substandard or cause harm? Likewise for the donor if they are sued or if property is stolen, lost or damaged. Does a homeowner need a landlord’s policy if renting out a room? Does a motorist need to add “business use” to their policy if sharing a commute with a colleague or taking payment for a lift into town? The US Casualty Actuarial Society discussed this highly complex issue in New York late last year. Members agreed a typical personal auto policy should not cover vehicles while carrying passengers for hire, but what about a vehicle available for hire but not engaged in transportation services? Vicki Mullen, General Manager Consumer Relations and Market Development at the Insurance Council of Australia (ICA), believes it is inevitable that the sharing economy will continue to grow and develop. She says the initial challenge is for governments to consider whether such platforms are subject to current safety regimes, whether existing laws apply and if there are definitions that need to be extended. “Those issues are playing out with governments across the world at the moment,” she tells Insurance News. “In terms of insurance, there are two issues for the seller of the service. Firstly, is the activity legal? If not, then there is a insuranceNEWS
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problem straight away with claiming on an insurance policy. “Secondly, if it is legal, then is the provider fully compliant with safety regimes? This is an important threshold. “Awareness needs to be raised so people are not unwittingly providing a service that is not legal or compliant.” The issue then is whether a retail policy would respond in the event of a loss. “This will come down to the particular policy, but it may not respond if a domestic asset is being used for commercial purposes, particularly if the activity has not been disclosed.” Ms Mullen says ICA does not see the development of the sector as negative, and it could lead to opportunities for insurers. “What [the sharing economy] enables people to do is unlock domestic assets for commercial purposes, and that is very attractive. It is an issue for insurers how they respond, but this is clearly a potential market opportunity. “It’s taking off in a huge way in the US and Europe and I would expect Australia to follow. It is a matter for consumers to keep talking to insurers, but it is also a case of supply and demand. “If the business is compliant then that supports consumers with choice. There should be a level playing field regardless of who is providing the service.” However, Allianz General Manager Corporate Affairs at Nicholas Scofield believes everyone is getting a little carried away with the concept. “There is a perception in various quarters that anything the internet or social media can deliver in terms of communicating and engaging is good, and a sign of just how the internet is benefitting communities,” he tells Insurance News. “Sometimes not much attention is given to how some of these sharing platforms fit into the real world and the legal and contractual framework.” Mr Scofield says the belief that there cannot possibly be a downside leads to insurance being overlooked, despite the fact that participating in the sharing economy will insuranceNEWS
inevitably have a significant impact on cover. Motor policies usually will not respond to damage that arises from using your own vehicle for ride-sharing services, he says. “Our product disclosure statement says claims will not be paid if passengers are being carried for hire, fare or reward, unless it is under a private pooling arrangement.” And home policies will generally not respond to damage caused by people invited in by the homeowner. “People think, ‘It’s new, it’s innovative, isn’t it good?’ But there are potentially very significant issues arising out of this. “In principle, people have freedom to use their own property in any way they see fit, but that doesn’t mean there aren’t legal implications, and implications for things such as insurance. “If people are going to participate in these things they should certainly make themselves aware of the implications. “There is a duty of disclosure. If there is a change in use then the insurer needs to be informed. Policies might be able to be revised and additional premium paid for additional risk.” Mr Scofield believes an element of naivety exists, which could lead to tragedy. Just because you can talk to people on social media does not make them your friends, he says. “There’s a big bad world out there. Pooling with family, friends or neighbours is one thing, but you are usually participating in this activity with total strangers and getting into a car with someone you’ve never met. “Young women have been assaulted by taxi drivers in the past and this is a grey world of people not under any monitoring or control. “Some of these things provide an open door for people who want to harm or rip people off.” But Mr Scofield accepts the trend is only likely to continue – and insurers must stay on top of it. “There may be opportunities for new products. Whenever there is a gap in the market, then insurers will monitor, investigate and look at whether there is an 43
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opportunity to extend a product or design a new product to fill that market need. “But it’s too early. To be able to price and write a policy around an unmet market need, there needs to be a base level of information about risk and average claims cost.” QBE believes the spread of the sharing economy will be limited only by “the imagination of entrepreneurs or government regulation”. But consumers can be burned when services or products are not consistent within an industry, the insurer says. “In many ways, the sharing economy is based on trust. We’ve seen how that trust can be damaged through actions such as surge pricing at critical times, the skills and behaviour of some drivers who aren’t regulated and the damage to homes or loss of property. “Insurance gives government and consumers peace of mind. If a market does not have the appropriate regulations and, subsequently, insurance to ensure the economic and physical safety of those involved, it is likely to suffer. “Consumers need to be sure they are covered, either through their own policy or that of the company they are engaging with or a member of.” QBE says many of its policies cover operators in this market, although there are limitations. For example, its householders policy would not be voided by peer-to-peer letting services if the insured rented out spare rooms, but theft or malicious damage by anyone on the property with the consent of the insured would be excluded. If a whole property were to be let on a peer-to-peer basis, the insured would not be covered and would need to obtain landlord insurance. “We will continue to work with our customers to meet their needs, in whatever market they are innovating,” QBE says. “As this market matures and data grows, all stakeholders will be better able to assess the risks and we will continue to develop products to make it possible.” The JP Morgan/Taylor Fry General Insurance Barometer notes the sharing 44
Big business: the sharing economy is front page news
“People think, ‘It’s new, it’s innovative, isn’t it good?’ But there are potentially very significant issues arising out of this.”
economy provides opportunities and challenges. The insurance implications for Uber users in Australia are “particularly concerning”, it says, because if an insurance company proves a driver’s actions to be illegal, a claim against the policy can be declined. The report quotes a New South Wales Roads and Maritime Services spokesman as saying that while Uber is not breaching the state’s Passenger Transport Act 1990 by offering the service, motorists transporting passengers for a fare are. “In Australia, Uber requires drivers to have a full licence, compulsory third-party coverage and third-party property damage insurance,” the report says. “However, it is likely that a personal insurance claim will be denied. “Uber therefore provides ‘contingent coverage’ (in the event that a driver’s personal insurance does not apply) for bodily injury and property damage to third parties. “This would still leave the driver’s vehicle uncovered in the case of a personal comprehensive claim being declined.” An Uber spokesman tells Insurance News that all UberX trips – where drivers use their own vehicle – are covered by $US5 million ($6.42 million) of contingent liability cover, plus each partner-driver’s insurance policies. “Uber connects millions of trips in more than 270 cities around the world on a weekly basis and every ride-sharing trip is insured by an AM Best A+ rated insurance company.” Uber did not respond to questions about whether or not a participant’s vehicle would be without cover if a claim was denied. An NRMA spokesman tells Insurance News customers should always check to see if proposed sharing arrangements are covered under current policies. Perhaps communication is the key if disaster is to be avoided. Nobody wants to spoil the party, or get in the way of progress, but the insurance industry is right to urge caution. It may be fun, it may be innovative, it may save money, but those participating must take * their share of responsibility too.
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An eye in the sky
Drone technology offers a new approach to loss management, but flying the things is not without dangers By Andy Swales
FOR MANY PEOPLE, THE WORD DRONE WILL conjure up images of military spy planes and remote missile strikes in faraway war zones. But unmanned aerial vehicles (UAVs) are becoming increasingly common at home, for a range of commercial, governmental and recreational uses. Remotely piloted craft of all shapes and sizes are now used in applications such as crop surveying and environmental monitoring. Real estate agents use them to take aerial photos of properties, while online retail giant Amazon plans to eventually use them for deliveries. The Civil Aviation Safety Authority (CASA) says more than 650 applications for UAVs have been identified, mostly “dull, dirty, dangerous and demanding... tasks that a remotely piloted aircraft can do best because it does not put its pilot at risk”. And the insurance industry is among those waking up to the potential benefits – particularly in the field of loss management. In Australia, LMI Group founder Allan Manning is leading the way. He bought a drone late last year, and within weeks had the perfect opportunity to use it. A fire left a Victorian factory in ruins and its owners anxiously awaiting an inspection to see if they could salvage vital equipment. But Professor Manning and his team could not simply stroll into the flame-ravaged building. “The WorkCover authority wouldn’t let us go inside just for an inspection,” he tells Insurance News. “They couldn’t just let us walk inside, so the use of the drone was a blessing.” 46
In went LMI’s new UAV, with Professor Manning at the controls and a colleague monitoring live footage from a GoPro digital camera mounted on the aircraft. The result was a win for everyone – not least LMI and its occupational health and safety (OHS) bill. “The factory needed this vital equipment,” Professor Manning said. “Some of it was destroyed but some of it was salvageable. By determining what could be recovered and from where it could be recovered, we were able to work with WorkCover Victoria and the local council to allow us access and get that equipment out. And that reduced the business interruption costs.” Professor Manning sees many other potential uses for the drone, particularly where OHS issues are a barrier to quick loss management inspections. UAVs can be flown over the site of vehicle accidents involving fuel or chemical spills, or to the tops of buildings damaged by hail or windstorms. “You can put it up on a roof without the OHS exposure of someone having to go up to inspect it, and you’ve got the photographic evidence of the damage.” He says loss management jobs often involve hardto-reach or potentially hazardous scenes. “I can remember through my career, some of the things I’ve done. I’ve climbed up the top of a collapsed... crane that’s got oil all over the ladder. “You don’t have to do that [with the drone]. You just sit on the ground in complete safety.” LMI’s drone is a DJI Phantom 2, a four-propeller aircraft that weighs about 1.2 kilograms and has a diagonal span of about 35 centimetres. insuranceNEWS
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LMI Group’s Allan Manning: using drones keeps staff safely on the ground
“For what you pay for it, it’s brilliant. To me, for the OHS peace of mind, it paid for itself in the first job. You’re not putting your staff at risk unnecessarily.”
With a mounted camera – plus a gimbal that steadies the camera while the craft manoeuvres – it cost the company about $2000. He plans to buy another for LMI’s New Zealand office. “For what you pay for it, it’s brilliant,” Professor Manning says. “To me, for the OHS peace of mind, it paid for itself in the first job. You’re not putting your staff at risk unnecessarily.” Images from the camera can be viewed live on a tablet and are also recorded. Professor Manning says the drone can be piloted by one person, but he tends to have one flying and one monitoring the pictures. He has learned to control the UAV with the help of video tutorials and plenty of practice – which is an ongoing process. “We’re still in the learning phase. I think it’ll take us a while. It’s easy to fly... the more you use it, the better you become.” However, the use of drones is not without its dangers: as more commercial and recreational UAVs take to the skies, concerns over safety and privacy (see panel page 66) are growing. CASA rules dictate drones should be flown in line of sight only and must stay below 120 metres in “controlled airspace”, which covers most urban areas. They should not fly within 30 metres of vehicles and people or pass over “populous areas” such as beaches, backyards, parks and sporting ovals. UAVs must not be flown within 5.5 kilometres of airfields, and commercial users must be certified by the authority. A series of recent scares illustrate authorities’ concerns.
In December CASA announced it would fine an operator for breaching the 30-metre rule after he flew his drone over the scene of a police operation in Altona, Victoria. The UAV hit a power line, fell to the ground and narrowly missed an officer. CASA has also been at pains to warn operators against flying over bushfire sites, voicing fears that fire-fighting aircraft could be grounded, “putting people and property at risk”. It follows an incident during the 2013 fire in the New South Wales town of Lithgow. In March last year a rescue helicopter taking a patient to a hospital in Newcastle was forced to take evasive action to avoid a drone, and at the UK’s Heathrow Airport last July a remote-controlled craft passed with six metres of a landing passenger jet’s wing. Professor Manning says common sense should dictate when a UAV can be used. “Like any tool, you can do bad things with it and you can do good things with it. It’s up to the operator. I hope people don’t [use drones inappropriately], because if enough people do they’ll ban the things and that’ll be a useful piece of technology taken away from us.” He says LMI has an in-house rule not to fly within 30 metres of people. Any user would be “an absolute idiot” to go near airfields or fire zones. “You’re creating liability for yourself. If someone’s house was destroyed and they argued your inappropriate use of a drone was stopping the fire brigades putting the fire out... it’s just common sense.” insuranceNEWS
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Bird’s eye view: damage caused by a bushfire on Victoria’s Mornington Peninsula
CASA says it is reviewing its rules on commercial and recreational drone use, with some changes possible early this year. Amendments could include removing the need for commercial certification on craft lighter than two kilograms, as suggested during a parliamentary review of drone safety and privacy last year. The push for drone use is also coming from outside the insurance industry. Australian UAV is a commercial operator that works in surveying and mapping, using $40,000 fixed-wing eBee drones that cover hundreds of hectares a day. The company is now looking to expand into loss management assessments. Director James Rennie is a natural resources scientist who provided hydrological analysis to loss adjusters following the major floods of 2011 and 2012. He says there are many benefits in having aerial photography available to adjusters immediately after a storm, flood or fire. “After large bushfires or flood events, for example, if you were doing a crop loss [assessment], we could give you to within a few metres the actual area of crop loss. “So rather than trying to estimate it from the ground by driving around, we can do a full flyover and then provide a scale map that you can bring into Google Maps or another geographical information system.” From the aerial pictures it takes, Australian UAV can create 3D digital surface models showing the extent of flooding. It can also provide elevation data 48
that helps identify the difference between floodwater damage and stormwater damage. The company’s drones can be fitted with “nearinfrared” cameras that give more detailed assessments of bushfire damage than normal cameras or the naked eye. Australian UAV has already performed surveys for insured parties, such as Mornington Council in
“We can do a full flyover and then provide a scale map that you can bring into Google Maps or another geographical information system.” Victoria, which recently requested a report on bushfire damage in the shire. Mr Rennie has also approached loss adjusters with a view to helping them in post-event assessments. Professor Manning believes LMI is currently the only company using a drone for loss management in this country. Australasian Institute of Chartered Loss Adjusters Chief Executive Tony Libke says it is early days but “there is definitely a use for drones”. In the US, Brown Claims Management Group, of Louisiana, is at the forefront of the trend towards insuranceNEWS
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High fliers: drones enable risk-free roof assessments
The prying game THe GrowInG use of Drones HAs CreATeD new privacy concerns, perhaps best illustrated by recent media reports of a Victorian woman who was photographed sun-baking topless in her own backyard. she was snapped from above by a real estate agent’s drone that was surveying the property next door – and the resulting photos were then blown up and plastered across a billboard in the street. In June 2013 the Australian Law reform Commission (ALrC) was asked to review current privacy laws in light of new technology including drones, and last september it made a series of recommendations to AttorneyGeneral George Brandis. It says existing legislative and common law privacy protections are “a patchwork, with some important pieces missing and inconsistencies between others”, and serious invasions of privacy are occurring with “increasing ease and frequency” in an age “when the mobile phones in our pockets are all potential surveillance devices, drones are becoming cheaper and more advanced, and personal information once put online seems impossible to destroy or forget”. Australian law therefore needs a “cause of action” for pursuing privacy lawsuits, to be contained in a stand-alone Commonwealth act. The ALrC also says surveillance device laws “should be the same throughout Australia”, with Commonwealth legislation to replace differing state and territory laws. It says “surveillance legislation should become technology neutral, so the law can apply to new devices, such as unmanned aerial vehicles”. However, given the ALrC review was instigated by the previous Labor government, its chances of being implemented appear slim. The House of representatives standing Committee on social Policy and Legal Affairs reviewed drone safety and privacy issues last July, before the ALrC final report was released. The cross-party committee echoes the commission’s call for a tort on serious invasion of privacy, and urges the Civil Aviation safety Authority (CAsA) to add a section on privacy obligations to its user pamphlets about drone safety. other recommendations include a national privacy regime that removes interstate differences and contains technology-neutral definitions of surveillance devices, and government to work “with CAsA and the Australian Privacy Commissioner to review the adequacy of the privacy and air safety regimes in relation to remotely piloted aircraft”. for now, LMI Group founder Alan Manning says “common courtesy” is key to avoiding privacy complaints – and it always has been, regardless of the technology. “It’s the same if I need to go onto a person’s property; in the old days, if I could get onto a high-rise building nearby to get an aerial photograph, I’d just go and say, ‘Can I please go to your window or go up on top of your roof?’ I can’t remember ever being refused. “I would never go on someone’s property without their permission. [with drones it] is the same thing – I wouldn’t invade their airspace.”
drone use in loss adjusting – using the same DJI Phantom 2 model as LMI. President Stephen Brown says the company has been “experimenting” with the technique for about a year. Drone use is “definitely expanding” in the US claims adjusting industry and “carriers continue to enquire about the potential benefits... [but] I would not say it has gained general acceptance within the industry just yet”, he tells Insurance News. A recent report from US consultant Cognizant says UAVs could be the “next disruptive technology” in the insurance industry, “with the potential to dramatically alter business conventions by introducing new ways of working”. It says general insurers “can benefit significantly from the use of drones, especially in the areas of claims adjudication, risk engineering and catastrophe claims management”. It suggests UAVs’ ability to quickly examine large areas could speed the claims process following catastrophes and reduce the number of loss adjusters needed in the field. So is there a danger drones could challenge loss adjusters’ role, with robotic eyes in the sky reducing the need for specialist boots on the ground? Professor Manning thinks not. “I cannot see [drone use] reducing the number of staff in my area. I can see it making us more efficient and safer but reducing numbers, I doubt it in the short to medium term. “Photographs are only one part of the assessment process. There are still interviews, quantification and * so on.” insuranceNEWS
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Material concern Graphene has been hailed as the next miracle substance – but could it pose a threat to human health, and to the insurance industry? world-changer or deadly risk: graphene could be both
By John Deex
IT IS A MILLION TIMES THINNER THAN A HUMAN HAIR, YET 300 times stronger than steel. It is fire-resistant, but retains heat. A better conductor than copper, but not even helium can pass through it. Graphene is so thin it's being hailed as the world’s first genuinely two-dimensional material – the explanation behind that statement would take up several pages. And it has the potential to change the world. Scientists were aware of carbon’s potential for decades, but all attempts to extract an atom-thick layer of carbon had failed. Until 2004, when two Russian researchers at the University of Manchester made a stunningly simple breakthrough – using everyday Scotch tape. Andre Geim and Kostya Novoselov saw small pieces of graphite on a piece of tape used to clean a graphite stone. The material on the tape was thinner than anything previously attained. Graphene had been discovered. Mr Geim and Mr Novoselov were awarded the Nobel Prize for physics, and laboratories across the world began working out how to make practical use of the discovery. The opportunities are almost endless. Graphene body armour could stop a bullet, easily outperforming Kevlar. The material could also be used to make solar panels up to 1000 times more efficient – but cheaper. Clothes that communicate, drugs that target specific cells, packaging that tells you when food is off and advanced water purification processes – all this is possible with graphene. It could make the fictional see-through computer screens seen in films like Minority Report a reality, and lead to unbreakable mobile phones with vast battery life. The first graphene products are expected to hit the market this year. But not everyone is celebrating. QBE is among the insurance companies that have pointed to 52
studies outlining the potentially harmful effects of graphene on human health. Graphene oxide moves through water with ease, leading to concerns it could enter the human body and cause untold damage. Graphene’s jagged edges could pierce membranes in human lung, skin and immune cells, allowing the material to enter and disrupt their function. “The longer-term effects of graphene on the human body are currently unknown,” QBE says. The insurer believes the impact on the insurance industry could match that of asbestos – a natural substance widely used in manufacturing and construction until it was banned in Australia in 2003. The death toll from exposure to the deadly dust continues to rise, and will keep doing so until around 2020. Up to 40,000 Australians will be diagnosed with an asbestos-related disease in the next 20 years, while in the UK the asbestos death toll now exceeds deaths from road accidents. The estimated future costs to the UK insurance industry alone are between £4 billion and £10 billion ($7.8 billion-$19.5 billion). “Therefore, for all the potential advancements graphene could bring, we urge caution,” QBE says. “To avoid the human and financial repercussions of another asbestos, we need to have a thorough understanding of graphene’s properties.” Munich Re’s Risk Manager Gerhard Schmid says the reinsurer has been monitoring graphene since 1998. “Graphene is an overarching expression in the field of nanotechnology,” he tells Insurance News. “In particular, nanotubes [rolled up tubes of graphene] are discussed as a major threat in the public risk discussion. “Via nanotechnology, graphene is an integrated part of our emerging risk radar.” Potential concerns include inflammation of the lungs, or lung cancer when nanotubes or connected nanoparticles are inhaled. Dr Schmid says in the event of large graphene-related losses, February/March 2015
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“It would be foolish to not take a cautious approach to the widespread use of any nanomaterial, let alone those like graphene or graphene oxide. These materials… could result in longterm harmful human health effects.”
there will be demand for specially worded “nano policies”, separated from traditional policies. David Officer, Professor of Organic Chemistry at the Australian Research Council Centre of Excellence for Electromaterials Science, is an expert in graphene research. He tells Insurance News QBE “has taken a number of random ideas and tried to link them without much logic or evidence”. Suggesting graphene oxide behaviour is a model for that of graphene is misleading, he says. “Graphene oxide is not graphene. It is a very different material and it has very different properties. It does indeed disperse in water much more easily than graphene and it will have completely different physiological effects to graphene.” Professor Officer says the comment about graphene entering cells raises a key issue about the material. There are many types of graphene that “will undoubtedly have different health effects” depending on their size and shape. Graphene’s size directly controls its physicochemical properties, he says. “We make graphene sheets that are bigger than human cells, so they are unlikely to enter cells. We also make much smaller graphene that can presumably enter cells. “In doing so, we functionalise the graphene and change its chemical nature, which undoubtedly has an effect on its toxicity or otherwise.” Professor Officer says there is little justification for drawing similarities between graphene and asbestos, given there is no chemical or physical similarity between the two materials. “Nonetheless, that does not mean that a form of graphene will not have harmful effects in the lungs, since it has already been shown that graphene oxide induces lung inflammation and persistent lung injury. But will graphene, a different material, also do that?” Despite taking issue with some of QBE’s comments, Professor 54
Officer agrees on a crucial point – that caution is required. “It would be foolish to not take a cautious approach to the widespread use of any nanomaterial, let alone those like graphene or graphene oxide,” he says. “These materials can bind DNA, proteins and a wide variety of other biomaterials that could result in long-term harmful human health effects.” The University of Manchester, the home of graphene, insists “there are no proven dangers to consumers”. However, it accepts inhaling or ingesting nanomaterials such as graphene “could potentially be toxic”. Professor Maurizio Prato, leader of the health and environment work package for the Graphene Flagship, an EU research initiative with a budget of €1 billion ($1.47 billion), believes the comparison with asbestos is unjustified. “Alarmist claims” concerning the toxicity of graphene cannot be taken seriously at this stage, he tells Insurance News. “Single-layer graphene is much more biodegradable than asbestos, which is made up of long, thick fibres which cannot be destroyed, and are highly reactive with biological tissues,” he says. “We therefore expect to see no asbestos-type behaviour in singlelayer graphene.” However, Professor Prato, a chemist at the University of Trieste, says graphene health and safety is under intense investigation in laboratories across the globe, and the biological effects “have yet to established with certainty”. The increasing international effort to investigate the toxicity of graphene will be a slow process. In the meantime, surely QBE’s words of caution ring true. It may not have every fact straight, or the proof to back up its argument, but even scientists agree caution would be wise when it comes to graphene. . It could be the material that changes the world – but let’s make * sure it’s for the better, not worse. February/March 2015
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Environmental protection Brokers may be missing out on a prime opportunity if they don't alert clients to the need for pollution cover By Jan McCallum
AN ENVIRONMENTAL insurance issue can arrive at a company with either a bang or a whimper. A chemical explosion at a factory will make television news, but a bill for environmental damage can just as easily result from silent seepage from an underground storage tank. Both lead to a large bill for the clean-up and land remediation â€“ which is the point at which many policyholders discover the pollution exclusion in their public liability policy. Several insurers and Lloydâ€™s coverholders offer environmental insurance, and many of them believe brokers are missing an opportunity to sell cover that provides funds to reinstate the environment once contaminated. EnviroSure broker and environmental insurance specialist Anthony Saunders says the issue was highlighted in a Queensland Supreme Court case last year. Chemical company Hamcor sued Marsh and one of its authorised representatives, plus the state fire brigade, after a fire at its manufacturing plant. The fire brigade fought the blaze with huge quantities of water that flowed onto nearby bushland and into waterways, landing Hamcor a $9 million remediation bill. Hamcor failed in its suit against the fire brigade for negligence and against Marsh and the authorised representative over the cover arranged. EnviroSure specialises in professional indemnity and public liability cover for individuals and businesses with environmental risk. Mr Saunders says many 56
people are unaware their standard industrial special risks or business pack policy will not cover pollution remediation. He says brokers also need information about environmental insurance so they can identify the risk and bring it to the clientâ€™s attention. There are enough insurers prepared to write the cover, Mr Saunders tells Insurance News. Sterling Insurance Chief Executive Chris Dardaneliotis agrees more education is needed. He recently saw a $300,000 clean-up claim from a contractor that had serviced pipes at a petrol station. An explosion at a sewerage plant was traced back to the station, some kilometres away, and it was discovered that pollutants had flowed into the water table. Mr Dardaneliotis says insurers have more appetite to provide environmental insurance for contractors than for premises, but both covers are available from insurers with a good track record in the Australian market. He estimates demand for the cover is growing by 5% to 7% a year, and he says it will only increase as governments become more stringent about environmental protection and ensuring taxpayers are not left with the costs of pollution clean-ups. Mr Saunders says brokers who do not alert clients to the risk or offer cover are exposing themselves to negligence claims. When discussing the cover with clients, brokers should consider potential pollution scenarios, including from work insuranceNEWS
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