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PIGGYBACK INTO ASIA: How IAG’s Mike Wilkins is helping Warren Buffett’s Berkshire Hathaway in a deal that suits them both

August/September 2015

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Contents 6 Newsmakers » 10 Piggyback into Asia » Warren Buffett’s remarkable deal with IAG gives him secure access to the insurance world’s best opportunities.

16 Swimming against the tide » Insurers must gear up to negotiate troubled waters as the cyclical downturn gathers pace, a new report warns.

22 Oh boy… » El Nino is set to turn up the heat on Australia’s bushfire risk, but there’s an even greater threat arising in the Indian Ocean.

26 Insurance renaissance » How globalisation, analytics, alternative capital and innovation will give the industry back its lost relevance.

32 Moving into the mainstream » With insurance-linked securities now commonplace in reinsurance and creeping into the primary market, are the investment bankers taking over?

40 Playing with fire » A devastating blaze has left Australia wondering how safe its high-rise buildings really are.

48 Expanding the Arch way » The Bermuda-based insurer is here to stay, and sees some space for itself in the crowded SME market.

52 No room for neutrality » Insurers get a warm welcome to the UN, as the global climate change action debate heats up.

54 High stakes » Strata growth offers great opportunities, but there are towering challenges too.

58 Doing it for the kids » Axis Australia chief David Smith is using his finance nous to help scientists beat childhood cancer.

60 Trouble brewing »

66 Falling out of favour » How quickly can a broker’s revenue stream be destroyed? In the case of life advisers, it took less than five years.

70 A new dimension » 3D printing is revolutionising manufacturing, with serious implications for product liability and other commercial covers.

75 Broker education » Moving beyond ‘easier, cheaper, faster’

76 Healthy growth » AHI founder David Epper knows how to survive and thrive in tough times.

companyNEWS 77 Going for growth » AIB focuses on its wholesale niches.

78 To the rescue » NTI unveils livestock accident assist.

peopleNEWS 79 This sporting life » Sportscover underwriting chief Jarrod Bell is a team leader with lofty goals.

80 Queensland Day honours top service and young professionals » 82 McLardy McShane tees off for charities » 84 NSW brokers fly high at Allianz Young Eagle event » 86 AHI staff farewell founder » 88 UAC challenges YPs on hard market » 90 maglog »

Volcanic eruptions carry more risk than just delaying airline flights. A big one could blast humanity back to ‘a pre-civilisation state’.

August/September 2015

Cover image: Bill Wood

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newsmakers at

+ is a free weekly online news service for the general insurance industry. The website has more than 22,000 subscribers. In June and July we published 386 articles online. These were made up as follows: Local Corporate Regulatory & Government Financial Services The Professional International Analysis Breaking News

Zurich-based global property and casualty (P&C) insurer Ace will acquire US rival Chubb for $US28.3 billion and take its name, to create the second-largest commercial insurer in the US, with combined revenue of $US31 billion. The friendly takeover, the largest in the insurance sector, adds momentum to the consolidation under way in the industry. An environment of low interest rates, intense competition and pressure on premiums has fuelled the rush to grow through acquisition. Analyst Dealogic says mergers and acquisitions worth $US72.5 billion have been transacted so far this year. Ace has a presence in 54 countries, Chubb in 25. The Ace-Chubb business will have a combined workforce of 33,000 and will reap annual cost savings of $US650 million a year. In a memo to brokers, Chubb Chief Executive John Finnegan flags job losses. “As we begin… integrating the two companies, we will evaluate our needs across our businesses and locations, and where there

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Some 18,635 news articles – including 188 breaking news bulletins – have been published since we started in 2001. All articles can be accessed through our archives. Access to articles and other services provided by is free.

= is overlap the most qualified people from Ace and Chubb will be selected for these positions,” he says. Ace Chief Executive Evan Greenberg – who will lead the merged company as Chairman and Chief Executive – says the tie-up will create a “unique” business. “We are combining two great underwriting companies that… will make each other better and create a unique company in a class of its own that has greater growth and earning power than the sum of the two companies separately.” Mr Finnegan had planned to step down at the end of next year, but will now stay on as Executive Vice-President for External Affairs in North America. He will “assist” with the integration, but will not have operational responsibilities. Mr Finnegan says the merger will create a “best-in-class global franchise in P&C insurance”.

Ace-Chubb merger creates $US31 billion ‘P&C powerhouse’, 6 July

We just think a reinsurance pool is bad policy in a market we’d argue is working extremely well. There is no market failure in north Queensland.

New Vero NZ chief Paul Smeaton (above) will take over as Chief Executive of Vero New Zealand following the departure of Gary Dransfield. Mr Dransfield is returning to Australia to become interim Chief Executive Suncorp Life, replacing Geoff Summerhayes. Mr Smeaton, currently Executive General Manager Statutory Claims, Commercial Insurance, will begin his new role on September 14. He joined Suncorp in 1994 and has since held senior positions in IT, corporate projects, human resources, procurement, facilities and general insurance. A former executive general manager commercial claims, he was appointed in 2010 to the strategically sensitive role of executive general manager statutory claims.


Smeaton to lead Vero NZ, 29 June 2015

– Suncorp Personal Insurance Chief Executive Mark Milliner takes a stand against Government intervention

A hedge for windfarms

Swiss Re Corporate Solutions has teamed up with Infigen Energy to create Australia’s first hedging tool to cover risk in windfarms. The hedge, covering windfarms across SA, NSW and WA with more than 500 megawatts of capacity, pays Infigen a fixed amount per megawatt-hour for periods of low wind. “Windfarm operators are constantly looking for ways to better protect themselves in low-wind weather cycles,” Swiss Re Corporate Solutions Head of Weather Solutions for Asia-Pacific Jamie Summons said. The hedge is based on actual energy production across multiple sites, unlike traditional wind protection solutions that are tied to single-site modelled windspeed indices. It increases cashflow predictability and reduces earnings volatility. Swiss Re says tailored hedging solutions can cover shortfalls and compensate for when the sun doesn’t shine or the wind doesn’t blow. By the end of this decade, a 50% increase in renewable energy investment is likely to more than double spending on insurance and other risk transfer solutions in six of the world’s leading renewable energy markets. insuranceNEWS

Swiss Re helps windfarms cover calm days, 29 June August/September 2015


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Better next time: Suncorp says repaired homes are equipped to withstand the next cyclone

Suncorp uses muscle to break stalemate In pushing for a home retrofit program in north Queensland, Suncorp is flexing its muscles in a bid to dissuade the Federal Government from creating a reinsurance pool or a mutual insurer for cyclone cover in the region. It says the $2 million cost of a taskforce to examine the options would be better spent on a program to help homeowners prepare their properties for cyclones, which would cut home insurance costs and insurers’ claims costs. Last week Suncorp Personal Insurance Chief executive Mark Milliner travelled to James Cook University’s Cyclone Testing Station in Townsville to release a report showing homeowner retrofits are better than “hiding the problem behind an insurance pool”. The paper shows one-quarter of Suncorp policyholders claimed for Cyclone Yasi in 2011 and 86% of these claims for were for minor, preventable damage. The report – Build to Last: A Protecting the North Initiative – draws on analysis by James Cook University and consultancy Urbis to establish the costs and benefits of a retrofit program. Based on claims from cyclones Larry in 2006 and Yasi, the report says about 100,000 older homes may not meet current wind-load codes. In Innisfail, claims following Yasi cost half those for Cyclone Larry five years earlier, because much of the town had already been rebuilt.

“Clearly this is good evidence… that if we do rebuild towns to the right sort of cyclone standards, the next time a cyclone comes through people will be safer and there is significantly less damage,” Mr Milliner told Roof upgrades can halve cyclone damage bills, and can pay for themselves after just one storm, the report says. Home and contents premiums in north Queensland have risen 80% since 2005, compared with 25% nationally. The new report is part of Suncorp’s “Protecting the North” program, which offers lower premiums in return for homeowner mitigation, a direct strata insurance product for smaller buildings – which Mr Milliner says is “getting good traction” – and a product for low-income households, with contents cover from $4 a week. Suncorp’s retrofit proposal comes after CGU cut premiums to more than 7000 unit-owners under its north Queensland resilience project. It tested 390 homes for disaster resilience and offered advice on problems that needed fixing. “I think as an industry it’s in all the insurers’ interests to look at ways we can encourage policyholders to reduce risk and reduce premiums,” Mr Milliner says. “Whatever happens, one thing is for sure – the cyclone threat is not going anywhere.” A retro solution to the ever-present threat of cyclones, Analysis, 27 July

UK sees Australia as high terror risk The UK Foreign Office now ranks the terror threat in Australia as high – the same as in war-torn nations such as Afghanistan and Iraq. Aon Risk Solutions Placement Manager Crisis Management Karina Rodriguez Diaz says the move reflects the Lindt cafe attack in Sydney last year and at least four terror plot arrests. She told the risk in Australia is “definitely” growing as extremist groups call for attacks on Western soil. “Most of the increased risk comes from opportunistic attacks from the so-called lone wolves using more accessible weapons rather than large organised attacks that require complex planning and infrastructure.”

Awareness and preparation are the keys to responding, she says. “Organisations need to ensure they are adequately covered against the risk of terrorism, but also need to understand the impact a terror attack can have on their business and their brand and reputation. “Rather than exclusively relying on insurance, crisis management and business continuity plans, as well as training, are essential.” Last September the Abbott Government raised Australia’s terror alert level from medium to high. And earlier this year Aon’s Terrorism and Political Violence Risk Map raised Australia’s risk rating from negligible to low, adding a terrorism peril.


UK warns of rising terror threat in Australia, 20 July August/September 2015

Barber steps up at Willis Willis Australasia Deputy Chief Executive Tony Barber (above) is to become Chief Executive from January 1. Mr Barber will replace Roger Wilkinson, who will retire at the end of the year after serving three years as chief executive. Mr Barber joined Willis in 1998 from Aon, and has since held senior client advocate positions for large clients, as well as placement and state leadership roles. He started his insurance career in 1986 with New Zealand Insurance. Willis Australasia employs 400 staff across six offices in Australia and three in New Zealand. Willis names next regional CEO, Breaking News, 16 July

Maps make it cheaper Insurance premiums are starting to fall as flood mapping improves. Insurers have previously complained about a lack of accurate data, which became an issue after the 2011 summer floods, when flood cover was made compulsory in many household policies. Customers protested at premium increases, claiming they had no risk, while insurers argued they were pricing on the information available. Inquiries after the floods showed data was often hard to find, or local councils did not want to hand it over. However, this has changed, with the Insurance Council of Australia, insurers, town planners and engineers collaborating on flood mapping. Flood mapping delivers for consumers, 13 July


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newsmakers at

From the

Colin Fagen

Tim Plant

Shaun Standfield

Mark Lingafelter

Big changes as QBE shuffles its management pack Tim Plant has been promoted to Chief Executive of QBE’s Australian and New Zealand operations, replacing Colin Fagen who moves into a new role as Group Chief Strategy Officer. Mr Plant, currently head of the insurer’s corporate partners and direct business, has more than 20 years’ experience in international insurance and reinsurance including more than 13 years with QBE. Group Chief Executive John Neal says that Mr Fagen will be responsible for leading major growth and efficiency initiatives across QBE globally. Both roles are effective from August 18. Meanwhile Former Chubb Australia managing director Mark Lingafelter will become Managing Director Asia Pacific at QBE. Mr Lingafelter left Chubb in May “to pursue other opportunities in the insurance industry”.

The Singapore-based position will answer to Chief Executive Emerging Markets David Fried. He will take up the position in September. And QBE’s Chief Underwriting Officer Asia, Shaun Standfield, has been named as the new Managing Director of major authorised representative and broker group Insurance Advisernet (IA). Mr Standfield was appointed to the Asia role in 2012, after serving five years as QBE’s general manager Australian Intermediaries. IA Chairman Ian Carr says Mr Standfield will start with the company in October, working from its newly re-established head office in North Sydney. QBE announces new Aust-NZ CEO; ExChubb chief joins QBE, Standfield goes broking, Breaking News, July 28

Hollard scuttles Greenstone float Hollard Insurance will retain ownership of pet, life, health and funeral insurance distributor Greenstone after shelving an initial public offering for the company. Fund managers baulked at the indicative price of $2-$2.50 per share that would raise $810-$984 million. Greenstone had more than 350,000 inforce policies and 310,000 individual customers at December 31, according to the float prospectus. The company expects a net profit of $60.4 million this financial year on gross written premium of $130.3 million, and a profit of $90.3 million in 2015/16. Profit last financial Publisher/editor: TERRY McMULLAN McMullan Conway Communications Pty Ltd Tel: + 61 3 9499 5538 Fax: +61 3 9499 5535 Email: Advertising: NAOMI CONWAY McMullan Conway Communications Pty Ltd Tel: +61 3 9499 5538 Fax: +61 3 9499 5535 Email: Artwork delivery to: McMullan Conway Communications Pty Ltd PO Box 116, Ivanhoe VIC 3079 Australia or Level 1, 120 Upper Heidelberg Road, Ivanhoe VIC 3079 (COURIERS ONLY) Email:

year was $45.2 million. Greenstone has about 456 full-time equivalent staff. Reports say institutional investors were concerned at the amount of float proceeds being paid to founding shareholders – money that would not be reinvested in the company. Hollard planned to reduce its stake in Greenstone to about 32% and would have taken $589.1 million from the float. Another $249.8 million would have been paid to Hollard Financial Services co-founder Gavin Donnelly. Fund managers reject Greenstone float price, 15 June 2015

Terry McMullan

subscriPtion enquiries: Email: contributions: We welcome all material that is relevant to the Australasian and regional risk insurance industry, including all aspects of risk management. Please contact the Editor, +61 3 9499 5538. Printing: Printgraphics, 14 Hardner Road, Mt Waverley VIC 3149, Australia

A McMullan Conway production

ISSN 1837-4972


The decision by Berkshire Hathaway to make its belated entry into Asia via IAG says much about the American investment giant’s way of doing things. Our examination in this issue of Insurance News of its motives in buying a slice of IAG and doing a deal that even Warren Buffett admits is unprecedented illustrates just how much the international insurance scene is changing. Buffett has built his company’s fortunes on the back of reinsurance, and now that reinsurance is faltering as new capital promotes lower premiums and different approaches to risk, his focus – or at least that of his trusted insurance lieutenant, Ajit Jain – has shifted further down the food chain. Asia is the biggest game in insurance now, and having ignored the opportunity while the profits from reinsurance and his US insurance operations kept pouring in, Buffett is scrambling to catch up. In this issue we also introduce Mike McGavick, the erudite Chief Executive of XL Catlin, who provides a very interesting spin on the present state of the international industry as it goes through all manner of twists and turns. He believes the influx of capital into the global insurance market is a very good thing, and suggests the industry may be on the brink of a “renaissance of relevance”, where Big Data and underwriting will restore insurance to its long-lost position at the centre of enterprise. You’ll also learn about insurance-linked securities and what they mean for the industry, from an expert. And we’ve also examined all kinds of risks and business developments, from volcanoes to the highly combustible exteriors of some skyscrapers. Insurance is a fascinating business, and the people at Insurance News take great delight in exposing its inner workings, explaining the impossibly complex and shedding some light on the things leading the industry forward into a brave new world. We hope you enjoy this issue.


August/september 2015

Material in insuranceNEWS (the magazine) is protected under the Commonwealth Copyright Act 1968. No material may be reproduced in part or in whole without the consent of the copyright holders. The content of articles appearing in this magazine do not necessarily reflect the views of the Publisher. All statements made are based on information that is believed to be reliable and accurate, but no liability is accepted for any fault or omission. We also accept no responsibility or liability for any matter published in this magazine that reflects personal opinion. Printed on FSC ® paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification.

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Piggyback into

Warren Buffett’s remarkable deal with IAG gives him secure access to the insurance world’s best opportunities By Michelle Hannen

THE DEAL BETWEEN IAG AND BERKSHIRE Hathaway announced in June took everyone by surprise. Conducted in secrecy between senior IAG executives and the US investment giant’s inner circle, the arrangement has many moving parts. But in essence it is about one thing only: Asia. Under Managing Director and Chief Executive Mike Wilkins’ astute leadership, IAG has been focusing on building an Asian business for several years now, making steady inroads into the lands of opportunity. By contrast, Berkshire Hathaway Chief Executive Warren Buffett has been slow to move on Asia, which represents an enormous opportunity for insurers thanks to its huge population and the rapid gentrification of its middle classes. While it is said that fools rush in – and Mr Buffett is no one’s fool – he is no longer sitting back and watching his competitors fail in Asia. Instead, AIG and Prudential have begun to post strong results from the region, while former AIG chief executive Maurice “Hank” Greenberg’s Starr Companies completed the first foreign buyout of a state-backed general insurer in China last year. Mr Buffett’s Berkshire Hathaway conglomerate 10

does some business in Asia through its reinsurance operation, General Re, but by contrast IAG is well entrenched in primary market joint ventures in India, Thailand, Malaysia, China, Vietnam and Indonesia. The deal gives Mr Buffett an entree into Asia that is as close to risk-free as possible. But there is upside for IAG, too. Under the terms of the arrangement IAG gets additional capital, not only from Berkshire Hathaway’s $500 million investment but also around $700 million over the next five years as a result of it ceding 20% of its local business, which it can invest in its capital-hungry Asian businesses. They are the kind of markets where the adage “you've got to spend money to make money” rings only too true. While Mr Wilkins says that money could be returned to shareholders, it is more likely it will be used for the two other options he outlined when announcing the deal: for acquisitions or to be invested in existing businesses. And while Mr Wilkins says he has no obligation to consult with Berkshire Hathaway “on our strategy or any activities we might undertake”, Mr Buffett made mutterings on the day of the announcement insuranceNEWS

August/September 2015

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about “the capabilities of both organisations to work together to go into other Asian markets”. “The idea of participating in Asia in a significant way with someone who knows what they are doing is enormously appealing to us,” Mr Buffett told one interviewer. “It’s a huge market and we really haven’t done anything in it. “We have written certain catastrophe reinsurance over time, but in terms of tapping into the primary market we have never done that. It’s not easy to enter into a new area. We are doing it without specialty operations, but as far as we are concerned IAG is an ideal way to participate in it with people that are on the spot and know what they are doing.” In fact, Mr Buffett made no secret that IAG declined an offer from Berkshire Hathaway for a larger deal. Which should not come as a surprise, really. As Mr Buffett has himself famously said: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble”. There are no bigger opportunities in the insurance business than those which currently exist in Asia and it appears, that with IAG’s help, he hopes to do just that.

“The idea of participating in Asia in a significant way with someone who knows what they are doing is enormously appealing to us. It’s a huge market and we really haven’t done anything in it.” – Warren Buffett insuranceNEWS

August/September 2015


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“It’s a long-term relationship that we are entering into. We think when you look at the package it’s a sensible next development in the relationship with Berkshire.” – Mike Wilkins (right)

THE DEAL BERKSHIRE HATHAWAY HAS ACQUIRED 3.7% of IAG, through the issue of new shares, for $500 million, and is required to, at a minimum, maintain that shareholding for the next 10 years. IAG also has the option to issue additional shares, representing another 5% of the business, to Berkshire Hathaway by July 1, 2017. For its part, Berkshire Hathaway has committed not to lift its shareholding in IAG beyond 14.9% for the duration of the agreement. Under a 10-year whole of account quota share deal, 20% of IAG’s premium income will be ceded to Berkshire Hathaway, which represents around $2.2 billion a year. In return, Berkshire will pay 20% of IAG’s claims cost and 20% of its insurance operating costs. The quota-share arrangement will reduce IAG’s capital requirements by $700 million over the next five years. But IAG is not giving away 20% of its insurance profit, thanks to an as-yetundisclosed fee that Berkshire will pay IAG for access to income from its strong brands and market-leading position. Mr Buffett has described the payment as “substantial – a payment of a size that virtually no other insurance company in the world would pay, and that we have never paid before. In the insurance world it would be looked at as unusual, but for people who understood it, it is sensible.” IAG also scores Berkshire’s local personal lines and SME business and an agreement that its new partner won't compete with it in these lines in the AsiaPacific for the life of the deal. In return, Berkshire Hathaway has acquired the renewal rights to IAG’s ASX 250 corporate property and liability accounts, which an IAG spokesman says represents less than half of its large-commercial lines book, and accounts for less than $50 million of its total gross written premium.


THE PLAYERS #1 Mike Wilkins and IAG WHILE MR BUFFETT’S REPUTATION CERTAINLY PRECEDES HIM, SOME MIGHT say Mr Wilkins also has a reputation as a man with the Midas touch. In the six years Insurance News has published its “Top 20” list of influential local insurance executives, Mr Wilkins has always been in the top three. Under his careful leadership, IAG has transformed itself to become the dominant player in both the Australian and New Zealand insurance markets at a time when market pressures have many predicting that size equals survival. Consider the evidence: when Mr Wilkins took over as chief executive at IAG in 2008 the company was plagued by profit warnings and was itself a takeover target. Slowly but steadily he restructured its local businesses, engineered an exit from the troubled UK operation he had inherited, set the insurer’s Asian strategy and, finally, took IAG to a clear market-leading position in both Australia and New Zealand with the 2013 acquisition of Wesfarmers’ insurance underwriting operations. His pedigree for delivery, however, extends back further when, as chief executive of the Australian arm of UK insurer Royal & Sun Alliance he led the float of the company – then renamed Promina – and its eventual sale to Suncorp in 2007 for a whopping $7.9 billion. While many assume Berkshire Hathaway got the better end of this deal, IAG has scored some big wins in landing one of the world’s most respected insurance companies – indeed, one of the world’s most respected companies in any industry – as a long-term cornerstone backer. Not only does it get the kudos associated with Mr Buffett’s seal of approval, but in swapping 20% of its premium income for a fee IAG is reducing its earnings volatility and its capital requirements. That, coupled with the lower reinsurance spend that will accompany the reduction in its exposure to the catastrophe-prone Australian and NZ markets, Berkshire’s local personal and SME business, an enhanced ability to deliver on its through-the-cycle target of 15% return on equity and increased financial flexibility, all have Mr Wilkins smiling. The additional capital – much of which is likely earmarked for Asian expansion – comes at the right time with plans in place to increase IAG’s shareholding in SBI General Insurance, its joint venture with the State Bank of India, from 26% to 49% following an increase in that country’s foreign direct investment limit. It is also looking to capitalise on its recently obtained insurance licence in Indonesia by finding a distribution partner, play a role in the consolidation of the Thailand insurance market and increase its market presence in Malaysia. But China is the big prize and one which is now on the table following the first foreign buyout of a state-backed general insurer last year, and the free trade agreement signed between Australia and China late last year. IAG currently owns 20% of regional motor player Bohai Property Insurance Company but Mr Wilkins has clearly stated his intention for a bigger, national presence in the Chinese market, something that won’t come cheaply.


August/September 2015

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“I cannot remember in 48 years where we talked about doing a 10-year deal where we effectively signed off on whatever they do for 10 years. There is nowhere in the world where we have done such a deal.” – Warren Buffett (left)


THE PLAYERS #2 Warren Buffett and Berkshire Hathaway MANY INDUSTRIES MAY LAY CLAIM TO MR BUFFETT AND HIS DIVERSIFIED investment conglomerate Berkshire Hathaway, but, as he made perfectly clear when announcing this deal, the insurance industry has always had his heart. “Despite the fact that we are in a great many businesses, our first love, our long-time love and our future love has always been the insurance business,” he said. Rightly so. He has built Berkshire into a Top 10 listed company globally with a market capitalisation of more than $US350 billion, admitting in 2004 that without its entry into the sector through the acquisition of US commercial insurer National Indemnity in 1967, “Berkshire would be lucky to be worth half of what it is today”. Berkshire Hathaway’s insurance and reinsurance operation now span several US commercial and personal lines underwriting businesses, as well as global reinsurer Gen Re. But not prepared to rest on his laurels, Mr Buffett launched a new company, Berkshire Hathaway Specialty Insurance (BHSI) in April 2013 with ambitions to create a global commercial primary insurer. BHSI quickly expanded from its US origins and now has operations in Canada, Australia, New Zealand, Hong Kong and Singapore. Not bad for a company only two years old. The Boston-based insurer’s ambitious growth plans include expansion into the UK and Europe along with breaking $US1 billion in premium income this year. When assessing Mr Buffett’s motives for the IAG deal, BHSI is an important piece of the puzzle. The specialty arm was launched in Australia this April, with a New Zealand operation following in July. The IAG deal gives BHSI’s local operations a big boost, adding close to $50 million in premium income overnight, through its acquisition of IAG’s large-commercial property and liability business. When announcing the deal, Mr Buffett said: “Our strategic partnership with IAG will help fast-track our entry into this region”. BHSI already has a presence in Asia through its Hong Kong and Singapore operations and the Asian exposure the IAG deal gives it will help to significantly boost Mr Buffett’s planned global expansion. Another famous Buffett-ism is that “risk comes from not knowing what you’re doing”, and by partnering with IAG, with whom Berkshire has had a reinsurance relationship since 2000, it cannot be said that Mr Buffett has not done his due diligence on his new partner. Mr Buffett says he has a “good understanding and respect for their people, what they offer and the way they do business”, but even he admits that the freedom afforded to IAG as part of this deal is extraordinary. “I cannot remember in 48 years where we talked about doing a 10-year deal where we effectively signed off on whatever they do for 10 years. There is nowhere in the world where we have done such a deal.” But the deal has benefits for Berkshire Hathaway beyond the insurance industry. To match future claims liabilities in local currency, the $2.2 billion a year it earns in premium income from IAG will be reinvested in the local stockmarket, with Mr Buffett planning to buy stakes in up to five Australian equities. This strategy provides Mr Buffett with one of his very favourite things: diversification, both by currency and industry.



August/September 2015

ONE EARLY CASUALTY FROM THE DEAL WAS Steadfast, which had a previously agreed arrangement with Berkshire Hathaway to underwrite its new personal lines offering, Steadfast Direct. Steadfast Managing Director and Chief Executive Robert Kelly said the deal “became collateral damage” in the Berkshire-IAG relationship, which prevents Berkshire from competing against IAG in the personal lines space. But Steadfast has fallen on its feet, with a neat solution emerging in the form of IAG agreeing to underwrite Steadfast Direct, while defining it as a “challenger” brand. Despite IAG shares spiking 6% before closing up 4.6% on the day the deal was announced, analysts have been cautious in their reaction. Much has been made of Mr Buffett’s reputation as the world’s best investor, and the inference that he must have achieved a better outcome from the deal than IAG. Mr Buffett has described the value in this multilayered arrangement as “being shared fairly”, but ever the strategist he has ensured there is plenty of upside for Berkshire. This was best summed up by Commonwealth Bank analyst Ross Curran who put the following question to Mr Wilkins and IAG Chief Financial Officer Nick Hawkins at an analysts’ briefing: “Is Berkshire getting 20% of IAG for 3.7% of the capital?” IAG’s response that the deal will improve its insurance margin and reduce its capital requirements did not silence the critics, who remain concerned that the deal is too dilutive to IAG’s earnings per share. Mr Hawkins says IAG’s longer-term earnings will actually increase when the fee Berkshire Hathaway is paying for access to IAG’s brands is taken into account, but the fact that the details of that fee are yet to be revealed makes his claim impossible to assess. Some are advocating that a capital return to shareholders would be appropriate compensation for any dilution in earnings per share. “A simple capital return would be the reward. However, we are not convinced that is what investors will receive,” Credit Suisse insurance analyst Andrew Adams said. While questions remain over the merits of some details of the deal, it is likely to be an arrangement best measured by each company’s success in Asia over the longer term. And perhaps one best judged against Mr Buffett’s own golden rules of investing: “Rule number one: Never lose money. Rule number two: Never forget rule number one.”

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INMAG AUG 15_page layouts 3/08/2015 5:09 pm Page 16

Swimming against the tide

6.0% 5.0% 4.0% 3.0% 2.0%




August/September 2015








Insurers must gear up to negotiate troubled waters as the cyclical downturn gathers pace, a new report warns


By John Deex



August/September 2015

“Commercial rates, and to a lesser degree motor, have both been negative. We expect rate pressure to remain a feature into 2016, albeit at more moderate levels, resulting in a GWP growth outlook of 1.7% in 2015 and 2.4% in 2016.” Motor GWP, which accounts for about 22% of the total premium pool, spluttered to a halt last year with an “anaemic” 1% growth rate – the lowest for a decade. This is less than the growth in the total number of vehicles in the country, estimated at 1.5%. Growth in home and contents GWP fared a little better, but was still down on previous years. Some of the slowdown is due to competition putting a lid on premium increases, but the continued shift in new dwelling construction to units is also having an impact.

Industry underlying ITR margin forecast 20%






8.8 2017F







DB Forecast 14.4 14.9 13.6 13.3 13.2 12.0 5.0 4.8 3.7 3.8 4.3 6.0




THE FULL IMPACT OF CURRENT SOFT market conditions on Australian general insurers is about to become clear – and it’s not looking pretty. Actuarial consultant Finity’s latest Pendulum report, compiled with Deutsche Bank, says negligible top-line growth over the past year heralds the onset of the longpredicted cyclical downturn. However, the true effect on insurers’ margins is yet to emerge, and while ongoing reinsurance savings will soften the blow, negative real premium rates will see underlying insurance trading result (ITR) margins compress from now on. “Combined with a sustained low yield outlook, insurers are now swimming against a strong tide which we believe will carry [returns on equity] back towards the longterm average of 11-12% compared with 15% over the past decade,” says the report. Although listed general insurers are best placed to weather the storm, with cost savings and strong surplus capital positions supporting attractive dividend yields, there is minimal earnings growth ahead. Underlying ITR margins lifted from 14.6% in 2013 to 14.9% last year, in line with Finity’s prediction in its last Pendulum report that peak margins would enjoy a period of “extra time”. However, the premium rate cycle has turned with a soft outlook into 2016, and the outlook for industry investment income is significantly lower than in last year’s report. Underlying ITR margins are expected to drop to 13.6% this year and 13.2% by 2017. “Undoubtedly, the key change over the past year has been a sharp slowdown in the premium cycle, resulting in industry gross written premium (GWP) growth of only 1%, below our 2.6% forecast,” says the report.





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Underwriting profit % Tech Reserve Inv Inc % Source: Deutsche Bank, APRA 17

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Industry GWP growth outlook

Share of personal lines (motor + home) market


100 8.5


80 6.1


2.8 5.6

3.3 5.9

3.9 6.4


































4% 1.7


2.4 4.9



40 20

1.0 2017F





0 2012


Major Insurers

Major Banks

Other Insurers

Challenger Brands

Source: Deutsche Bank, APRA

Source: Deutsche Bank, company data. Note: Coles history included within IAG (Major Insurers)

“About two years ago we started to predict the downturn in the industry,” Finity Principal and Pendulum co-author Andy Cohen tells Insurance News. “[Last year] turned out, unexpectedly, to be another good year, but what we are seeing now is that fall in growth and margins that we were expecting to come through. “It is going to get tougher but it won’t be disastrous. “We are coming off highs but are not looking at a complete collapse. Insurers will have to swim harder to get to the finish line, but we are not expecting mass drownings.” Finity expects the general insurance industry to see premium rate reductions of 0.3% this year, driven by decreases in shorttail classes and reinsurance cost savings being passed on to customers. Rate pressure should moderate next year and level off in 2017 but taking into account claims inflation, the real premium rate change is expected to be -2% this year, -1.6% next year and -1.5% in 2017. 2015 is shaping up as a bad year for catastrophe costs too, with events in the first half already totalling 10.8% of GWP on a gross basis. Over the last decade, catastrophe costs have averaged 4.9% of GWP and over the last 30 years, just 3%. Australia is expected to remain in El

Nino conditions this summer. These typically result in catastrophe costs 50% below La Nina conditions and 25% below the through-cycle average. As a result, Finity forecasts a quieter second half, resulting in 2015 catastrophe costs of 7.5% of GWP. “With drier weather expected to persist into 2016, we also see scope for below average catastrophe costs in 2016,” the report says. “While this has not been reflected in our forecasts, should it occur we believe it could exacerbate industry pricing pressures given the continued build in reinsurer and direct insurer capital and still healthy industry returns on equity.” Industry mergers and acquisitions have picked up in response to softening pricing. Last year’s IAG/Wesfarmers merger and this year’s Catlin/XL and Ace/Chubb mergers should help reduce competition in the domestic commercial market, says Finity. “Although Berkshire [Hathaway’s] direct market entry … may offset benefits here, its move to focus only on the top-end following a strategic relationship with IAG will temper impacts.” Even though returns on equity across key classes are starting to moderate, they remain elevated and continue to drive new competition.



August/September 2015

Challenger brands continued to take market share in home and motor, lifting 160 basis points to 8.9% and overtaking the major banks, which expanded 20 basis points to 8%. In comparison, the major insurers lost another 150 basis points market share (now 58.5%) resulting in flat GWP, compared to 26% growth for challengers and 6% for banks. In motor, Suncorp has borne the brunt of the big players’ decline, losing 4% market share. And although IAG appears to have fared better, this is somewhat masked by the purchase of the Coles motor portfolio through the Wesfarmers acquisition. “Clearly, to stem the loss in market share the major insurers will need to respond with more competitive premiums, hence maintaining the headwinds for top-line growth,” the report says. “The challengers and bank-owned insurers, while growing strongly at present, are not immune to growth pressures in future, especially if they want to maintain profitability.” However, Mr Cohen says the big brands are beginning to hit back. “We are seeing the major insurers get pricing very close to challenger brands, which has not always been the case. “This suggests a bit of fighting back from the likes of IAG and Suncorp.”

In To fu sp

INMAG AUG 15_page layouts 3/08/2015 5:10 pm Page 19


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INMAG AUG 15_page layouts 3/08/2015 5:10 pm Page 20

Premium rate trends in home and motor – percentage change 6.0%



Buildings Contents

4.0% 3.0% 2.0%





















1.0% Sep-10

“Some of the larger players have already changed operating models and embarked on savings through headcount reduction and offshoring.”

–2.0% Source: ISA, Deutsche Bank

In fact, Finity expects a low growth environment in personal lines for some time to come. Intense competition shows no sign of abating, and consumers are now much more inclined to shop around and switch insurers. “Increasing propensity to shop [and] falling customer loyalty typically mean finding the cheapest price is the goal for policyholders,” Finity says. “In our view, this dynamic is not going away in the foreseeable future. As it becomes more entrenched, it will become a further brake on top-line growth.” Home ownership has reduced from 75% in 1994/95 to 67% two decades later, and there has been a significant shift towards units and apartments. “This means that demand for home buildings insurance is being supplanted by demand for (cheaper) strata insurance,” the report says. “However, the strata market is crowded, with premiums being slashed by up to 30% in the past few months.” A significant proportion of people in units do not bother buying contents insurance either, the report adds. Customer needs are also changing in line with available technologies. “For example, car-sharing facilitated via mobile phone apps will suppress the need for more cars on the road, and this will 20

reduce the demand for motor insurance.” The car-sharing industry’s revenue in Australia has grown 25% over the past five years to $56 million in 2014/15, and while this in itself is tiny, “the potential going forward for significant growth and disruption to the motor insurance market is clear”. The transition to automatic braking systems and driverless cars will put further pressure on the motor premium pool by taking the personal risk out of driving. “Arguably, the question is not if this dynamic will take place, but how quickly,” Finity says. In such a low-growth environment, Finity believes insurers will refocus on expenses. Some of the larger players have already changed operating models and embarked on savings through headcount reduction and offshoring. Challenger brands have also established low-cost models through largely online product delivery. “We expect a focus on reducing expenses, or at least getting more value from each expense dollar spent, will be a path insurers continue to travel down.” However, Finity believes insurers will get more bang for the buck through targeting customers and claims. Expenses are typically only 30% of premium, it says, while claims indemnity costs insuranceNEWS

August/September 2015

represent the largest component of insurance spend – about 60% of premium in a good year and more than 80% in a bad year. “With so many dollars tied up in claims expenditure, even small improvements can make a meaningful contribution to profitability,” the report says. “Claims transformation programs are reentering the insurance vernacular. “Boards and executives, perhaps realising that claims has been the oft-neglected poor cousin, are now looking at claims efficiency and effectiveness across all dimensions: customer, people, process, technology and analytics.” Mr Cohen says customers must be protected during the process. “The top line is not growing and rates are not going to increase, which is why we say it is time for insurers to look at claims,” he tells Insurance News. “The challenge is to do that without alienating the customer, but it can be done.” Overall, the last few years have been very kind to Australian general insurers – with top and bottom lines showing good growth. But the signs of tougher times ahead have been there for a while, and those warnings are now coming to pass. Insurers – large and small – will need to face up to the new realities and plot a course through the troubled waters of the next few * years.

INMAG AUG 15_page layouts 3/08/2015 5:10 pm Page 21

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INMAG AUG 15_page layouts 3/08/2015 4:27 pm Page 22

Oh boy… El Nino is set to turn up the heat on Australia’s bushfire risk, but there’s an even greater threat arising in the Indian Ocean By John Deex


WHEN SOUTH AMERICAN FISHERMEN noted the appearance of unusually warm waters in the Pacific before Christmas, they knew El Nino – translated as the little boy, or Christ child – was coming. However, the effects are anything but small, or angelic. Australia is usually one of the worst-affected countries. El Nino is caused by rising sea surface temperatures in the central and eastern tropical Pacific, resulting in an atmospheric shift. Trade winds weaken, and sometimes reverse, and rainfall that usually heads for Australia falls on central and eastern parts of the Pacific basin instead. An El Nino threatened last year, but never quite materialised. However, the Bureau of Meteorology officially moved its tracker from “alert” to “El Nino” in May, and it has continued to strengthen since. Pacific warming has so far outstripped even the record El Nino of 1997/98, suggesting that the current event could be the strongest yet. El Ninos are inherently unpredictable, and the strength of the event does not always relate to the strength of the effects. But there are certain trends that usually occur, and which insurers and brokers would do well to watch. El Nino usually means Australia experiences reduced rainfall in winter and spring, particularly in the north and east. insuranceNEWS

August/September 2015

Nine of the 10 driest winter/spring periods on record have occurred during El Nino years, with the droughts of 1982, 1994, 2002 and 2006 all associated with El Nino. Warmer-than-average temperatures are expected across most of southern Australia, exacerbating the effect of lower rainfall. For southern coastal locations such as Adelaide and Melbourne, daily heat extremes tend to be more intense. The bureau says the combination of low rainfall and high temperatures means “the frequency of high fire danger ratings and risk of a significant fire danger season in southeast Australia are significantly higher following an El Nino year”. Some El Ninos have been followed by severe summer fires, including Ash Wednesday (February 1983) and the 2002/03 and 2006/07 seasons. The Bushfire and Natural Hazards Cooperative Research Centre’s bushfire outlook for northern Australia makes fairly grim reading. Parts of Western Australia, the Northern Territory and Queensland all face abovenormal fire potential this season – and El Nino is a major factor. “El Nino is typically associated with above-average daytime temperatures and a delay in the start of the northern wet season, suggesting that an early end to

INMAG AUG 15_page layouts 3/08/2015 4:27 pm Page 23

the fire danger season is unlikely,” the outlook says. “The combination of above-average temperatures, dry fuel and low rainfall suggests fire weather is likely to be elevated during the northern fire season.” The centre’s southern outlook – not expected until September – is likely to be affected by El Nino to an even greater extent. Insurance Council of Australia General Manager Policy, Risk & Disaster Karl Sullivan says insurers will be watching developments closely. “When an El Nino event develops you do expect a transition to more intense bushfire conditions, particularly along the eastern seaboard,” he tells Insurance News. “The insurance industry watches with strong interest to see if the emergency services are responding appropriately.” Insurers will take action by deploying catastrophe assets in a different way. “It is standard practice for them to configure themselves to the most likely threat at the start of the season,” he says. “But if you look at the major bushfires, they don’t always marry up to an El Nino. “There can be a lag between them. These are very complex climate scenarios being modelled, but it will be warmer and drier. And it looks like it will last a long time.”

It’s not all about El Nino – there is another climate driver that many experts believe could have an even greater impact on bushfire risk in some areas of Australia. The Indian Ocean Dipole (IOD) is an ocean and atmosphere phenomenon in the equatorial Indian Ocean, measured by the difference between sea surface temperature anomalies in the west and east. A positive IOD is characterised by cooler-than-normal water in the tropical eastern Indian Ocean and warmer-thannormal water in the tropical western Indian Ocean. This pattern is associated with a decrease in rainfall over parts of central and southern Australia – and is therefore also associated with increased bushfire risk. The worst possible scenario is the combination of El Nino and a positive IOD. While the IOD is currently neutral, the latest Bureau of Meteorology update says three out of five surveyed international climate models indicate a positive IOD will occur during the southern-hemisphere winter or spring. CSIRO scientist Wenju Cai tells Insurance News he believes a positive IOD would have a greater impact on bushfire risk than El Nino, particularly for southeast Australia. “El Nino will make eastern Australia drier, increasing the bushfires in eastern states,” he says. insuranceNEWS

August/September 2015

El Nino fact file El Ninos usually develop in autumn to winter and start to decay in summer. Events can last for as little as six months or as long as two years. On average they occur every three to five years. The last El Nino was in 2009/10. Globally, seven of the 10 hottest years on record were in an El Nino year or the following year. There have been 26 events since 1900, and 17 have brought widespread drought. Seven of Australia’s 10 driest years were during an El Nino. On average, fewer tropical cyclones occur in El Nino years, particularly in Queensland, where the risk of cyclones crossing the coast is halved compared with neutral years. El Nino years tend to lead to lower snow depths in Australia’s alpine regions. Decreased cloud cover often leads to cooler-than-average night-time temperatures in winter and spring, particularly across eastern Australia, which can lead to increased frost risk. The Australian record cold temperature of minus 23 degrees was observed at Charlotte Pass, New South Wales, on June 29 1994 – an El Nino year.


News Ltd

INMAG AUG 15_page layouts 3/08/2015 4:27 pm Page 24

Remember these? The last 10 El Nino events have been a pretty mixed bag. Some brought mayhem and misery, while we barely noticed others.

2009/10 A weak to moderate event, the overall effect on Australia was low. May to October 2009 was dry over much of the country. The El Nino strengthened in November but paradoxically this ushered in a wet period over eastern Australia.

2006/07 Another weak event, but this time most of the country was strongly affected, with low rainfall between May and December 2006. Southern Victoria and northern Tasmania were particularly dry, setting records for lowest falls. Lightning sparked The Great Divide Fires in December 2006, the longest-running bushfires in Victoria’s history. They caused the worst bushfire smoke on record, and there were further widespread fires in New South Wales.

2002/03 A weak to moderate El Nino, but boy did we feel it! A major drought affected almost the whole country from March 2002 to January 2003. Exceptionally warm conditions led to severe bushfires in NSW, Canberra and Victoria, along with widespread water shortages.




The strongest El Nino since the start of the 20th century, but Australia escaped relatively unscathed. There was below average rainfall in many areas from April 1997 to March 1998, but crops benefitted from some widespread falls. From April 1998 onwards rainfall was consistently above average in eastern Australia.

A moderate to strong event but with generally weak impact. Victoria, NSW and Queensland had average to above-average rainfall from May 1987 to January 1988. Parts of Tasmania, pockets of Gippsland and the southwest corner of WA fared worse.


The second strongest event on record was brutal, with drought widespread across eastern and southern Australia. In February 1983 heatwave conditions led to the Ash Wednesday bushfires, which resulted in the deaths of 75 people in Victoria and SA. The drought ended abruptly the following month with floods across central and southern Australia.

A strong event, with significant impact. For 10 months rainfall was in the lowest 10% of recorded totals across most of Queensland, NSW, Victoria, South Australia, northeast Tasmania and southern Western Australia. Very heavy rain and flooding occurred in many areas in January 1995, effectively ending the event.

1993/94 A moderate event, this El Nino never really got started. There was average rainfall across eastern Australia for much of the period and large parts of NSW and Victoria recorded totals in the highest 10% for the six months from July to December 1993.

1991/92 A moderate to strong El Nino, with a strong effect in some areas. Queensland and northern NSW suffered drastically reduced rainfall. Further south, totals were average to above-average.


August/September 2015


1977/78 A moderate El Nino, with moderate to strong impact. But it didn’t last long. For the six months from June to November 1977 recorded rainfall totals were in the driest 10% for most of NSW, the southern half of Queensland, patches of northern Victoria and northern Tasmania, and scattered regions in WA and SA. The situation eased with above-average falls in January 1978.

INMAG AUG 15_page layouts 4/08/2015 10:21 am Page 25

“For southeastern Australia, El Nino alone does not have a pathway for impact; it has impact only if it occurs in conjunction with a positive IOD. “A positive IOD is predicted to occur concurrently with El Nino this year. “Most of southeast Australia’s major bushfires were preconditioned by a positive IOD – for example, Ash Wednesday in 1983 and Black Saturday in 2009, and many others. “In the case of 1983, it was preceded by a positive IOD occurring with an El Nino, and in the case of Black Saturday, it was preceded by three consecutive positive IOD events in 2006, 2007 and 2008 without an El Nino.” There are no guarantees, of course, due to the unpredictability of these climate phenomena and their effects. Dr Cai says the 1982/83 El Nino – the second strongest on record – caused chaos in Australia courtesy of heatwaves, the Ash Wednesday bushfires and a massive dust storm in Melbourne. But the record event of 1997/98, while causing $50 billion in losses and 23,000 deaths worldwide, had limited impact in Australia. It was, however, swiftly followed by La Nina – the opposite of El Nino which usually results in increased rainfall and flooding. Dr Cai says the rapid reversal is a common pattern.

“Huge La Ninas often follow huge El Ninos. This represents a dilemma as you can switch from one extreme to the other from one year to the next. “You can imagine a situation where you have a drought, only to be followed by floods. “The size of the El Nino can be used to predict the size of the La Nina. “Quite rightly people are focusing on the El Nino at the moment, because we will experience that impact first.” The fears may be unfounded, and this bushfire season could pass uneventfully. But even if we emerge unscathed this time, it probably will not be long before the same situation comes around again. Dr Cai has contributed to papers showing climate change will bring increased severe positive IODs and El Ninos. Under current greenhouse gas emission levels, extreme positive IODs are expected to triple in frequency – occurring every 6.3 years this century compared with every 17.3 years last century. A separate report states super El Ninos will double in frequency, even under modest global warming scenarios. Insurers cannot afford to take their eye off the ball for one moment. Bushfires have always been a part of life in Australia – but the threat may be about * to reach a whole new level. insuranceNEWS

August/September 2015

“Huge La Ninas often follow huge El Ninos. This represents a dilemma as you can switch from one extreme to the other from one year to the next.”


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Insurance renaissance How globalisation, analytics, alternative capital and innovation will give the industry back its lost relevance By Terry McMullan

MIKE MCGAVICK IS INSIGHTFUL, candid and unafraid to speak out on what he sees as the global insurance industry’s declining relevance to business – and the factors that can turn the situation around. The Chief Executive of the XL Catlin Group – he masterminded the merger of his XL Group with Catlin in January – can see the mess the global industry is in at the moment, but also sees the possibility of a renaissance in the industry’s fortunes. Speaking at the International Insurance Society’s (IIS) Global Insurance Forum in Rio de Janeiro in 2012, Mr McGavick upset many of his counterparts when he accused the industry of failing to keep up with the rapid pace of change in global society. “Our participation in the economy is in decline and we are doing very little about 26

it,” he told industry leaders in a stirring speech calling for “growth through insight and innovation”. He said the global insurance industry is “afraid” of the rapid growth of new markets and accused insurers of only coming to grips with new market opportunities once they have accumulated “very large datasets” to measure risks. “Rapid change is the enemy of the way we have always practised insurance,” he told the Rio audience. In June Mr McGavick was back on the IIS stage, this time in New York, which Insurance News attended as the event’s gold media sponsor. His critical stance hasn’t changed that much, with one subtle difference: now he sees insurance heading towards a new age insuranceNEWS

August/September 2015

in which old skills and new opportunities combine to win back the industry’s relevance to customers. And he shrugs off comments by “a few of my peers that what I had to say [in Rio] was very bad for the industry, I should stop saying it, it was unhelpful and that I was depressing the [industry’s] share prices – which I do not have the power to do”. Now, he says, his belief that the industry has lost relevance is more widely accepted. Mr McGavick bases his argument on the global property and casualty sector contributing about 3.4% of total economic activity in 2002. By 2011 it had shrunk to about 2.8%, “and that is, by any definition, a decline in relevance”. “While the global economic pie was

INMAG AUG 15_page layouts 3/08/2015 4:27 pm Page 27

“While the global economic pie was growing, it showed a declining ability for us as a reflector of all economic activity. We are not keeping up.” “You always want to be in an industry that is attractive to capital. The alternative is death.”

“Kids working in garages in America are busy destroying categories of economic activity and reducing them to apps.”

growing, including through the global financial crisis, it showed a declining ability for us as a reflector of all economic activity. “We are not keeping up.” In other words, the percentage of global economic activity being actively covered by the insurance industry has fallen. Larger companies in particular are covering more of their risks through their own balance sheets, without turning to insurance. “This should trouble us greatly,” he told the New York audience. “It indicates our industry’s not doing its job.” Most of the decline is being measured in the casualty space, “which means we’re becoming less relevant to clients in meeting their concerns”. He uses a simple example of the industry’s decline – the smartphone he car-

ries in his pocket. “I don’t wear a watch, because my cellphone always has the time on it. Timekeeping is now free.” Putting it simply, insurers have always covered the risks associated with mining the minerals used to make watches, as well as the transport processes, manufacturing and sales. But more and more people now rely on their smartphones to keep track of time. “Every watch not bought is a declining opportunity for insurers to make a difference,” Mr McGavick says. “And we’re also not buying music players, cameras, film, medical monitoring equipment, global positioning systems and so on. They all come free in a smartphone. “We should feel a sense of loss, because each thing your phone replaces is another lost opportunity for our sector.” insuranceNEWS

August/September 2015

Mr McGavick believes insurance has not kept pace with the growth of technology in global society. “Kids working in garages in America are busy destroying categories of economic activity and reducing them to apps.” And while technology is growing rapidly in all facets of industries, it is “almost untouched by the insurance industry”. “Cyber liability is the first knock on the door of trying to become relevant, but it’s barely growing and it’s not at all what our clients are mainly worried about.” The rate of change today “is a constant challenge to our industry because we like longitudinal datasets in order to make our next move”. “We want 10 years of data before we start nicking away at [the risks]. Whole 27

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Mike McGavick is acknowledged as one of the global insurance industry’s outstanding leaders, with a cut-through approach to issues. He joined the XL Group in 2008 as Chief Executive after a distinguished insurance career. He has also served as a chief of staff in the US Senate, and has run (unsuccessfully) for the Senate for the state of Washington. Among many awards he has won since taking over management of XL is the Bermuda Insurance Institute’s (Re)insurance Person of 2010. In January Mr McGavick announced that XL was buying Catlin for $US4.2 billion, allowing the company to expand into specialised commercial insurance. It also made the combined XL Catlin one of the world’s 10 leading reinsurers.

industries come and go in that amount of time. “To be relevant we must think entirely differently about how we are willing to apply our underwriting skills.” Mr McGavick nominates five trends that are now dictating the insurance industry’s behaviour and, taken collectively, are also driving the move to consolidation. However, with all but one of these trends, the positive possibilities outweigh the negatives. Globalisation of the industry: While it’s happening, he sees the different regulatory systems in effect around the world as a major impediment to the industry’s ability to profit from global growth. Describing the various laws and regulations as “balkanisation” – an historical term suggesting a chaotically fragmented set of rules and regulations for each country – he says different requirements in different jurisdictions mean companies face constant uncertainty and a need to abide by widely divergent laws. Insurance is one of the most regulated industries in any country, and Mr McGavick says the ability to trade globally compliant solutions “is incredibly difficult and incredibly costly”. “Yet for our clients it’s as easy as getting a website to be a global business. “This means risks are becoming more



“We have a responsibility to our shareholders who depend on us to come up with new ways to be relevant.”

global even as the solutions set struggles to match it. This is an interesting challenge.” Analytics: “Anyone at this meeting who finds analytics a new phenomenon in the insurance sector might be in the wrong meeting,” he told the seminar audience. “We’ve been around large numbers forever. “But now volumes of data and the trade of data into information is stunningly more possible in ways we couldn’t [previously] imagine. “It’s really wonderful to watch good underwriting minds liberated to play with all that data. “But the expense of capturing all that data in a meaningful way and turning it into information, and the expense of maintaining truly unique or distinct preparatory data, is a tremendous challenge we’ve only just begun to scratch the surface of.


Consolidation of the broker community: Mr McGavick sees global brokers’ clients’ needs becoming more global, “and the response must be more global to service them… in a boundary-free way”. “It’s just fascinating to watch. Consolidation is a byproduct of [brokers’] efforts to serve their clients, and that was why their power became disproportionate within the economic chain. “We all know that across the economic



August/September 2015

continuum of serving a client, the rewards flow between the different players in that value chain according to, in some cases, their concentration [into fewer entities]. “If you study the returns on capital, the broker community has grown substantially while the rewards for the market community have shrunk substantially. “That concentration is causing a response on the market side, which you expect as a logical move back to equilibrium.” Alternative capital: While he acknowledges the unease of insurers and reinsurers at the dramatic influx of alternative capital into the reinsurance market in particular, he believes it’s a trend that must be embraced. “It’s wishful thinking to think it’s going to go away,” he says. “The reality is that right now capital is focused on highly profitable lines where there are high levels of modelling – that takes us back to analytics – and is beginning to distort the marketplace in a way that is sending people scattering trying to find other profitable activity. “That is concentrating the [insurance] sector into certain smaller subsets and creating the sort of trading war that is no fun for anyone – eventually not even the client.”


Regulation: “The entire global regulatory community, after realising there was a massive


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social failure in the financial crisis, is searching for a way to guarantee to the citizens of their various countries that it won’t happen again,” Mr McGavick says. “Since these kind of episodic economic events are actually a product of humankind I think they’ll likely fail in that task. “But that doesn’t mean they’re not taking the task very seriously. “Among their objectives is [the imposition] of new kinds of regulation on the insurance community, which I argue are not justified by anything that happened in the financial crisis or since. “These new standards will make capital more dear. No matter what else it does, it will make capital less efficiently used and it will make the cost of compliance even greater.” THOSE FIVE FACTORS HAVE LED TO A new environment in the global insurance industry – one Mr McGavick now sees as being capable of staging an industrial renaissance. He believes the (possibly unfixable) problem of a fragmented and ultimately obstructive global regulatory system can be countered through alternative capital enabling the industry to embrace innovation via technology. Using the core skill of insurance – underwriting – with innovative approaches is the way he sees the insurance sector coming back into equilibrium with other major industries. The very high values being placed on specialty insurance companies right now are, he says, the result of these companies being more involved in the “innovation cycle”. “The crisis of relevance and the dearness of capital mean innovation is one of the best ways to fight back,” he says. “This is why I think that over time you’re going to see greater levels of investment in innovation by the sector. It’s the only way through where we’re stuck right now.” And key to all this is the underwriter, because when the going gets tough the pressure comes back on companies’ underwriting skills. “The number one trend that is helping the industry to rise again is the underwriting craft,” he told the New York audience. “We all know the industry can get sloppy when it’s easy to make the money back on the investment side. “But when you’ve got no interest rates to speak of, you had better be making it through your underwriters.” Underwriting is back in the prominent place it belongs in, he says, “and long may it last”. “The primary role of the organisation is to create the solutions that pool and transfer risk. That is what underwriting is all about.” 30

“We want 10 years of data before we start nicking away at [the risks]. Whole industries come and go in that amount of time.”

Analytics is giving insurers new ways to think about risk, he says. “If the industry continues to think about new ways to deal with risk, the potential to unlock entirely new horizons of insurable activity – whether in the technology space or in spaces that we’ve long not been able to crack, like flood or quake – we can go to new places.” That’s why he sees the contribution of alternative capital as essential to the mix. “When alternative capital first started breaking into the market four years ago, many people were bothered by this and saw it as a threat to the traditional characner of the reinsurance model,” he says. “But no. You always want to be in an industry that is attractive to capital. The alternative is death. “We have to welcome it and accept that some of that capital is going to be transformational. “I know that many of you writing cat out of Bermuda right now know it’s not very comfortable, but having that capital interested and comfortable in our sector will be absolutely essential if we do succeed in achieving breakthroughs in products and opportunities. “The truth is, while we have a bit too much capital now relative to the existing product set, we have nowhere near the capital we need to solve the issues we should be really ambitious to solve.” insuranceNEWS

August/September 2015

Mr McGavick agrees the economic situation globally is glum at present, but he sees a strong upside in the industry’s ability to adapt. “People no longer able to make a profit in one way look for another way. That is the natural regenerative economic cycle.” New opportunities arising from new challenges weren’t on Mr McGavick’s mind when he took on the industry in Rio in 2011 to warn it of its declining relevance. His New York address this year is therefore an about-face of sorts, but his sense of urgency in getting the industry moving is still strong. “We are in a very difficult cycle in the property and casualty sector, and in the life sector,” he says. “We have a responsibility to our shareholders who depend on us to come up with new ways to be relevant. “Relevant enough to know that a customer will pay us a little bit more than it costs us in order to serve them. That is the virtuous cycle we’re engaged in. “Analytics and the capital available will enable us to do new and great things for society, and that will get us back to making the kind of difference that we should be making. “If I came to you three years ago pessimistic and really worried about relevance, things are evolving now – the forces are in hand to make the kind of difference we * really can make.”


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Willis Capital Markets & Advisory ILS chief Bill Dubinsky: alternative capital is influencing the structure of the reinsurance industry



August/September 2015

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Moving into the mainstream With insurance-linked securities now commonplace in reinsurance and creeping into the primary market, are the investment bankers taking over? By Michelle Hannen

THE $US1.5 BILLION IN NON-LIFE catastrophe bonds issued in the first quarter of 2015 marked the highest first-quarter insurance-linked securities (ILS) issuance in history. This followed on from 2014, which saw $US8 billion in catastrophe bonds issued – another record. It’s a market growing so rapidly that records are becoming meaningless, as evidenced by the meteoric increase in size of the total non-life ILS market (often referred to as alternative capital and comprising financial instruments such as catastrophe bonds, sidecars, collateralised reinsurance and industry loss warranties) from $US16 billion in 2008 to $US65 billion in 2014. The market has had peaks before – think 2007 – but the circumstances of the past were very different, with opportunistic hedge funds tumbling in to take advantage of hard rates in a post-catastrophe environment – in that instance, the aftermath of Hurricanes Katrina, Rita and Wilma. Many fled the scene at the first sign of market softening. This time, long-term investors – in the form of pension funds – are looking for any positive return in a global financial system at near collapse. They have found even the returns available in a soft reinsurance market more attractive than the alternatives on offer. Fast forward five years and investment banker Bill Dubinsky foresees an “inflection point” where ILS – alternative capital in its various forms – has become mainstream. “The knock-on effect is that it’s influencing the structure of the overall reinsurance industry.” Mr Dubinsky is Managing Director and Head of ILS at Willis Capital Markets & Advisory (WCMA), an insurance-focused

investment bank division of the global broker. WCMA focuses on providing equity, debt, contingent capital and insurance-linked securities underwriting and trading, as well as mergers and acquisitions (M&A), capital raising, initial public offering (IPO) and strategic advisory services. During a visit to Sydney he told Insurance News pension funds, unlike “hot” hedge fund money, have lower return targets and more tolerance for the inevitable losses that investing in reinsurance brings. Or, as John Philipsz, the Managing Director of WCMA’s newly opened Australian office, puts it: “Pension funds are a lot like barges – slow to shift once they’ve set a course.” The reliability of the current capital is what differentiates this climate from past alternative capital bubbles. “Since it’s here to stay, that makes a lot more possible than if it’s only temporary,” Mr Dubinsky says. “People can begin to build plans around it. “It allows people to think about lots of innovative things going forward, and we’re at the stage where people are willing to branch out.” In reality, that means the expanded use of ILS products into other parts of the world beyond the US and Japan, where their use is now commonplace. It also means adapting products used in other financial markets for the purposes of the reinsurance industry, and dreaming up new financial instruments altogether. He predicts that competitive pressures among insurers will drive a flight to ILS for their reinsurance covers, which can offer efficient capital allocation for both regulatory purposes and for enhanced shareholder returns. insuranceNEWS

Policyholders should also benefit through the increased availability and affordability of insurance policies. Added to that, any opportunity to lower their reinsurance spend is attractive to insurers, particularly when, on the other side of their business, they face challenges to produce investment returns in the prolonged low interest rate environment. But Mr Dubinsky warns insurers are missing a trick if they are utilising ILS to buy the same reinsurance cover they previously had at a cheaper price.

“Pension funds are a lot like barges – slow to shift once they’ve set a course.” – John Philipsz, Managing Director of WCMA’s Australian office “Insurers should instead be looking to restructure their reinsurance programs to better integrate ILS capacity and make more dramatic performance and efficiency gains, ultimately to the benefit of shareholders and policyholders.” The deeper market penetration of ILS in the current cycle also means that the pension funds are no longer satisfied with simply participating in the reinsurance space. “While it’s at early stages, I think that we’ll start to see the capital penetrating directly into the insurance space,” Mr Dubinsky says. Those who find that idea fanciful should note that it has already begun, with a recent deal struck between ILS investment manager Nephila Capital and US commercial insurer State National, where

August/September 2015


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the insurer will give Nephila access to direct insurance business via a fronting relationship arrangement. “Such ventures are more toward the beginning and not the end of a wave of dramatic structural change caused by ILS moving from reinsurance to insurance,” Mr Dubinsky says. “As with the changes sweeping reinsurance, while the entry of ILS into insurance may start in the US and in London, it will not end there.” And, he adds, it will not be limited to natural catastrophe covers. Australian insurers are beginning to get in on the act, with personal lines challenger brand Youi recently placing part of its reinsurance with a consortium of capital market investors. Such deals, as well as plentiful advisory opportunities and Australia’s close proximity to Asia, prompted WCMA to open a Sydney office in February, complementing its presence in New York, London and Hong Kong. “Having a presence across multiple regions, including Australia, is really critical to be an effective business,” Mr Dubinsky tells Insurance News. “It’s not just a business that’s a New York and London business.” Mr Philipsz, who is transferring from London to lead the local operation, describes the Australian market as “very interesting” from an advisory and capital markets perspective. He says as well as large major players such as Suncorp and IAG, the specialty market – comprised of Lloyd’s businesses wanting an onthe-ground presence in Australia and entrepreneurial managing general agent start-ups – is “growing significantly”. Mr Philipsz says such growth presents opportunities for a business like WCMA, which is the only investment banking firm locally with “true insurance expertise”. Apart from taking advantage of local market opportunities, the Sydney office will also co-ordinate 34

closely with the Hong Kong operation and take advantage of its geographic position as a stepping stone into the Asian market. Despite the use of catastrophe bonds by local insurers posing some challenges to achieve full capital relief under Australian Prudential Regulation Authority (APRA) rules, Mr Philipsz says local insurers are “intrigued” by the opportunities that insurance-linked securities offer. Investors “love diversification” and can’t get enough Australian risk to meet their demands, he says. Mr Philipsz is hopeful that APRA’s views on catastrophe bonds evolve “if the situation arises where Australian domestic insurers cannot access reinsurance as competitive as that available to their global counterparts”. He is sympathetic with the regulator’s desire to ensure that claims will be paid to protect policyholders but points to the vast magnitude of the $US65 billion ILS industry. “[The pension funds] can’t all be wrong and they can’t all be fickle.” Superannuation funds from Australia and New Zealand are active investors in the alternative capital arena, with Mr Dubinsky estimating they currently account for around 10% of total capital being invested by specialist insurance investment managers. It’s a figure he expects will increase, and he predicts local super funds will also begin to provide capacity directly to carriers rather than investing via intermediaries as confidence in the market, and in reinsurance as an investment option, grows. “It’s very limited. It’s all indirect investment, and I wouldn’t be surprised to see some direct investment. “There’s no reason that a country of this size with this amount of wealth couldn’t support a little bit more direct investment.” Whatever insurers and reinsurers may think about this new market order, ignorance will not be bliss, Mr Dubinsky says. “I think people have a tendency insuranceNEWS

“There’s no reason that a country of this size with this amount of wealth couldn’t support a little bit more direct investment.” What are insurance-linked securities? Catastrophe Bonds (cat bonds): Catastrophe bonds are corporate bonds that transfer catastrophe and natural disaster risks from an issuer to investors. Should the event covered by the bond occur, the investors lose the principal they invested and the issuer (often an insurer or reinsurer) receives that money to cover their losses. Collateralised Reinsurance: Collateralised reinsurance is a reinsurance contract that is fully collateralised by investors or third-party capital for their full potential claim obligation under the contract. Unlike cat bonds, a tradable instrument is not created to facilitate the risk transfer process. Sidecars: A sidecar is a financial structure that allows investors to take on both the risk and return from a specific book of insurance or reinsurance business. Sidecars are sometimes joint ventures between two insurers or two reinsurers but are increasingly formed between a (re)insurer and a capital provider used to enable thirdparty capital to participate in underwriting. Industry Loss Warranties (ILW): Industry loss warranties are a form of reinsurance where a reinsurer can recover its losses from an event once industry insured losses exceed a predetermined amount. ILWs are used extensively as a form of retrocessional reinsurance (the reinsurance of reinsurers).

August/September 2015



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The growth of insurance-linked securities 2008 ILS Market Breakdown 6% 13% 6% 75%

to look at what’s happening someplace else. “For example, reinsurers in Bermuda are facing some competitive threats, and others assume that that’s the end of it, it could never affect them. That’s not the way we see things. “People who are opportunistic and thoughtful about it will be advantaged and people who ignore it will potentially have some suffering. “I used to have a chart that I carried around that showed each of the Bermuda reinsurers, and the ones that had done nothing. “The ones that have done nothing have disappeared. They’ve been acquired.” In another ultra-competitive insurance market – Lloyd’s – Mr Dubinsky says a lot of companies are “playing at the margins, and assuming that they can continue to do their underwriting business in the same way”. “They’re not thinking whether instead of just competing with alternative capital and pension fund money, there’s a way for them to embrace it and offer their customers a better value proposition. “The reinsurers that have been most successful have taken an approach where they’ve said, ‘our balance sheet is effective and our underwriting expertise is still valuable, but there are instances where we can combine our underwriting expertise with investor capital instead of our own capital and offer a better deal for the customer’.” As the market sorts itself out into the wills and will nots, so too will the capital undergo some growing pains as the pension funds find their comfort zones. But Mr Dubinsky says that it would take a major, unexpected loss event to shake pension fund confidence in the industry as a diversified investment play. “If we were to wake up tomorrow morning and find out that there was a large earthquake in San Francisco that caused $US100 36

billion in insured losses, that is something that the investors expect. They understand they’ll have large losses.” He says while such an event may cause the funds to take stock and consider which investment managers managed their money – and the risks – best, “I think they will snap back quite quickly and reload to support trading forward in the market”. “That’s not to say it’ll be totally smooth, because if there is a $US100 billion loss, it’s going to affect everything. “But we believe it will be okay.” Instead, the sort of catastrophe Mr Dubinsky forsees throwing the market into chaos is more along the lines of a $US100 billion insured loss resulting from something like a 7.0 earthquake in London. While the size of loss may be comparable to the San Francisco earthquake scenario, the models and the industry assume that there’s a much more modest risk. “I think in that instance you could have some investors who are still willing to rush in and participate in what would presumably be quite a hard market after that. “But you’d have others who would pull back, and say, ‘We thought that you underwriters knew what you were doing, but you missed this one and we’re going to wait and see and watch on the sidelines for a while’.” So it seems that the pension funds and the investment bankers are here to stay, and are growing in their reach. But rather than posing a threat, Mr Dubinsky tells Insurance News the market will benefit from their more mainstream presence. “Ultimately, this should be good for policyholders, to the extent that there are more sources of capital to support the reinsurance buying of insurers. “That should enable insurers to make existing products more available and affordable, and also create * new products.” insuranceNEWS

2014 ILS Market Breakdown 6%

Total: $16 billion

Cat Bonds Sidecars Collateralised Re ILWs

12% 36% Total: $65 billion 46%

Source: WCMA

WHILE THE TOTAL SIzE OF THE ILS MARkET HAS grown staggeringly since 2008, so too has the use of collateralised reinsurance (see charts above), jumping from 6% of the total market to 46% of the total market in 2014. Mr Dubinsky says the reasons for this are two-fold: • The ease of executing collateralised reinsurance transactions has improved; and • Pension funds, which have historically been most comfortable with bond instruments, have grown in confidence and broadened their investment horizons. But while they are making up a smaller proportion of the total ILS pie, he says the issuance of catastrophe bonds has also increased significantly. “I don’t necessarily think that the collateralised redevelopment has come at the expense of the cat bond market. I think largely it’s allowed for risk to get to the investors that wouldn’t otherwise have made it.” Sidecar structures were in vogue during the hard market in 2008, but Mr Dubinsky says that they dropped off to represent just 7-8% of total ILS investment by 2010. He says their usage has since grown considerably and their structure has also changed markedly. “We’ve seen a real move to more strategic use of sidecars. Today the reinsurers and even insurers that are starting to [use sidecars] are looking for more long-term relationships with investors that can grow and shrink during the cycle. “The investors are looking at the alignment of interests that quota share structures give that an excess of loss arrangement won’t give them.” He says sidecars are a particularly useful tool to employ in the emerging risk space, where a short loss history makes returns difficult to predict, and highly skilled underwriting is required. Mr Dubinsky cites cyber as an area of risk that could benefit from sidecar arrangements. “The types of insurance products that are available are not really meeting the demands of policyholders such as financial institutions, retailers and utilities. “I think that alternative capital could be part of the solution to making more risk transfer available, and hopefully providing incentives for people to mitigate the risk.” He predicts “quite significant growth” in the use of sidecars, particularly by insurers, in the years ahead.

August/September 2015

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Tapping into the

expertise As one of Australia’s largest general insurers, Allianz provides cover for a wide range of general insurance needs; ranging from domestic motor products through to directors’ and officers’ cover and many levels of cover in between. SOMETIMES THOUGH, A CLIENT has special requirements, best managed by a niche provider. Niche markets require a unique understanding of the risks inherent in the businesses they serve. That’s where the One Allianz offering comes in. The One Allianz offering refers to a group of underwriting agencies and business partners that are part of the Allianz ‘family’. It enables the global brand to work alongside smaller, more nimble players, to ensure that they offer a wider range of coverage. In a recent interview, Allianz’s Managing Director Niran Peiris was asked why Allianz has adopted the underwriting agency model. “We have a saying at Allianz,” explained Peiris, “we don’t want to leave one dollar WN XZWÅ\IJTM XZMUQ]U WV \PM \IJTM JMKI][M we didn’t bring the best of Allianz to the deal. That means if we can’t write the risk, we are going to put you in the hands of one of our business partners who can.” The underwriting agency model provides brokers and their clients with access to experts who are knowledgeable about their insurance class, and the nuances that it entails, but with the backing of the strength of the Allianz brand. “The idea for the One Allianz offering stemmed from our global roots,” continued Peiris. “Initially we were able to tap into the experience offered by members of the Allianz Group such as Allianz Global

Corporate and Specialty,” he said. “No one can do what we do because of our international expertise.” Through its global reach, Allianz is able to adopt best practice solutions from around the world. The success of working with specialist operations with inherent expertise in their ÅMTL XMWXTM _PW IZM XI[[QWVI\M IJW]\ \PMQZ particular risk class, made a lot of sense. “These people wake up in the morning living and breathing their business,” explained Peiris. “They complement our size and global breadth by being more nimble, more experienced in their specialty.” One Allianz encompasses a range of [XMKQITQ[\ QV[]ZIVKM IVL ÅVIVKM [WT]\QWV[ through brands such as Club Marine, Hunter Premium Funding, and Allianz Marine & Transit Underwriting Agency. In addition to this, they have developed partnerships with selected underwriting agencies. Whether they provide cover for pets, strata, crops, or ocean liners, the thing that the One Allianz family has in common is that \PMa IZM TMILMZ[ QV \PMQZ ÅMTL Becoming part of the One Allianz team Allianz seeks partners that complement it – in terms of offering and service. Organisations become part of One Allianz through a number of avenues. One is by an Allianz Group global connection. Euler Hermes, Allianz Global Assistance and Petplan are examples of this.

)VW\PMZ Q[ _PMV Q\ PI[ JMMV QLMV\QÅML that the current book would do better being in the hands of a specialist. Global Transport, Allianz Marine & Transit Underwriting Agency and more recently Strata Community Insurance and AFA are companies that have joined the One Allianz offering in this way. <PM ÅVIT _Ia \W JMKWUM XIZ\ WN \PM 7VM Allianz family is when the company QLMV\QÅM[ I UIZSM\ \PMa _IV\ \W X]Z[]M IVL seeks the best organisation to partner with to achieve success in this insurance class. David Hosking, Chief General Manager of the Broker & Agency Division calls these \aXM[ WN KWUXIVQM[ »OZMMVÅMTL IKY]Q[Q\QWV[¼ “When we saw that crop insurance was a market that we wanted to be in, _M [M\ W]\ \W ÅVL \PM JM[\ WN \PM JM[\ crop insurers to partner with,” Hosking explained. “Primacy and Agricola (later merged as Primacy) were the obvious choices because they were organisations as committed as we are to rural and regional Australia and to the provision of crop insurance.” Allianz has a clear strategy to work with like-minded, specialist insurance ]VLMZ_ZQ\QVO IOMVKQM[ QV IZMI[ WN QLMV\QÅML growth. This strengthens its partnership with brokers who can tap into the expertise this brings. One can therefore expect more agencies to join the One Allianz fold.

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L to R: Denis Morrissey (Allianz), David Hosking, (Allianz), Emily Malthus (Club Marine), Glenn Lambert (GT Insurance), Ross Porter (AFA), Chris Doube (Euler Hermes), Stephen Ford, (AM&T), Niran Peiris (Allianz), Brad Bartlem (Hunter Premium Funding), Paul Keating (Strata Community Insurance).

…No one can do what we do because of our international expertise. Through its global reach, Allianz is able to adopt best practice solutions from around the world.

The One Allianz Offering AFA – specialises in accident and health insurance products. Allianz Global Assistance – is a leading travel insurance and assistance provider. Allianz Marine and Transit Underwriting Agency (AM&T) – marine underwriting experts.

Case Study 1: Global Transport Allianz acquired a majority shareholding in GT in 2006. “At the time our heavy motor book was not doing as well as we would have liked,” explained General Manager Commercial, B&A, Denis Morrissey. “We felt that the best option was to transfer the book to an operation that would get on and do what it does best.” The strategy worked. In 2006 GT’s GWP was $50 million. In 2014 it had risen to $187 million. During that time the workforce expanded from 30 employees to 130. It has grown from two branches in 2006 to six branches plus three regional offices in Australia and two in New Zealand. In that time GT has outpaced the market for GWP growth.

Case Study 2: Primacy Primacy has been an agent of Allianz since 2001. In 2013 Allianz acquired 100% of Primacy and Agricola. The merged company began trading as Primacy in 2014, which is when Allianz transferred its direct crop book to the company. Market share has grown to 46% with Primacy offering a full suite of crop products – broadacre, cotton, forestry, greenhouse, horticulture & viticulture, and fruiting tree & vine. Most recently, the company has launched its multi-peril crop Insurance. Primacy is recognised as one of the country’s dominant agricultural providers.

Brooklyn Underwriting Agency – specialist insurer to the Information, Technology & Telecommunications (IT&T) industry. CEMAC – one of the leaders in plant & equipment insurance. Club Marine – Australia’s largest boat and pleasure craft insurance. Euler Hermes – the global leader brand in credit insurance. GT Insurance – a leading player in the provision of heavy motor and transport insurance in Australia. Hunter Premium Funding – one of the largest, most experienced premium funders in Australia and New Zealand. Petplan – offers animal health insurance for dogs, cats and horses. Primacy – a leading agricultural insurer including crop and forestry insurance in Australia and NZ. Strata Community Insurance – offers market-leading residential strata products.

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Playing with fire A devastating blaze has left Australia wondering how safe its high-rise buildings really are By John Deex

IN THE EARLY HOURS OF November 25 last year, a resident on the eighth floor of the Lacrosse building in Melbourne’s Docklands stood on his apartment’s balcony and casually dropped a lit cigarette on the floor. The unextinguished cigarette set fire to a plastic container, spread to a timber table top and then a nearby airconditioning unit. The fire raced up the outside of the building, fuelled by an aluminium composite wall cladding, Alucobest, which had been imported from China and not tested to Australian standards. It spread at terrifying speed: the first call was received by the Metropolitan Fire Brigade at 2.24am and the blaze had reached the 21st floor just 11 minutes later. About 400 occupants were safely evacuated, but experts believe that was fortuitous. There was little wind that night and the sprinkler system performed well above its designed capability. Under slightly different circumstances, many lives could have been lost. 40

The Metropolitan Fire Brigade, which trains its crews to attack fires rather than merely prevent them spreading, subsequently made the extraordinary announcement that it could be forced to tell firemen not to enter buildings while fires like these are in progress. Alucobest panels are so flammable that CSIRO scientists, carrying out testing following the Lacrosse blaze, had to abandon the procedure after just a few minutes. That discarded cigarette started more than just a building fire – it also sparked a furious public debate about the safety of high-rise buildings in Australia. There are so many questions. How could a product such as Alucobest be used so inappropriately, putting lives at risk in such a wealthy, developed, highly regulated nation? How many other buildings across Australia are affected? What can be done to prevent untested and unsafe building materials being used in the future, and what role should insurers be playing? The authorities have been shocked into immediate action: • The Victorian Building Authority is investigating the construction of the Lacrosse insuranceNEWS

apartments and carrying out a full audit of 170 high-rise Melbourne CBD buildings. • The Western Australian Building Commission has followed suit, so far finding nine Perth buildings using potentially non-compliant cladding. • A Senate inquiry has been launched to look into the impact of non-conforming building products. But it will be months, possibly years, before we know the full extent of the problem and what it will take to fix it. Fire Protection Association Australia (FPA Australia) Chief Executive Scott Williams tells Insurance News the seriousness of the situation cannot be underestimated. “The only thing that stopped that fire was it reaching the top of the building,” he says. “If the building had been 40 or 50 storeys it would have just kept going, and fire crews would have had no way of tackling it. “We don’t know how many buildings are affected. It is the great unknown. “We know this product has been widely distributed in Australia, and now we need to unravel where it has been used. “It is quite possible that it has been used in hundreds or thousands of buildings, and it could cost hundreds of millions of dollars to rectify. “Even if just 5% of the 170 August/September 2015

buildings being checked in Melbourne were found to be non-compliant, you could still be talking tens of millions of dollars. It is logistically a huge exercise.” Mr Williams believes the Building Code of Australia needs to be altered to prevent disasters. The code is performancebased rather than prescriptive and, while it is lauded as such, FPA Australia believes some tightening is required. For a product to be compliant under the code it must be “deemed to satisfy” as a building solution. However, an “alternative solution” is permitted – using non-deemed-to-satisfy products – so long as it is assessed and proven to also comply with relevant performance requirements. Australian Building Codes Board General Manager Neil Savery admits that in theory it would be possible for Alucobest to be used as part of an alternative solution. “The practitioners involved would have to satisfy themselves that it met the performance requirements,” he tells Insurance News. “It was quite clearly not suitable in the circumstances that we saw. That situation should not occur.” So how did it occur? Investigations into the specific chain of events that led to the Lacrosse fire are ongoing. But one expert source, who declined to be named, believes products such as Alucobest came to the fore because they

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Still insured and occupied: the Lacrosse building in Melbourne showing the path of the fire from a lower-floor balcony

were seen as innovative and cost-efficient, and the safety issues were just not picked up. “Building surveyors didn’t recognise the risk and fire safety engineers are rarely involved with a building facade,” he tells Insurance News. “The building code is poorly written and sometimes misunderstood. “Building surveyors need more education, and if good fire engineers were involved they would immediately pick up the problem. The process fell apart. There is nobody to check the building has been built correctly.” Mr Williams believes the code must be more clear in crucial areas. “There are scenarios where compliance doesn’t have safety impacts – but with cladding it can’t be negotiable,” he says. “You simply have to use a tested and approved product. “But it’s more a rearrangement of pathways rather than a case of scrapping the code and starting again.” However, Mr Savery defends the code and insists buildings that comply with it are safe. “Other parts of the [Lacrosse] building were compliant with the code and performed, and as a result no lives were lost,” he says. “There were features that had been tampered with. Smoke detectors had been covered with foil, fire extinguishers were blocked off. That’s a management issue, and nothing to do with the code. “It should be a performance-based code. All the key organisations would shudder at the idea of making it prescriptive. insuranceNEWS

August/September 2015


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“We need them to say, ‘There are these issues and unless you fix them we won’t insure you’. If the insurance industry wakes up and all of a sudden starts cancelling policies, then I think we will fix it.”

“If a building is built to comply with the code it is safe, it will stand up. “There are hundreds and thousands of buildings out there performing exactly as they are intended to perform. “We have very low rates of deaths and injuries in comparison with the rest of the world.” However, he says there are lessons to be learned from the Lacrosse blaze. “I don’t want to sound arrogant or complacent. There are a number of things we should do. We need to check the provisions within the code to make sure there is sufficient clarity. “Over the next four years we are also incrementally quantifying performance requirements that only have a narrative – those that describe the outcome but don’t give a numerical target.” The role of the insurance industry could be crucial, with the expert source saying insurers “must step up to the plate”. “We need them to say, ‘There are these issues and unless you fix them we won’t insure you,’” the source says. “If the insurance industry 42

A world of trouble It is not just Australia where flammable cladding is a burning issue. There have been a series of high-rise fires across the world attributed to the cladding materials, going back almost a decade. In 2007 the 41-storey Water Club tower in Atlantic City, United States, caught fire while under construction. An internal blaze on the third floor “spread vertically and rapidly” to the top of the building, which had an aluminium/polyethylene composite panel facade. Three years later the Wooshin Golden Suites, a 42storey residential building in South korea, was gutted after fire raced from the fourth floor to the top. Again, the fire spread through an aluminium composite panel facade. In 2012 the United Arab Emirates suffered three serious apartment block fires. A fire on the roof of Dubai’s 34-storey Tamweel Tower, spread down the exterior of the building’s composite panel facade. And the Saif Belhasa Building in Dubai was also hit


– fire racing to the top of the 13-storey block after starting on the fourth floor. A blaze at the Al Tayer Tower in Sharjah was started by a discarded cigarette on a first-storey balcony that “contained cardboard boxes and plastics”, before racing up the metal composite cladding to the top of the 40storey building. Sound familiar? That same year seven people died in the Mermoz Tower in Roubaix, France (below), after fire spread to the top of the building in just a few minutes. The building had – surprise, surprise – an aluminium/polyethylene composite panel facade. And the reports keep coming in.

August/September 2015

In February this year Dubai’s Torch Tower (below) lived up to its name when a blaze spread – thanks to a composite panel facade – from the 52nd floor to the top of the 79-storey residential building.

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“The safest apartments in that building are the ones that are already burnt, because they cannot burn again. They should have at least locked and secured every single balcony.”

wakes up and all of a sudden starts cancelling policies, then I think we will fix it.” He says it is almost inconceivable that the Lacrosse building is still insured – given that it is reoccupied and nothing structurally has changed. “It is still a disaster waiting to happen,” he says. Loss management specialist Allan Manning, Managing Director of LMI Group, backs calls for increased rigour from the industry. “I do agree that insurers have a social responsibility and shouldn’t be insuring buildings using this material in this way,” he says. And Mr Williams agrees insurers’ attitude could make a serious difference. He would like to see more follow the approach of FM Global, which carries out its own testing of materials. He also finds it hard to believe the Lacrosse building has been deemed safe. “The City of Melbourne is saying, ‘We are happy with the other measures and therefore we think it’s safe enough.’ It’s a very subjective statement. 44

“The apartments are not safe for one moment. The safest apartments in that building are the ones that are already burnt, because they cannot burn again. “They should have at least locked and secured every single balcony. The balconies are still being used for storage [and] there are three times as many occupants as there should be. “There is a recipe for disaster here and it is going to become a political nightmare.” The Insurance Council of Australia declined to discuss the issue with Insurance News, despite requests for comment. Instead it repeated a previously supplied statement. “Australian insurers are well represented on standards committees, which address the suitability of building products for construction in Australia,” the statement says. “Many insurers inspect high-rise buildings prior to agreeing to underwrite them, and also rely on policyholders making declarations that a high-rise building is fully compliant with Australian building standards. “Many insurers will decline to insure high-rise buildings where a compliance issue falls outside their underwriting criteria.” insuranceNEWS

However, industry insiders have questioned whether insurers will be willing to turn down business in such a soft market – citing the Lacrosse building as an example of the risks they are prepared to take. The legacy of the Lacrosse fire is a mess. The City of Melbourne has issued the more than 300 building owners with a showcause notice requiring rectification work to be undertaken. The owners in turn are considering a class action against, among others, the builder and building surveyor. It is a complex legal minefield that could be repeated many times over if other, similar, fires occur. Mr Savery may be right – buildings that follow the code to the letter should be safe. But that did not stop the Lacrosse fire from happening, and it is unlikely to be the only building to have used a non-compliant product in a non-compliant way. Many feel the code on its own is not enough – there must be enough checks in place or it is all talk and no teeth. “What a wonderful situation that this has been exposed and there has been no loss of life,” Mr Williams says. Thanks to a huge slice of luck, Australia has been given a second chance. But governments need to August/September 2015

give this the attention it deserves and come up with solutions – fast. “Rome burned because of narrow streets and combustible facades,” the expert source tells Insurance News. “The Great Fire of London spread because of narrow streets and combustible facades. * “Will we never learn?”

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Arch Insurance’s James Weatherstone: a longer, harder slog finding the right SME clients



August/September 2015

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Expanding the Arch way The Bermuda-based insurer is here to stay, and sees some space for itself in the crowded SME market By Jan McCallum

ARCH INSURANCE SIGNALLED ITS COMMITMENT TO GROWING in Australia last year when it bought Melbourne-based Resource Underwriting Pacific. The acquisition has brought greater scale, a Melbourne office with a well-known book of business and experienced underwriters, Arch Insurance Europe President and Chief Executive James Weatherstone tells Insurance News. Arch is “thickening” the Australian offering with products it can bring to the table such as casualty, directors’ and officers’ insurance, accident and health cover, and expanded professional indemnity capability. Mr Weatherstone has also devised a strategy of targeting the mid and SME markets. But why expand into a sector many regard as already over-serviced? “What market isn’t?” he replies. Australia is a large, stable economy with a well-established legislature, legal system and code of business practice, says Mr Weatherstone, who is based in the United Kingdom and directs Arch’s international insurance businesses outside the United States. There are more “known knowns” than “known unknowns”, he says. “Our job as underwriters is to… find the best distribution with the best products.” The particular attraction of the SME market is the fact that it tends to be “stickier”. Business can be harder to find, but clients who value service and claims capabilities will stay with an insurer that meets those needs, rather than switching for a cheaper price. The territory comes with high service expectations from clients. “I don’t think that is any different from anywhere else. We have to work harder for probably less returns than we ever did, but that’s the job. “It is a longer, harder slog finding good-quality SME clients and opportunities, but a lot of it is to some extent based on their negative experience with other carriers.”

Mr Weatherstone says success will come through execution of the strategy: product lines and distribution channels. “Are you conflicted and what is your motivation? Is your motivation to be an underwriter or to be a broker? I haven’t seen it work as a hybrid too effectively so far.” Arch’s entry to Australia was not exactly auspicious. It came to the market five years ago, just in time for a series of catastrophes, starting with the 2010/11 summer floods. It entered with a “test the water” strategy of offering property cover only. Arch wasn’t put off, but it saw the monoline route was not the way forward and that it had to look beyond larger accounts. While he values relationships with coverholders, Mr Weatherstone says Arch will increasingly be dealing direct here and is adopting a model that has served it well in the US and European markets. Arch Australia employs 30 people, and is on a mission to attract talent – the best people in the marketplace, with an emphasis on longevity. “We value age, we value experience, we value broker and distribution relationships with people who can bring to us a track record of successful underwriting. “We are not here for a short-haul program of top-line generation – we’re here for a long-haul program of underwriting profitability.” Mr Weatherstone has not set a target size for the Australian business, but he says it will have the same goals as the rest of the group: to make a positive contribution to the tangible book value of parent Arch Capital Group. Arch Capital, founded in 2001, sets a high bar for its insurance and reinsurance operations and mortgage insurance business. A 15% return on capital has been the return rate hurdle in the more than 10 years Mr Weatherstone has been with the company, and the board hasn’t relaxed it to shift with the underwriting cycle. “It’s a tough objective, but when you blend all of our product lines across an underwriting cycle of, say, 10 years’ duration and including

“We are not here for a shorthaul program of top-line generation – we’re here for a long-haul program of underwriting profitability.”


August/September 2015


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investment income, we have delivered that 15% hurdle return as an insurance company, a reinsurance company and as a capital group.” For Mr Weatherstone, it proves the value of diversification. He’s happy with Arch’s product mix here, but says it is at different levels of maturity. The company is still working on plans for property business, but the portfolio will be tilted from the large account space towards the SME market. Arch is also looking to improve its brand recognition. Mr Weatherstone says in some ways the company has “grown by stealth” into a group with an $US8 billion market capitalisation, with some of the best ratings in the business. This has come through solid management, “by doing what you say you will do”, cycle management, underwriting for profit rather than premium and not being afraid to walk away from underpriced business. “It’s just good execution.” He describes the Australian broker market here as very efficient – “the brokers do an excellent job” – that translates across the world. So what is he looking for from the Australian operation in a year’s time? “A business that makes a pretty good underwriting margin, that is still evolving. That is a pretty good outcome for me – and a business that people want to come and work for.” Mr Weatherstone entered the industry from university and says insurance wasn’t highly regarded as a rewarding career then, but it hasn’t disappointed him. Young people now seek out careers in insurance, possibly because of the banks’ activities during the global financial crisis. “When I started it was seen as the backwater career in financial services. It’s no longer that.” What keeps him in the industry? “The people; the friendships I have made.” The group will consider further acquisitions here but is not actively looking. And Mr Weatherstone says the right targets are hard to find. Potential candidates must have a track record of underwriting profitability, but culture is the key – finding people on the same wavelength as Arch, with a high degree of underwriting integrity. He says these are early days, but Resource Underwriting and what was a small existing Arch operation are coming together, and * the momentum is positive. August/September 2015

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No room for neutrality

The insurance industry should be a leader in risk-sensitive investment: UN Secretary-General Ban ki-moon speaks to the industry “summit” in New York

Insurers get a warm welcome to the UN, as the global climate change action debate heats up By Terry McMullan THE INSURANCE INDUSTRY IS IN MANY ways overly modest about its ability to influence the course of political and social change. And it doesn’t normally see itself as a major force in discussions on such subjects as global development and investment. But United Nations Secretary-General Ban Ki-moon certainly does see the industry as a significant force in forging a more secure future for the world. Whereas Australian insurance industry conference organisers can rarely tempt senior federal government ministers to attend, Mr Ban was the warmly welcoming host and keynote speaker at an extraordinary “summit meeting” at the UN headquarters in New York in June. The UN Insurance Sector Summit involved delegates to the International Insurance Society’s (IIS) annual Global Insurance Forum moving across town to the UN for the day, to discuss with senior offi52

cials how the industry can help drive economic growth, financial stability, affordable healthcare and global environmental security. Held in the impressive surrounds of the Economic and Social Council’s conference hall, close by the power-infused General Assembly, the summit brought together a large number of insurance industry leaders, mainly from US and European companies. Delegates from Asian, African and South American insurance bodies also attended, along with a handful of Australians. Insurance News attended the forum as gold media sponsor of the event. Following last year’s UN Climate Summit in New York, the insurance industry committed to double its green investments to $US84 billion by the end of this year. Insurance leaders also announced their commitment to increase the amount placed in climate-smart developments to 10 times the current figure by 2020 – and Mr Ban made it obvious to the IIS delegates that he wants the industry to use its financial muscle to promote greater environmental action. Some insurance companies, most notably French insurer Axa, have taken unilateral climate action, vowing to “decarbonise” their investments – in effect withdrawing investments from high-carbonemitting businesses and transferring funds to sustainable low-carbon enterprises. The insurance industry was one of a insuranceNEWS

August/September 2015

“coalition” of institutional investors that have now committed to cut carbon-linked investments by $US100 billion, and to disclose the carbon footprint of a further $500 billion. Three major pension funds also announced they would accelerate their investments in low-carbon enterprises. The UN’s embrace of the global insurance industry followed Prince Charles’ call at last year’s IIS forum in London for insurers to provide “substantial and measurable commitments” to supporting and influencing the drive to cut carbon emissions. “You might think disaster risk reduction is a matter in which every sector of society should be fully engaged, but I’m told only half of the countries currently assessing progress against the existing frameworks report any engagement by business on disaster risk management,” he said. “That seems incredible.” Prince Charles warned insurers they, as well as banks, financial institutions and investors, must assess the risk to their businesses posed by climate change and associated natural disasters. “And mark my words, the risks are untold and catastrophic.” Mr Ban told the New York conference delegates this is “a critical year for action” on climate change, with several major UN events focused on sustainability and climate risks. Following last month’s International Conference on Financing for Development

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“It is time for global action on resilience and disaster risk reduction that not only anticipates and absorbs climate risks, but also reshapes them into an opportunity for safer, sustainable development.” Global action call: Industry leaders, bureaucrats and organisations from around the world attended the UN insurance summit

in Addis Ababa, Ethiopia, comes a special summit in New York in September, where UN member states will discuss sustainable development. That will be followed by the most important meeting of all – a gathering in Paris at the end of the year of parties to the UN climate change convention. At the time of going to press, Australia has not announced its decision on how much it will reduce carbon emissions by 2030, with Prime Minister Tony Abbott saying only that “we’ll take a very strong and credible position to Paris”. Late in July the Climate Council – an independent non-profit organisation formed after the Abbott Government abolished the Climate Commission in 2013 – said Australia is one of the largest carbon emitters per capita and the 13th-largest greenhouse gas emitter. It called for Australia to step up action on climate change and set an emissionsreduction target of 40-60% by 2030. Mr Ban told the IIS delegates the Paris meeting will provide “an historic opportunity to adopt a new set of sustainable development goals and to put the world on track for long-term, low-carbon, climateresilient growth”. China has already committed to cut its carbon emissions by 40-45% by 2020 and 6065% by 2030. The US will cut its emissions by 17% by 2020 and 28% by 2025.

Calling on the industry to “ensure that commitments made at the UN Climate Summit last year are now implemented”, Mr Ban urged delegates to “think more strategically about how climate risks can be reduced, and to adjust your investments accordingly”. “Investors today do not know whether countries are serious about tackling climate change, or if they are content to allow a high-carbon, ‘business as usual’ future, with all the risks that climate change imposes on assets and financial instruments,” he said. “That is one reason why reaching an ambitious climate change agreement in Paris is so important. “A strong agreement will provide the clear signals the private sector needs to allocate capital to build a low-carbon economy.” The insurance industry can be central in building a more resilient, climate-smart economy. “Increase investments in resilient, lowcarbon infrastructure, and create the innovative financial tools that will make markets work for a safer climate. To take one example, it is time to put a realistic price on carbon emissions. “This can unleash the full potential of climate finance and increase investments in resilient infrastructure.” Mr Ban says climate change impacts are accelerating and weather-related disasters are becoming more frequent and intense, “while people and organisations all over insuranceNEWS

August/September 2015

the world are demanding leadership and action”. Both public and private-sector support is needed, and Mr Ban sees the insurance industry playing an important role, especially in helping to ease the financial burden associated with disasters and in protecting the vulnerable. “The insurance sector is well placed to be a leader in risk-sensitive investments,” he said. It is a major source of long-term investment funds, and insurers should “play a strong role in shaping a more sustainable future”. He says disaster risk reduction is a frontline defence against the impact of climate change, and a “smart, cost-effective and lifesaving investment”. “It is time for global action on resilience and disaster risk reduction that not only anticipates and absorbs climate risks, but also reshapes them into an opportunity for safer, sustainable development.” While the insurance industry in Australia has demonstrated its commitment to resilience in recent years – most notably in catastrophe-prone communities in Queensland – its ability to drive the need for greater government action on climate change has been, at best, muted. With the UN calling for the global insurance industry to use its financial muscle and risk experience to drive both change and resilience, perhaps the days when insurers * stood timidly by are coming to an end. 53

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High stakes Strata growth offers great opportunities, but there are towering challenges too By John Deex

Growing together: the number of insurers involved in strata insurance is increasing at the same rate as higher-density developments across Australia


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MORE THAN 3.2 MILLION AUSTRALIANS, including a quarter of Greater Sydney residents, live in high-density housing, with the figure expected to increase by another million over the next decade. The total value of strata assets is estimated at more than $1.8 trillion, tipped to rise to $2.2 trillion by 2022. This all makes the strata insurance market look very tempting indeed, and new entrants have gathered like moths to a flame. But the sector is not without its challenges as it starts to become a victim of its own success and prospects. Rates are being forced down to almost unsustainable levels as insurers fight for their share of the market, and increasing complexity and regulations require ever more in-depth knowledge. Affordability in north Queensland and the growing use of new, sometimes nonconforming, building materials can be added to the list of issues keeping strata insurance professionals awake at night. Steadfast-owned CHU wrote its first strata policy in 1978, and Chief Executive Bobby Lehane says Australia’s population growth, increasing urbanisation and preference for high-density living point to a bright future for the sector. Both vertical (high-rise) and horizontal (community associations and planned estate) strata properties have attracted significant investment over the past decade, he says. “We have seen the size and scale of these developments grow as land becomes more expensive and developers need to increase the density of developments to maximise the return on their investment.” Craig Hodgson, General Manager of QUS, which entered the market in 2008, says the trend towards higher-density living will only increase. “As a result the strata insurance market will continue to grow significantly over the next 10 years and is probably one of the very few insurance markets that is able to say that.” But the sector – once the province of a select few – is becoming overcrowded as everyone tries to grab a piece of the action. There is talk of a price war, and allegainsuranceNEWS

August/September 2015

tions of irrational premium reductions of 30% and more. Ryan Houston, National Manager at CGU-owned Strata Unit Underwriters (SUU), says while falling premiums are good for consumers, long-term sustainability is a concern. “The market feedback regularly indicates some competitors discounting their renewal business upwards of 30%, even when the long-term claims performance doesn’t support this reduced pricing,” he tells Insurance News. “We’ve been around for more than 15 years in the strata market and think we have a good handle on how it works. “The current environment is feeding the price-focused nature of consumer behaviour and moving well away from other, equally important considerations such as an underwriter’s experience, security, product quality and service, reliability and longevity.” Managing Director of Allianz partner Strata Community Insurance (SCI) Paul Keating believes some participants in the strata insurance business are in the middle of “earn-out” periods following mergers and acquisitions. “We have one whose strategy is to write as much as they can to gain a certain market share as quickly as possible,” he said. Longitude – part of Sura and underwritten by Vero – and QUS are among those singled out as conducting an aggressive approach. But neither company sees it that way. QUS says is has invested heavily in developing a rating algorithm with a view to writing good-quality risks at the right price. “This investment has meant we have found ourselves very competitive on some risks and not so on others, where our competitors may be using a more broad rating approach,” Mr Hodgson says. Likewise Longitude, formed in 2012, says it has a “very clear pricing strategy” and as a result has lost 80% of its portfolio in one region. “We have lost significant business in certain markets where pricing has been unsustainable,” Managing Director Jesse Borthwick tells Insurance News. “If we’ve got 55

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room to be aggressive then we’ll be aggressive, but we can be more competitive in certain regions and types of business than in others.” Longitude believes strata has been sheltered from the “real world” of competition and previously operated under the radar, away from public and political scrutiny. “It’s therefore no surprise that strata, having now raised its head above the parapet, has joined the norms of competition attached to the more established insurance sectors,” Mr Borthwick says. Increasing complexity is another challenge facing the strata market, along with ramped-up regulation. The New South Wales Government has invited submissions on draft bills aimed at creating a modern framework for strata residents. It is the first major reform of strata laws since the Strata Titles Act in 1973. Proposed changes include new accountabilities for strata managing agents, a new democratic process for the sale and renewal of strata schemes and a new process for ensuring building defects are addressed quickly. “We have seen an evolution in the way schemes are developed to include mixed use of commercial, retail and residential all within the one development,” Mr Lehane says. “This has, of course, led to additional complexity and exposure issues that need to be factored in when providing insurance solutions. That also highlights the importance of strata specialist knowledge.” Mr Borthwick believes insurance businesses that are not 100% strata focused will find it a huge challenge to keep pace with existing and emerging sets of legislation and regulations. “Lot owners and occupiers face a growing range of financial exposures as both their buildings and their lifestyles become more wide ranging,” he says. “This means insurance policies and service standards cannot afford to stand still for too long. “We generally review our policy cover every two to three years so that customers are well protected.” Increasing complexity may lead to changes in the distribution model, with bro56

kers used more often to cut through the legal and regulatory quagmire. “Changes to state-based legislation have the potential to affect the level of involvement that strata managers have in the placement of insurance, which will in turn affect how strata insurance is distributed,” Mr Hodgson says. “We are already seeing a strong shift to broker involvement in the distribution of strata insurance.” Jodie Richardson, Property Underwriter for northern Australia strata specialists Brooklyn, can also envisage brokers returning to the fore in the buying process, plus “some consolidation among carriers”. “It’s an ever-growing market as Australia’s housing profile shifts dramatically from single dwellings to medium and high density housing,” she says.

ings are constructed, not downstream via the various building warranty schemes.” Mr Houston agrees the quality of workmanship and non-compliance in strata building construction is a major issue. He cites the high-rise fire at the Lacrosse building in Melbourne’s Docklands in November as an example. The blaze spread rapidly from an eighth-floor balcony thanks to a flammable aluminium cladding that had not been tested to Australian standards. “We have seen quite a few examples recently where highly designed and engineered properties have sustained exaggerated losses due to... the use of certain building materials, construction defects or because of non-compliance to building codes at the time of construction,” he tells Insurance News.

“It’s an ever-growing market as Australia’s housing profile shifts dramatically from single dwellings to medium and high density housing.” “Insurers need to ensure they keep pace with the market dynamics and remain valuable, attentive and responsive to the end insured. “Transparency with the market is critical.” Building defects and non-conformity with building codes create extra headaches for strata insurers. “There has been a dramatic increase in the numbers and size of defects arising from new buildings over the past decade,” Mr Keating says. “It affects everyone – owners, tenants, strata managers, our dispute resolution and legal system, and insurers and brokers. “The ultimate cost is worn by owners, and quality needs to be addressed as buildinsuranceNEWS

August/September 2015

“Besides the concerning issue of the safety of those living in these buildings, in some instances it has resulted in the owners having to fund significant rectification works to bring their building up to code. “From a strata insurer’s perspective, it also adds considerable complication to the claims settlement or reinstatement, as well as raising questions about the effectiveness of the construction approval and certification processes. “An insurer takes on risk ‘in good faith’ that a property is appropriately approved and certified to meet code requirements at the time of construction.” Another well-documented challenge for strata insurers is the difficulty associated with providing cover in north Queensland.

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More Business More Value More Often For Your Brokerage Longitude says it is one of the “few insurers” to cover risks Australia-wide, including north Queensland. However, it could be forced to withdraw if it is not allowed to apply its own underwriting disciplines and pricing, and “too few players in the market might result in us having an unworkable share of these risks on our books”. Brooklyn writes northern Australian strata only, while SUU last year launched a building resilience project that provided $1.4 million in premium relief to more than 7000 north Queensland customers. Earlier this year Suncorp launched a national direct strata product for properties of up to 10 units that it says helps address north Queensland affordability. QUS says if it can obtain a fair price for clients and capacity providers alike, then it is “more than happy to support the market”. So what’s next for strata? The current highly competitive environment suits buyers down to the ground – but can it last? Growth is inevitable, despite the many challenges, but Longitude believes the increasingly complex nature of the market will prove too much for some. “There are good reasons why the industry remains a specialist market,” Mr Borthwick says. “Many of the recent entrants are new to strata and do not deal exclusively in strata. “Because of this, they will struggle to give the customer the attention they deserve and to build a value proposition that will last. “To survive long-term in this insurance space requires strata knowledge or expertise, and anything else is simply not sustainable.” But even if the number of players is reduced, there’s no going back to the old days. The strata insurance sector has changed, and will keep on changing in line with its clients’ demands. “We will see some fail, some consolidate and some survive,” Mr Lehane says. “But the reality is that the competitive landscape has irreversibly changed, and ultimately that has to be a good thing for the consumer.” *

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Doing it for the kids Axis Australia chief David Smith is using his finance nous to help scientists beat childhood cancer By Shelley Dempsey

CANCER TOUCHES MANY lives, but few people can say they are actively working to fight the disease, and especially to change the fortunes of children. David Smith is one of those dedicated people. As Chief Executive of Axis Specialty Australia, he is a busy man, but he still devotes plenty of time to the cause that lies closest to his heart – the internationally renowned Children’s Cancer Institute (CCI) at the University of New South Wales, which conducts world-class medical research to find improved treatments for children with cancer. Mr Smith has chaired the institute’s board since November 2012, and has used his finance skills to improve fund-raising, recruit board members and other staff, raise the project’s profile in insurance and the corporate world, and find better ways to manage money. “It’s really about making sure we leverage every dollar possible to improve the cause,” 58

he tells Insurance News. In Australia 640 children are diagnosed with cancer each year. Sixty years ago, the disease was almost always a death sentence for a child, but today, thanks to medical breakthroughs, eight out of 10 young sufferers survive. When he was asked to join the board by long-time friend and InterRISK Chief Executive Phil Kearns, Mr Smith tells Insurance News he wondered what he could contribute. “What became apparent to me was that I could really help out getting the commercial stuff sorted with the institute, so we’re financially sustainable,” he says. “We’re an independent research institute. So it’s very, very important that we have the wherewithal to keep going, and that’s where I think I can add value.” CCI is Australia’s only independent medical research institute dedicated to ending insuranceNEWS

childhood cancer. This is challenging because research has shown that a “one size fits all” approach does not work for every child. Michelle Haber, the institute’s Executive Director, says that after many years of research “we know that the reason one in five children are not surviving is because every child and every cancer is different, so standard treatments don’t work for every child”. “As we look ahead we are focused on developing tailored treatment, which will mean for the 150 Australian children diagnosed each year with highrisk or relapsed cancer, that we will undertake a complex series of tests on each of those children’s cancer in order to identify the best possible combination of drugs likely to be effective against that child’s particular cancer. “This approach is at the international forefront and represents a new era in childhood August/September 2015

cancer research and treatment.” Research at the institute, which opened in 1984 and now employs more than 200 people, has already led to major developments in treating cancer. One of the institute’s research teams, led by Deputy Director Murray Norris, has developed unique technology enabling the early prediction of relapses in the most common childhood cancer – acute lymphoblastic leukaemia. As a result of this technology, cure rates for high-risk acute lymphoblastic leukaemia in children have doubled from 35% to 70% in the past decade in Australia – which equates to at least 40 people alive today who would otherwise have died. “The really cool thing is that with research techniques today they can determine if a child is likely to relapse, and change the treatment upfront, so that relapse can be avoided and the side-effects of the drug treatment can be reduced,” Mr Smith says.

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Building awareness and funding: David Smith with Children’s Cancer Institute Drug Discovery Team Research Officer Poh Sim khoo

In June Professor Norris was made a Member of the Order of Australia for his work. “I was so thrilled when I heard that news,” Mr Smith says. “Professor Norris is one of three people at the institute who have dedicated their whole lives to this cause. He has been doing this for 30 years. It’s quite humbling to be a part of that and to chair a board where people are world-class in their field.” Mr Smith has seen “significant improvement with fund-raising” during his tenure, but he modestly says this is not due to his own efforts. “We have focused on building a strong fund-raising team, a new strategy to develop sustainable and predictable income streams and we’ve invested in employing the best people for the job. “This has helped us build more consistent income performance which is critical – we can’t complete the research without the funds.”

“CCI recognised the need to reinvigorate the board and take it to that next level,” he says. Current high-profile board members include Brickworks Managing Director Lindsay Partridge and Clayton Utz Senior Partner Simon Truskett. A replacement with good sporting contacts is currently being sought for Mr Kearns, a former Wallabies skipper. The Diamond Ball, the institute’s headline charity event, will be held on August 29 at Randwick Racecourse. Last year the guest list included former NSW governor Dame Marie Bashir and her husband, former Sydney lord mayor and Wallabies captain Sir Nicholas Shehadie. Mr Smith also works in less obvious ways. “I am trying to get some significant funding from within financial services,” he says, declining to elaborate “at this point”. “I’ve certainly tried to get as much interest in CCI from insuranceNEWS

“I am trying to get some significant funding from within financial services. The dream would be for CCI to be the charity of choice at sponsorship functions and broker forums.” within the insurance industry as I can. The dream would be for CCI to be the charity of choice at sponsorship functions and broker forums.” All CCI board members are there because of their networks, he says. “It’s really about getting awareness out there across our various networks. I have been able to make introductions at a corporate and at a personal level.” August/September 2015

Mr Smith has plenty of motivation for carrying out his work. “The role had a natural attraction to me. I lost both my parents to cancer. “Children’s cancer and adult cancer are different but sort of related, and I thought I could make a difference here.” Beyond that, “this is about young kids and their quality of life, and getting rid of this hor* rendous disease”. 59

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Trouble brewing Volcanic eruptions carry more risk than just delaying airline flights. A big one could blast humanity back to ‘a pre-civilisation state’ By Andy Swales

AFTER THE ERUPTION OF MOUNT VESUVIUS in the year 79, witness Pliny the Younger recalled hearing “the shrieks of women, the wailing of infants and the shouting of men” as ash clouds choked the Roman city of Pompeii. “Many besought the aid of the gods, but still more imagined there were no gods left, and that the universe was plunged into eternal darkness,” he wrote. It remains one of the most infamous catastrophes in human history, but in terms of deaths – as few as 3400, according to some estimates – it was a relatively minor event. Almost 1800 years later, the most deadly volcanic eruption on record, at Tambora in Indonesia in 1815, would claim 92,000 lives, and the main cause of death was not poisonous gas or pyroclastic flows, but starvation. The huge ash cloud created a “year without summer” across the northern hemisphere in 1816, destroying crops and livestock. Now scientists are warning of the potential devastation from a similar – or even greater – eruption at one of the world’s many volcanic hotspots. A recent report from the European Science Foundation says some estimates show “the population directly at risk from volcanoes in the year 2000 60

stood at 500 million or more, a figure certain to grow. This makes it all the more important that scientists develop their capacity to make reliable and timely warnings of eruptions.” The report says volcanic explosivity index (VEI) values have been calculated for 5000 eruptions in the current geological era – the Holocene. The index measures the volume of erupted material and height of the resulting plume, on a scale ranging from 1-8. The report warns climactic effects from major eruptions – such as “drastic problems in food and water security” – could be far more devastating today, when the global population is larger and more densely situated. “The VEI 8 Toba eruption in Sumatra about 74,000 years ago… released roughly 800 cubic km of ash and aerosols into the atmosphere, which covered much of southeast Asia to a depth of more than 10cm, enough to destroy much of the vegetation, and cooling mid-latitude temperatures… for several years.” The foundation warns an event now “on the scale of the Toba eruption… could return humanity to a pre-civilisation state”. “During the Holocene, at least seven VEI 7 eruptions took place,” the report says. “All but one insuranceNEWS

August/September 2015

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Brooding giant: Rangitoto Island (at left) looms close to the Auckland CBD (at right). Rangitoto was formed by an eruption about 500-600 years ago, and the volcanic field on which Auckland is built remains active

occurred at a time when the global population was far below 1 billion. “With a population above 7 billion and heading for 12 billion, a recurrence of a VEI 7 eruption could have extreme consequences. “The probability of such an event occurring in the 21st century is 5-10%. Consequently, VEI 7 and larger eruptions represent a severe threat for our modern society.” It says “it would be unrealistic to expect fewer fatalities than in some of the 20th century’s tragedies, such as the 1918 flu pandemic, which killed 3-5% of the world’s population”. The report calls for the establishment of a global volcanic monitoring system. “It is not possible to completely avoid the hazard posed by volcanic eruptions… nevertheless, it would be possible to mitigate much of the loss of life, given sufficient warning.” It says disruption to food supplies could be reduced through better organisation, storage and relocation of crops. This year’s Swiss Re Sonar report on emerging insurance risks echoes the foundation’s fears. It warns volcanoes are “not yet sufficiently taken into account as serious disruptors by a wide range of stakeholders”.

“Volcanoes are not yet sufficiently taken into account as serious disruptors by a wide range of stakeholders” – Swiss Re “The risk of volcanic eruptions might… be underestimated because no large eruption has occurred since the 1815 Tambora eruption,” Swiss Re says. “It has been estimated that the effects of a medium-scale super eruption would be similar to those predicted for the impact of an asteroid with a diameter of 1km.” University College London (UCL) volcanologist Christopher Kilburn tells Insurance News risk modelling for volcanoes is still in its infancy. Dr Kilburn works with the Aon Benfield UCL Hazard Centre, which seeks to improve understanding of non-modelled risks – those lacking commercially available catastrophe models – such as volcano. insuranceNEWS

August/September 2015


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Blowing its top: a view from a Balinese port of Mount Raung in east Java spewing ash into the air on July 12. The eruption forced the cancellation of flights into and out of Bali and other nearby centres, stranding thousands of tourists

It aims to increase engagement between academia, insurers and other stakeholders to improve risk reduction, response and relief. “My understanding is that there is not yet any cat model for volcanic hazards on a par with those for conventionally modelled perils,” Dr Kilburn says. “Modelling companies are starting to look at this… but development is still in its early stages. “Many academic studies of hazards have been made for individual volcanoes. Most, though, have been directed towards supporting civil protection agencies, rather than the insurance market.” Macquarie University’s Risk Frontiers has developed what it believes were the first commercial volcanic loss models for the insurance industry – for New Zealand and Tokyo. They calculate building damage and clean-up costs, with the latter including agricultural losses. Senior Risk Scientist Christina Magill says the insurance industry-backed modeller continues to research volcanic risk in the Asia-Pacific region. “We hope this research will add to current and future… loss models,” she tells Insurance News. New Zealand has 12 active volcano fields, according to GNS Science, which monitors and models volcanic and other geological threats. Auckland, the country’s biggest city, sits on a field of 53 dormant volcanoes. Rangitoto Island is the largest volcano in the area and has erupted several times, most recently about 550 years ago. Insurance Council of New Zealand Chief

“There is not yet any cat model for volcanic hazards on a par with those for conventionally modelled perils.”



Executive Tim Grafton says the threat there has also been modelled by groups such as GNS Science, the Earthquake Commission (EQC) and insurers. “The risks and the impact and probability scenarios are well known,” he tells Insurance News. “There’s been work done in Auckland, and I think it’s about a 5% chance over the next 50 years, so it’s small. But certainly some risk exists. “If you had a reasonably localised eruption affecting, let’s say, about a 3km radius, that would cost – depending on location, but certainly in industrial areas of Auckland – several billion dollars in damage.” Mr Grafton says New Zealand has “very high levels of insurance penetration for house insurance”, while the EQC also covers volcano damage, meaning it would pay a share of residential claims after an event. He says following the devastating Canterbury earthquakes of 2010/11, New Zealanders are “very well aware that we’re in a seismically challenged part of the world”. However, there needs to be “a lot more work August/September 2015

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Going nowhere: the departure board in the international terminal at Bali's Ngurah Rai Airport on July 11, after Mount Raung in east Java erupted

done in terms of scenario planning – what the response would be to a volcanic eruption... so there would be no surprises in terms of how policies would respond if that occurred”. In the modern world, even “small”, non-fatal events can have huge impacts. The eruption of the Eyjafjallajökull volcano in Iceland in 2010 is a prime example. “This minor VEI 3-4 eruption generated an ash plume with a height of about 9km, which created the highest level of air travel disruption in Europe since World War II for about one week,” the European Science Foundation says. “The large economic loss – estimated at $US2$US5 billion – derived from the closure of most European airspace.” Jets were grounded amid safety fears, but airlines’ business interruption coverage was unresponsive, because their fleets were not damaged. Meanwhile, many stranded tourists faced a battle for payouts from their travel insurers. Swiss Re Corporate Solutions Head of Aerospace Oliver Dlugosch says more than 100,000 flights were cancelled, and the International Air Transport Association estimates $US1.8 billion in revenue was lost. After the event, Swiss Re introduced a nondamage business interruption (NDBI) cover for airlines that will pay out when flights are cancelled due to ash clouds. But the product has been slow to sell.

“There needs to be a lot more work done in terms of scenario planning – what the response would be to a volcanic eruption... so there would be no surprises in terms of how policies would respond.”



“Some airlines were particularly interested following the [Eyjafjallajökull] event but, to my knowledge, no airline has purchased the additional NDBI coverage, leaving airlines uninsured for a large part of the costs,” Mr Dlugosch tells Insurance News. “Overall demand has been low – it may be budgetary considerations, or that an all-inclusive coverage and larger limits are needed. “Swiss Re Corporate Solutions is therefore working with airlines on a product modification to widen the coverage with a defined retention for the airline, and these discussions are ongoing.” Since 2010 volcanic eruptions have disrupted air travel on several other occasions, most recently in July, when thousands of Australians were stranded in Bali due to ash clouds from Mount * Raung in Indonesia. August/September 2015

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Falling out of favour How quickly can a broker’s revenue stream be destroyed? In the case of life advisers, it took less than five years By John Wilkinson, Editor, Life+Health WHEN THE RECOMMENDATIONS OF the Ripoll inquiry into Storm Financial were published, the impact on both the general and life insurance industry was minimal. Held in 2010, the inquiry focused on advisers selling investment products, and Storm’s involvement in the life industry was almost non-existent. But that was to change when the legislation based on the inquiry’s recommendations was published by the then Labor Government. Suddenly the original Storm-related recommendations, which were not regarded as contentious, were expanded to include all sorts of new proposals. Included in these was a call to ban commissions, to be replaced by a fee for service. A best-interests duty was introduced with a catch-all clause that demanded brokers and advisers cover everything with the client. But there was no definition of what “everything” was. Neither was there a definition of “bad advice”. Adviser groups based their argument for keeping commissions on a simple enough view – the life underinsurance problem would only get worse if people had to pay for the advice. The Future of Financial Advice (FOFA) 66

legislation attracted opposition from both insurers and adviser associations, with a good degree of success. Commissions were eventually allowed under the revised legislation for both general and life insurance – except where life insurance was part of superannuation. General insurance brokers were given a watered-down version of the best-interests duty in response to claims by the National Insurance Brokers Association that the legislation was really focused on investment advisers. That was (and is) true, but governments and their agencies have shown in the past a preference for bundling financial services intermediaries into one neat and tidy group. For example, the onerous provisions of the Financial Services Reform Act in 2001 flowed from the massive Wallis Inquiry – which hardly mentioned general insurance. When the Abbott Government was elected in September 2013, there were further pushes from adviser bodies to change the FOFA legislation, in particular to remove the catch-all component of the best-interests duty. But when the Coalition’s FOFA amendment bill reached the Senate, it didn’t have insuranceNEWS

August/September 2015

the numbers. An attempt to introduce changes through regulation also failed, with Labor and the independents overturning them. In the meantime, newspaper articles about poor advice at the Commonwealth Bank’s financial planning arms started appearing, and the Australian Securities and Investments Commission (ASIC) said it would take a long hard look at the life advice industry. The result of ASIC’s examination wasn’t good. It found almost 40% of the recommendations prepared for consumers by life advisers had problems, especially with plans linked to commissions. With the issue refusing to go away and media and community criticism intensifying, the life industry brought in former actuary and Australian Prudential Regulation Authority member John Trowbridge to undertake an independent review. The report was funded by the Financial Services Council, representing the life insurers, and the Association of Financial Advisers (AFA), while the Financial Planning Association refused to participate. The old rule of never commissioning a report without being sure of the result came

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into play. It’s fair to say the advisers did not come out of it well, while the insurers quickly moved to support what would effectively be a cut in their overheads. Mr Trowbridge recommended a 20% level commission and an advice fee of $1200 – a result the insurers welcomed as “groundbreaking” and the advisers as “disastrous”. Advisers expressed their disappointment with some very vocal criticism of the life insurers and their association, AFA. A stalemate was looming until Financial Services Minister Josh Frydenberg stepped in and told the life industry to come to an agreement by June 30. Five days before the deadline, the minister announced agreement had been achieved, with a new “life industry framework” limiting commissions to 60% upfront and 20% ongoing. The advisers were in shock. But at least they still had some revenue, although many claim this is not a financially viable model for the future. But the real snake in the grass is a clawback proposal that will see advisers repaying all commissions if the policy is moved in the first year. The second year sees this drop to 60% of commissions and the third year 30%. This move is designed to counter advisers “churning” polices to earn upfront commissions from the same client over a number of years. Nobody disputes some advisers are involved in churning, but no hard evidence has been put forward by either the regulator, insurers or research houses to establish just how common the problem is. Anecdotal evidence suggests it’s not a significant problem. Munich Re is understood to have examined the movement of life policies, but 68

refused to comment on this when questioned by Insurance News. What concerns advisers is that clients also move their policies for a variety of reasons, and what has been proposed flies in

“The outlook for life advisers worrying about their future income is not good. It’s estimated their revenue could be slashed by up to 50%.” the face of the best-interests duty. For example, if an adviser finds a better policy with more conditions that match the client’s needs, at a better price, their duty will be to move the policy. But if they do they will lose their commission. A battle is now under way to scrap the clawback provision, but how successful that will be is uncertain. Mr Frydenberg has created a proposal in the framework that will probably be supported in the Senate by Labor and enough independents. insuranceNEWS

August/September 2015

At the moment the life industry framework exists only in the minister’s press release. The final detail will appear in legislation to be introduced in the spring session of Parliament. The outlook for life advisers worrying about their future income is not good. It’s estimated their revenue could be slashed by up to 50%. Some will leave the industry while others will move to investment advice work where fees for service have become the norm. There is no clawback for investment advice. It’s worth noting that it took only five years for independent life insurance advisers to have their business methods and their security completely overturned. Political and public sentiment turned against the financial planning industry in that space of time. Could such a thing happen to general insurance brokers? ASIC has been active in the general insurance industry with penalties against insurers and bans on brokers. While the commission process for brokers is more transparent, the payment method is not without its critics. Varying levels of commission paid to brokers, plus associated payments, are seen in some quarters as having the potential to compromise a broker’s commitment to the best-interests provisions of FOFA. As the life insurance commissions issue has demonstrated, political and public pressure and the desire to make change is sometimes unstoppable. Each time a solution was formulated, the advisers’ ability to resist further change was diminished. When change comes, it can happen a lot quicker than you think. Ask a life adviser * how quickly it changed for them.

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A new dimension 3D printing is revolutionising manufacturing, with serious implications for product liability and other commercial covers By Leo D’Angelo Fisher

EVEN BY TODAY’S TECHNOLOGY standards, the idea of a 3D printer that can miraculously “print” anything from a teacup to a house, layer by layer, seems fantastic. A few years ago, footage of a 3D printer producing a tangible object – perhaps the lifelike head of a celebrity or sporting hero – might have been the kind of story to end the evening news. But 3D printing is no longer a novelty, nor is it a futuristic technology. It is here and now. Like many new technologies this century, its take-up has been rapid, farreaching and epoch-defining. What the internet has been to retailing, 3D promises to be for manufacturing, and insurers are grappling with what that means for them and their clients. 3D printing, also known as additive manufacturing, has been around since the 1980s, when it was known as “rapid prototyping” technology. At that time the technology was expensive and strictly high-end. It was used, for example, by car and aerospace manufacturers to create prototypes for product development. However, in recent years mid-level 3D printers have become capable of what once was the preserve of million-dollar systems, with the cost of commercial and industrial printers falling in inverse proportion to their increasing capabilities. That’s exciting news for business, but the big insurers are being more circumspect. They’re developing their expertise in 3D printing, and the more they learn the more cautious they become. Allianz warns of the “evolving risks” that will accompany the benefits of 3D printing, particularly in the areas of product liability, intellectual property and data security. Allianz Senior Underwriter Juergen Weichert, who specialises in liability, says the implications of 3D printing in familiar applications such as developing prototypes are “manageable”, but looking ahead the risk landscape is not so clear. “As the technology evolves and becomes 70

a greater part of the supply chain, product liability could become more complex, while the increased reliance on data will be a new challenge for manufacturers,” he says. “Should a product prove faulty, who is liable will depend on who is producing and selling the product. For example, if a company uses 3D printing to make prototypes, or even components for use in its own products, there will be little change. “However, liability would be less clear where processes are split, such as where one company produces a component for use in another’s product, or where one firm provides the design, another the 3D manufacturing, and another the distribution.” 3D printing is used in industries as diverse as aerospace, automotive, construction, engineering, fashion and medical. Medical applications are astonishing, such as the printing of blood vessels, prosthetic parts, patient-specific implants, heart valves, ear cartilage and synthetic skin. No application is too small or too big. In China earlier this year, a building company “printed” 10 houses in one day at a cost of $US5000 each. The aerospace sector is a pioneer in the use of 3D printing technology, but Airbus still managed to surprise industry observers recently when it revealed it had printed more than 1000 components for its new A350 aircraft. Airbus says using on-demand 3D printing technology – rather than sourcing traditionally manufactured components – enabled it to meet its delivery deadline last December. Australia is no slouch when it comes to 3D printing. In February researchers from Monash University and its spin-off company Amaero Engineering produced what they believe is the world’s first printed jet engine. No wonder 3D printing raises so many questions for insurers. Swiss Re has identified several implications of 3D printing for (re)insurance. It notes end users will be able to print complete products – perhaps from designs they insuranceNEWS

August/September 2015

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“Liability would be less clear where processes are split, such as where one company produces a component for use in another’s product, or where one firm provides the design, another the 3D manufacturing, and another the distribution.”

have bought online – which will blur boundaries between manufacturer and end user, and raise questions about who is responsible if a product proves faulty. The boundaries between product designer and producer will also become less defined, which will require a review of the scope of professional indemnity covers. Architects, designers and engineers may wonder if their policies apply to computeraided design production. If designs become public and shared, intellectual property rights and cyber cover issues may also arise. “Although it will likely take a while until we see the implications of this new technology in the (re)insurance segment, Swiss Re works with clients to leverage their knowledge about 3D printing and collaborates in developing intelligent and appropriate 3D printing insurance solutions,” the reinsurer says in a paper on the subject. “It is important to closely monitor developments, and our risk experts are ready to work with clients and partners to identify and assess issues that may arise when underwriting 3D printing-related risks.” Insurance lawyers will have much to ponder as 3D printing threatens to upend the certainties of liability, intellectual property and copyright law. But we’ll have to make an educated guess on that, because three well-known insurance law firms contacted by Insurance News for this story either declined to comment or didn’t respond at all. A spokesman for Hall & Wilcox at least offered: “The firm is looking at 3D printing as an emerging issue.” Mike Cole, Managing Director of broker Modern Risk Solutions, compares 3D printing to the industrial revolution. He says its full impact has yet to be felt, which makes it an ideal time for the insurance industry – and its legal advisers – to gain a better understanding. “There are a lot of implications for the insurance industry to be wary of,” the Melbourne-based broker tells Insurance News.

Not as silly as it seems: a Chinese company recently used four 3D printers to print out 10 full-sized houses in a day. The printers are 10 metres wide and 6.6 metres high, and have sprays that use a combination of cement and construction waste to “print” walls


August/September 2015


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“3D printing promises businesses many benefits and new opportunities, but adopting the technology also exposes business-owners to risk.”

3D printing: how it works 3D printers use computeraided design (CAD) software to digitally convert a design into horizontal “slices” which are seamlessly reproduced layer by layer to create a three-dimensional object. The printer sprays or transfers layers of material – as diverse as plastic, resin, glass, ceramic and metal – from the bottom up. They are fused together to create the final object. Fused deposition modelling (FDM) and selective laser sintering (SLS) are the most common 3D printing technologies. FDM printers use a thermoplastic filament, which is melted and then extruded through a nozzle, layer by layer, to create a 3D object which solidifies on cooling. During the printing process an object can be strengthened by a support structure, which can be produced by the same printer from a different material using a second nozzle. SLS involves heating and solidifying granular material such as plastic, ceramic or glass. A laser fuses the layers to form a solid 3D object. 3D printing is also known as additive manufacturing.


“We’ve spoken to local insurers because we can see the need for insurance solutions and bespoke products for [3D printing]. No insurer to date has a 3D-specific product that I’m aware of. “I’ve been talking to a couple of local insurers about better understanding the risks involved and coming up with a product.” Mr Cole declines to name the insurers, but cautions the industry has only a limited window until 3D printing becomes mainstream. “Within five years, 3D printing will be the norm. The changes will be massive. It is not inconceivable that a mechanic in remote Australia requiring a part will be able to print the part rather than waiting days for it to arrive. This sort of change throws up a lot of insurance issues.” Zurich Insurance is investigating the “associated risks” of 3D printing at each stage of the manufacturing, distribution and end-use process. It says 3D printing promises businesses many benefits and new opportunities, but adopting the technology also exposes business-owners to risk. Brokers need to familiarise themselves with the insurance pitfalls of 3D printing as much as their clients. “Many people are unaware that by merely employing one of these machines you may well be drastically altering the risk exposure of the business,” Zurich says in a paper. “If an insurer or broker is unaware that a customer is actually operating a 3D printer, then a business may not be covered in areas they otherwise thought they would be, and insurance premiums are likely to be incorrect. “A shift in an operating model of a business can cause it to deviate from or expand upon its original purpose when initially insured.” Zurich calls this “business operating drift”, and it believes companies that adopt 3D printing technology are at risk. Zurich insuranceNEWS

August/September 2015

believes the issue will strengthen the bond between brokers and their clients. “We believe the role of the broker will be more important than ever in the coming years as SMEs face an increasingly complex business environment and changing risk profile,” it says in another report, called SMEs and Risk in 2020: Business and Risk Implications of a Shifting Landscape. The insurance industry knows it must address the issue of 3D printing because its take-up in recent years has been nothing short of phenomenal. Figures for Australia are hard to come by – although the fact Harvey Norman sells a Da Vinci 1.0A 3D printer for $899 provides a clue to the technology’s prevalence – but the overseas experience is illuminating. A PricewaterhouseCoopers survey of 100 industrial manufacturers in the US last year found 67% used 3D printing. The growing impact has also been captured in data compiled by US 3D printing consulting business Wohlers Associates, which produces the annual Wohlers Report. It says the size of the 3D printing industry worldwide was $US295 million in 1995; last year it was $US4.1 billion. Wohlers expects the industry to be worth $US10.8 billion by 2021. “What’s most exciting is that we have barely scratched the surface of what’s possible,” report co-author Tim Caffrey says. Scott Mayson, from RMIT University’s Centre for Additive Manufacturing, agrees there is growing interest in the application of 3D printing in industry. “Businesses are taking change [resulting from 3D printing] in manufacturing quite seriously – they’re looking at the opportunities, they’re keen to understand what 3D printing means for their business,” Dr Mayson tells Insurance News. They’re not the only ones showing an interest. Dr Mayson says he is advising a major Australian insurance company “around 3D futures”, but declined to name it. As is often the case with 3D printing, * watch this space.

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Broker education: Moving beyond ‘easier, cheaper, faster’ By Sheila Baker, Managing Director, Gold Seal

IT’S GREAT TO SEE HOW engaged the insurance industry is becoming in the debate around education, with many strong views on the subject being aired. The discussions further demonstrate the need to take a serious look at where we need to be in the future without the constraint of current structures, industry bodies or regulations in our thinking. Education in broking has become focused on two stakeholders – the regulators and the industry bodies. This ignores many other stakeholders, including “other” education providers like Gold Seal, as well as the students and employers who largely pay for the education. This imbalance has to be addressed. Our current minimum (and minimalist) broker education standards are driven by the need for consumer protection. That’s important, yes, but it shouldn’t be the sole basis for education standards. Compliance with standards is one thing, but our years of working with brokers at Gold Seal have taught me that those who thrive recognise the importance of having the necessary skillsets to manage and run a business. These skillsets include such aspects as training, HR management, business planning, etc. For example, traditionally HR has been considered a separate practice from compliance. Few people know, or remember, that the financial services reforms of 2004 underpin all other business practices as well – not just education. When brokers look for further professional development, most look for product training. Underwriters run product training at no charge, so under-

standably that’s what brokers do. This is good learning, but it doesn’t address their major business issues. So, is a degree the answer? I think it would be great if a degree was developed to offer vocational education and training (VET) graduates a pathway that is insurance-specific.

But it shouldn’t be a minimum standard to operate in the industry; it should be another step after the basic vocational education is completed. The discussion around degrees for brokers should be based on continuing education and upskilling, and how they can best be achieved.

Four steps to success


Implement broker education to a quality standard rather than a minimum standard.

2 3

Encourage education-providers and industry bodies to reconsider their minimalist approach to professional education. Abolish price-cutting and stop offering students shorter and simpler ways to complete their education. Quality education should not be cheap, and it shouldn’t be easy.

Reintroduce content that brokers need more of, such as technical subjects. And later, when the student has chosen a career path – technical or business – provide relevant courses in business practices.


Re-examine the workplace requirements for more practical, business-related content and development of business skills.

An example: I once worked with a group of optometrists. Optometry is comparable to insurance broking in that once you have a science degree; you can hang out a shingle and run an optometry practice. But having the qualification obviously doesn’t make you a practitioner. So La Trobe University Graduate School formulated a graduate qualification that addressed all of those other business skills like HR, marketing, leadership and so on. I suggest we start by looking at the needs of brokers, and the wider insurance industry, in the medium to long term. We need to try to understand what the future broker will look like, and then devise the education requirements insuranceNEWS

that will best support them in meeting those changed realities. I can see the day coming where commissions are no more and broking businesses are primarily driven by the client’s experience, a la Uber and TripAdvisor. Compliance then will become increasingly driven by market forces rather than just regulation. Much criticism for the present situation, where low cost, “tick a box” training is the accepted norm, has been laid at the feet of the educationproviders. Some of that criticism is fair, but the broking community also needs to take some responsibility. It has allowed itself to be lulled into a belief that education has little monetary value. August/September 2015

The feedback we get from the brokers that pass through Gold Seal’s programs every year is how much they value and desire learning that genuinely makes them a better insurance professional – although even this is sometimes not enough to make them open their wallets wider! The insurance industry offers the cheapest, shortest and easiest diplomas of any financial services intermediary group anywhere. It grates with Gold Seal philosophically, because our business is built on providing quality services rather than rockbottom methods. But it’s difficult to stand outside when competition is forcing prices down. We need to deliver education that goes way beyond the “easier, cheaper, faster” mentality. Everyone from the education-providers, industry bodies and regulators needs to recognise the environment is changing and we must equip brokers to face the business realities of the future. For our part, we are putting together a roundtable with attendees from all parts of the industry and all stakeholders – not just a closed group of vested interests – to take this debate into the future, firstly by attempting to define the future broker and their needs. My personal mission is to help this great industry continue to provide value to the business community, and grow and flourish into the future. * Gold Seal provides business management, compliance, regulatory and people development services to the intermediary sector. It is the largest independent education provider to the sector, working with more than 450 brokerages as well as individual industry professionals. 75

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Healthy growth AHI founder David Epper knows how to survive and thrive in tough times By Jan McCallum Leaving with plenty of energy: Accident and Health International founder David Epper (right) with new Chief Executive Peter Banks

THE INSURANCE MARKET IS increasingly tough, but the industry has been through it before and Accident and Health International (AHI) founder David Epper says businesses that focus on their capabilities will get through it again. Mr Epper recently retired as managing director of AHI and is leaving the industry – well, almost – after a 40-year career. “The competition is increasing and it is frustrating at the moment that there are new players coming in, writing business that is new business to them,” he tells Insurance News. “For the poor underwriters who have lost the business, it is just frustrating.” He says groups that understand the competition and their own strengths will survive, because there is an answer to any problem. Mr Epper started AHI in 1998, then sold 50% to CGU in 2010 and the remaining stake to the insurer in June. He will stay on the company’s board and be on call if necessary, although he doesn’t see that happening because he is handing over to staff with long track records at the company. As a young man Mr Epper had not planned on working in insurance, and he knew nothing about it when he started. After leaving school he joined a stockbroker, but was retrenched when the company merged a year later, in 1976. “I was hanging around home not doing what my mother told me, which was to go out and get a job.” His father played golf with AIG executive Ferris Ashton, a renowned sportsman and broadcaster, and asked Mr Ashton if he could give young David a job. 76

That led to administration work in AIG’s accident and health team, where he was in charge of cover notes and quotes. “The only think I knew about it was that the cover notes went in the green file and the quotes went into the red file, but I didn’t know what they were,” Mr Epper says. However, he did learn from “some very good people” and stayed with AIG until 1988, attending night classes over four years to gain a college qualification. “I met some really, really good friends through that, all of whom have gone up in the insurance world to run insurers and brokerages,” he says. Mr Epper says it was not hard to get into insurance at that time – and it was a lot of fun. He set a goal of earning $25,000 a year by the age of 25 and achieved that, becoming AIG’s New South Wales manager. Hartford Fire Insurance approached him with a job offer in 1988. “I thought it would be interesting to see what another company did. I was asked to set up their accident and health department, and I thought it would also be interesting to start something.” Hartford quit the Australian market in 1993 and sold the business to QBE. Mr Epper wanted to remain working in a small team and moved to underwriting agency Harbour Pacific, which was sold to Aon in the late 1990s. “I again thought I didn’t want to work for a big company, and maybe I could do this myself.” GIO had provided security for Harbour Pacific, and former GIO general manager Kevin Kinsella had moved to Gerling, which insuranceNEWS

August/September 2015

led to Gerling providing security for the new company and offering Mr Epper office space. He started the business with one staff member. They sat in the office the first day “and looked at each other, and she told me to go out and get some business”. It was a risk for someone who, by then, had a young family. There were a couple of lean years when he took a wage that covered the mortgage and basic living expenses only, paying staff more than himself. Mr Epper has enjoyed the culture of the smaller underwriting agency, where a broker can call and talk to an underwriter, who can make a decision. With more agencies starting up, and more insurer and broker group-owned agencies, the market continues to evolve. Insurer-owned agencies give insurers a marketing edge, but Mr Epper says there is still a place for the small and nimble agency. By 2010 AHI had expanded, opening offices in Melbourne, Brisbane and Perth, and Mr Epper was receiving offers to sell. He thought it was time to consider what the company was worth, and if it made sense to sell “even though we didn’t have to, didn’t expect to and didn’t want to”. The exercise made him think about succession planning. He was in his early 50s and knew neither of his children would follow him into the business. That led to CGU buying 50% of AHI, with an option to take the remainder this year. Mr Epper is leaving while he has the

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Going for growth: AIB focuses on its wholesale niches

energy to enjoy his interests: surfing, fishing and golfing. And he remains involved in charitable activities. His son was diagnosed with autism about the time Mr Epper started AHI, and when the Eppers investigated the condition they saw how families with severely disabled children struggled to get by. Mr Epper served on the board of Aspect (Autism Spectrum Australia) from 2001 to 2012 and worked on fundraising and mentoring parents. AHI has raised about $1.2 million for Aspect through golf days, paying for buses and school computers. Most of the golfers come from the insurance sector and Mr Epper appreciates their support, telling Insurance News it shows the industry’s generosity when times are tough. When his son enrolled at St Edmund’s school for students with special needs, Mr Epper became involved in fundraising there, too. Last year he was awarded the Medal of the Order of Australia for his work helping children affected by autism. Peter Banks, a 16-year veteran of AHI, has taken over as Chief Executive. Mr Epper says that while the time is right for him to step back, he also sees it as providing an opportunity for other staff to step up and take their careers and the business further. His advice to young people starting out is simple: find a mentor. He says the industry pays well, “you meet fabulous people and make great friends. Go out and enjoy it. Listen and * learn and just be yourself, too.”

THE WHOLESALE DIVISION OF Queensland-based broker AIB is looking to build on its niche success and grow in new directions. The division provides brokers with tailor-made policies in four specialist areas: childcare providers, tourism industry operators, beauty and hairdressers, and indigenous insurances. Wholesale Manager John Lewis says bespoke policy wordings and unique benefits and covers are crucial to its achievements. “We have always been a leader in Aboriginal business and the childcare business has been continuously growing,” he tells Insurance News. “We now have an in-house claims facility and a $50 million liability option, which gives us an edge over competitors.” Last year the business had 1779 policies, but this has grown to 2200 this year. Mr Lewis, who became Wholesale Manager in February 2013, says he is proactive about winning new business. “We provide quotes within 24 hours unless we need to refer, and we assist brokers in providing responses. “We offer our attendance if required (at the expense of the third-party broker) and try to market our products at the right times. “It’s about building good relationships with the third-party brokers, getting the trust from them, and offering something different to our competitors. “We have attended the Underwriting Agencies Council expos in the major states, plus we attend the National Insurance Brokers Association convention in September.” Mr Lewis says making sure AIB Wholesale’s niche products have always been ahead in the market is the secret to its expansion to date. “The growth of the childcare book is huge, and this is due to understanding what is required out there, attending relevant conferences, enhancing the wording and benefits all the time, and continuously thinking what is required to get the business.” Good service is a key focus too, he says. insuranceNEWS

August/September 2015

An edge over the competition: AIB’s John Lewis

“We build rapport with third-party brokers who, after receiving excellent service, will continue to use us. “We also keep strong relationships with our facility underwriters who understand our vision and assist with the growth.” As well as growing the current schemes, Mr Lewis says more would be considered. “We are not for trying everything,” he said. “We need to ensure we find a product which we believe would be niche to us, that would be the same as the current four which we have had for more than 14 years.” AIB General Insurance Brokers was founded in 1982 in Alice Springs. It now has * offices in Maroochydore and Brisbane. 77

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To the rescue: NTI unveils livestock accident assist


will link the caller to specialist service providers with costs passed to the operator or their insurer. Mr Driscoll says the RSPCA and Animal Health Australia have been consulted and are supportive.

“This is indicative of our commitment to an industry that was our bread and butter when we first started in the 1970s,” he says. “We won’t get this perfect straight away. It is new, and it will evolve, but we will get it * right in the end.”

News Ltd

NATIONAL TRANSPORT INSURANCE (NTI) is set to launch an industry-first Livestock Assist service aimed at a proactive and immediate response to the unique challenges of accidents involving animals. The leading heavy motor insurer has worked with the Australian Livestock and Rural Transporters’ Association (ALRTA) to develop the scheme, which is an extension to its successful Accident Assist service. A dedicated national hotline to the NTI call centre will result in a specialist response in accordance with official procedures. NTI Industry Affairs Manager Owen Driscoll tells Insurance News a number of serious accidents, including the infamous “flying sheep” incident in Victoria three years ago, led to the development of the program. A truck carrying 400 sheep overturned on a Metropolitan Ring Road overpass above the Princes Freeway at Laverton North, and motorists described horrific scenes as dead and injured animals plunged from the overpass onto the freeway below. “There wasn’t enough immediate action, and we started to think that we needed to do something about this,” Mr Driscoll says. “We needed a proper emergency response program which was proactive in terms of animal welfare. “The number of accidents involving livestock is falling, but there will always be some incidents and they need to be dealt with properly.” Mr Driscoll says such incidents present unique safety and welfare challenges, with dead and injured animals that need to be disposed of, euthanased or treated. Uninjured stock may also need to be secured in order to prevent further accidents from occurring. “It can be a very emotive scene, and we need to act professionally and quickly,” he says. Once the call comes in to the call centre, an appropriate response will be co-ordinated which may include a vet, the RSPCA, animal health experts and livestock companies to supply portable yards to contain stock. The service will be available to all livestock operators and drivers, with all costs covered for those insured by NTI. If not insured with NTI, the call centre

Tragic scene: the sight of dead and injured sheep on the Princes Freeway led NTI to develop an emergency response program


August/September 2015

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This sporting life Sportscover underwriting chief Jarrod Bell is a team leader with lofty goals By Andy Swales WHEN JARROD BELL BEGAN his insurance career, like many ambitious young professionals, he set himself a goal to reach the top. But even he has been somewhat surprised at the progress he has made since. At the age of 37 he is Underwriting Manager at sports and leisure specialist Sportscover Australia, responsible for operations across Australia and the company’s emerging presence in Asia. “It hasn’t been easy; they certainly make you work for it,” he tells Insurance News. “But it’s something I’m proud of – it’s a goal that I set, that I wanted to get to this level.” As is so often the case, the insurance industry chose him, rather than the other way around. “I don’t think anyone gears up for [a career in] insurance,” he says. Born and raised in Melbourne, Mr Bell studied a commerce degree at the city’s Deakin University, majoring in sports marketing. “I was looking for a job in sports administration – not the easiest job to come by. After that it was just a case of finding a full-time job and it happened to be in insurance.” After a short spell in motor claims at CGU, an opportunity for an underwriting assistant emerged at Sportscover’s Melbourne base. It proved an ideal fit. “It was very fortunate. I’d worked in sports administration – Softball Australia and a couple of basketball associations – more in a volunteer role than anything else. “When this came up, it was underwriting, which was what I wanted to do, and being related to sports as well, it all fitted very nicely.” Like so many Melburnians, Mr Bell lives and breathes sport. Injuries have halted his playing days, but he watches “AFL, Premier League, basically anything”. It seems sport runs in the

family. He supports Crystal Palace – one of the English Premier League’s less glamorous clubs. “My grandmother lived behind the stadium in south London. My grandfather played for Oldham, then moved to London to play for Palace. “I’m the only one in the family who supports them – my brother’s a Liverpool fan, but I kept the family connection.” Mr Bell joined Sportscover about 14 years ago and steadily climbed the ladder to head up underwriting in Melbourne. Last October he took over the regional role, covering Australia, New Zealand, Hong Kong, Singapore and Thailand, managing a team of 14. He says Sportscover’s corporate culture encourages such progression. “We’ve got countless examples of people who have done that, whether it’s in claims or underwriting or even marketing – people starting off as assistants and moving their way through.” He says the company works hard to identify and attract such rising stars. “[The insurance industry] is not perceived as glamorous. We hire a lot of young staff and how we promote the industry is that it can send you anywhere in the world. In this company, I’ve spent time in London, Hong Kong, Singapore, Thailand, all around Australia… “I’m on a plane basically once a week. That’s the way we promote our business: one, sport, which attracts younger staff members; and two, the opportunities we can provide.” It’s an exciting time for Sportscover. The Lloyd’s coverholder is looking to expand its operations in Europe and Asia, where a growing middle class is driving demand for the company’s covers for sportspeople and sporting and leisure organisations. “It’s been over a couple of years that we’ve been doing a slow progression, certainly into Singapore and Hong Kong,” Mr Bell says. “We’re doing it insuranceNEWS

remotely from Australia at the moment, but I’m there probably every three months. The product’s new there, the brand name’s new, so there’s a lot of work to be done, but it’s something we see as key to our business goals and our expansion.” Mr Bell says Asia presents “a huge opportunity for us. It’s almost going back to when we started in Australia, New Zealand and the UK, offering those specialist products no one has seen before.” He says Sportscover strives for relationships with its brokers and its end customers, which it offers risk management services such as pitch safety checks and a soon-to-bereleased concussion test. “We deal with brokers, we establish relationships with our sports [customers], and we set up tri-partisan relationships between us, the broker and client – certainly in the Australian and UK markets. “In Asia we’re building a base with the brokers at the moment. Then when the clients become big enough, we’ll move with that tri-partisan [aspect].” Mr Bell says his current role involves “a lot of hard work, a lot of travel... a lot of airport lounges” and time away from his wife and young daughter. But he is proud of his career progress – of “being able to move through a company from being a [young] assistant who knows nothing about insurance or underwriting, and to have that support”. On his goals for the future, he demonstrates a healthy aversion to buzzwords. “I don’t want to use the word innovative because I read that in Insurance News all the time! “What we’re trying to do is build a brand that’s trusted in the industry – we feel we’ve got that – and build a brand that’s known for its service levels, in terms of ... [making] it easier to deal with us and providing the information that brokers and clients want from us easily.” * August/September 2015

Sportscover’s Jarrod Bell: living, breathing and working with sport


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Queensland Day honours top service and young professionals More than 350 brokers and guests celebrated the industry’s best at the Council of Queensland Insurance Brokers’ (CQIB) annual Queensland Day celebration in June. CQIB President Sean Bemrose welcomed members from around the state and business partners from farther afield to the Brisbane Convention Centre’s Sky Room. It was a night to recognise insurers and allied industries for their support over the past year, with six awards presented. The Peter McCarthy CQIB Young Professional of the Year Award went to Rebecca Challenor from JW Bell & Associates. The award recognises an industry up-and-comer who has given their brokerage, clients and the industry outstanding commitment and service over the past 12 months. QBE won the coveted Queensland All-rounder Insurer of the Year Award, accepted by Regional State Manager of Intermediary Distribution Leigh Stalker. It was a special night for CGU, with State Manager Ian Garbutt accepting the runner-up award for the company as well as the domestic insurer award. Tiana Iuvale from CGU received the Mick Lambert Barker Award, which is presented to a business partner staff member for “service above and beyond”. Allianz won the claims service award and Steadfast-owned Underwriting Agencies of Australia received the underwriting agency award.



August/September 2015

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Some people just like to lead At LIU, claims come first. Our highly rrecognised ecognised claims team ar are e as proficient proficient at assessing risk as they are are in managing claims. It’s It’s this in-depth knowledge of each risk that ensures ensures their claims response response is pragmatic, fast and well-communicated. For claims service that puts you ahead, contact LIU.

LIU. The People, The Products, Products, The Capacity Capacity. www

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peopleNEWS McLardy McShane tees off for charities Portsea on Victoria’s Mornington Peninsula provided a spectacular setting for McLardy McShane’s 11th annual golf day in May. A keen field of 130 teed off, raising more than $22,000 for the Reach Foundation and Cure for MND Foundation as they went around each sponsored hole. More than 150 sponsors, insurers and clients filled Hotel Sorrento that evening for dinner sponsored by CGU, hearing former Essendon footballer and Melbourne coach Neale Daniher speak about living with motor neurone disease. Brother Terry Daniher, also a former Essendon player, gave an entertaining insight to life in the football-playing family. Reach Corporate Partnerships Coordinator Ashley Clarke told how Reach had helped her, inspiring her to join the foundation and support young people.



August/September 2015


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NSW brokers fly high at Allianz Young Eagle event The brightest young brokers pitted their wits against each other at the annual Allianz Young Eagle contest in Sydney in July, with Team NSW getting its talons into the much sought-after trophy. More than 100 Young Eagles, aged 35 and under, were nominated by their principals for the 24 prized spots, so just attending the event was an achievement. State teams of four brokers plus an Allianz employee were tasked with running their own insurance company in a market simulation. For each year of the seven-year exercise (actually two days) the Young Eagles presented the rationale for their decisions to a board of senior executives. The board consisted of Chief General Manager Broker & Agency David Hosking, General Manager Broker & Agency Commercial Denis Morrissey, General Manager Claims Lori Callahan and Chief Actuary Noeline Woof. There were five state-based teams, an Allianz team and an Insurance Advisernet team. Each was observed by an experienced member of the Allianz Broker & Agency Commercial team. The winning NSW team was made up of Dominic Brettell from Honan Insurance Group, John Cartwright of Cartwright Insurance Brokers, James Sharp from PSC Insurance Brokers, Gemma Gould of MGA Insurance Brokers and John kay from Allianz. During a “fireside chat”, Allianz Australia Managing Director Niran Peiris shared his insights about the state of the insurance market. The Young Eagle scheme is the youth section of Allianz’s Blue Eagle loyalty program.



August/September 2015

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AHI staff farewell founder The new financial year marked the end of one era for Accident and Health International (AHI) and the start of another, with a new owner and a new chief executive. Around 60 staff and friends from around the country rang in the changes on July 1 with a party at Sydney’s Manly Skiff Club to farewell founder and retiring managing director David Epper and retiring southern region manager Don Mazlin. Mr Epper started AHI in 1998 and has handed over to Chief Executive Peter Banks and new owner CGU, which has held 50% of AHI since 2010. AHI General Manager kevin kinsella gave a touching tribute to both men and Mr Epper was presented with a cricket bat signed by Don Bradman.



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UAC challenges YPs on hard market A hard market doesn’t seem likely any time soon, but perhaps it’s only a massive catastrophe – or series of catastrophes – away. How would brokers cope with the resulting dramatic rise in premiums? That was the challenge the Underwriting Agencies Council (UAC) and National Insurance Brokers Association (NIBA) threw down to young brokers at the Queensland underwriting expo in July. The day started with the young professionals (YPs) breakfast and a panel discussion of the challenges of broking in a hard market. Facilitated by Pen Underwriting Chief Executive Paul Lynam, the discussion was based around a series of major natural catastrophes hitting a wide area of California leading to the sudden end of the current soft market. The event was booked out by 98 YPs keen to hear how the industry would react and what brokers could do to help their clients through it. More than 275 brokers and 60 exhibitors attended the expo that followed at Brisbane’s Pullman hotel. Later there was silence in the house during lunch when seven-time women’s world champion surfer Layne Beachley spoke on how to achieve repeated success. She took the audience through her championship wins, describing how she overcame fears and faced challenges. The winners of NIBA’s annual broker awards for Queensland were announced at the expo.



August/September 2015

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maglog »

Sam Pentecost Contributor

CHIEF EXECUTIVES ARE PRECIOUS BEINGS WHOSE health and welfare should be the constant concerns of their chairmen. They are after all the leaders, the people who carry the fortunes of their companies and their share prices on their shoulders and the details in their heads. So why are so many of them – the male ones, at least – at their happiest doing things that carry a tinge of devil-maycare? In the 1980s it was drinking too much and then playing squash, or vice-versa. Then there were the ’90s, when brokers discovered the joy of driving meno-Porsches and Harleys. Steadfast’s Robert Kelly used to love heading off around the backblocks with his mates on their giant motor-sickles, and I can remember one early NIBA convention where he arrived at the Gold Coast a tad battered from what is referred to in polite bikie circles as “an involuntary dismount”. Suncorp’s Commercial Insurance Chief Executive Anthony Day used to blat around on a noisy little black thing that Went Like Stink before eventually accepting that something more dignified might be better. He settled for the replica Indian motorcycle he was pictured with on this magazine’s cover a few issues ago – a giant beast of a thing with more bling than a jeweller’s showcase. And then there’s the cyclists… Ebix Australia Managing Director Leon d’Apice is a regular bicycle commuter, and he has the scars to prove it. Don’t get him started on the consequences of “dooring”, which is what happens when some motorist opens his or her vehicle’s door just as the Leons of this world are passing by on their way to work. Ouch. So really, are bosses who ride to work really, you know, safe? Take Tony Wheatley, the Chief Executive of WR Berkley Australia and one of the sanest, most clear-headed bosses in the industry. Except he was pictured in a newspaper a few weeks ago (right) expounding not on the virtues of professional indemnity or general liability, but on the wondrous qualities of something called a Cannondale Super Six Evo Hi Mod with DAce DI2. I don’t know either, but according to Tony it’s beautiful. I think that’s her with Tony in the picture. But I doubt Tony’s Cannondale Super Six Evo Hi Mod with DAce DI2 has ever been doored. Because being ridden to work (when he has the time) is the job of his more mundane-sounding Giant TCR 1. He rides a couple of hundred kilometres a week, for transport and for fun. Fun? I assume he hasn’t followed Leon in the morning exercise of flying through the air without bike or face airbag, but I’m nonetheless left speechless by the matter-of-fact way Tony describes in the newspaper article a little bingle he’d had. “I was riding the Sydney to the Gong [Woollongong to those readers who wondered] on a rainy day several years ago, and lost focus chatting to someone just south of the National Park entry. I slipped on the white line and ended up on the deck in the middle of the traffic lane. “Luckily it was early and there were no cars, otherwise I would have been in real trouble. I think about it every time I ride that route.” Perhaps it’s the brushes with mortality that appeals to chief executives who have pastimes with a tinge of danger about them. I started researching this aspect, but gave up 90

after reading of so many American bosses who have buried themselves into hillsides with aerial stunt-flying, or raced cars into oblivion, or scuba-dived and never come up. Or is it just that the thrill of it all, where all you’re responsible for is yourself and your own physical safety, helps you unwind after a day or a week of full engagement? Drop me a line if you’re a bike commuter or have some unusually dangerous way of relaxing after a week working in insurance, a profession that’s meant to be all about risk aversion. Send me pictures at This is a subject worth exploring.


August/September 2015

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