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THE BIG 10: RANKING INSURERS
REINSURANCE: CASHED UP, COMPETING
DANGERS AHEAD: RISKS THAT WILL BITE
EASY RIDER: Suncorp’s Anthony Day won’t be distracted from the road ahead
August/September 2014
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This is a general description of insurance services and does not represent or alter any insurance policy. Such services are provided to qualified customers by affiliated companies Zurich Insurance Company Ltd, 400 University Ave., Toronto, ON M5G 1S9, and outside the US and Canada, Zurich Insurance plc, Ballsbridge Park, Dublin 4, Ireland (and its EU 5 Blue St., North Sydney, NSW 2060 and further entities, as required by local jurisdiction.
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WHEN YOU ARE PASSIONATE ABOUT SOMETHING, YOU PROTECT IT IN THE BEST WAY
ZURICH INSURANCE. FOR THOSE WHO TRULY LOVE THEIR BUSINESS.
ed companies of the Zurich Insurance Group Ltd, as in the US, Zurich American Insurance Company, 1400 American Lane, Schaumburg, IL 60196, in Canada, nd (and its EU branches), Zurich Insurance Company Ltd, Mythenquai 2, 8002 Zurich, Zurich Australian Insurance Limited, ABN 13000296640, AFS Licence No 232507,
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Combining market-leading product features with the flexibility to tailor individual covers, your SME clients will find it easy to protect their businesses. With covers available for over 3400 occupations, our products are designed to provide versatile choices across a full range of risk appetites that have never been easier to write.
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Contents With profits and investment earnings flatlining, premiums are nevertheless falling as capital pours in. Can it be controlled?
The National Motor Vehicle Theft Reduction Council is a shining example of public-private partnership.
lawNEWS Latest projections on global warming strengthen the case for disaster mitigation and adaptation – so is the industry doing enough? APRA’s statistics demonstrate the market dominance of the major local giants.
The Federal Court has ruled against S&P over its ratings on ‘grotesquely complex’ financial instruments, in a case with global ramifications.
companyNEWS While other players in the commercial insurance market grapple with various distractions, Anthony Day sees Suncorp sitting in pole position. The Abbott government is tempted to close down the Australian Reinsurance Pool Corporation. Would this leave the nation exposed?
Sura Travel helps brokers meet rising demand for corporate travel cover. Broker launches a comparator. Zurich listens and moves.
What will happen if smart cities go haywire, or someone gets on your cloud account? Swiss Re sees a world of new risks. Simon Cook manages a major brokerage and a leading warranty company – and still finds time to represent yet another industry. How much is too much? Insurers are battling the many effects of new risk assessment rules. The tsunami risk in Australia may be greater than previously thought, but is anyone taking the threat seriously?
CGU revs up commercial motor products. Ace tailors cover to clinics and hospitals. Dual moves into medmal.
Popular North American claims technology arrives Down Under.
peopleNEWS
Zurich’s new claims chief may have been born in the USA, but an ideal he discovered in Australia drew him back here. Insurers are exploring the science behind catastrophe modelling to gain a better understanding of risk. The idea of a natural disaster insurance pool to deal with affordability issues has divided two of the industry’s most influential companies.
August/September 2014
Cover: Anthony Day, Chief Executive Commercial Insurance, Suncorp Image: Kym Thomson
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newsmakers at
Great career, nice bank balance
insuranceNEWS.com.au is a free weekly online news service for the general insurance industry. The website has more than 21,000 subscribers. In June and July we published 398 articles online. These were made up as follows:
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Godden is AJG chief
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“ ” If change doesn’t happen, I would not be surprised if the issue was… picked up by the appropriate regulator.
– Consumer expert Allan Fels releases a paper calling for more transparency in the insurance industry
Andrew Godden (above) has been made Chief Executive of US broker Arthur J Gallagher’s broking operations in Australia, including Gallagher Australia and the recently acquired OAMPS. Current OAMPS Chief Executive Mike Cutter will step down at the end of this month. Mr Godden, who was previously Chief Executive of Arthur J Gallagher Australasia, will relocate from Perth to Sydney. Arthur J Gallagher bought OAMPS and New Zealand broker Crombie Lockwood from Wesfarmers as part of a $1.01 billion deal last month. Steve Lockwood, formerly Wesfarmers’ insurance broking executive chairman, will lead the integration of the 60-branch transTasman operation.
Growing competition in the industry has created strong demand for insurance professionals, according to recruitment company Hays. “The sector remains financially strong and a great place to build a career, although the outlook on salaries is mixed,” this year’s Hays Salary Guide says. The increase in competition is particularly good news for brokers. “Brokers with strong networks or a track record of generating consistent results and new business development are able to demand a premium salary package when looking at new opportunities.” Account brokers can earn $80,000$100,000 a year in most capital cities, with the highest salaries in Perth, at $100,000-$130,000. Hobart has the lowest salaries for account brokers, at $70,000-$90,000. General insurance staff with technical and commercial lines experience are also wanted, while quality candidates are “hard to find and… hard to retain”. Overall, salaries have stayed flat in commercial lines, despite the sector’s strong financial performance. Brokers enjoy strong position on jobs, salaries, 14 July
INTERVIEWS THIS WAY
Cutter leaves OAMPS as Godden begins Gallagher era, 21 July
Recovery cost a lot of money
6
cost $US2 billion by the time the Costa Concordia is towed from Tuscany to the port of Genoa and broken up for scrap. The massive bill – which will be picked up by London marine insurers – has concerned the insurance industry because the cost of the rescue operation was exacerbated by the Italian Government’s insistence that the ship be removed intact to avoid environmental damage. Wrecks are usually cut into pieces before being transported from disaster sites.
insuranceNEWS
August/September 2014
Insurers fear this may set an expensive precedent. Reinsurers in the Lloyd’s market estimate the decision to relocate the wreck intact has added $US257 million to the overall salvage cost. Costa Concordia salvage costs give insurers sinking feeling, 14 July
Reuters
The massive operation to refloat and remove the stricken cruise liner Costa Concordia, which sank off the coast of Italy in January 2012, will end up costing more than $US2 billion ($2.13 billion), according to the Chief Executive of the cruise liner’s operator Costa Crociere, Michael Thamm. He describes the refloat and removal of the 290-metre, 114,500-tonne vessel as an “unprecedented engineering challenge”. The ship was hoisted upright in September last year, and was refloated today. Mr Thamm has told German newspaper Bild am Sonntag that the disaster is likely to
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“Analysts have generally supported the insurer as a good investment prospect”
Analysts remain confident that QBE is a “buy” investment prospect despite its first-half profit forecast being lowered by 18% last week. Group Chief Executive John Neal says the slide is due to increased workers’ compensation claims in Argentina. The insurer last week forecast first-half net profit of about $US390 million, with the bottom line mainly hit by a claims reserve strengthening of about $US170 million in Latin America. Legislative changes and deteriorating economic conditions contributed to increased Argentinean workers’ compensation claims. But analysts have generally supported the insurer as a good investment prospect – particularly following the sharp share price fall experienced last week after the downgrade in profit was announced. The fall will not affect QBE’s credit rating, with Standard & Poor’s saying the revised earnings “are slightly credit negative”, but “can be accommodated at the current rating and do not represent a downgrade trigger event under our existing negative outlook”. Gross written premium is set to be about $US8.5 billion, down from $US9.4 billion in the corresponding period last year and below the $US8.9 billion QBE originally predicted. QBE still a ‘buy’ despite lower profit forecast, 4 August
News Ltd
Argentines hurt QBE
Class action payout Insurance companies are in line for a major slice of the $494.6 million Black Saturday bushfire settlement, the largest class action settlement in Australian legal history. The class action against electricity provider SP Ausnet, maintenance contractor UAM and the Victorian Government was led by law firm Maurice Blackburn. A total of 24 insurance companies provided funding support for the litigation in a bid to recover some of the claims paid out to victims. It is understood the insurers’ share is around $140 million.
The 2009 bushfire disaster in Victoria’s Kilmore East and Kinglake regions, which killed 119 people and destroyed 1242 properties, was the subject of a 16-month trial in the Supreme Court of Victoria. The settlement – which does not include admissions of liability by the defendants – is subject to court approval. It will then take 12 to 18 months for claims to be assessed and the settlement distributed. Insurers to recoup some Black Saturday losses, 21 July
Falling short UK price comparison websites fail to meet consumer expectations and in some cases fall short of regulatory standards, the Financial Conduct Authority (FCA) warns. It says the websites do not always give appropriate, clear information, and consumers’ focus on price and brand may distract from crucial features such as policy coverage and terms. “Our review found they were not meeting our requirements in delivering fair and consistent outcomes for consumers,” FCA Director of Supervision Clive Adamson said. “We also found, through our consumer research, that consumers had a number of misconceptions about the services they provided.” The websites are increasingly popular in the UK, where an estimated one-third of consumers use them to buy motor insurance. Comparison sites failing consumers: UK regulator, 21 July
Sportscover seeks a Lloyd’s partner Melbourne-based international underwriting agency Sportscover has denied a UK media report that it will auction off its Lloyd's syndicate, but admits it is seeking new capital. Director Steve Boucher told insuranceNEWS.com.au the company is “continuing to talk to a number of potential partners” who can help provide capital into 2015 and beyond for further growth. Syndicate 3334 writes mostly sports and
leisure business, mainly on behalf of Sportscover Australia and its European offshoot. Sportscover already has capital in place for this year and is talking to existing and new capital providers about whether or not they may or may not want to take a share in 2015. Mr Boucher says Sportscover will “definitely remain involved in the syndicate”, and the new capital could also take the form of an equity stake in Sportscover.
insuranceNEWS
August/September 2014
The Sportscover Australia and Europe underwriting agencies bring the syndicate most of its business, he says. “Those underwriting agents will continue to develop the business for the syndicate, so we most definitely will be involved.” Under its obligations to Lloyd’s, the Sportscover syndicate must get its capital into line by October this year. Sportscover seeks new capital for Lloyd’s syndicate, 4 August
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newsmakers at
From the
Brokers – win a trip to Bali with Catlin International insurer Catlin is offering brokers a chance to win a trip to Bali to see the latest stage in its global marine science project. The winner will travel to Bali next month to dive or snorkel with the Catlin Seaview Survey team, which is studying the health of coral reefs worldwide. The competition is being run by Catlin in partnership with Insurance News. Contest entrants have until August 31 to answer five questions online. It’s the second time Catlin and Insurance News have partnered for this competition. In 2012 two brokers were flown to Cairns and helicoptered offshore to spend a day with the Catlin Seaview Survey team on the Great Barrier Reef. Last year the team moved to the Caribbean, and now it is examining the tropical waters of the Coral Triangle around the Philippines, Timor-Leste and Indonesia.
PUBLISHER/EDITOR: TERRY McMULLAN McMullan Conway Communications Pty Ltd Tel: + 61 3 9499 5538 Fax: +61 3 9499 5535 Email: publisher@insurancenews.com.au ADVERTISING: NAOMI CONWAY McMullan Conway Communications Pty Ltd Tel: +61 3 9499 5538 Fax: +61 3 9499 5535 Email: naomi@mccmedia.com.au 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: naomi@mccmedia.com.au
Catlin Australia Director Andrew Case says the company is “really excited to be partnering with Insurance News for this competition, because it will provide one lucky person with a deep insight into the workings of the Catlin Seaview Survey and how it’s making a difference to the scientific community. “The Catlin Seaview Survey aims to enable scientists to monitor changes on the Great Barrier Reef, Coral Sea and now the Coral Triangle for decades to come,” Mr Case said. The winner will receive a three-day trip to Bali, with two nights’ accommodation, return economy airfares, transfers, main meals and a visit to the Catlin Seaview Survey dive site. Brokers can enter the competition at http://www.catlin.com/en/asiapacific/ australia
Terry McMullan
SUBSCRIPTION ENQUIRIES: www.insurancenews.com.au/subscribe Email: admin@insurancenews.com.au 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 www.insurancenews.com.au/magazine
A McMullan Conway production
ISSN 1837-4972
8
The picture of Aleksandr the meerkat on the cover of our last edition drew a lot of comment, not least from British readers whose enthusiasm for the little guy has made insurance comparator comparethemarket.co.uk an amazing success. While the accompanying article explained why Australian insurers are snubbing comparison sites, the trend for consumers to do their own insurance research online is unstoppable. The problem is not the sites; it’s consumers’ fixation on price to the exclusion of the product’s fitness for purpose. In this edition we have news of a business comparator starting up with a bold plan to help people do their online research while giving them access to a broker at any point. That’s one solution worthy of success. Innovation is relatively rare in this industry, so it was a pleasant surprise to hear insurance leaders at the International Insurance Society’s seminar in London in June welcome the massive influx of capital into the reinsurance sector. A report on the discussion is on page 10. Rather than worry about its impact on the established reinsurers, the insurers see the capital windfall as an opportunity to expand into new markets, develop new products or get involved in the hocus-pocus of insurance-linked securities. So while Australian insurers are quite right to worry about personal lines consumers’ emphasis on price – let’s face it, it’s hardly a new phenomenon – they would be unwise to leave the comparators hosting only smaller “challenger” brands. We don’t know what the final answer to the growing presence of the comparators should be, but like the disruptive inflow of investor capital into reinsurance, opportunities will inevitably arise from such a popular distribution channel. Rejection isn’t the answer, so maybe innovation is.
insuranceNEWS
August/September 2014
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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The brave new world of reinsurance With profits and investment earnings flatlining, premiums are nevertheless falling as capital pours in. Can it be controlled? By Terry McMullan
INNOVATION IS SUDDENLY A BUZZWORD around one of the industry’s most conservative (and profitable) sectors, reinsurance. And no wonder. An unprecedented influx of capital from investors over the past 18 months has enabled new ways of covering risks to come to the fore. But while pension funds, hedge funds, private investors and institutions are reaping the benefits of a relatively benign first half, the sheer volume of money being invested is also forcing down reinsurance premiums. Even as the wider investment markets struggle to return to pre-global financial crisis levels, the fall in reinsurance premiums has had a knock-on effect in the local market, with premiums in competitive classes falling as far as they have risen in the past few years. It’s a glitch in the insurance cycle, and no one seems sure what might happen next. However, reinsurance leaders at the International Insurance Society’s (IIS) 50th annual seminar in London in June were relatively relaxed about the situation. Scor Chairman and Chief Executive Denis Kessler says insurance cycles “never happen in the future, but always in the past”. “In today’s world we must expect inflows and outflows of capital,” he said. “That’s how it is in a frictionless world, when you have information on the market on a daily basis. Market conditions can change very quickly.” Lloyd’s Director International Markets Vincent Vandendael agrees. “This isn’t a traditional soft market,” he told the London seminar. “Business is becoming less cyclical. That [additional] capital is here to stay, and the industry has to decide how to deal with it.” Noting there is “room for capital in the [catastrophe] space, which is already absorbing part of that capital”, Mr Vandendael adds: “There are pockets where we can all grow.” Reinsurance broker Guy Carpenter says in a new report that Australian and New 10
Zealand insurers benefitted from double-digit reinsurance premium reductions at the June 30 renewals, which came “due to oversupply of capacity following a benign year for catastrophe losses – despite some uptick in ultimate losses from the 2010/11 New Zealand earthquakes”. It says investor demand for insurance-linked securities such as catastrophe bonds is “robust”, with capacity from alternative markets now accounting for $US50 billion – 15% of the global property catastrophe reinsurance pool. Willis Re estimates the fall in the Australian market has been in the region of 12.5-17.5% on a risk-adjusted basis. Ratings agencies estimate professional lines in Australia have fallen 5-7.5% and casualty has dropped 2-5%. New Zealand’s Earthquake Commission has taken advantage of the competitive market to negotiate a “traditional” reinsurance contract worth $NZ4.5 billion – raising the cover by about $NZ750 million over last year for 10% less. Commentators say Australian property rates are being driven by abundant capacity and supply, as the “traditional” reinsurers – Munich Re, Swiss Re, et al – seek to maintain their market positions. The major reinsurers are in an awkward (and unfamiliar) position, with Munich Re, Swiss Re and Berkshire Hathaway all registering profit falls in the past quarter. The premium drops experienced in Australia and New Zealand have occurred in most other markets, too. Premiums fell 1520% in the UK, 15-25% in the bellwether state of Florida, and 10-20% in other US states. Commentators say falling premiums and increasing competition in the reinsurance sector are positives for insurers, which have been able to negotiate better terms for the next year. insuranceNEWS
August/September 2014
Reinsurers have also been more willing to lock in capacity early and to package across multiple programs. Multiyear deals have also been done. It’s a situation that has brought some cautious expressions of concern from ratings agencies, but the influx of new capital has resulted in innovations joining the mainstream. Insurance-linked securities such as catastrophe bonds – until relatively recently a niche reinsurance by-product – are now being accepted as a strong alternative to traditional reinsurance. The second quarter of this year saw several new records set by cat bonds: the highest number of bonds sold in a three-month period, a 50% rise in issuance for the half-year at $US5.9 billion, and an unprecedented $US1.5 billion bond for Florida’s Citizens Property Insurance, which is owned by the State Government. So popular have the bonds become that their value is now falling, thanks to investors oversubscribing. Aon Benfield’s index of
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“There will always be fringe players and they’ll most likely get out at the first negative challenge. But reinsurance is an attractive asset class.”
catastrophe bond prices shows the securities fell behind comparable asset classes during the second quarter. Sidecars – in which investors take on the risk and return of a group of insurance policies – are also proving increasingly popular. US insurer Liberty Mutual has been swift to grab the opportunities offered by too much money and too few opportunities, by paying $US3 billion to Berkshire Hathaway to increase its reinsurance cover by $US6.5 billion for asbestos and environmental liabilities incurred before 2005. The cover also includes Liberty’s US workers’ compensation liabilities up to this year. But is the tens of billions of dollars in additional capital here for good, or are all these new investors merely fair-weather friends? Opinions vary. Aon Benfield Americas Chief Executive Bryon Ehrhart warned last month that only a “significant catastrophe” – $US80-100 billion – could hit reinsurers’ capital reserves enough to stop bond prices falling.
That echoes the view of Gen Re Chairman Tad Montross, who told Insurance News earlier this year that the industry will see “how resilient these investors are after a $150 billion catastrophe loss”. But Axis Capital President and Chief Executive Albert Benchimol is more relaxed, telling the IIS seminar that pension funds, in particular, see the reinsurance market as an attractive source of investment. “There will always be fringe players and they’ll most likely get out at the first negative challenge,” he said. “But reinsurance is an attractive asset class. There are naïve investors everywhere, but there’s pretty good analysis around saying this is a good asset class. “You have to be prepared to accept the cyclicality and volatility of our industry, and if you don’t have the wherewithal to accept that, then you may find this is something that won’t work for you. “I have a lot of respect for the talent that’s embedded in these pension funds. They know what they’re getting into and they will make the decisions. If terms and conditions are attractive they’ll increase their allocations to the asset class and if they’re not they’ll reduce them.” Asked if he would prefer to partner with a pension fund or a hedge fund, Mr Benchimol said he “would not want to partner with an opportunistic source of capital”. “What matters to us most importantly is that they understand what we’re about. It would have to be a long-term view. Our partners have to be fully aligned with us.” Australian insurers are cautious about the new insurance-linked securities, with market leaders IAG and Suncorp both expressing a for sticking with traditional reinsurers and relationships built up over many years. insuranceNEWS
August/September 2014
IAG Chief Financial Officer Nick Hawkins told the Actuaries Institute’s Catastrophe Risk Seminar in June he knows traditional reinsurers will pay claims. In the reinsurance centres of New York, London and Bermuda, the larger reinsurers are weathering the competition storm relatively well, and are even displaying considerable expertise in managing insurance-linked securities. Participants at the IIS seminar’s reinsurance discussion panel were bullish about the impact of the new investors, saying the only reinsurers who should be worried are the smaller players. As Mr Benchimol sees it, “the sweet spot for opportunities will be the middle-sized companies such as Axis”. But he sees dark days ahead for small reinsurers exposed to “concentration risk” – having too few risks of the same type on their portfolio. “They are going to have problems surviving,” he told the IIS seminar. “The rest of us will gain from this.” Scor’s Mr Kessler says the reinsurance climate has changed, and the opportunities presented by additional capital have to be handled with care. “We have to be sure we don’t stand alone, but where do we expand? Life insurance? China? It’s not easy.” Mr Benchimol says the present situation in reinsurance is “a typical supply and demand imbalance”. “Any report on a catastrophe will speak of large cat economic losses and insured losses being 10-20% of that number,” he said. “So clearly there are opportunities there. “I hope we’ll use that capacity to go after those risks, and do what the industry is supposed to do – provide capital to stabilise the risk environment of owners, entrepreneurs, businesses and governments. “Rather than fight over a slice of the pie, I hope we will use that pie to benefit ! everybody.” 11
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Latest projections on global warming strengthen the case for disaster mitigation and adaptation – so is the industry doing enough? By Andy Swales
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insuranceNEWS
August/September 2014
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IT SEEMS BARELY A WEEK GOES BY WITHOUT a new warning on the advances of climate change and the potentially dire consequences for our future. And while some remain sceptical, for many the evidence is both compelling and alarming. In March the Intergovernmental Panel on Climate Change (IPCC) released its Fifth Assessment Report – a vast publication compiled by hundreds of scientists, offering the most detailed analysis on global warming to date. It concludes that climate change is “unequivocal, and since the 1950s many of the observed changes are unprecedented over decades to millennia”. “The atmosphere and oceans have warmed,” it says. “The amounts of snow and ice have diminished, the sea level has risen and the concentrations of greenhouse gases have increased.” The United Nations-backed authority claims human influence on warming is “clear”, and greenhouse gas emissions “have risen to unprecedented levels despite a growing number of policies to reduce climate change. Emissions grew more quickly between 2000 and 2010 than in each of the three previous decades.” The implications for Australia and the region are stark. If global temperatures rise 2-4 degrees compared with pre-industrial temperatures, we will experience more extreme rainstorms, leading to increased flood risk in the medium term (2030-2040) and “high” or “very high” risk in the long term (2080-2100), the IPCC says. There could also be a greater threat to coastal regions from cyclones and rising oceans. Under the 2-4 degree model, a high level of adaptation – land-use controls and defences, for example – could temper the rising flood risk but not halt it, the report warns. A recent Committee for the Economic Development of Australia (CEDA) report suggests the danger to infrastructure here is significant. It says Australia has 35,000km of coastal road and rail worth $60 billion that is at risk of sea level rises and storm surges driven by climate change. The Victorian Government predicts its water, power, telco, transport and building sectors “are all at significant risk from climate change impacts” by 2030 in the worst-case scenario or 2070 in the best case. Consumer group Choice has warned extreme weather risks and climate change could almost double home insurance premiums and cut at least 20% off property values in some exposed areas over a 30-year mortgage. The threat from bushfires is also forecast to grow. University of New South Wales climate change scientist Andy Pitman told the recent Actuaries Institute Catastrophe Risk Seminar in Sydney that the frequency of heatwaves in Australia is expected to double by 2030 and triple by 2070. There is a slow upward trend in bushfire risk, but
“Is it sustainable for insurers to lobby for mitigation alone, or should they also be challenging governments for action on emission reductions?” he says cyclones are so rare the data is not good enough to predict how their frequency and intensity might change. Mr Pitman’s warning was timely enough, coming less than a week after the world recorded its hottest May since records began in 1880 – averaging 15.54 degrees in the month, according to the US National Oceanic and Atmospheric Administration. It marked the 39th consecutive May and 351st consecutive month with a global temperature above the 20th century average. A recent CSIRO report on oceanic weather systems adds to the concerns on bushfires. It says under current greenhouse gas emissions, extreme positive Indian Ocean Dipoles – where sea surface temperatures are cooler than normal in the east but higher than normal in the west – will occur every 6.3 years this century, up from every 17.3 years last century. These events, which bring dry conditions to Australia through winter and spring, have preceded most major bushfires, including the Black Saturday bushfires in 2009. In December 2010 parties to the UN Framework Convention on Climate Change committed to limiting the global temperature rise to two degrees, but the target could already be beyond that. The IPCC says it will not happen without substantial and sustained reductions of greenhouse gas emissions, but governments are making slow progress – not least in Australia, where mining magnate Clive Palmer, of all people, is now presented as a defender of green policies. Professor Pitman told the Actuaries Institute seminar the world is on track to exceed two degrees warming and could well top four degrees this century. The insurance industry is already seeing the effects. Munich Re’s natural disaster loss database, the NatCatService, reports the number of weatherrelated loss events in Australia and Oceania has almost quadrupled since 1980. It says the cost also has risen four-fold to nearly $US200 billion ($213 billion) a year. The reinsurer’s Head of Geo Risks, Corporate Underwriting Alexander Allmann says the cause of rising natural catastrophe threats in Australia is clouded – but the trend is clear. insuranceNEWS
August/September 2014
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“Science sees the number and severity of weather extremes [in Australia] being impacted primarily and more strongly than in other regions of the world by natural climate oscillations such as the El Nino/ La Nina phenomenon,” he says. “Therefore it is very complex to isolate the contribution of other factors... such as climate change to loss trends from natural catastrophes. “But science, of course, expects Australia to be increasingly affected by climate change in the longterm, with a probably rising number and severity of weather extremes such as heatwaves and floods.” The IPCC concedes studies linking insurance loss trends with human-influenced warming are lacking, but it says as the climate changes, “increasing volatility and burden of losses in many regions are expected to fundamentally affect the industry, leading insurers to adapt their business to the changing risk, including the use of short-term contracts”. The report says the “balance between [premium] affordability and [insurer] profitability is sensitive to climate change. Increases in large weather-related losses may corrode an insurer’s solvency if it fails to adjust its risk management, or is hampered in doing so by price regulation. “Additionally, misguided incentives for development in hazard-prone areas, as with the US National Flood Insurance Program, can aggravate the situation. “The additional uncertainty induced by climate change translates into a need for more risk capital. “This raises insurance premiums and affects the economy.” It also warns liability insurance could be susceptible. “So far, no damages have been awarded for greenhouse gas emissions as such, but litigation where damages are sought is pending.” In high-income countries such as Australia premium discounts that are contingent on risk-reduction will be an important tool for insurers, the report says. Essentially, price must send the right signal on risk: insurers and governments need to resist distortions arising from subsidies and regulation. In a report last month, Lloyd’s Chairman John Nelson said “insurers must factor climate change into modelling, and develop the tools we need to understand and evaluate its impact”. Mr Allmann says Munich Re’s models do take account of “clear, verifiable” trends, which may include climate change effects. “By taking such trends into account, models can depict the different factors that play a role, including possible effects of climate change. “One example of this is the models we use for hurricane activity in the US, which are based on average values of the cyclical warm phase in the North Atlantic that has persisted since the mid-1990s and engendered high levels of hurricane activity, 14
Number of reported disasters by decade by hazard type (1971–2010) 5,000
4,000 3,496
Floods Mass movement
3,000 2,386
Storms Drought
2,000
Extreme temperature
1,534
Wildfires
1,000
743
0 1971–1980
1981–1990
1991–2000
2001–2010
Source: Atlas of mortality and economic losses from weather, climate and water extremes (1970–2012)
rather than on long-term average values.” Better data can drive more informed adaptation. The Australian Business Roundtable for Disaster Resilience & Safer Communities, which includes Munich Re and IAG, says the cost of natural disasters in the country is forecast to rise from $6.3 billion a year to about $23 billion in 2050. The key to avoiding this, it says, is increased disaster mitigation. It argues “carefully targeted disaster mitigation investments” of $250 million a year would save the economy $12.2 billion by 2050. And in July the roundtable published a report claiming consolidation of disaster information and delivery of the data to communities, businesses and governments in an “open accessible format” could add $2.4 billion to the projected saving. It is a message echoed by insurers, which have lobbied to restrict building in high-risk areas, for the removal of tax barriers to insurance take-up and to encourage flood defences, allowing them to accurately price to reduced risk. The benefits can be seen in flood-prone towns such as Roma in Queensland. “If a levee to protect the town had been built in 2005, it would have cost $20 million,” CEDA Chief Executive Stephen Martin says. “However, since 2008 $100 million has been paid in insurance claims and since 2005 a repair bill of more than $500 million has been incurred by the public and private sectors.” insuranceNEWS
August/September 2014
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Regional risks: a table from the latest report of the Intergovernmental Panel on Climate Change
In late July, work on the first phase of a levee in Roma reached 90% completion, prompting Suncorp – which stopped writing new cover in the town after the 2011 floods – to announce property premium reductions of 45% on average and up to 90% in some cases. But the IPCC warns that as the climate changes, “in many locations, continued reliance on increased [flood] protection alone would become progressively less feasible”. That raises a question for insurers, which have been reluctant to get involved in the semantics and politics of climate change. Is it sustainable for insurers to lobby for mitigation alone, or should they also be challenging governments for action on emission reductions? Head of Munich Re’s Corporate Climate Centre Ernst Rauch says insured losses from weather-related catastrophes are “increasing dramatically” and “an analysis of our loss statistics provides indications that climate change is partly to blame”. “But the trend is being principally driven by increasing values and the settlement of exposed regions – in other words, socioeconomic factors.” He tells Insurance News it is now “an economic imperative to invest in mitigating the effects of greenhouse gases to slow the pace of climate change, and thereby achieve a long-term reduction in the economic impact from adaptation costs and losses”. 16
However, it seems much of the damage is already done. “Even if global climate protection measures prove successful, a further increase in temperature can be expected in the medium term, because greenhouse gases such as carbon dioxide retain a climate-changing effect in the atmosphere over many decades,” Mr Ernst says. “Preventive measures against natural catastrophes and adjustments to climate change are therefore essential.” This, perhaps, is the crux of the matter for the insurance industry: that the rewards from emissions reduction are simply too long-term to warrant lobbying on. The Insurance Council of Australia (ICA) tells Insurance News the industry closely monitors the climate change debate and keeps a database of catastrophes dating back 40 years. “Any climate change signal that may be present [in the data] is being overwhelmed by the losses directly attributable to population changes, building costs and codes and land use planning. “It is not so much that there are more frequent storms or more violent storms in Australia, but that far more infrastructure has been built in coastal regions that are vulnerable to storms.” ICA’s focus is “on today’s weather and on pricing risk in the built environment”. The debate around carbon reduction, it says, “is ! a matter best left for other experts”. insuranceNEWS
August/September 2014
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WHEN MAX NEEDED HELP TO SEE IT THROUGH, HE WENT THROUGH JOHN.
In 2013, when Max Cunningham’s business dream literally went up in smoke, he was prepared. Within two days, CGU had purchased Max an onsite caravan to live in, so he could continue to manage his oyster farm. Within 20 days, CGU had settled the majority of his claim. Max’s insurance adviser, John Farrell, didn’t recommend CGU to Max out of habit. It was out of his experience seeing that when his clients needed it, CGU would be there to help them see it through. To find out why you should be recommending CGU to your clients, visit cgu.com.au Insurance issued by CGU Insurance Limited ABN 27 004 478 371 AFSL 23829. This is general advice only and your client should consider their personal circumstances and the relevant Product Disclosure Statement available from www.cgu.com.au before purchasing any insurance product.
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Our Top
10
insurers
APRA’s statistics demonstrate the market dominance of the major local giants By Wendy Pugh
IAG AND SUNCORP LOOM LARGE OVER THE AUSTRALIAN general insurance industry. Where 10 years ago the size of the top five players in the local market was relatively close, consolidation has lengthened the distance between the top two and the rest. Insurance News has used company-level data collected by the Australian Prudential Regulation Authority (APRA) to provide a snapshot of the major insurers’ performance and their ranking in the market. While IAG and Suncorp reign supreme, the various measurements reveal some insurers doing better in some areas than others. For example, rankings for gross earned premium and underwriting results are topped by IAG, while Suncorp takes the leading position for investment income and net profit. QBE and Allianz Australia also feature prominently, while branches of overseas insurers and insurance operations owned by the banks and motoring groups fill out the remaining places in the tables. The results in our table are based on company information for the financial years ending in 2013. The APRA data is based on reporting years ending in March, June, September and December and uses individual insurer accounts rather than consolidated group results. Transactions between related entities within the same insurance group are included in the results. The APRA company-level financial performance statistics cover a total of 212 entities, including the niche insurers and subsidiaries owned by parent companies. Reinsurers are listed in the APRA report, but are omitted in the top 10 rankings compiled by Insurance News. Swiss Re International is included as an insurer, separate from its reinsurance business. Our table also highlights the extra IAG business that will result from its takeover of the Wesfarmers underwriting operations last December – a transaction that was finalised in June. The table for gross earned premium shows IAG with a collection
of $9.46 billion, well ahead of $7.63 billion for Suncorp, $5 billion for QBE and $3.84 billion for Allianz. Wesfarmers General Insurance earned $1.33 billion in premiums and Zurich $1.29 billion. Filling out the remaining Top 10 places are Ace, CommInsure, AIG and Westpac. The most recent APRA company-level data includes IAG companies such as Insurance Australia Ltd, IAG Re Australia, Swann, CGU and CGU-VACC. The data compiled by Insurance News also includes a 70% share from the company’s Insurance Manufacturers of Australia joint venture with RACV. Suncorp is included in the statistics as Suncorp, GIO General, Australian Associated Motor Insurers (AAMI), Australian Alliance Insurance Company and AAI. The combined Suncorp companies top the gross incurred claims table with $5.79 billion, followed by IAG with $5.73 billion and QBE with $2.86 billion. Wesfarmers has claims of $872,885. Underwriting earnings are led by IAG, with $977.71 million, ahead of Suncorp, QBE and Allianz. QBE data is included by APRA under QBE Insurance (Australia), QBE Insurance (International) and QBE Lenders’ Mortgage Insurance. The Allianz figures include a contribution from CIC Allianz Insurance, a provider of Green Slip compulsory third party insurance in New South Wales. Genworth underwriting earnings of $160.1 million rank fifth, coming in ahead of Wesfarmers. The US-based company floated the local Genworth Mortgage Insurance business on the Australian Securities Exchange in May. Insurance businesses run by banks also feature in underwriting result listings, with Westpac’s general insurance and lenders’ mortgage businesses reporting a combined $119.46 million. The ANZ underwriting result, including OnePath, lenders’ mortgage insurance and ANZCover, which is in run-off, totals $101.44
This table contains 11 companies’ details so readers can see who would be in 10th place once the business of IAG and Wesfarmers is combined following the acquisition that was completed on June 30 this year
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August/September 2014
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million. CommInsure and Western Australia’s RAC Insurance round out the Top 10. Investment income earnings are topped by Suncorp with $1.41 billion, ahead of IAG on $663.96 million, and followed by QBE, Allianz and Genworth. Fifth place in the investment income stakes is held by Catholic Church Insurance, with its investments returning $98.03 million. Zurich follows on $93.8 million. BHP Marine ranks eighth, while medical indemnity insurer Avant is ninth, ahead of Wesfarmers. Suncorp’s strong investment income also propels it to the top of the net profit table with earnings of $1.61 billion. IAG earnings are $1.03 billion. Others in the Top 10 list are QBE, Allianz, Genworth, Westpac, Zurich, ANZ, BHP Marine and Wesfarmers. On reinsurance, IAG’s expenses total $3.42 billion, with recoveries of $1.55 billion while Suncorp has expenses of $1.01 billion and recoveries of $528.4 million. Several branches of overseas insurers feature in the reinsurance statistics. Ace has expenses of $338.72 million and recoveries of $106.93 million while the local branch of Munich Re subsidiary Great Lakes reports expenses of $317.29 million and recoveries of $132.77 million. FM Insurance, part of US-based mutual FM Global which has been in Australia for 40 years, has reinsurance expenses of $141.97 million and recoveries of $107.84 million. Overall, general insurer and reinsurer annual profits totalled $5.16 billion last year, according to the APRA numbers. Gross earned premium was $39.88 billion and gross incurred claims were $24.7 billion. Underwriting earnings totalled $4.12 billion and investment earnings $3.86 billion. The data also highlights the performance of more recent arrivals
insuranceNEWS
on the Australian insurance scene and those whose products are included in the challenger brand category. Auto & General’s gross earned premium was $272.67 million, for a profit of $13.66 million. South African personal lines insurer Youi had gross earned premium of $213.85 million, an underwriting result of $35.25 million ! and net profit of $157,000.
GI
in a snapshot Profit $5.16 billion Premium $39.88 billion Claims $24.7 billion Number of licensed insurers/reinsurers 212 For the year ended 31 December 2013
August/September 2014
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Easy Rider While other players in the commercial insurance market grapple with various distractions, Anthony Day sees Suncorp sitting in pole position By Michelle Hannen
WITH HIS FIVE-YEAR ANNIVERSARY AS Suncorp’s Commercial Insurance Chief Executive looming, it’s fitting that Anthony Day recently took delivery of a new motorcycle. His obsession with motorbike riding coincides with his time at Suncorp; Mr Day got his motorcycle licence just before starting with the insurer some six and a half years ago, and has owned three other motorcycles since then. “It’s a lot of fun,” he says of his escape. “I ride it once every three weeks on a weekend with a friend who has been my best mate since I was 15. We go out riding together for about three or four hours, and it’s the one time I don’t think about work, I don’t think about anything. I just think about riding because I’m scared I’ll hurt myself if I don’t.” But the latest acquisition is not just any old bike – the 1811cc Indian Chief Vintage – it’s the realisation of a long-held dream. “It’s got a lot of personal relevance to me, this bike. My dad, when he met my mum, had an Indian with a sidecar,” Mr Day tells Insurance News. “I always wanted to buy an Indian.” While the 2014 Indian Chief Vintage’s marketing tag is “style meets swagger”, describing Mr Day the same way might be taking things a bit far. But he is certainly affable and relaxed when meeting Insurance News, and, really, why wouldn’t he be? With major competitors CGU and the former Wesfarmers-owned insurers busy figuring out how to integrate the businesses, and the local operations of some of his global rivals dealing with internal issues, to say Mr Day is optimistic about the future might be an understatement. “There is no doubt there is disruption in the market,” he says. “Two carriers are going to go through a change that distracts them to an internal focus rather than an external
focus, and I think the important thing for companies like us is to be ready. “Business will be out there and brokers naturally will redistribute according to their customer needs. And there are pressures on other companies who have overseas exposures to ensure that they get a good return out of the Australian market.
“Two carriers are going to go through a change that distracts them to an internal focus rather than an external focus, and I think the important thing for companies like us is to be ready.” “So we think as long as we’re ready with our own service propositions and we’re stable, we’re in an ideal position to capitalise on that. That’s what I’m looking forward to over the next two years.” Fighting words indeed, but that’s not to say that the market upheavals have had no bearing on Suncorp as yet, with Mr Day charinsuranceNEWS
August/September 2014
acterising the run-up to the June 30 renewals as “the dash for cash”. “Obviously the Wesfarmers group was leading up to a change, ensuring their numbers were looking as good as possible. CGU were gearing themselves up as well. There was a fair bit of competition out there.” The recent renewals aside, Mr Day describes the commercial insurance market as having gone through a “pretty amazing period”. “We’ve seen a lot of capacity come into the market over the past 12 months, particularly in the reinsurance market, and that has obviously affected the risk appetite of a lot of companies.” New carriers and a stable claims environment have also added to pricing pressures. “That’s putting additional pressure on the local market here, particularly in the commercial lines. “But just because rates are coming down a bit in certain lines doesn’t mean the overall market’s softening,” he says. “In some lines they’re actually going up. “There’s inflationary increases going through. That’s our experience at the moment, but my own view is I think now June 30 is over it’s going to stabilise a lot.” But the opportunities for Suncorp’s commercial business do not begin and end with property and casualty. The sun is also shining on the company’s statutory insurance business. Suncorp is Australia’s largest personal injury insurer, and Mr Day believes there’s plenty of hay to be made there, too. A recent move into the Australian Capital Territory compulsory third party (CTP) market, which was previously 100% underwritten by NRMA Insurance, has paid dividends, with Suncorp grabbing an 11% market share in its first year. “That market had been asking for someone to go in there for many years, and 21
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Relaxed about the pace of change in reinsurance Working with the reinsurance markets is another key facet of Anthony Day’s role at Suncorp. His responsibilities extend to buying reinsurance for the entire Suncorp group. That entails managing the largest catastrophe reinsurance program in the world, providing him with a unique vantage point from which to pass comment on the future direction of the global reinsurance market. While the influx of capacity into the market – particularly as a result of yieldchasing in a low interest rate environment by US pension funds – has been well documented, the longer-term tenure of that capital is more hotly debated. Mr Day says the market’s newest entrants are proving their intentions by recruiting talent from traditional reinsurers. “This year on our reinsurance trip it was very obvious that the skills, capabilities and the knowledge of these capital markets is increasing dramatically.” And he believes this is just one indicator of a permanent shift in the way reinsurance is handled. To further support this argument, Mr Day points out that the sums of money involved are relatively minor in comparison to the total amounts under management by the pension funds. “There’s trillions of dollars tied up in these funds, and we’re talking a very small part of those trillions. So any volatility in that is just their way of diversifying themselves.” The impact of the new capital – which thus far has been spared significant catastrophe losses – is that pressure is increasingly being put on traditional players to lift their game. That’s good news for big buyers like Suncorp, with the newcomers driving innovation up – and pricing down – in the broader market. “As a global buyer, I’m feeling pretty good about it because I see innovation coming through and I see capacity there. We will always be a big capacity buyer so I need to ensure that there is long-term capacity available.” That said, Suncorp still takes a fairly conservative approach to its reinsurance buying. “We will continue to buy the majority of our program through the traditional markets, but we will explore the alternative capacity if they meet the right need for us – which is more about whether there is a better way to manage our risk. “I’m yet to find a compelling reason for why we would need to move outside the traditional markets, other than that there’s new capacity and you get to know them and they get to know you. “That is nice, but it’s not compelling for me yet.”
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“I saw an organisation that had every capability in the world but they just hadn’t organised themselves in the right way.”
eventually we found a way that we could do it in an effective manner, and we’ve been extremely successful,” he tells Insurance News. Mr Day says the precursor to Suncorp’s ACT move was the shift away from a scheme-by-scheme approach to the statutory classes to a national approach within Suncorp. “The fundamental service they’re all providing is getting people back to work or back to life. So while scheme rules are quite different, the fundamentals of the business are exactly the same.” After many years of stagnation, the advent of the National Disability Insurance Scheme (NDIS) and the National Injury Insurance Scheme (NIIS) has kick-started reviews by state governments into the longterm feasibility of their involvement in the CTP and workers’ compensation insurance markets. At present, workers’ compensation schemes in New South Wales, Victoria, Queensland and South Australia are underwritten by their governments, as are CTP schemes in Victoria, Western Australia, Tasmania and South Australia. “Most state governments that are running a government scheme are going to look at the alternative of a privatised scheme,” Mr Day predicts. “That creates opportunities for companies who are well positioned, have great claims management and know how to run the best practice. “And that’s where we see a great opportunity for us.” Not surprisingly, Mr Day is a strong advocate of the view that privatised schemes are more cost-effective for the end consumer (and governments) than publicly owned schemes. “Under the private sector you’re going to see better competition, better innovation insuranceNEWS
August/September 2014
and an enormous benefit to the consumer,” he says. News that the SA Government will privatise its CTP scheme in 2016 has further buoyed Suncorp, with the company – along with several others – declaring its intention to enter that market when it can. “Having recently moved into a new market, we learned some lessons on the way and we think we’re really well positioned,” Mr Day says. That Suncorp is well positioned to take advantage of future opportunities is no happy accident. When Mr Day first joined the company, he describes feeling like “a kid with a cookie jar”. “I saw an organisation that had every capability in the world but they just hadn’t organised themselves in the right way.” What followed was a five-year simplification program which has ensured the business is “in great shape to capitalise on any market conditions, but in particular on a market where there’s some disruption and there’s business up for grabs”. An alignment of the underwriting, distribution and claims functions was followed by improved communication between each area. Mr Day says Suncorp’s determination to build a solid and stable leadership team have given brokers confidence in the consistency of the insurer’s delivery. “We’ve seen our customer and broker stats go up dramatically, and we’ve got our systems and processes working well.” The next piece of the puzzle involves a better segmentation of its customer base. “Traditionally we have been a distribution and product company but I talk about three layers of cake. “You can cut my business today by distribution and you can cut it by product. Now
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NOW TAKING ORDERS S SPECIALIST PECIALIST INSIGHT INSIGHT.. C COMPLETE OMPLETE SEC SECURITY URITY SU R A HOSPITALITY SURA H O S PITALITY IISS A N NEW, E W, SP SPECIALIST E CIALI ST UNDERWRITING UN DER W R ITING AG AGENCY E NCY CCREATED RE AT ED BY TH THEE AAMALGAMATION M ALGA M ATION OF W WELL E LL ES ESTABLISHED TABLI S H ED UNDERWRITING UN DER W R ITING AG AGENCY E NCY BUSINESSES. BU S IN ESSES .
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AL ALAN AN M MACKAY A C K AY UN UNDERWRITING D E R W R I T I NG D DIRECTOR I R E C T OR
D DEAN E A N FIDDES F I DDE S NA NATIONAL T IONAL M MANAGER ANAGER
BRUCE GIBBS BR UCE G I BB S UNDERWRITING U N D E R W R I T IN G MANAGER MANAGER
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TTELEPHONE. E L E P H O N E . 0033 8823 8 8 2 3 99402 402 MOBILE. M O B I L E . 00467 4 6 7 0059 5 9 599 599 EEMAIL. M A I L . DDEAN.FIDDES@SURA.COM.AU E A N . F I D D ES @ S U R A . C O M . AU
TTELEPHONE. E L E P H O N E . 0022 9930 9 9 3 0 9547 9 5 47 EEMAIL. M AI L . BBRUCE.GIBBS@SURA.COM.AU R U C E .GI B B S @ S U R A .C O M . A U
Sura Hospitality P/L ABN: 21 0 051 51 930 10 105 5 AFSL: 255319 arranges this insurance ffor or certain Underwriters Underwriters at Lloyd’s. Lloyd’s.
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Getting to know Anthony Day Sporting team: The Brisbane Lions AFL team. Words to live by: “You’re dead a long time so you might as well enjoy it while you’re here” – a phrase my dad often used. Something people don't know about me: I’m one of 10 children. I have seven sisters and two brothers.
what I’d like to do is get a third layer of the cake and cut it by customer – to really understand the customers we have. “That’s the next evolution for us and that’s really where a lot of our focus is now.” To do that Suncorp is adopting an approach that classifies customers according to an “insurance persona”. To demonstrate what he means, Mr Day lists just three of the various personas identified and used by Suncorp. One is “cynics” – customers who doubt the value of insurance, possibly due to a bad experience; another is “tick-a-boxes” – customers who want to hear a few options to allow them to check a box and move on; and another is “mechanics” – customers who want to get into the detail. Mr Day says the key is to identify the customer type as early as possible during a conversation, to allow staff to respond to the persona type most effectively rather than fall back on a standard script. These efforts are largely focused in the direct market. While brokers may be wary of an insurer working in the intermediated market referring to direct products, Mr Day says brokers shouldn’t feel threatened by the expansion of direct commercial business in Australia. “Brokers will always be our largest channel, but there are other commoditised products or simpler products that other channels are more likely to be aligned to,” he says. “That’s where I think direct works pretty well. “If someone wants to buy online, they can. If someone wants to speak to a contact centre, they can. If someone wants to go to an adviser, they can. And if someone wants totally independent advice, they can get it. “So no matter how a customer wants to buy we need to be able to cater for that.” 24
Conversely, with the proliferation of underwriting agencies being formed by brokerages, Mr Day says brokers are increasingly creeping into traditional insurer territory, further blurring the boundaries. “Once a cluster group was purely a distribution source for us, but they’re now also a competitor in some respects. That’s a new
“Brokers will always be our largest channel, but there are other commoditised products or simpler products that other channels are more likely to be aligned to.” dynamic that’s getting bigger and bigger.” Mr Day says that ultimately the customer is the driving force behind the crossover. “Being close to the customer is obviously incredibly important and I think that’s why you’re seeing brokers and the big cluster groups building their capabilities and adding more services.” insuranceNEWS
August/September 2014
But he is pragmatic about the situation. “You can argue, kick and scream, but it’s about how you work in with those [players], and I think that’s really what we’re focused on. “What’s the key role we should play, what’s the key role a broker should play and who is in the best position to play those roles? “That’s really what all insurers should be focused on – ‘how do I adapt to the varying distribution channels that are out there?’ – because customers’ preferences and needs are changing.” He describes the present competitive environment situation as a period of “settling down”, but says that ultimately there will be “less duplication between what the intermediaries do and what we do”. And it’s not just brokers putting the squeeze on insurers. With global market capacity at an all-time high, reinsurers are increasingly looking to get a slice of the primary market, too. “So at two ends of the spectrum we’re seeing more competition,” Mr Day says. After five years as commercial chief, and with the business transformation puzzle almost complete, Mr Day still finds his job full of opportunity and new ideas. The challenge for him now, he says, is to “take this business, capitalise on it and take it to the next level”. “We’ll continue to change because the market’s changing. The environment we’re operating in is changing constantly. You need to adapt to it and those that don’t adapt are the ones that are going to be left behind.” Perhaps this easy rider is indeed content with a future in cruise control, driving the evolution, rather than revolution, of ! Suncorp’s commercial business.
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NOW BOARDING
WE’RE TRAVEL INSURANCE SPECIALIS SPECIALISTS. TS. OUR O UR PRO PRODUCTS DUCTS IINCLUDE: NCLUDE: C CORPORATE ORPORATE TRAVEL TRAVEL INTEGRATED INTE GRATED THROU THROUGH GH YOUR BRO BROKING KING SYSTEM, SYS TEM, E ECOMMERCE COMMERCE R RETAIL ETAIL TTRAVEL, RAVEL, KI KIDNAP DNAP AN AND DR RANSOM ANSOM AN AND DH HIGH IGH R RISK ISK TTRAVEL RAVEL SURA.CO SURA.COM.AU/TRAVEL M .AU/T RA V EL In pr providing oviding an any y financial services Sura Accident and Health P/L is an Authorised Representativ Representative e of Austagencies Pty Ltd (ABN 76 006 090 464, AFSL 244584)
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A gamble we don’t need to The Abbott government is tempted to close down the Australian Reinsurance Pool Corporation. Would this leave the nation exposed? By John Deex
THE TERRORIST ATTACKS OF September 11, 2001, changed the world – and the global insurance industry. Faced with massive claims, reinsurers were swift to see the scale of the risk that had emerged and promptly excluded terrorism from commercial coverage. Terrorism is hugely difficult for insurers to price. Events are rare, making it hard to measure frequency, and they are random. There is also limited opportunity to mitigate against the risk. The potential consequences are vast – damage from a nuclear attack in New York, for example, would cost an estimated $US778 billion. “No insurer or group of insurance companies could risk exposure to this 26
magnitude of loss,” says the American Academy of Actuaries. In response to the World Trade Centre attacks, what terrorism cover there was available basically vanished from the market. To ensure insurance could continue to cover at-risk buildings and cities – and at that stage that was pretty much anywhere – most developed nations set up various kinds of government-backed reinsurance schemes for terrorism losses, enabling insurers to make cover widely available. The Australian Reinsurance Pool Corporation (ARPC) was established under the Terrorism Insurance Act 2003, giving insurers the option of reinsuring risk by paying premiums to the pool. insuranceNEWS
August/September 2014
Several months ago, the Federal Government’s National Commission of Audit recommended there is “scope for a gradual Commonwealth exit” from the Australian scheme as private market capacity increases. In its list of “principal bodies for rationalisation”, the ARPC is second under “Abolishing”. This was swiftly followed by the federal budget announcement that Treasury will be allocated $1.2 million to assess the pool’s future. Does this mean the ARPC’s days are numbered? While it’s too early to say, the Government’s attitude to the ARPC has changed dramatically since the heady days of its foundation.
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A terrorist attack in Australia is inevitable: an Australian federal policeman sifts through the wreckage of the Sari Club in Bali following the October 2002 bombing that killed 202 people, 88 of them Australians. The Deputy Chairman of the Parliamentary Joint Intelligence and Security Committee, Anthony Byrne, warned Parliament last month that “eventually and inevitably an event of the magnitude of the Bali event” will occur in Australia
Reuters
“There are plenty of reasons why a cash-strapped government would see the ARPC’s reserves as a windfall worth having. But there are also plenty of unanswered questions.”
d to take Designed by Treasury officials under then-treasurer Peter Costello, the scheme was introduced to meet the needs of a diverse range of industries and businesses unable to find terrorism cover in the local property insurance market. The scheme has brought stability to the market, and in its own quiet way it has slowly accumulated a tidy reserve. It’s that reserve which appears to have piqued the interest of successive federal governments. The Federal Government has said it will take $450 million from the ARPC over the next four years “to compensate the Government for the $10 billion guarantee it provides”. The previous government gave the same reason when it budgeted for an annual $150
million dividend from the fund, or $600 million over four years. As the Property Council of Australia’s Acting Chief Executive Glenn Byres explains, “the [ARPC] fund has been seen as a ‘honeypot’ by successive governments who have raided it to plug budget holes”. There are plenty of reasons why a cashstrapped government would see the ARPC’s reserves as a windfall worth having. But there are also plenty of unanswered questions: • If the ARPC is abolished, will Australian insurers be able to obtain sufficient terrorism reinsurance? • While the global reinsurance market is remarkably buoyant at present, will it insuranceNEWS
August/September 2014
remain so in the future, or will investors move on as investment markets improve? • When the next big catastrophe comes along, will reinsurance markets revert to the previous model, where terrorism was an unacceptable risk? • And come to that, if it’s such a smart idea to abolish the ARPC, why aren’t the other major economies with similar terrorism insurance pool schemes abolishing theirs? All the parties interviewed for this article seem to agree on one point: It isn’t just known terrorist threats, but the unknown, that we need to insure against. So scrapping the APRC seems to be, at this stage, a gamble we just don’t need to take. 27
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Australian Reinsurance Pool Corporation Chief Executive Christopher Wallace
“We continue to provide economic resilience to the nation.” AUSTRALIAN REINSURANCE POOL Corporation Chief Executive Christopher Wallace is blunt when asked if the closure of the ARPC would really be such a sensible move. “Of course it’s not.” He tells Insurance News the National Commission of Audit recommendation was “very heavily qualified” and really only suggested the abolition of the ARPC if market value no longer existed. Dr Wallace, an economist, has only been in the job since December. Formerly the general manager for benefits management at health insurer HCF, he has worked in the insurance sector for 25 years. He is swift to remind Insurance News that the commission of audit made a recommendation – it’s not government policy. He says the impending review of the pool is simply procedural. Such assessments take place as a matter of course every three years. “In our view there continues to be market value [in the ARPC],” he says. “The size of the potential loss is far greater than the capacity within the insurance industry.” While he acknowledges some examples of individuals getting terrorism cover, he warns it’s not necessarily available in the broader market. “We continue to provide economic resilience to the nation.” Dr Wallace says the ARPC can offer funding of more than $13 billion – made up of retrocession reinsurance of $3 billion and the Commonwealth guarantee of $10 billion. This covers 99% of possible scenarios, he says. “Even if there were [a major terrorist event in Australia that damaged or destroyed property] the Government would not lose out – the ARPC would draw on the Commonwealth guarantee but then repay the money over a period of time. “If there is an event our premiums would triple, as agreed, and we would use that money to pay back the Government.” He says the pool’s retrocession reinsurance of $3 billion is not enough. “We have a detailed knowledge of the capacity out there because we are purchasing all that is available. “The pool does not cover nuclear or radiological events, but we look at a range of
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scenarios and there are many that go way beyond $3 billion.” Supporters of the US scheme say the expiration of its Terrorism Risk Insurance Act would hit the availability of cover and have a devastating impact on the wider economy. The Australian situation is no different, says Dr Wallace. “There remains a real threat which still needs to be addressed. If we didn’t have a pooling mechanism we’d be the only Western country not to have one. “It is an important way to mitigate these man-made catastrophes. They cannot be predicted like natural catastrophes.” He agrees the terrorism reinsurance capacity that may be available in global markets would disappear overnight in the event of a major terrorist attack in the West. “Yes there is capacity today, but if there was an event that would no longer be the case.” The ARPC’s latest strategic plan outlines ambitions for expansion. Dr Wallace says “notable risks”, including high-rise residential and mixed-use residential and commercial, are not covered under the scheme. “We cannot cover [those risks] under the legislation as it currently stands. This would be a small increase in the scheme but an important one.” He says the proposals may be considered under the Treasury review. If the Terrorism Insurance Act continues but the pool does not, then the insurance industry would bear the risk, Dr Wallace says. But if insurers are allowed to exclude terrorism, property-owners will be left exposed. “That would have an impact on financing confidence for major developments. Would large developments get financed if there was that kind of risk? “In a purely free market CBDs would not be insurable.” Dr Wallace says there is no financial argument for withdrawing from the scheme. “We are fully self-funding – we have paid the Government $800 million over a short period. If we were not here it would worsen the Government’s budget position. “In our view the pool is equitable because it spreads the risks across all the parties involved.”
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Willis Re Head of Broking Glen Riddell (left) and Aon Benfield Chief Operating Officer of Analytics Asia-Pacific Rade Musulin
Property Council of Australia Acting Chief Executive Glenn Byres
“Terrorism markets have recovered and can offer increased capacity.”
“It would leave our major cities without the means to rebuild.” THE PROPERTY COUNCIL OF AUSTRALIA PLACES considerable reliance on the benefits of Australia’s homegrown terrorism reinsurance pool. As Acting Chief Executive Glenn Byres explains it, the pool underpins the country’s economic stability, and disengaging from it could be catastrophic. “Terrorism risk would be uninsurable, and new investment in Australian commercial property would unravel overnight,” he tells Insurance News. “Firms would rush to reallocate capital to the overseas markets that do have government-backed terrorism reinsurance. “Most importantly, it would leave our major cities without the means to rebuild should the unthinkable happen.” Mr Byres says the 2012 review of the Terrorism Insurance Act concluded there was a significant and ongoing shortfall in reinsurance capacity for terrorism risk at affordable prices. “While that remains the case it is critical that the ARPC is retained to underpin our economic resilience to terrorism incidents,” he says. “The adequacy of reinsurance capacity will be reconsidered over the coming year as part of the ARPC’s triennial review. Solid evidence of market capacity would need to be found before the ARPC model could be tinkered with.” The Property Council is highly critical of the $450 million payments from the ARPC to Government outlined in this year’s budget. “The ARPC has been capitalised using levies on commercial building owners,” Mr Byres says. “Unfortunately, the fund has been seen as a honeypot by successive governments who have raided it to plug budget holes. The current federal government intends to siphon $450 million over the coming four years alone. “Any conversation about the future of the ARPC needs to start with how we stop the pilfering of industry funds. “We also need a plan for the repayment of those specialpurpose funds if and when the scheme winds up.
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REINSURANCE BROKERS MIGHT BE EXPECTED TO PUSH THE AVAILABILITY of terrorism reinsurance in global markets, but they’re nevertheless cautious. Willis Re Head of Broking Glen Riddell believes there is sufficient capacity in private terrorism markets, which have also adapted to changing conditions. “There is certainly a considerable amount of capacity available in the private market, and typically in these circumstances additional capacity will flow into the market to meet demand,” he tells Insurance News. “Globally, there is excess capital in insurance and reinsurance markets that can be deployed.” Mr Riddell says insurance and reinsurance markets now place greater reliance on modelling, and terrorism is no exception. “Today modelling enables underwriters to not only quantify their exposures but provide a greater level of confidence in their pricing of exposures.” Rade Musulin, Aon Benfield’s Chief Operating Officer of Analytics Asia-Pacific, agrees with Mr Riddell on the markets’ ability to adapt to changing conditions. “There is no doubt that terrorism markets have recovered and can offer increased capacity for the peril,” he tells Insurance News. While it was previously ignored, policies and coverages have now been developed for the exposure, underwriters are more knowledgeable and models have been created and upgraded. Substantial mitigation strategies, such as increased security at airports, have also been put in place. All this means most countries are better equipped to handle wellunderstood terrorist threats than they were following the 9/11 attacks. So, the big question: Is the insurance industry ready to stand on its own two feet? Not yet, says Mr Musulin. “The more important question is whether we are able to cope with future terrorist threats… without unacceptable disruption. “Unfortunately, the answer to that question is at best unclear and is likely to be no. “Because of that it is in the Government’s interest to maintain the infrastructure to partner with the insurance industry to assure a supply of terrorism insurance at affordable prices. “But the specific scope and structure of such programs should be subject to periodic review.” August/September 2014
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The value of continuing education Continuing education and professional development are hallmarks of insurance broking.
This accords with a recent ABS study that found, ‘…further training such as work-related training, is vital in maximising people’s capabilities and increasing productivity and workforce participation.’1 While brokers are licenced through ASIC, most recognise the value of attaining additional qualifications. They thus seek certification through one of two main accrediting bodies – ANZIIF or NIBA. In doing so, they set themselves up for life-long learning. Continuing education both equips brokers with the latest innovations to best serve their customers and contributes to their personal growth. Education and training are recognised as ‘major contributing factors to personal and economic well-being’ and therefore the emphasis on education in the industry is positive all round. Education Advocates There are many champions of further education throughout the sector. “Participation in continuing professional development is one of the key aspects of professionalism that clients expect from their insurance brokers. And brokers recognise the personal and business benefits to be gained,” said Dallas Booth, CEO NIBA. “Our brokers look for positive learning outcomes by undertaking quality professional development activities that are well structured and relevant to their particular business and career needs,” he added. The team at ANZIIF concurs. “The industry now changes very quickly, so professionals need to keep learning to perform optimally and offer maximum benefit to their employers and customers,” said Anton BartonHarris, general manager, education, events and international. “Continued learning also has the benefit of increasing engagement with industry developments, which improves job satisfaction and encourages innovation,” he said. The Challenge The challenge for underwriters is to keep the continuing education of their intermediaries both relevant and stimulating. Allianz is one company that takes its role of training brokers at all stages of their careers very seriously. It began with a series of training days back in 2009, which have continued to go from strength to strength. “Our training days have evolved over the past five years,” said Allianz’s managing director, Niran Peiris. “We listen to feedback and constantly refine the content of the days to suit the needs of our broker partners,” he said. Importantly, different insurance professionals are at various stages in their development and have different development needs. The 2013 NIBA Broker Market Survey revealed 29% of respondents had been in the industry over 25 years, while 11% had been in the industry less than three years. “We recognise the need to cater for the different levels of experience of attendees. So we introduced the concept of tailored education streams to our training days several years ago,” explained Peiris. These different training streams allow continuing education to be pitched at the level that best suits each individual broker’s needs.
Allianz Young Eagle participants: (L-R), Megan Henry, Trans-West Insurance Brokers; Noel Kelly, Austbrokers AEI Transport; and Carlo Gentili, GSA Insurance Brokers.
In 2014, the Allianz training days offer four different streams. This allows training to be simultaneously targeted across a broad spectrum of industry participants. Streams are aimed at all levels; from relative new comers, to more experienced professionals, to the executive level. “We are also able to provide programs tailored to the needs of various broker segments,” Peiris said. 1 4234.0 - Work-Related Training and Adult Learning, Australia, Apr 2013 2 http://www.ibisworld.com.au/industry/default.aspx?indid=1891 and NIBA Broker Market Survey 2012.
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Paul Clitheroe addresses the audience at an Allianz Training Day
Allianz sources the best talent, both internally and externally, to provide relevant training day content. This year, Olympic Champion Alisa Camplin will share her formula for success. While renowned thought leader Matt Church is again facilitating the days. He will also be leading a number of thought provoking workshops designed to challenge the way attendees think. Training Delivered Online 24/7 Training Days are an excellent way to deliver continuing education. With both ANZIIF and NIBA members needing 25 points or hours of professional development respectively per year, however there is also a need for flexible training options. Allianz has addressed this need by making its eCampus online training available to all Blue Eagle partners. Through eCampus, brokers and their staff have access to online product and professional development training 24/7. Harvard Manage Mentor® provides training in everything from writing through to negotiating skills. Plus detailed product training allows brokers to understand the ins and outs of the different policies. Training Leaders of the Future “Any well rounded training program has to look at the needs of young insurance professionals,” said Denis Morrissey, general manager B&A Commercial. The Young Eagle program, introduced in 2011, is designed to provide world class training to the leaders of the future.
This national annual event involves a competition between state teams. The teams participate in a two day simulation during which they run a general insurance company. “Our Young Eagles are mentored by an experienced member of the Broker and Agency Commercial team and have to account for their decisions to a ‘board’ of Allianz senior executives,” explained Morrissey. “This intensive training program gives our future leaders a glimpse at what it takes to account for their decisions,” he said. “With the establishment of the Young Eagle Alumni, we are providing young professionals with the chance to come together and network,” said Morrissey. State-based functions featuring local thought leaders allow the Young Eagles to learn from local experts. National Partner Education Summit Delivering an education program to broker principals who have themselves become mentors is yet another challenge for underwriters. Allianz achieves this through its National Partner Education Summit. “This forum allows recognised thought leaders in the business community to deliver key economic, political and market commentary to some of the most experienced brokers in the nation,” said Adam Farr, national manager cluster groups and national sales program. Allianz strives to offer its broker partners the best training and development opportunities in the market. Whether they are just starting out, or have spent their entire career in the industry; Allianz training days aim to deliver something relevant, stimulating and thought provoking.
Brokers are important to the economy2 • There are over 2,000 registered insurance broker businesses in Australia • Brokers generated AU$12 billion dollars in revenue in 2014 • Brokers place about 90% of commercial insurance premiums in Australia • The industry employs 24,589 people.
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The dangers ahead
The latest risks identified are: Cloud computing security (High impact, 0-3 years): Shared cloud computing fuels risks of lost or leaked data and hijacking of resources. Partial business interruption, provider liability claims and reputation and financial damage could be the result.
What will happen if smart cities go haywire, or someone gets on your cloud account? Swiss Re sees a world of new risks
Contagious emerging market crisis (High impact, 0-3 years): Withdrawn funds, commodity price slumps and local woes could upset emerging markets. Premium and revenue growth could be threatened and companies may miss targets if problems spread.
By Wendy Pugh
Eurozone crisis leading to deflation (High impact, 0-3 years): A faltering European economic recovery could spark a deflationary spiral. Reinsurers and insurers could miss premium and revenue targets and the asset side of balance sheets would suffer.
INSTRUCTIONS FOR LIVING IN THE FUTURE could include don’t drink the water, eat the food or breathe the air. And at all costs avoid the e-cigarettes. Environmental contamination, health risks and technological malfunctions feature in the latest Swiss Re Sonar New Emerging Risk Insights report. A total of 26 themes are included, and while some may never materialise, others are flagged as having a potential impact within three years. “By sharing our findings we hope to raise awareness for these specific risks,” Head of Group Qualitative Risk Management Philippe Brahin says. Forewarned is forearmed, and for the insurance industry there are also business opportunities in finding ways to tackle emerging risks. “There is no silver bullet that will work in all cases – but sharing knowledge is a good first step to prepare for what might lie ahead,” the report says. Swiss Re used a web-based platform to collect emerging risk “signals”, which are assessed and prioritised in consultation with specialists from various insurance areas. “Today’s risk landscape is changing fast, driven by new economic, technological, sociopolitical, regulatory and environmental developments,” the reinsurer says. “The risks that emerge from these changes are often difficult to quantify, but they may have a major impact on society and the insurance industry, across all lines of business.” Risks highlighted in previous editions of the Swiss Re report are excluded this time around to focus on fresh issues. 34
Short-termism of macro-policy measures (High impact, 0-3 years): Political inertia since the global financial crisis has led to central banks engaging “in the greatest monetary policy experiment in history, with unknown long-term consequences”.
Air pollution as mortality driver (High impact, more than 3 years): Health problems may drive litigation against polluters, car manufacturers and energy companies. Increased disease and mortality may affect business and life and health covers.
Concussion crisis in sports (Medium impact, 03 years): US contact sport injuries are rising as more people participate and athletes become stronger. New types of concussion injuries may also be detected, boosting workers’ compensation and liability claims.
Democratisation of genetic testing (Medium impact, 0-3 years): Easy and cheap genetic testing increases product liability and professional risks in cases of false results. Medical malpractice claims may be based on delayed diagnoses or wrong interpretations.
Digital slander (Medium impact, 0-3 years): Anyone can cause reputational damage with attacks through social media. Privacy breaches could increase claims against data providers and there’s potential for increased data theft and other costs.
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E-cigarettes (Medium impact, 0-3 years): Liability claims similar to those related to tobacco may emerge if e-cigarettes prove more harmful than presumed today. The inhalers, which vaporise a liquid solution, are increasingly popular.
Financial consumer protection regulation (Medium impact, 0-3): Regulators face pressure to protect consumers and restore their confidence, leading potentially to more frequent product liability and recall claims and increased intervention in product innovation.
From closed to open business models (Medium impact, 0-3 years): Sharing ideas and technologies could be detrimental if unique company information is released widely. But benefits include reduced costs, fresh perspectives and faster product development.
AGILE RELIABLE LOCAL
Food and water safety trade-offs with growth (Medium impact, 0-3 years): Safety issues loom from land cultivation and water sourcing to food processing and distribution. Claims may rise against polluters, farmers and food producers while recalls and crisis management may increase.
Secession risks in Europe (Medium impact, 0-3 years): The definition of Europe is under challenge, with Russia’s move on the Crimean Peninsula providing an extreme example. Investors face regulatory uncertainty, economic risks and potential social unrest.
Access Arch, and you ignite a world of solutions. We stand ready to respond to your facultative, retail and agency needs. ArchExpertise®
“One size fits all” regulation (Medium impact, 0-3 years): Early success in highlighting insurer differences from other financial institutions is fading as policymakers focus on simplicity and comparability. Inappropriate regulation could cost the industry and its clients.
Plant pathogen threatens rubber production (Medium impact, 0-3 years): Experts say a pathogen that attacks rubber trees will reach Asia’s plantations. A rubber shortage would hit aviation and other industries as there is no synthetic substitute for aircraft tyres.
Aluminium health risks (Medium impact, more than 3 years): The metal is used in appliances, medicines and antiperspirants but it’s also a neurotoxin. Accumulations in the body could have unknown long-term consequences and far-reaching liability implications.
Smart cities (Medium impact, more than 3 years): Sensors, webcams and internet data may increasingly drive traffic control transportation and other city services, but could also lead to cascading effects and large losses if systems malfunction.
(02) 8284 8400 | www.archinsurance.com.au ©2014 Arch Underwriting at Lloyd’s (Australia) Pty Ltd
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Demographic inclusion at the workplace (Medium impact, more than 3 years): Workplace inclusion across generations will allow new career paths and working models to evolve as lifespans increase. Companies which fail to adapt may face a talent gap.
Urban farming (Medium impact, more than 3 years): Bringing farming into city landscapes, such as through high-rise greenhouses, raises new property risks and contamination dangers while urban animal husbandry may increase pandemic risks.
Action cam liability (Low impact, 0-3 years): Cameras attached to planes, cars cycles, boats and surfboards may incite risky behaviour. Manufacturers could be held liable for damage related to action cam use, while health risks may rise.
Epigenetics – genome modification as a liability loss driver (Low impact, 0-3 years): Scientists have identified chemicals that may affect gene expression and some studies are showing correlations and effects which could have implications for insurers including new product liability losses.
From 3D to 4D printing (Low impact, 0-3 years): Combining 3D printing with advanced materials that can self-assemble into predetermined shapes or change with certain conditions brings added complexity. Possible defects may be even more critical.
Missing aircraft triggers technological change (Low impact, 0-3 years): Supplementing the black box flight recorder with new technology to keep track of long-haul planes may increase costs and create new exposures regarding data policy.
Collapse of oceanic ecosystems (Low impact, more than 3 years): As oceans become ever more polluted, the marine ecosystem is harmed and biodiversity threatened until self-recovery may no longer be possible, having implications for social and economic well-being.
Enhanced humans (Low impact, more than 3 years): Technologies to improve body functions beyond human levels increase liability exposures around malfunction and faulty design while also raising reputational risks from supporting ethically sensitive projects.
Methane hydrate – an upcoming energy source? (Low impact, more than 3 years): Abundant supplies of methane hydrate are trapped in submarine crystal lattice structures similar to ice, but extraction could cause ocean spills and may boost greenhouse gas emissions.
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We did. ‘When I obtained my AFSL, I was looking for a broking group that gave me access to general industry support, enhanced policy wordings and ongoing training via national and local conferences & training days. AIMS and IBNA have ticked all those boxes.’ Anthony Murphy Red Star Insurance AIMS and IBNA member
‘Since joining IBNA we have thoroughly enjoyed the camaraderie and knowledge sharing amongst the group. It has been a real boost for our staff training and development program and our clients have enjoyed industry leading policy wordings. The AIMS Annual Conference and the regional gatherings are fantastic and present a great opportunity to mix with other like-minded brokers.’
‘Joining IBNA approximately 18 months ago was a great decision for us. Our partnership with AIMS and IBNA has provided us with numerous benefits from market leading tailored policy wordings; training and developments days; extensive compliance and HR support; and strengthened partnerships with major insurers, just to name a few.’
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Man of many talents Simon Cook manages a major brokerage and a leading warranty company – and still finds time to represent yet another industry By Terry McMullan
SIMON COOK IS ONE OF THOSE INSURANCE brokers whose relaxed demeanour and engaging manner could tempt you to forget that he’s also a very successful businessman. And the way he achieved that success also says much about the astuteness of his mentor, Ian Frith. Mr Cook is Chief Executive of one of Australia’s largest independent brokerages, IC Frith & Associates. Founded in 1983, the company today has operations across Australia and in six countries, employing around 300 people. But insurance was the last thing on Mr Cook’s mind when he moved from Melbourne to Sydney in 1987 at the age of 20, shifting quickly from a retail job into selling boats “because that’s what my father did”. “My first job was selling trailer boats on Parramatta Road on a commission-only basis. And over time, I progressed to working at the factory outlet for Mariner Cruisers at Pittwater. “But that was in 1991, and there was a big recession back then. Boat sales weren’t that great, especially as I was working on commission, so I started looking around for a job paying a regular wage. “Club Marine offered me job as an underwriter, knowing I had a pretty good knowledge of boats.” That “pretty good” knowledge has led to a career-long involvement in the boating industry, which runs in parallel with his management of IC Frith. [see panel opposite] Mr Cook worked for Club Marine for 14 years, ending up as New South Wales state manager. Along the way he became good friends with Ian Frith, the largest pleasurecraft insurance broker in the state, and even then a power in the broking sector. (For those who came in late, Ian Frith was one of the founders of Steadfast and grew a reputation for being able to spot business opportunities in insurance and develop their potential. Now retired from broking, he’s actively involved in a range of enterprises, including taking a leading role in the development of the alpaca farming industry in Australia.) “Ian had an industry facility for liability and he also did some warranty business on behalf of marine companies,” Mr Cook says. “We had a good working relationship.” 40
In July 2004, Mr Frith raised an issue that would change Mr Cook’s career. “It was over lunch, and late into the lunch he started discussing me coming to work for him. I said, ‘Mate, ask me that when we haven’t had a drink, and we’ll discuss it then’. “A week later he sent one of his employees – a good mate of mine – over to see me with a contract in his hand. When I spoke to him about it, Ian said, ‘I want you to start Victoria for me’. So I took the job and moved back to Melbourne.” For the following three years Mr Cook worked on the IC Frith operation in Victoria, buying brokerages and building business relationships – a valuable experience for what was to follow. In 2007 he returned to Sydney – much to the delight of his Sydneysider wife Natalie – to run the company’s marine book. But within a year he was the chief executive, with Mr Frith choosing to step back from running the business. “It was a pretty interesting way we went about it, I guess,” Mr Cook tells Insurance News. “I just put my hand up. I said to Ian, ‘Listen, I think I could run this company. So if you’re waiting for somebody to ask, I reckon I could do it.’ “So that was it. He took a bit of a punt on me, and we’ve gone on from there.” That “bit of a punt” has proved to be a very big kick. Mr Cook says that in the seven years he has been running the company with his fellow executive shareholders (Mr Frith sold the company to Mr Cook and other management shareholders, but retains a shareholding) IC Frith & Associates has grown 235%, its profitability has improved substantially and the company’s balance sheet value has tripled. The company has based its growth on broking – it is among the top 10 in Australia and New Zealand by revenue – and on its warranty business, which is thought to be one of the largest in the southern hemisphere. While the broking and warranty operations are headquartered in the same building in the northwestern Sydney suburb of Baulkham Hills, the contrast between the quiet and orderly administration offices and the hectic activity of a large and very busy call centre one floor below is remarkable.
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Simon Cook’s early career in the marine industry, from boat salesman to pleasurecraft insurer, has given him an unusual profile in the boating industry – unusual, that is, for an insurance broker. By the time he joined IC Frith, Mr Cook was well known and respected in the pleasurecraft industry. That recognition saw him elected to the board of the Boating Industry Association of NSW in 2001. He has continued on the board throughout his involvement with IC Frith, and today he’s Vice-President of the association and also its longest-serving director. He represents the association on the board of the Boating Industries Alliance Australia, and in June last year Mr Cook was appointed to the board of the International Council of Marine Industry Associations as the Australian representative.
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“It really is a bit like a big family business in a way, with family values... it’s tremendous that we’ve managed to keep that as the business has expanded.”
Mr Cook says the warranty business was started by Mr Frith 10 years after the broking company was established. He marketed the warranty scheme to major retail chain Harvey Norman, and that side of the business has developed hand in hand with the giant retailer. “Consequently as they’ve expanded around the world, we’ve follow them,” Mr Cook says. “New Zealand, Singapore, Malaysia, and now Slovenia.” Which explains why IC Frith & Associates is the only Australian broker to have an office in the former Yugoslav state, now a thriving member of the European Union. “There’s five Harvey Norman stores there now, and we support them there the same way we do anywhere else. It’s a beautiful, quite different country.” So 10 years after joining IC Frith, and seven years after taking up the reins as chief executive, does the Pittwater boat salesman ever feel surprised to find himself where he is now, running a major brokerage and service company? It’s a question that is met with a hint of steel behind the easy smile. “I don’t like to lose, so I don’t. I’ve never failed at anything I’ve set out to do. I’m always determined to succeed, and in this place we all work hard to succeed. “But I do think you’ve got to be relaxed in a job like this – it’s the way I want the people around me to be.” Mr Cook and his fellow executive directors have worked to retain the “family” feel of the business that was formed under Mr Frith. “It really is a bit like a big family business in a way, with family values,” he says. “We recently had an awards night for staff, and they prepared a video to play on the night that asked 40 people to use one word to describe he company and what it’s like working here. “And you know, 70% of them used the same word – family. “That’s quite a value – they’re not told to say it. It’s not like we’ve said, ‘we must have a family business’. I was really chuffed. “It’s tremendous that we’ve managed to keep that sort of value as the business has expanded.” This comment leads to a discussion on how IC Frith 42
the brokerage will keep growing in an increasingly competitive market. “Insurance broking is quite mature, and I think trying to keep getting double-digit growth has been difficult,” Mr Cook says. “The problem with continuing to grow is that you’ve got to look at [mergers and acquisitions] and that’s very difficult at the moment; the prices are quite high. The large predators in the market are making good deals very hard to find. “But there are those that don’t want to be in those larger groups, so they’re the ones that we’d like to talk to.” Otherwise, what about global expansion? “We already had a big New Zealand business through the Harvey Norman connection, and we’re actually quite a big broker there, too. “What we’ve done in Singapore is get that warranty beachhead and then put a broker in there. We’ve got a simple insurance broking licence – it’s not a big business, but it certainly opens us up to the Asian region.” IC Frith also looked at the Irish market, but backed away when Mr Cook realised “it’s even more of relationship business than we have here”. “It’d be really hard to make your way in the Irish market unless you know people. It would have been very difficult. “I just think you have to be patient about growth at the moment. There’s no rush.” With an enviably large list of middle market clients to look after already, Mr Cook nevertheless has plenty of ideas for expanding IC Frith & Associates further. Why not, for example, emulate what the company has already done in the recreational boating industry? “Pick an industry, specialise in it and deliver specialised products that match its needs,” he says. “Our strategy says we must be able to provide a certain amount of income from products that we provide to a percentage of the industry, or you don’t do it. So it comes down to having the right products and the best way to market those products. “We want to be the peak provider. That’s our focus, ! rather than going after everything.”
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How much is too much? Insurers are battling the many effects of new risk assessment rules By Wendy Pugh INSURERS ARE TAKING A DEEP BREATH and regrouping after tackling their first financial year under tougher rules aimed at shoring up the financial system and averting any future crisis. More complex capital calculations and reporting rules introduced by the Australian Prudential Regulation Authority (APRA) have left some wondering if the demands are out of hand and are unnecessarily hobbling the industry. Companies have reviewed and calculated capital levels, assessed risk appetites, stress-tested scenarios and battled with documentation as they look to the future of their businesses. “People have had to spend a lot of time and effort to get the new regime into place,” 46
Ernst & Young Oceania Insurance Leader Grant Peters tells Insurance News. “This is a major change, it is more complex than the previous regime and people are still getting a handle on it.” APRA’s life and general insurance capital (LAGIC) standards are part of an international reform trend ignited after the global financial crisis shook overseas financial institutions. Criticisms of LAGIC focus on the calculations of minimum prudential capital requirements and the range and complexity of compliance activity and documentation required. The process encourages companies to take a more rigorous approach to assessing their own risk appetite, strategies and capital requirements, but according to some executives it also generates extra expenses, takes up staff resources and may hinder insurers in expanding and competing. Suncorp Commercial Insurance Chief Executive Anthony Day and Personal Insurance Chief Executive Mark Milliner say in a letter to Financial System Inquiry Chairman David Murray that “while Suncorp supports strong prudential requirements, APRA’s latest insuranceNEWS
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reforms have introduced some inflexible frameworks which have created unnecessary costs for consumers”. APRA itself recognises the potential to improve the reporting side of the process, announcing a “holistic review” of appointed actuary and general insurance requirements. LAGIC came into effect on January 1 last year. The tougher standards apply regardless of company size, meaning smaller insurers in particular have faced extra consulting and advisory expenses and greater challenges from diverting management attention from wider responsibilities. “They are very detailed and sophisticated documents that you are required to produce,” an executive at a smaller insurer tells Insurance News. “They take a lot of work and I don’t have a department to do that. “Ultimately, it is the customer that pays for this, and then you are getting into arguments about the affordability of insurance.” Australia’s reforms come as Europe presses ahead with its tougher Solvency II standards and the United States grapples with regulatory changes. The banking sector has also gone through a similar process with the global Basel accords.
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M ore b usiness More business M ore o ften More often M ore v alue More value
“There was a need for a review of the capital requirements and the process that APRA has gone through has been a pretty good one, but we are probably at the threshold of regulation fatigue,” Actuaries Institute President Daniel Smith tells Insurance News. “We are at the point now where the insurance companies are saying, you have had your go and reviewed it all, but now it is time for us to be able to run our businesses.” Changes to the minimum prudential capital requirements under LAGIC include a new “horizontal” element to reflect the risks for insurers from potential numerous small events in a single year, adding to the calculations for large 1-in-200 year type catastrophes. Ernst & Young’s Mr Peters says the new standards are more risk-sensitive and increase the importance of diversification in achieving a more optimal capital result. As a result, companies are likely to increasingly look at various strategies to spread and transfer risk, including reinsurance and product development. Suncorp’s Financial System Inquiry sub-
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“This excessive regulation has resulted in our policyholders having to cover $20 million in additional charges that could have been avoided.” mission says the insurance concentration risk charge has forced it to unnecessarily change its reinsurance structure and buy two extra reinstatements upfront that are highly unlikely to ever be used. “This has been at a cost of some $20 million to the business, in order to avoid Suncorp having well over $100 million in unlikely capital charges,” the company says. “Ultimately, the cost of reinsurance is factored into insurance premiums. This excessive regulation has resulted in our policyholders having to cover $20 million in additional charges that could have been avoided.” The company also says inflexible capital frameworks introduced by the reforms are stifling innovation and efficiencies in the reinsurance market. IAG says the standards place a greater risk-weighting on its Asian joint ventures, while excluding almost all the economic value. It says the higher capital requirements then disadvantage the company versus European and US rivals as it pursues international expansion in the region. “It is necessary to ensure that Australian regulators do not impose significant regulatory burden and cost on Australian insurers that undermines international competitiveness,” the company says in its submission to the Financial System Inquiry. “What is needed is an approach to regulation that balances the objective of promoting financial safety with the need to minimise the adverse effects on efficiency and competition.” Global insurers with businesses in Australia also need to ensure capital is suffi48
ciently allocated to meet the local standards, potentially limiting their financial flexibility. Documentation surrounding the regulatory process includes the financial condition report (FCR), insurance liability valuation report (ILVR) and the new internal capital adequacy assessment process (ICAAP) report. The Insurance Council of Australia (ICA) says APRA’s review of the reporting requirements of actuaries and general insurers provides an opportunity to find some solutions to improve the process. “In the context of ongoing work with APRA on regulatory efficiency, ICA has raised a number of issues with the FCR, ILVR and ICAAP reports,” General Manager Policy Regulation John Anning tells Insurance News. These issues include duplication, unnecessarily detailed reporting requirements and the amount of work needed by insurers to complete the reports. The ICAAP reports are a key part of APRA’s aim for insurers to take a more rigorous approach to their risk and capital assessments and include an overview summary document and an annual report. Overall, APRA Deputy Chairman Ian Laughlin says the regulator is “quite pleased” with the way that the industry has managed the adoption of LAGIC so far, and ICAAP processes have led many boards to hold lengthy workshops, often with outside input. “We’d like to think that the changes we have introduced have helped lift not just the prudential soundness of insurers, but also general governance and management standards across the industry,” Mr Laughlin told an ICA seminar earlier this year. APRA’s report card to insurers on their first ICAAP summaries judges them as a work in progress. “This was the first attempt by insurers to produce ICAAP summary statements and, not surprisingly, the quality varied significantly,” the regulator says in a bulletin. “APRA’s general approach to the evolution of ICAAPs could be characterised as one of seeking continuous improvement both at an industry and individual-entity level.” The regulator has given some individual feedback on the more detailed annual documents and temporarily relaxed a three-month deadline for submitting financial condition reports amid deadline pressure concerns. Overall, APRA says ICAAP “needs to be a forward-looking process in which risk appetite, capital management, strategy and business plans are integrated and adequately documented”. insuranceNEWS
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One insurer’s suggestion to make the process easier includes using results from the first returns to give clearer examples or templates for exemplary ICAAP reports. The Actuaries Institute’s Mr Smith says APRA’s review of the documentation is welcome and could help insurers deal with the increased requirements and ensure the process generates the results intended. “Because of the amount of reports and the extent of extra work that has been imposed on some companies, there is a danger of the reports becoming very much compliance reports rather than adding a lot of value to the business,” he says. “While they are all a little bit different, lots of them are covering off the same sorts of things.” LAGIC reforms will also be overlaid by a new APRA risk management standard that takes effect from January across all sectors the regulator oversees, and which requires companies to designate a chief risk officer. APRA has rejected calls for the role to be undertaken by the chief financial officer, appointed actuary or head of internal audit. It says the chief risk officer should have a seat at the executive management table and report to the chief executive. But the regulator acknowledges potential difficulties for small and less complex businesses, and says it will consider requests for alternative arrangements on a case-bycase basis. Comments by Mr Laughlin indicate there are no further plans for significant change following the recent surge in reform activity, with the focus moving to fine-tuning. “We’ve had many policy changes over the last few years, as we have renovated the regulatory framework,” he says. “But we have largely completed that work – if you like, the renovation is almost complete, with just finishing touches required.” Still, that may be optimistic thinking. The international regulatory environment keeps changing and new capital standards for large global insurers are in the pipeline. It’s not yet certain how that will affect Australian companies. “Individual jurisdictions and regulators are much more globally connected and aligned now, and you can see that in everything that comes through,” Mr Peters says. “It is a journey that APRA and the global regulators are taking the financial services sector through.” Insurers would welcome some improvements to the system, but any breather from the pace of change when it comes to capital and risk regulation measures may be ! a short one.
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Pain that comes in waves The tsunami risk in Australia may be greater than previously thought, but is anyone taking the threat seriously?
A tsunami wave 7.9 metres high struck Steep Point, WA, in 2006
By Wendy Pugh
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HISTORICAL ACCOUNTS AND geological records show Australia is not immune to potential devastation from tsunamis, despite being lucky enough to avoid catastrophic damage in recent times. The Indian Ocean tsunami of 2004 and the devastation along Japan’s northeastern coast in 2011 reminded the world of the sea’s destructive power, but Australians typically view such an event as unlikely. “We tend to be a little complacent about things we know not too much about,” James Goff at the University of New South Wales School of Biological, Earth and Environmental Sciences tells Insurance News. “We are limited by our imagination.” A review of Australia’s tsunami database by Professor Goff and Catherine Chagué-Goff shows the country has experienced almost three times as many tsunamis as once thought. Their study of geological evidence and historical accounts since European settlement raises the estimated number to 145, up from 55 in a 2007 database. The research, published in the journal Progress in Physical Geography, finds NSW has experienced 57 tsunamis, followed by Tasmania with 40, Queensland with 26 and Western Australia with 23. The database is far from definitive, and the researchers would like to see it funded as a web-based resource that is searchable, updatable and available to parties including scientists, government bodies, the insurance industry and catastrophe modellers. Australia is not as tectonically active as Indonesia or New Zealand, but it is exposed insuranceNEWS
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to tsunamis generated near those countries. Other potential risks include waves caused by submarine landslides from the surrounding continental shelf, while the cause of many earlier events is simply unknown. The Bureau of Meteorology, which runs the Joint Australian Tsunami Warning Centre with Geoscience Australia, says the country is surrounded to the northwest and east by 8000km of active tectonic plate boundaries capable of generating tsunamis. One-third of earthquakes worldwide occur along these boundaries, and waves could hit Australia within two to four hours. In deep ocean a tsunami can travel at more than 900kmh, close to the speed of a jumbo jet, while in shallow water it is more like the pace of a fast cyclist. Unlike storm waves, the water movement reaches all the way to the sea floor. Damage from a tsunami and how far it extends inland can depend on the slope of the shore and the shape of the coastline and beach areas. “The impact of a tsunami hitting vulnerable, low-lying areas on the Australian coast could be significant,” the Bureau of Meteorology says. Australia’s relatively brief history since European settlement and its sparse population in remote coastal areas help obscure the potential risk, despite warning signs evident from earlier times. An earthquake off the Indonesian island of Java in July 2006 led to Australia’s largest recorded event – a tsunami rising up to 7.9 metres above sea level at Steep Point,
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the nation’s westernmost location. Professor Goff says the quake zone that generated the tsunami could cause much larger events, which would have wider repercussions for Western Australia, including at key gas production facilities and ports serving the mining regions. An earlier event was recorded at Norfolk Island in 1805, when a letter writer described an “unprecedented efflux” as water hit the military barracks and threatened the town. And newspaper reports from 1936 say four lives were lost when a steamer entering Port Phillip Bay was hit by a “huge tidal wave”, which rose suddenly out of a calm sea. Most of the tsunamis recorded around the Australian mainland are small, but they are significant for the clues they give to their potential sources. More research is needed to examine the risk of larger waves, of the kind that may have struck before European settlement. “Existing models simply do not produce large enough tsunamis to replicate the prehistoric record,” Professor Goff says. “So the models are missing something. “As the database grows and modelling is improved we can start to get a far better idea of magnitude and frequency from different sources.” The 2004 Indian Ocean tsunami – which killed more than 250,000 people, some as far away as South Africa – highlighted limitations in alert and response systems in Western Australia. The 2006 Java tsunami has also helped
steer research efforts towards the western coastline, but the database update in fact shows Queensland, NSW and Tasmania have recorded the most events. Possible tsunami sources for eastern Australia include the Puysegur subduction zone south of New Zealand and the Tonga Trench to that country’s north. “In prehistory there are geological hints that there have been quite big events that have happened – maybe four, five metrehigh waves that if you imagined them hitting Sydney would be a bit worrying,” Professor Goff tells Insurance News. He says the database update complements similar work undertaken for New Zealand, the Pacific region and Japan, and ideally it would be continually updated and improved as new information is discovered. A number of potential incidents have been excluded from the database pending stronger confirmation that they were tsunamis. Professor Goff suggests the Bureau of Meteorology could host a curated, interactive database, or in the private sector there could be a role for reinsurers and insurers. He says there is a risk people will seek out the information only after a serious event, because memories of recent catastrophes soon fade and highlighting the dangers of unpredictable potential disasters is difficult. “My message to the insurance and reinsurance industry would be that if you want this information it is there, and we are more than delighted to talk to people about it.” ! insuranceNEWS
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23 19 57 17 40 The number of tsunamis known to have reached the Australian coast, by state. The numbers include events that have hit more than one state
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A fair way for a fair go Zurich’s new claims chief may have been born in the USA, but an ideal he discovered in Australia drew him back here By Shelley Dempsey
Zurich’s Chief Claims Officer Daniel Franzetti: an Australia posting ticked all the right boxes
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IT SEEMS ZURICH’S NEW CLAIMS chief Daniel Franzetti was destined to work in Australia. In swapping chilly Chicago for sunny Sydney in December, he returned to the country that first inspired him to pursue his career. The seed was sown when the New Jersey native arrived on these shores for a study tour in 1988. “Probably the reason why I went into claims is the concept of a fair go,” the former claims investigator and lawyer says. “I’d say fairness is one of my core values as an individual, so the Australian concept of a fair go is something that resonates with me both personally and professionally.” In the past 17 years, while moving up the claims leadership ladder at Zurich, he has been offered numerous overseas postings. But none appealed, until now. So what made him move halfway around the world with his wife, two young children and a dog that had to be quarantined? “I knew we’d be very happy here because of my previous experience with the people, the culture and landscape – and the warm weather. “With Zurich being such a global company, I’ve had lots of opportunities over the years internationally, but it always had to be the right place, the right role for me and the right time for my family – and this was the first one that checked all three boxes.” As Chief Claims Officer for Australia and New Zealand, Mr Franzetti leads a team of 275, compared with 500 in Chicago, where he led the claims technical shared services team as senior Vice-President. However, the role here is broader, which he prefers. “In Australia, I’m responsible for all functions across all claims.” In his first 90 days in Australia Mr Franzetti hit the ground running, con-
sulting with brokers and staff on ways to improve the processing of around 100,000 claims a year. “In June we went live with online lodgement for motor,” he tells Insurance News. “Brokers said they want to be able to access Zurich systems easily, and this is one area that’s important to us, so we added that. “We’ll look at taking property online next. Those two are really the most important lines, and after that we’ll evaluate other lines.” Brokers also want Zurich to remain
with Zurich direct, and elsewhere the insurer has tied agents or writes business direct. “For us in Australia, having those broker relationships is critical to our mutual success,” Mr Franzetti says. He says Zurich’s claims record is reflected in the National Insurance Brokers Association insurer of the year award it won for the first time last year. “You don’t win that award unless you have a very valuable claims value proposition.” Zurich was certainly quick to act following a devastating
“Zurich has made a ‘strategic decision’ to maintain a unique business model, using only brokers in Australia. We don’t get business from any other channel here.” “local” and have called for claims services that are responsive, easy to access, fair, timely and consistent. Mr Franzetti has been tasked with continuing to deliver a “cutting-edge, leading claims organisation” by new Asia-Pacific General Insurance Chief Executive Stuart Spencer. Japan and Australia comprise 70% of Zurich’s Asia-Pacific market. Mr Spencer says there is “room to grow” in Australia and New Zealand, with the group seeking to increase underwriting margins. And while Zurich is cutting 800 jobs globally, that is not a focus here. Zurich has made a “strategic decision” to maintain a unique business model, using only brokers in Australia. “We don’t get business from any other channel here.” In the US policyholders mostly deal insuranceNEWS
fire in January at the renowned Stokehouse restaurant in Melbourne’s St Kilda. The morning after the fire the insurer had staff on site and “we partnered with the Stokehouse’s owners every step of the way”. The swift recovery of the business saw a pop-up restaurant established before the restaurant was relocated into central Melbourne and plans drawn for a modern replacement on the original site in St Kilda. Mr Franzetti recalls going to see a movie with his wife Dana on the Friday night that the fire struck. When he left the cinema he found seven voicemails and 17 emails on his phone, “all about the Stokehouse”. The restaurant was comprehensively covered through a Zurich business pack.
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Putting the customer at the centre: shortly after Melbourne’s iconic Stokehouse restaurant was destroyed by fire in January, the site was cleared and Zurich had a temporary pop-up replacement on site ready to serve customers. Daniel Franzetti (at right) and Zurich Australia Chief Executive Daniel Fogarty are pictured with Stokehouse owners Sharon and Frank van Haandel as the temporary restaurant opened for business
Zurich has received positive feedback from the family because “we put the customer at the centre of what we do. Part of our commitment at Zurich is to our communities and we take that seriously. “Being part of the response to the Stokehouse fire is something we’re very proud of. This is what we are here for.” Fraud is another area in which Mr Franzetti is well versed – and he is keen to make the most of his US experience in Australia. In the US the National Insurance Crime Bureau – which estimates 10% of property and casualty claims are fraudulent – is the industry thought leader on the matter. It helps to pool data through a vendor called ISO – a member of the Verisk Insurance Solutions group at Verisk Analytics – that aggregates data from 95% of major insurers and searches for fraud indicators across portfolios. Mr Franzetti plans to open talks with other Australian insurers about a similar analytics system here. “In the US we did collaborate on that sort of thing. It’s a very powerful tool. I think there’s an opportunity for the insurance community here to really band together further around detection and to prevent fraud.” With his mix of skills and experience, Mr Franzetti is attuned to dealing with fraudsters and lawyers 54
alike – and knowing how both think. However, his career as a lawyer was short-lived – only six months. “It wasn’t for me,” he says. “I think you learn very quickly that law is a business. There’s a tremendous amount of pressure for you to bill hours.” He uses his legal skills “every day” at Zurich, though. “As an organisation that spends a significant amount of money on outside counsel, I think it does give me a unique insight into their world.” Law school in New York was worth attending for another reason: he met Dana there, and she went on to spend nine years as a claims counsel for Zurich in the US. “It’s good having somebody with that background at home who I can bounce ideas off,” Mr Franzetti says. Zurich has experienced a benign catastrophe year, but Mr Franzetti has begun refining the local catastrophe plan anyway. “I think in claims it’s hope for the best but prepare for the worst,” he says. “One thing I’m proud of is the way we’ve responded to catastrophes in Australia over the years.” He is well placed to judge, having previously spent four years in a global general insurance role for Zurich, where he observed about 10 claims operations worldwide. When it comes to disasters, there is little he has not seen. insuranceNEWS
“I was heavily involved in the response to Hurricane Katrina: that was probably the biggest event in the US. I was there five days after and it was so unfortunate. “The tremendous people impact on the city of New Orleans really affected all of us. Entire neighbourhoods have never been rebuilt and probably never will be.” Zurich is still committed to New Orleans, helping many charities and sponsoring the Zurich Classic PGA golf tournament there. Mr Franzetti also witnessed the aftermath of Superstorm Sandy in his home state, New Jersey. “It was devastating. The New Jersey Shore boardwalk is iconic, but the rollercoaster we all rode as kids was actually out into the ocean.” Fortunately, his family members who remain in the state survived unscathed. Disturbing as these sort of events are, they’re what make claims worthwhile, Mr Franzetti says. “What I love about insurance is the satisfaction of truly helping people and businesses when they need it most. “I’ve been fortunate in my career to have been very hands-on in a lot of claims events, and just seeing the gratitude and relief you provide to people who have suffered a really unfortunate event makes this an extremely ful! filling career.”
August/September 2014
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Australia’s next top models Insurers are exploring the science behind catastrophe modelling to gain a better understanding of risk By Jan McCallum
Reuters
Something you can’t model completely: New Zealand insurer Tower says riots in the Solomon Islands (pictured), earthquakes and the occasional volcano have proved difficult to predict
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CATASTROPHE MODELLING only began in the 1980s, so it’s a relatively new science that is evolving quickly. And as the models develop, so do insurers become more demanding of their creators, seeking to understand data better so they can fine-tune it to their particular risks. Insurers now employ their own researchers to build on work by vendor modellers such as RMS, AIR Worldwide, Eqecat and Risk Frontiers. Meanwhile, the regulator is leaning on insurers’ boards to ensure they truly understand their companies’ exposures, rather than using models that might allow them to simply tick a compliance box. “We tend to spend a lot of time trying to back-solve – to understand the assumptions,” JLT Towers Re Head of Analytics for Australia and New Zealand Jeremy Waite told the Actuaries Institute’s catastrophe risk seminar. “People want increased consistency, transparency and flexibility.” RACQ Insurance Chief Financial Officer Michael Lonergan says modelling is particularly important for personal lines insurers in the Queensland market. His company is blending models with actual experience. “Relying solely on vendor models will put you at risk,” he says. Scientists can feed the models with data going back to the 1800s – but that’s relatively recent in their eyes. And models are only as good as their designers, the information available, its accuracy and how well it applies to an individual insurer’s book. In recent years modellers have come under fire for overstating risk, with critics saying consumers pay the price through higher premiums. In their defence, Mr Waite
“The 2011 floods in Australia and the Christchurch earthquakes in New Zealand prompted APRA to undertake a thematic review of modelling, which led it to conclude there is an over-reliance on models.” says Hurricane Andrew in 1992 caused $US15.5 billion of losses – sending nine insurers broke – and models predicted $US13 billion of that. The Hurricane Andrew experience – it remains one of the biggest insurance payouts in history – fuelled the growth in modelling, as insurers sought to better understand their exposures. But because models affect companies’ calculations for claims reserves, the science has naturally drawn the attention of regulators. The Australian Prudential Regulation Authority (APRA) has made it clear that boards and managers must do more to understand the strengths, weaknesses and inherent assumptions of models they use, and to complement model outputs with their own work. The 2011 floods in Australia and the Christchurch earthquakes in New Zealand prompted APRA to undertake a thematic review of modelling, which led it to conclude there is an over-reliance on models. Deputy Chairman Ian Laughlin told the actuaries’ seminar that catastrophe risk significantly influences insurers’ decisions on risk appetite – the extent to which they need to reduce risk insuranceNEWS
through reinsurance and how much they will retain. “It is essential the board pays close attention to the cat risks,” he says. “It needs to satisfy itself that risks are well understood, quantified as much as possible, mitigated appropriately and residual risk is within appetite. “Insurers need to challenge themselves about their catastrophe risk and reinsurance arrangements.” They must also be aware of unmodelled risk – what the models do not, or cannot, tell them. New Zealand insurer Tower has found many of the risks it carries across the Pacific cannot be modelled completely. Chief Executive David Hancock says apart from earthquakes, Tower’s clients have encountered riots in the Solomon Islands and volcanorelated losses elsewhere. The Christchurch quakes have shown how models fail to deal with the length of time to recover from such a calamity, usually referred to as tail effects. Four years after the Christchurch quakes began, insurers in New Zealand are still dealing with a shortage of tradesmen and building supplies and the complex interaction with local governments, agencies such as the August/September 2014
Earthquake Commission, reinsurers and insurers. Mr Hancock says modellers will struggle to accurately calculate demand surge and the number of claims for a catastrophe of such scale. “The question about what is not in the model is just as important as what is in the model.” Paul Burgess, Senior Director at the Singapore office of modeller RMS, tells Insurance News there is now a trend for insurers to “drill down” into models, driven by regulatory pressure and the desire to tweak models to suit their portfolios. “Our clients know a lot about their own portfolios, and we know a lot from scientific and engineering research. “They are living and breathing in these markets and territories year in and year out, and they know a lot more about the classes they underwrite and the customers they have.” Insurers and reinsurers are also building their own models, although they spread the risk by also using vendor models. IAG Chief Financial Officer Nick Hawkins says in recent years the insurer has tried to create “a more granular understanding of our risk appetite”. IAG and Suncorp are among the world’s largest buyers of catastrophe reinsurance – IAG takes $5-$6 billion a year – and have the resources to invest in their own modelling research. Mr Hawkins has a reinsurance team of 50, with 20 working on natural peril risk. “When you start building expertise in-house, you start relying on that more and more,” he says. “Our philosophy is to invest heavily. The success for me would be less reliance on industry models and more on ! what we do internally.” 57
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Pooling in different directions
The idea of a natural disaster insurance pool to deal with affordability issues has divided two of the industry’s most influential companies By John Deex SOME MIGHT THINK THE OBVIOUS RESPONSE FOR INSURERS facing flak in all directions would be to band together. But on the issue of unaffordable home and contents premiums in north Queensland, two of the most influential companies would be struggling to disagree more. The opposing standpoints of Allianz Australia and Suncorp were brought into sharp focus by their submissions to the financial system inquiry. They both raised the issue as a major problem – but could not have been further apart in terms of the solution. Put simply, Allianz believes a natural disaster reinsurance pool is the answer. Suncorp most adamantly does not. The arguments behind these starkly different views are well reasoned. In his covering letter to inquiry chairman David Murray, Allianz Managing Director Niran Peiris describes the “emerging affordability issue” as one of the most critical facing the insurance industry. And the submission that follows sets out clearly what should be done if the Government decides to intervene. “Allianz supports the development of an industry-led solution in the form of a natural disaster reinsurance pool, which, at no cost to taxpayers, could be established to give Australians living in high-risk locations access to essential and affordable home insurance.” Extreme weather events have come thick and fast in recent years – Victoria’s Black Saturday bushfires in 2009, hailstorms in Perth and Melbourne the following year, Cyclone Yasi and floods in Queensland in 2011, to name a few. Higher premiums were the end result, with those vulnerable to flood and cyclone hardest hit. Allianz says some homeowners at high risk from both these perils are subjected to annual premiums of $30,000. Many in this situation underinsure or, worse, fall out of insurance altogether. This is evidence, says Allianz, that the Australian insurance 58
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market is unable to provide affordable cover for some customers. It believes the situation is politically unsustainable – that at some point the Government will have to step in. And when it does, it insists a pool is the way to go. “With appropriate government regulation, a natural disaster reinsurance pool could be established and operated by the insurance industry and funded by a modest levy on residential insurance policies, similar to the way the terrorism pool is funded by a modest levy on commercial property insurance policies.” No government or taxpayer funding would be required, says Allianz. And the pool would not work alone. Mitigation, adaptation and land-use planning must be pursued to help alleviate affordability issues. But these complementary strategies will only go so far, says Allianz. They are “unlikely to provide a comprehensive solution”, despite what some might have you believe. Enter Suncorp. In his covering letter to Mr Murray, Chief Executive Personal Insurance (and Insurance Council of Australia President) Mark Milliner acknowledges the “increasing concern” over the affordability issue. But he says this can be addressed through comprehensive mitigation and resilience programs. “Any solution that seeks to reapportion insurance risk back onto governments, such as a natural disaster pool, will be unsustainable in the long term,” he argues. Many of Suncorp’s objections stem from the principle that pools blunt the impact of price signals. The removal of the price signal relating to natural disaster risk could lead to increased exposure “as the cost of the risk is not directly applied to those facing it”. More homes could be built in high-risk areas and the incentive for vital mitigation work would disappear. Risk-based pricing guides mitigation needs and this should be the focus, says Suncorp, citing several examples that prove it can work. August/September 2014
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Premiums were cut by up to 70% in Charleville and Roma following the construction of flood levees. “Clearly mitigation can play a critical role in reducing premiums in disaster-prone areas,” says Suncorp. “However, current investment in disaster prevention has not kept pace with Australia’s increasing natural disaster risk profile… As a result, towns across the country remain exposed to unsustainably high levels of natural disaster risk and affordability will continue to be an ongoing concern for our communities.” Suncorp recommends the introduction of a “comprehensive national mitigation and resilience program”. It also commissioned a report by KPMG to contrast the economic consequences of mitigation and a disaster pool. The study concluded that over a 10-year period mitigation would provide a 0.05% boost to GDP, while a pool would result in a 0.02% reduction. The Suncorp message is clear – mitigation works, pools don’t. So what does Allianz have to say in response? General Manager Corporate Affairs Nicholas Scofield tells Insurance News the company’s starting point is that it is unsustainable for “average people living in average houses” to be facing premiums of $10,000 or more. “This is not something temporary that is going to resolve itself – it is only going to get worse. “Greater sophistication in pricing will drive further extremes.” The only solution, says Mr Scofield, is to bring the extreme prices down by subsidising those affected. But that doesn’t mean mitigation gets forgotten. “We agree wholeheartedly that for flood risk, mitigation should be carried out where possible.” But he adds that mitigation isn’t the whole answer as far as Allianz is concerned. “It might bring premiums down by 30%, but if someone is facing a $15,000 bill, bringing it down 30% does not address the affordability issue. “And quite obviously you can’t mitigate cyclone risk.” The key issue with relying solely on mitigation is “an enormous legacy problem”, says Mr Scofield. “We’ve already got half a million people living in flood risk zones. “These people don’t have a lazy $20,000-$40,000 they can use to upgrade their houses. “We don’t disagree on mitigation and adaptation. But when you’ve done all that, there will still be a legacy of people facing unaffordable premiums. What is the solution when mitigation isn’t possible?” Price signals are no use to people who are forced out of insurance altogether, he says. The KPMG report does not analyse the type of pool Allianz is now proposing, Mr Scofield says, but refers to a government-funded pool that was being discussed within the industry “about three or four years ago”. “That is now very unlikely with the current political situation. Instead it could be funded through a levy on every policy in that class of insurance. “Funding can only come from one of two places – the Government or other policyholders. In a perfect world it would be the Government but in the real world that is not going to happen.” Mr Scofield says there are other examples of subsidies that are readily accepted.
In Queensland, for example, every motorist pays the same premium for compulsory third party insurance, despite different drivers having different risk profiles. He feels it is hypocritical to accept one subsidy while complaining about another. And he believes a correctly designed pool could retain some level of price signal. “We are not arguing that people in these areas should have the price signal removed totally – just brought back into the zone of reality. Incentives would be maintained.” Mr Scofield says Allianz doesn’t want regulation any more than Suncorp, but it believes the current situation is unsustainable politically and will not continue for long. “At some point there will be a regulatory response and we want to put some stuff out there in the public arena so that if this happens quickly after a major event then they don’t just do the first thing they think of.” The Allianz arguments do little to sway Suncorp. Head of Strategy and Corporate Affairs for Suncorp Personal Insurance, Chris Newlan, tells Insurance News the Brisbane-based company remains convinced “mitigation and resilience programs are the most effective way to deal with properties facing high risk of natural disaster”. He says disaster pools “inevitably run into heavy deficits” and inhibit price signals that would otherwise “highlight where the risks posed to communities are unacceptably high”. This provides a “strong disincentive” for governments, developers and individuals to take the best approach to land use, mitigating existing properties and building standards that protect people from perils. “Many communities around Australia have developed without the proper planning to minimise the risk of natural disasters they face,” Mr Newlan says. “A comprehensive program of mitigation to protect these towns, and a co-ordinated approach to land use planning so no further building takes place in inappropriate locations, would be far preferable to the tens of billions of dollars in deficits faced by flood pools around the world.” In response to Allianz’s point that subsidies exist in other areas unchallenged, Mr Newlan says pools can be appropriate where risk levels are more evenly spread across the community. “We have long supported the National Disability Insurance Scheme and National Injury Insurance Scheme due to the extremely long-tail and capital-intensive needs of claimants,” he tells Insurance News. “Our work with KPMG showed that investing similar amounts in mitigation, as opposed to a pool, added $8 billion in GDP to the local community in the housing sector alone. “Any response must focus on shifting our disaster funding approach to protecting rather than rebuilding communities at risk.” The two insurance giants remain poles apart on a solution, which at least proves the industry does not approach all issues in lockstep. And while the debate does ensure all sides of the issue are thoroughly examined, it may yet cause problems. If, as Allianz fears, the next major natural disaster brings on government regulation in a rush – as it did after the Brisbane floods – a united insurance industry is essential to help show politicians the best ! ways to sort out the issues.
“Funding can only come from one of two places – the Government or other policyholders. In a perfect world it would be the Government but in the real world that is not going to happen.”
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STOP, THIEF!
How one little taskforce made it happen The National Motor Vehicle Theft Reduction Council is a shining example of public-private partnership By Leo D’Angelo Fisher
RAY CARROLL HAS BEEN the executive director of the National Motor Vehicle Theft Reduction Council (NMVTRC) since it was founded in 1999, and he headed the taskforce that led to its formation, so when he says he knows the secret of its success, he should know. “If we can attribute our success to one thing it’s our ability to keep all the players together and focused on outcomes,” Mr Carroll says. “There’s a huge amount of co-operation on the council.” (More on that later.) The extent of that success is best understood against the council’s ambitious – even idealistic – mission statement: “To deliver a culture of continuous and sustainable vehicle theft reduction in Australia by advancing reform and co-operation between industry, government and community stakeholders.” The council is a partnership of state and territory governments, police, the automotive industry and the insurance industry. Its members 62
vote every three years on whether to renew the mandate for another term. Fifteen years after its formation the council’s driving force can’t quite believe that they live to tell the tale. “We’ve defied the odds. What we’ve got is pretty unique,” Mr Carroll tells Insurance News. “I’ve been invited to speak at conferences around the world to talk about the work of the council, how we were established and how we operate.” The multi-party assault on car theft has clearly worked, From the council’s first full year of operation, 2000/01, motor vehicle thefts have plummeted from 142,000 to 53,000 last year. The NMVTRC has just four staff – including Mr Carroll and Strategy Director Geoff Hughes, who started with his boss in 1999. Which makes the council’s modest head office – and only office – in North Melbourne very quiet. The lean and mean operation is part of the plan. insuranceNEWS
“I’ve always been mindful that [small] organisations can morph into something much bigger and survival becomes their sole objective,” Mr Carroll says. “Our objective is that there’s always more to be done, and the triennial renewal process keeps us on our toes.” Insurance Council of Australia (ICA) General Manager Policy Risk & Disaster Karl Sullivan, who sits on the NMVTRC’s nine-member board, believes size does matter. “The council has been successful for a simple reason: they’ve kept themselves small. It’s not an enormous organisation with hundreds of staff. “They’ve kept themselves very focused and very nimble.” Business is not always known for taking a long-term view, and governments even less so, but Mr Carroll could be the reason that the NMVTRC is so doggedly focused on outcomes. He was a 22-year career policeman when he was appointed to head the council. A criminal investigation detective, prior to his appointment August/September 2014
he was the manager of Victoria Police’s crime prevention bureau. In 1997 the National Motor Vehicle Theft Task Force was formed as part of a state and federal government anti-crime strategy managed out of Victoria by the then Kennett government. The taskforce included representatives of government, police and the automotive and insurance industries, including the Insurance Council. The public-private composition mirrors the make-up of the NMVTRC, whose creation was a principal recommendation of the taskforce. Mr Carroll had been seconded to the taskforce as project manager and was the author of its Motor Vehicle Theft Reduction Plan. One of the taskforce’s most important achievements was agreement on the creation of a national information exchange. That agreement took a year of negotiations, Mr Carroll recalls. It also involved recommendations for a vehicle
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component identification system, the development of design standards for new vehicles, and the creation of theft prevention programs that targeted juveniles. The document, far from being the usual “law and order” response to crime, was a landmark report that not only identified the extent of the problem of car theft, but provided a plan to be implemented. Mr Carroll is convinced that private sector commitment was critical to the NMVTRC’s success – then and now. “The [multi-party] taskforce worked really well, and I felt that we needed to take the same taskforce approach, but when it came to setting up the more permanent organisation to drive these reforms, some [in government] believed that it should be set up within a government department,” he recalls. “I argued that it wouldn’t work, that it needed to be an independent, non-profit organisation.”
Keeping his operation lean, mean and effective: NMVTRC Executive Director Ray Carroll
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His argument won the day, and ICA bankrolled half of it. The council agreed to match funding from state and territory governments dollar for dollar, which for most of the past 15 years has been virtually unchanged at a modest $2 million a year. The only state not to continue supporting the council is Queensland (see panel). Mr Carroll says that the future of the NMVTRC was always going to rest with the insurance industry, because it had the most to gain from a sustained reduction in motor vehicle theft – after the general community, that is. “Reports of this kind usually sit on the shelf gathering dust, but there’s a significant reason why this one didn’t. “It was because the insurance industry backed it – it committed $1 million to what was largely seen as a government responsibility.” Mr Carroll says the role of the NMVTRC is to facilitate, consult and communicate. “We are not a lobby group. We don’t beat up any of our stakeholders. We’re here to facilitate change,” he says. “We use a policy-hub approach. We take a particular issue, hire a consultant to write a report, talk to our expert reference groups, we consult and we develop draft or template legislation, but then it’s up to governments to draft their own legislation.” Significant wins for the NMVTRC include the Personal Property Securities Register, which allows used-car buyers and motor traders nationally to check the history, financial status and legal standing of any used vehicle; the implementation of new damage-assessment criteria for statutory write-offs, aimed at disrupting the vehicle laundering trade; and the 2001 introduction of immobilisation technology in all new cars sold. The NMVTRC believes its 64
campaign to mandate immobilisation systems in new cars ensured that they were introduced in Australia five years earlier than otherwise might have been the case. The council estimates that 75% of cars in Australia now carry immobilisers, which has contributed to falling theft rates. But this has resulted in a spike in residential burglaries specifically for the purpose of stealing transponder keys to bypass the security devices, which presents the NMVTRC with a new trend and a fresh challenge. Allianz Australia Investigations Manager Todd Blunt says data collected by the NMVTRC provides deep insight into car thefts – how many vehicles are stolen, where from, what kind of vehicles, how many are recovered, and short-term thefts versus profit-motivated thefts. Insurance companies have their own data, but nothing matches the depth of the council’s national data going back 15 years. “We try to gather as much information as we can on the investigation side to help us assess claims that come before us and to better target investigations and identify genuine claims,” Mr Blunt tells Insurance News. “We don’t want to investigate claims that are genuine, but if something is a bit out of the ordinary, we’ll know because we have that data. “The information we get from the council enables us to make decisions [more accurately and] a little bit quicker.” But apart from the reams of data collected by the NMVTRC, Mr Blunt says receiving a 10-minute briefing from Mr Carroll can be more revealing than the highest pile of statistics. “Ray gets around so much speaking to industry, police, government and consumers, that he gets to see a lot more insuranceNEWS
emerging trends than anyone else,” Mr Blunt says. What statistics can often hide is the people behind the data – most notably the young offenders who steal cars for joy rides, hooning and for the heck of it. Seventy per cent of car thefts are committed by young men aged 14-24. Mr Carroll believes it’s necessary to get car theft numbers down, but it’s also important to prevent these young lives from spiralling out of control and becoming mired in the criminal justice system. The former crime prevention copper knows it’s possible to do both. “There are young guys who can steal lots and lots of cars and trash lots and lots of cars, but give them a chance of a job and a career and you can make a huge difference – to them and the community,” he says. The council has been involved in several rehabilitation and diversionary programs over the years, but one launched in April was a first: Australia’s only “social enterprise” smash repairer. With $750,000 seed funding from the council, Mission Australia is running Synergy Auto Repairs in innercity Melbourne, employing up to eight young former offenders at a time, some of whom have spent time in jail. The young offenders do a six-month TAFE pre-apprenticeship course as part of their employment with the repairer and are supervised by qualified tradesmen. Suncorp provides the damaged vehicles for them to repair and on completion helps the youths find apprenticeships in one of its authorised smash repairers. “This young offenders program with Suncorp and Mission Australia is something I’m very happy about. “It’s an opportunity to turn lives around and it’s an achievement to be proud of.” ! August/September 2014
Is this the end of the road? After avoiding the usual pitfalls and bunfights that can occur when industry and government sit at the same table, the NMVTRC’s luck may be running out. In 2012 the newly elected Queensland Government headed by Campbell Newman vowed to cut government spending to repair the state’s frayed finances, and its contribution to the council found its way onto the Premier’s hit list. Queensland is now the only state or territory not contributing to the council. Ray Carroll hopes that when the latest three-year review lands on Police Minister Jack Dempsey’s desk in September or October, Queensland will climb back on board. Queensland’s absence from the council has left a big hole in its budget: costing the council $205,000 a year in government funding – plus the matching amount from the ICA – out of an annual budget of about $2 million. Although hopeful, Mr Carroll admits “there’s no guarantee of our continuation beyond June next year”. He says the council has strong private sector support in Queensland – including from Suncorp, RACQ and the Motor Trades Association – and is hopeful of “re-engaging” with the State Government. “Car crime is a cross-border issue and for national consistency it is much better to have the states working together rather than individual states tackling the problem on their own.” But failing a last-minute change of heart, Queensland is determined to go it alone. A spokesman for Queensland Police Minister Jack Dempsey tells Insurance News the Government “doesn’t intend on re-establishing funding” to the NMVTRC. “The Queensland Government has a strong plan for a brighter and safer future for all vehicle owners,” he says. A future that very likely will not include the NMVTRC.
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lawNEWS
Sharing the blame The Federal Court has ruled against S&P over its ratings on ‘grotesquely complex’ financial instruments, in a case with global ramifications By Jan McCallum
WHEN 12 NEW SOUTH WALES COUNCILS invested in new financial notes in 2006, they were looking for a safe, long-term place to park ratepayers’ funds. They could not have imagined that eight years later they would set a legal precedent against ratings agencies. When the Full Court of the Federal Court handed down its judgement on ABN Amro Bank NV versus Bathurst Regional Council on June 6, the decision made waves globally. Two aspects of the case have significant ramifications for insurers: it has extended the duty of care, and increased the liability of companies found responsible for loss. The appeal court ruled ABN Amro, ratings agency Standard & Poor’s (S&P) and the company that sold the notes to the councils, Local Government Financial Services (LGFS), are each liable for 100% of the councils’ losses. This means if one of the three cannot pay, the other two must make up the amount. The original decision had apportioned the cost among the three. Law firm Piper Alderman ran the councils’ case. Partner Amanda Banton says the decision “changes the legal landscape with regard to apportionable claims for misleading and deceptive conduct”. She says apportioning blame has become a standard defence tactic that has made legal proceedings more complex. “The strategy of blaming other parties to lessen liability is now significantly more limited.” The Federal Court notes proportionate liability and contributory negligence were introduced into the law in 1994 in response to groups such as auditors being sued because they had professional indemnity insurance, and not necessarily because of any major involvement in a loss. This “deep pocket syndrome” had led to a significant rise in insurance premiums. In 2006 ABN Amro created a financial product it called Rembrandt notes. S&P gave the notes its top AAA rating and LGFS bought them and sold them on to local councils. By 2007, with the onset of the global financial crisis, the notes’ value began to fall. The councils cashed out their notes in October 2008, receiving back less than 10% of the principal they had invested. They sued 66
for about $25 million of losses. A 53-day trial in 2012 raised issues of misleading and deceptive conduct and negligence. Federal Court judge Jayne Jagot described the Rembrandt notes as “grotesquely complex instruments” and ruled in favour of the councils. There were 10 separate proceedings when the parties appealed to the Full Court, with claims and cross-claims. In June the Full Court dismissed the appeal by ABN Amro, S&P and LGFS, agreeing with Justice Jagot on almost every point, with minor qualifications.
The Full Court “has in effect extended avenues of recourse available to investors under the Corporations Act” It says the councils had conservative investment strategies and LGFS was an adviser to them, rather than a “mere salesman”. LGFS specialised in tailoring information and advice to meet the needs of local government, and should have known the notes were not suitable for the councils. S&P accepted the AAA rating was flawed but argued it did not have a duty of care to the councils, because it had no contract with them. The court says the rating was misleading and deceptive. The AAA rating suggested S&P had assessed the notes “based on reasonable grounds and as the result of an exercise of reasonable care and skill when neither was true, and S&P also knew them not to be true when they were made”. ABN Amro was knowingly concerned in S&P’s contravention of the law on misleading and deceptive conduct and itself engaged in this conduct. LGFS also engaged in misleading and deceptive conduct and breached its insuranceNEWS
Australian financial services licence by selling a derivative. The judgement says S&P’s opinion does not have to be right, but the agency failed in its duty to exercise reasonable care in forming and expressing the opinion. S&P argued its ratings are available online, so it should not be expected to owe a duty to “anyone who might stumble across” them, and its opinions are not guarantees. But the court says S&P knew potential investors in the Rembrandt notes would rely on its opinion in deciding whether or not to buy. ABN Amro paid S&P to rate one note issue for the sole purpose of having a rating to give potential investors, and the agency knew its rating would be used to market the issue. It is one of the first cases of a ratings agency being successfully sued over a rating, and the judgement is likely to be raised in similar proceedings under way in the Netherlands against ABN Amro and S&P, and in British cases. Litigation funder Bentham IMF backed the councils’ case. Executive Director John Walker told Insurance News there have been similar actions in the US, where agencies argued they have published an opinion in good faith and are protected by the first amendment to the US constitution, which guards freedom of speech. Mr Walker says by finding damages are not apportionable, the Full Court has in effect extended avenues of recourse available to investors under the Corporations Act. Penny Taylor, a partner at law firm Kennedys, says the decision on proportionate liability is important. “The Full Court’s decision has significant bearing on proceedings where claimants have brought claims for a contravention of section 1041E of the Corporations Act,” she said. Defendants will no longer be able to raise a proportionate liability defence, even if other claims brought by the claimants are apportionable. But Ms Taylor told Insurance News the ABN Amro judgement conflicts with a judgement relating to financial planning group WealthSure. “Ultimately, the resolution of this important issue will be for the High Court,” she ! said.
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companyNEWS
Taking flight: Sura Travel helps brokers meet rising demand for corporate travel cover
INTERNATIONAL BUSINESS IS NO LONGER THE EXCLUSIVE realm of major corporations as smaller companies spread their wings and seek overseas opportunities. The internet and improved communications have opened doors for small to medium-sized enterprises and more companies are seeking travel insurance as managers and staff head to airports and far-flung destinations. Newly created Sura Travel, part of Austagencies, has developed products to help brokers meet the rising demand and fill a need which small and medium-sized businesses have often had covered through retail policies. Travel industry indicators suggest that the small end of town will remain a growth sector and there is no shortage of emerging businesses seeking to expand their overseas markets. “You see small start-ups and little businesses using the internet and social media to connect and make deals in places they couldn’t have dreamed of 20 years ago,” Sura Travel Director Graham Kingaby tells Insurance News. “Australian businesses are excellent at exploiting those overseas opportunities when they come up.” Mr Kingaby, who has 30 years’ insurance experience in the UK and Australia, including in the online sector locally, says the nation’s travel insurance market is worth more than $1 billion, but the SME opportunity has largely by-passed broking businesses. “Brokers only have a very small proportion,” he said. The challenge is to create a system that streamlines the process to make it an attractive business proposition for brokers, he says. They must increase the access of small business to corporate products that are superior to the retail versions and are tailored for the needs of the sector. “Corporate products tend to be better on a number of different levels,” Mr Kingaby says. “If you are a business person – even if you are only travelling three or four times a year – corporate travel insurance makes good sense.” insuranceNEWS
Sura Travel’s silver product has an aggregate event limit liability of $1 million and an allowance of $500,000 for charter or non-scheduled flights. Luggage and personal effects is covered to $10,000, there’s $5000 rental vehicle excess cover and unlimited cover for overseas medical expenses and emergency assistance. The gold product has an aggregate event limit of $3 million and allows $1 million for non-scheduled flights. The luggage and personal effects benefit doubles to $20,000 and the rental vehicle excess cover increases to $10,000. Policies include personal accident cover for spouses and children and business travellers family assistance. There is cover for kidnap, hijack, detention, extortion and ransom, while the corporate products include benefits for extraterritorial workers’ compensation and policies provide cover for domestic travel. Brokers can also ask for variations to standard policies, with the potential to easily develop bespoke products for more complex situations. For straightforward clients, a few simple questions help streamline a rapid quotation process and the system is designed to eliminate double-handling between clients, brokers and Sura. “This allows us to get the costs down for the broker to allow them to distribute efficiently,” Mr Kingaby tells Insurance News. The insurance is underwritten by Allianz, which also provides global assistance through 10,000 staff spread across 29 countries. The travel offering is also the latest extension of the Sura name as Austagencies streamlines brands across business areas. Earlier this year the group amalgamated four specialist underwriting agency brands into its new Sura Hospitality agency. Mr Kingaby says the outlook for smaller-end corporate travel insurance is bright, with expansion in Australia likely to continue in line with international trends. ! “It is a growing sector globally,” he says. August/September 2014
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companyNEWS
Beating them at their own game: Broker launches a comparator
Price doesn’t have to be first: Ensurance’s Stefan Hicks
THERE’S A LOT OF NOISE IN THE INDUSTRY ABOUT THE EVIL OF comparison websites and their potential to commoditise insurance by encouraging consumers to buy only on price. It’s an issue that troubles brokers, who have expressed concern at consumers bypassing them to research insurance online. Brokers also say the best price doesn’t necessarily mean consumers have got the policy they actually need. The debate puzzles Stefan Hicks, the Managing Director of Sydney-based insurance broker Savill Hicks, who says comparators don’t need to be price-driven. As he sees it, consumers are addressing the reality of insurance buying today, where they want to research online. But that doesn’t mean that once they’ve done the research they won’t decide they need the services of a broker to bring it all together. With this in mind, Mr Hicks and partner Brett Graves are part of a corporate transformation to launch a comparison site that provides the option of broker service. Consumers will be able to research online and will be directed through to Savill Hicks’ brokers if they need advice. “This is a tool that meets consumers’ changing purchasing habits, and if they require additional advice or expertise they can contact our call centre,” Mr Hicks tells Insurance News. In a neat execution of a reverse takeover, technology, underwriting and broking group Ensurance, founded by Mr Hicks and Mr Graves, is being taken over by listed mining company Parker Resources NL, and being transformed into an insurance business. The stockmarket listing will increase Ensurance’s ability to raise capital. Ensurance plans to offer a retail product by Christmas and commercial lines next year. Major insurers Suncorp and IAG refuse to allow their products to be featured on personal lines comparison sites, while QBE and Allianz have rejected involvement in other commercial lines comparators. The reasoning is the same – a fear that there is too much emphasis on price to the detriment of policy features. But Mr Hicks says some insurers have already agreed to participate. “We won’t promote price over features,” he says. “We’ll ask the client upfront a range of questions about what is important to them.” He says price will always be a factor for buyers, and Ensurance is aggregating information that consumers can already get by visiting the various insurers’ own websites. He believes the insurers will eventually have to participate in his site, because consumers are driving the change themselves by demanding the ability to search online and purchase when it suits them. “We have been live with multiple insurers online for a number of years,” Mr Hicks says. “We know this is no longer a concept – we know that it works and we know how to make it successful. “I don’t know how long insurers can say they don’t want to participate * in this.”
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IN BRIEF
companyNEWS
In transit: Zurich listens and moves GOODS IN TRANSIT (CARRIERS) INSURANCE OFFERED BY ZURICH WILL NOW ALSO include cover for extra expenses incurred that flow from the original loss or damage. Consequential cover, previously offered as part of the company’s broader carriers liability policy, it is now also available with goods in transit following requests, Head of Marine Matthew O’Sullivan says. “We have listened to the brokers and customers and offered a choice,” he tells Insurance News. The consequential insurance has a limit of $100,000 for any one loss or series of losses from the same event, and has a limit of $200,000 during the life of the policy. Goods in transit policies provide an annual cover for transportation risks that could involve collisions, overturning, crashing, fires and jackknifing. Features covered also include debris removal and unpacking delays. The consequential cover extends to additional customer expenses, such as the need to source alternative products and possibly disruptions to company operations. “Goods being moved around Australia are exposed to all kinds of risks but most of these can be insured simply and economically,” the company says. The change to the goods in transit insurance applies to policies purchased through the Z.streamXpress electronic system as well as through local Zurich marine underwriters.
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More power: CGU revs up commercial motor products CGU HAS ENHANCED ITS COMMERCIAL MOTOR PRODUCTS TO BRING THEM more closely in line with its fleet motor cover. National Underwriting Manager Fleet and Commercial Motor Tony Whitby says improvements include enhanced coverage and policy wording. Hire following accident is now an additional option, and significant online development has eased partner and broker transaction. Enhanced covers and limits are available to new customers from August 30, but existing customers don’t need to wait until then.
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Pollution cover: Ace tailors cover to clinics and hospitals IT MAY SEEM OBVIOUS, BUT POLLUTION AND CONTAMINATION ARE MAJOR problems for hospitals and clinics. Waste materials, used bandages and many other potential hazards are part and parcel of running a healthcare facility. Ace has had a healthcare premises pollution liability (PPL) policy available in the US for many years and Country President for Australia John French said it decided to see if clinics and hospitals in Australia were interested. “After having successfully trialled it with various brokers and their clients in Australia for the past 12 months, we are confident that Healthcare PPL will meet the needs of a wide array of healthcare facilities throughout the country,” he says. The policy is tailored to the unique pollution risks of doctors’ surgeries, hospitals, in-patient and outpatient surgical centres and long and short-term care facilities. It provides cover for sudden, accidental and gradual pollution, decontamination costs, emergency response costs, business interruption and crisis management. There is also cover for transport of waste, fungi and legionella.
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All fixed: Dual moves into medmal DUAL AUSTRALIA HAS EXPANDED INTO MEDICAL MALPRACTICE AS DEMAND FOR the product increases and the underwriting agency widens its professional indemnity (PI) portfolio. “It really has been in response to requests from brokers, as the one part of the wider PI market we didn’t service was medical malpractice,” Dual Asia-Pacific Chief Executive Damien Coates tells Insurance News. “It completes the professional indemnity jigsaw for Dual.” The cover for allied health professionals and establishments such as nursing homes and private hospitals comes as the medical sector expands and the ageing population puts increasing pressure on the system. Dual says medical malpractice claims increased 40% from 2007 to 2012 and there are more than 10,000 claims a year. The company’s policy is a combined medical malpractice and public and product liability cover with a capacity of $20 million for each. Preferred risks include private hospitals, medical centres, imaging and diagnostic clinics, nurses, retirement villages, pathology, physiotherapy, radiology, optometrists and podiatrists. Mr Coates says there is plenty of room for Dual in the medical indemnity market and the company has been “flooded” with interest since it launched the new offering. “Our legally qualified claims officers and panel law firms have the specialist knowledge required to manage sensitive and complex medical claims from notification right through to resolution,” the company says.
Dual’s policy features include cover for claims arising from dishonesty including Medicare benefits fraud, public relations expenses, court attendance costs, cover for students, volunteers, committee members and council members ! and cover for Good Samaritan acts. 72
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Xactware aims to revolutionise claims-handing: Popular North American claims technology arrives Down Under A CLAIMS SYSTEM THAT PLAYED A MAJOR role in the rebuilding of New Orleans after Hurricane Katrina is being introduced into the Australian and New Zealand insurance markets. Louisiana Citizens Insurance Corporation, a state government-owned insurer of last resort, credits the Xactware claims system with enabling it to manage the enormous recovery workload after the hurricane devastated the city in 2005. Brisbane-based IT company Insurtech Systems has been appointed Xactware’s exclusive representative in Australia and New Zealand. Xactware is used by 22 of the top 25 US property insurers and the top 10 Canadian insurers. The company says it is also used by more that 80% of insurance repair contractors in North America. Zurich-owned Farmers Insurance, the thirdlargest personal lines insurer in the US, several months ago became the latest major US insurer to switch to the Xactware system. Xactware’s claims-estimating solution includes online and mobile applications, exhaustive cost research, the Xactware Cloud, and 24/7 customer support. The claims management solution includes claims tracking, analytics, business intelligence tools, and a wide range of tools for claims handlers, estimators, and managers. Insurtech General Manager of Strategy Brian Hill says insurance customers who switch to the system “will see a huge difference in how their claims are managed”. “Xactware allows for collaboration along the entire insurance supply chain, from the insurer to the claims assessor and all the way through to the contractor,” he says. “Everyone is working on the same system and has visibility of the whole process. This means claims are processed much faster and with a consistently higher degree of accuracy.” Mr Hill says Australian and New Zealand insurers now stand to benefit from having claims settled faster. “We’re expecting this software to lead to significant increases in customer satisfaction while reducing insurers’ costs.” Before using Xactware solutions Louisiana Citizens says it had difficulty quickly determining when claims were inspected or when repair estimates had been written and reviewed. Now the information is readily available and accessible to managers – a vital feature after the hurricane struck. Xactware gave the insurer “the ability to acquire multiple plug-and-play solutions to problems that we had with our claims process,” Chief Claims Officer Quin Netzel said. “They’re all on a common platform. They all work together. “We’re able to get our customers back on their feet as quickly as possible, and we now have a way to quantifiably measure the impact of our adjusting.” Insurtech Systems was established in 2004 to manage IT development and maintenance for a group of companies. Xactware is part of the New Jersey-based Verisk ! Insurance Solutions.
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Waiting for an answer? We’ve heard you
As part of our ongoing commitment to service, we have implemented a strategy to provide you, our intermediary partners, with consistent, reliable and efficient motor and property claims service
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peopleNEWS Catlin toasts 10 years in Australia It’s 10 years since Catlin came to town, and founder and Group Chief Executive Stephen Catlin flew into Sydney last month to join more than 300 guests in marking the anniversary. Mr Catlin told guests the company’s values of transparency, accountability, integrity, dignity and teamwork have contributed to the success of the local office. Head of Australia and Pacific Andrew Case spoke of Catlin’s growth in the Australian market and its hopes for the future. The cocktail party – featuring a whiskeytasting bar and a champagne bar complementing the usual array of refreshments – was held in the lobby of Catlin’s new headquarters in Sydney’s Angel Place. With a guest list that read like a who’s who of insurance broking, the networking that followed the speeches ensured everyone had an enjoyable time.
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peopleNEWS Queensland brokers celebrate the best of the best Brokers fly to Brisbane from all over the state to attend the annual Queensland Day celebration to recognise and show appreciation of insurers and allied industry partners. This year Council of Queensland Insurance Brokers (CQIB) President Sean Bemrose welcomed 340 CQIB members and business partners to the awards night. Six awards were presented, with the Peter McCarthy CQIB Young Professional of the Year awarded to Madeline Barra of North Queensland Insurance Brokers in Townsville. Selection committee representative Don Tickle says the high calibre of the seven finalists shows there are young professionals who are well qualified to take their place among the CQIB community. Allianz was named Insurer of the Year for the fourth consecutive year, an award accepted by State Manager Chris Lynch, while QBE and CGU were joint runners-up. Darren Clien from Vero received the Mick Lambert Barker Award for a business partner staff member who provides exceptional service. The coveted claims service award went to Allianz while CGU received the domestic insurer award. Underwriting Agencies of Australia and GT Insurance were joint winners of the underwriting agency award.
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Boutique style, personal service with major league security That’s Summit Prestige Home Insurance, the hands-on, professional but practical underwriting agency that prefers can-do flexibility over bureaucratic inertia. We understand that customers of our broker clients have different needs and we aim to tailor their cover to suit. That means no ‘one-size-fits-all’ blanket cover (with a premium to match) for events unlikely to happen. For many reasons, brokers can relax when Summit handle their prestige home insurance business…
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The quality of our service… the speed of our quotes… the experience of our underwriting team… more flexibility in our guidelines… fast, if not immediate decisions on cover… the security of Lloyd’s… and at claim time when insurers and underwriting agencies are really put to the test, Summit’s history of prompt claims settlement really shines.
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peopleNEWS
NSW duo take the Blue Eagle crown to US Masters A trip to the US Masters in Augusta, Georgia next April was in the sights of competitors at the Allianz Blue Eagle National Golf Tournament in Sydney recently – and the scores were nailbitingly close. The five state winners converged on Sydney for the play-off at the Australian Golf Club in Sydney, one of the country’s oldest and most picturesque courses. The New South Wales team of Troy Garaty and Chris Murnane from Garaty Murnane Insurance Brokers won the national crown for their state for the first time, with a score of 46 points. Allianz Managing Director Niran Peiris presented the pair with a trophy. The South Australian team of Steve Pratt and Andrew Zander from Webster Hyde Heath was a close second at 45 points, followed by the 2011 winners, Shaun Luck and John Wilding from Sawtell and Salisbury, representing Queensland.
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peopleNEWS
YIPS ring in the new financial year The rapid growth of the Young Insurance Professionals (YIPS) shows how keen the industry’s up and comers are to network and build their business relationships. YIPS started in 2010 and has grown to branches in all state capitals and New Zealand holding regular professional development and social events. The Northern Territory branch was launched in July, while YIPS everywhere else welcomed the new financial year with networking events featured on these pages. The New Zealand YIPS branch celebrated its first birthday in Auckland with live entertainment at the Atticus Cafe. The Melbourne event at the Highlander Bar sold out quickly and the Western Australian branch met on the Etro rooftop bar overlooking the city. Queensland YIPS met again following the success of their trivia night in June, while New South Wales YIPS caught up over canapes at the Bull & Bear Bar in the Sydney CBD.
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peopleNEWS Celebrating 40 years of Comsure When you’ve got something to celebrate, do it in style. That’s what Queensland brokerage Comsure did recently, when the company marked its 40th anniversary with a gala celebration and charity art sale. About 150 staff, clients and insurance industry representatives attended the Gallery of Modern Art in Brisbane. The event was hosted by TV news presenter Bill McDonald and featured performances by local band Shag Rock. The art auction raised $4000 for two of Comsure’s major clients, Multicap and Act for Kids, and one of the pieces was created and donated by Comsure Chief Executive Stephen Hamill, who is an enthusiastic artist. The business was established in 1974 by his father, Terry Hamill, who retired recently. Director Richard Rentoul says many of the company’s clients “have been with Comsure since those early years. They include both small and large businesses, corporations and mums and dads. “They are a genuine reflection of the diverse and dynamic Queensland population.”
Celebrating a company milestone? Holding an event? Email admin@insurancenews.com.au to find out more 82
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Talk to insurancenews as part of your planning. We can help you make the most of it.
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peopleNEWS
Brisbane brokers pack into expo The Underwriting Agencies Council and National Insurance Brokers Association hosted one of their most successful Brisbane expos last month. More than 300 brokers poured into the Pullman Hotel exhibition space to talk business with specialists from 63 underwriting agencies. Most stayed for lunch to hear the inspirational story of former Royal Australian Navy clearance diver Paul de Gelder, who lost a leg and a hand following a shark attack in Sydney Harbour in 2009. Mr de Gelder shared his message of “improvise, adapt and overcome�, saying that during rehabilitation he had made the choice to embrace the support offered and look to the future, rather than succumb to negativity. He has since written a book and campaigns for shark conservation.
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maglog »
Sam Pentecost Contributor
THE LITTLE BLOKE TROTTING OUT ON TO THE MCG with Heritier Lumumba and the other members of the Collingwood AFL team is William George, the six-yearold son of MGA Managing Director Paul George and grandson of broking legend John George. Being good Adelaideans, the George family barracks for the Adelaide Crows, and there’s a bit of headscratching going on as to how young William became a dedicated supporter of the Magpies. While some families might have drawn the curtains, changed their name or moved to another city when one of their own switched to the Magpies, the Georges are made of sterner stuff. Paul says he has no idea how it happened – he blames William’s hobby of collecting football cards – but they’ve learned to accept that William has set his heart on Collingwood. Steele Sidebottom is his hero, and that’s that. When something like this happens in a family, one tends to share the misery around. And so Paul found himself telling some CGU friends, which led to the insurer’s Senior Manager Event Solutions Juliette Connolly arranging for William to run on to the MCG with the team before the Collingwood-Essendon game in July. CGU is a major sponsor of the Magpies – I know, I know… Seated in the stands, and doubtless wondering what the hell they were doing there, were his proud parents and grandparents. The only consolation was that Essendon won by 64 points. We were going to run another picture of William with Collingwood President Eddie McGuire, but enough is enough.
And three hearty cheers for Vero, which recently made a dream come true for a four-year-old named Jade Barter. Jade suffers from a rare immune deficiency, and has spent most of her life isolated from other kids her age. OAMPS, which is a sponsor of the Make-a-Wish Foundation, brought Jade to Vero’s attention. The insurer offered the Barter family exclusive use of its corporate box at Sydney’s Allphones Arena to see a live performance of Disney on Ice. Jade was transported from the family car to the corporate box in a special sealed pram. “This is the first time she has ever been able to do something like this,” said Jade’s mum Claire. “I think she was the most excited child in the whole arena.” Nice one.
Gaze fondly on the ad to the right of this page, because you’re unlikely to see it again. SRS, which has been a supporter of Insurance News right from the start, has been acquired (funny how companies are never “bought”; they’re always “acquired” or “merged”) by Arthur J Gallagher. SRS and the other underwriting agencies in the AJG stable have been placed under one new brand – Pen Underwriting. Our thanks to Chief Executive Paul Lynam for his friendship and encouragement, and congratulations for going with a name that didn’t involve dragging out a * Latin dictionary. 86
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“OUR 20 YEAR ASSOCIATION WITH LLOYD’S PROVIDES SRS WITH A TWO-FOLD BENEFIT. It gives brokers confidence in our brand and its longevity, plus it gives confidence to our supporters at Lloyd’s that we are a reliable representative in the Australian market who is here for the long haul. These key benefits, combined with highly experienced SRS staff in Australia and a highly skilled stable of claims managers, allow our underwriters to accommodate an extensive list of risks and occupation classes when Public or Products Liability cover is required.” Paul Lynam CEO, SRS Underwriting Agency Ability. Reliability. Consistency. SRS Delivers.
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www.aig.com.au AIG is the marketing name for the worldwide property-casualty, life and retirement, and general insurance operations of American International Group, Inc. In Australia, products and services are written or provided by AIG Australia Limited ABN 93 004 727 753 AFSL 381686. Not all products and services are available in all jurisdictions and are subject to actual policy language and underwriter discretion. For additional information on AIG Australia Limited products and services, please visit our website www.aig.com.au