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AUSTBROKERS ACHIEVES 25 years on, its formula still works
RATES ON THE RISE They really are, says a new survey
CLIMATE DISASTER Why reinsurers are worried – and angry
TRIALS OF LIFE Laidback Australians ignore security
GOODBYE TO THE TIE Office fashion – what’s acceptable, what isn’t, and how it’s changing February/March 2010
with Allianz in 2010 Allianz Training Days Allianz is pleased to announce its 2010 Training Day program, specifically designed for brokers and agents in provincial and metro areas throughout Australia. The Training Days include: • product training workshops, breakout streams & business skills sessions • networking opportunities with the ‘One Allianz’ team; and • accreditation for 6 CIP Points & 6 CPD Hours
State
Location
Date
Canberra & Riverina Region
3 February
NSW
Wollongong & South Coast Region
11 February
QLD
Brisbane
15 April
SA
Adelaide
5 May
NSW
Sydney
18 May
QLD
Gold Coast Region
18 August
Geelong & Western Districts Region
August
QLD
Sunshine Coast Region
14 September
WA
Perth
7 October
Newcastle & mid North Coast Region
October / November
Melbourne
18 November
ACT
VIC
NSW VIC
For further information and to register your interest for one of our Training Day events, please contact your local Allianz representative or your Genesis consultant.
Allianz Australia Insurance Limited (Allianz) AFS Licence No. 234708 ABN 15 000 122 850
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FIRST CLASS INSURANCE SOLUTIONS. Commerce and industry. They make the wheels of the world go round But what happens if the wheels fall off? Disaster. Catastrophe. Loss. Limit, reduce or totally avoid your client's exposure to upheaval and ruin with an insurance solution from a truly unique partnership. SRS Underwriting and Lloyd's of London.
SRS1475
FLEXIBILITY AND INNOVATION. SRS UNDERWRITING DELIVERS.
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SRS is Australia’s leading Lloyd's of London Underwriting Agency with offices in Sydney, Melbourne and Brisbane. The team at SRS routinely exceed client expectations by providing professional and flexible solutions across most major and many boutique general insurance product lines. With its own representation based in London, SRS benefits from daily direct contact with the Lloyd's Underwriting market. This has enabled SRS to cultivate long term relationships with an enviable stable of underwriting partners who are ranked within the highest tier in the London Market. With an 'always available' client service ethos, SRS exploits time zone differences to seek and secure opportunities for valued clients. SRS never sleeps. Little wonder then that in Australia, SRS is considered the "Gateway to Lloyds".
Sydney Ph: 02 9323 5000 Fax: 02 9323 5077 Melbourne Ph: 03 9810 0600 Fax: 03 9810 0650 Brisbane Ph: 07 3002 3000 Fax: 07 3002 3077
For more information about the scope and depth of our services, please visit our website.
www.srs.com.au
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Now authorised reps can attach themselves to the strength. These days, the insurance business is more competitive than ever.
the products and policy wordings that suit you and your clients needs.
That’s why authorised reps should attach themselves to the strongest partner they can find.
And because it’s Australia’s largest cluster group, with more than 400 offices nationwide, there’s sure to be a Steadfast brokerage just about anywhere you want to work.
By choosing a brokerage backed by Steadfast, you’ll have the tools to add value to client relationships, increase profitability and make your portfolio more valuable at the same time.
If this sort of strength appeals to you, or you would like more information, contact Steadfast today.
You’ll also be able to outsource all day-to-day, backroom distractions and get more time for your clients - and yourself. Of course, Steadfast has enormous buying power and offers the flexibility to work with insurers to provide PHONE: +61 2 9495 6575
A&G80643JFP
EMAIL: jphillips@steadfast.com.au
WEB: www.steadfast.com.au
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Contents 8 Newsmakers » 14 Is this the dawn of a new cycle? » It probably is, according to a survey. But sunnier times might be some way off yet.
20 Calm before the storm »
2009 was relatively quiet for claims, but that’s cold comfort for worried reinsurers.
26 ANZIIF opens its doors »
Expect more small associations to follow the risk management group’s lead.
30 Code of controversy »
The General Insurance Code of Practice review disappoints critics – but how much change was justified?
31 Business first, cluster second »
25 years on, Austbrokers’ unique ownership model is standing up well in a changing world.
36 Daylight robbery »
A global survey identifies insurers among firms most at risk of fraud.
40 Progressively competitive »
The crowded online motor insurance market attracts a giant US auto insurer.
42 Tower’s view is improving »
Jim Minto accentuates the positive – in attitudes and profits.
lawNEWS
58 More power to the regulator » APRA’S oversight of insurers will increase under new proposals.
59 Not falling for that one »
An unconventional defence focuses on ‘dangerous activity’.
60 Who cares? The insurer does »
Parliaments keep blocking the loopholes, but there’s always another one.
styleNEWS
62 Say goodbye to the tie » Insurance fashion is in need of some major tweaking.
peopleNEWS 68 69 70 72
They’re the toast of two coasts » The cost of churn » Vero’s match with a message » IAA conference hails WA’s Peter Gibbs »
74 maglog »
44 The trials of life »
Australia’s life insurers are doing a very good job – shame so much of it is done in the face of apathy and ignorance.
50 Hank Greenberg makes peace »
The AIG legend settles with the company he built into a global superpower.
52 What’s an insurer worth? »
Crunch time is near for an ambitious project to reform the way insurers are valued.
56 Big fish in a small pool »
D&O cover is under increasing scrutiny as shareholders take up class actions. Catherine Harrington Image: David Russell
February/March 2010
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newsmakers at insuranceNEWS.com.au Darwin blast: Insurers are inevitably in occasional conflict with individual customers, and like any insurer the TIO office in Darwin maintained discreet but effective security to protect its staff. But “customer interface” areas will always be a weak point, and it was that weakness a disgruntled claimant allegedly exploited on February 3 to injure 19 people. Police said a former pub bouncer whose workers’ compensation claim fell well short of his previous earnings wheeled a shopping cart loaded with petrol-filled jerry cans and lit fireworks into a TIO office in the centre of the city. Chief Executive Richard Harding said six staff were injured, two seriously. The other nine people injured were customers. Most suf fered burns or respiratory problems from smoke inhalation.
Don’t be cocky: The financial services sector has survived the global financial crisis, but that’s no excuse for cockiness, according to Zurich Australia Chief Executive David Smith. He says “professionals patting themselves on the back for surviving” are “madly rehiring those they previously dismissed and paying themselves big bonuses” – actions he says are just asking for trouble. “There’s an ongoing need for us to be cautious,” he told a media briefing in Sydney. “Our robust regulatory regime helped Australia
weather the worst of the financial crisis storm, but there is also the danger of the regulatory pendulum swinging too far the other way. He says the global financial crisis is still reverberating and “the pace of reform has accelerated at breakneck speed”. Warning that any reforms to the financial services sector “must be good reform”, Smith says Australia needs “balanced, well thought-out reform that builds and develops our system in a coherent and fully integrated manner”.
A grey issue: Iran is red, Russia is yellow and Angola is amber. But who’s green? That’s the question put to Aon after the insurance broker decided safety was no longer found in verdant green but monotonous grey in its 2010 Political Risk Map.
Ultimate accolade: Very few insurance executives can claim a place beside US founding father Benjamin Franklin and the founder of the modern German state, Otto von Bismarck. QBE Chief Executive Frank O’Halloran (above) can. His already impressive resume now includes a place in the prestigious Insurance Hall of Fame. Induction into the hall by the International Insurance Society is considered the highest honour in the global industry, and O’Halloran’s efforts in taking QBE from a regional player to globe-spanning behemoth was recognised as “nothing short of remarkable” by society President Michael Morrissey. Fellow laureates Franklin and Bismarck were initiated posthumously in 1976 and 1957 respectively – Franklin for pioneering organised risk-bearing in the United States and Bismarck for launching the world’s first national social insurance program. O’Halloran also takes his place among other titans like Maurice “Hank” Greenberg, Chubb founder Hendon Chubb and former Lloyd’s of London Chief Executive Sir David Rowland. He is just the second Australian Hall of Fame inductee after noted actuarial academic Alfred Pollard. Last year the Australian and New Zealand Insurance Industry Awards judges named O’Halloran “Insurance Leader of the Year” for the second time, and in December Insurance News placed him at No 1 in its list of the 20 most influential Australian insurance executives. QBE has offices in 45 countries and a market capitalisation of roughly $US22.5 billion ($25.1 billion). 8
insuranceNEWS
Once a default colour, green has apparently lost its position at the near end of the safety spectrum, with Aon using a grey palette to paint perennial safe places Canada, the United States, Australia, New Zealand, Europe and Scandinavia.
Managing social risk:
Remember country musician David Carroll’s online hit last year called “United Breaks Guitars”? The song, based on his unhappy experience pursuing compensation from the American airline, became a YouTube and Yellow retains its usual iTunes smash, focusing plenty of attention position as a signpost for on his plight and sending the company’s caution; Aon found public relations team into – well, a spin. Russia, India, China, The damage to United was incalculable, Turkey, Saudi Arabia and which is a good example of the reason Aon Peru all contained some Australia has partnered with reputation inherent risk. management specialists SR7 to provide soMost of Africa and cial media intelligence, insight and analysis southeast Asia, including to clients. Thailand, the Philippines The service is designed to help clients and Malaysia, is a slightly deal with what it says is an increasing incidarker shade of amber. Sudan, Venezuela, Yemen, dence of damage social media like Facebook can inflict on brands and corporate reputaAfghanistan, Congo DRC, tions – particularly if online comments end Iran, Iraq, North Korea, up in the mass media. Somalia and Zimbabwe – Aon’s new service will monitor and audit the most dangerous social media to identify and manage places on earth – earn a emerging risks. fire engine red. February/March 2010
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newsmakers at insuranceNEWS.com.au
Figure this: Year of change:
8
The elevation of Rob Scott (right) to Deputy President of the Insurance Council of Australia (ICA) marks the beginning of a year of change to be underscored by the appointment of a chief executive to replace Kerrie Kelly. The Wesfarmers Insurance Managing Director takes over from IAG Chief Executive Mike Wilkins, who stays on the ICA board as a director. Allianz Australia Managing Director Terry Towell remains President. Kelly began work in London this month as Director-General of the Association of British Insurers. As Insurance News went to print, Karl Sullivan held the interim role of Acting Chief Executive in her absence. He’s the General Manager of ICA’s Policy, Risk and Disaster Planning Directorate.
Percentage of rises recorded last year in personal lines premiums
4
Percentage of premium rises recorded last year in commercial lines
125
The combined ratio for compulsory third party in New South Wales last year
10
The percentage rise in NSW CTP premiums last year
APRA ups the ante: The Federal Government is planning to hand the prudential regulator sweeping new powers to boost financial sector stability. The Financial Sector Legislation Amendment (Prudential Refinements and Other Measures) Bill amends more than seven separate acts and caps US and British moves to strengthen financial regulation. The draft bill grants the Australian Prudential Regulation Authority (APRA) extended powers to investigate insurers, enforce compliance and prevent institutional failure.
The changes will enable APRA to – among many other things – force insurers to recapitalise in order to meet obligations and compel the supply of relevant information. The bill also clarifies government administration of the Financial Claims Scheme, which guarantees general insurance policies in addition to deposits held by Australian banks, credit unions and building societies, up to a limit of $1 million. If the bill becomes law general and life insurers will come under greater scrutiny and face increased levels of investigation and intervention from APRA. Details on page 58.
326 million
Amount in dollars governmentowned insurers paid out in professional indemnity and public and product liability claims last year
15.3
CommInsure’s share of the life risk market last year. (No 2 in the market is ING with 12.6%)
75
Percentage rise in profit for life insurers in December quarter compared with previous quarter
20
Credit crunch is history: The credit crunch is over according to trade credit insurer Coface, which has upgraded 20 country rankings in its latest analysis of global risk. Coface recorded a 40% fall in the number of defaulted payments in the second half of last year (there was a 19% surge in the first half) leading the Paris-based insurer to
call time on the global credit crunch.
past 60 years,” Coface said.
Trade credit terms are likely to improve in step with brighter economic conditions following a surfeit of bad debts during the downturn.
Australia and New Zealand are among the strongest performers with both countries receiving upgrades from A2 to A2-positive.
“The credit crisis, which will have lasted two years… has been of a magnitude unprecedented for the
insuranceNEWS
Percentage of staff who leave a job because of bad management, according to Exit Info
The insurer has this year forecast “a very soft recovery in developed countries, which is fragile due to the threat of various bubbles”.
February/March 2010
8
Percentage of insured Black Saturday bushfire victims who have decided to rebuild
9
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Reuters
newsmakers at insuranceNEWS.com.au
IAG turns the corner The past few years have been a slog for IAG, so the corks would have been popping at the start of February when the group announced a much-improved first-half performance. Chief Executive Mike Wilkins forecast an insurance profit of $488 million, more than double the amount earned in the period last year. He expects a full financial year insurance margin of between 11.5-13%, up from a previous forecast of 9-11%. Last year IAG reported an insurance profit of $227 million in the first half, contributing to a slim overall net profit of $4 million.
Life returns to Port au Prince: up to 3 million Haitians are homeless and as many as 200,000 died, but the insurance bill is comparatively miniscule
Giant quake, tiny claim: Insurers won’t be groaning under the weight of claims from the devastating earthquake that flattened Haiti in January. While at least 150,000 people died and most buildings in the capital city, Port au Prince, collapsed under the power of the Force 8 quake, experts estimate the insurance payout will be in the “low millions of dollars” range. Aid dollars to impoverished Haiti – which has become a byword for tragedy and chaos in the Caribbean – will be the main source of finance for rebuilding the shattered island. One of the world’s poorest countries, Haiti also has a very low level of insurance penetration at less
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 763 Heidelberg Road, Alphington VIC 3078 (COURIERS ONLY) Email: naomi@mccmedia.com.au
than 0.3% of gross domestic product. Londonbased Axco Insurance Information Services says general insurance premiums from Haitian total less than $US20 million ($23 million). The Caribbean Catastrophe Risk Insurance Facility paid the Haitian Government $US7.7 million ($8.7 million) on January 31, the bulk coming from Swiss Re. Despite the absence of insured losses, many industry companies have made donations to the Haiti disaster relief fund. Chubb has donated $US500,000 ($566,000) and Aon $US400,000 ($453,000). 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
10
insuranceNEWS
February/March 2010
Though full details were still under wraps when Insurance News went to print, IAG appears to have turned the corner after a period of consolidation marked by a reduction in dividends, staff and underperforming business. Wilkins attributes the improved result to better underlying profit performance, lower claims costs and favourable credit spreads. “Our largest business, Australia Direct, recorded solid gross written premium growth and a strong insurance margin while CGU also recorded a further, steady improvement in underlying profitability,” he says. He also reported a “sharp turnaround” in its New Zealand business.
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 certified paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification.
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As a broker you want to know your customers’ claims will be dealt with efficiently, but also effectively. Over eighty years ago, we started out doing workers compensation. Since then we’ve honed our knowledge and expertise, so you can be certain the details of your customers’ claims are in safe hands. For more details, contact your Relationship Manager or call 1800 767 991
WORKERS COMPENSATION
In NSW, GIO General Limited ABN 22 002 861 583 (GIO) operates as an agent for the NSW WorkCover Scheme. In Victoria, GIO Workers’ Compensation (Victoria) Limited operates GIO0148/FPC/IRM/R as an agent for the Victoria WorkSafe Authority. In WA, ACT, TAS and NT, Workers Compensation Insurance is issued by GIO.
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Is this the d a new c Forcing rates up: - Years of falling premiums - Rising CTP and weather-related claims - Investment losses from the Global Financial Crisis
14
insuranceNEWS
February/March 2010
It probably is, according to a survey. But sunnier times might be some way off yet By Ben Oliver PREDICTING AN END TO THE SOFT insurance cycle has been like watching the final of a 100-metre sprint: concentration, posturing, false starts, a nervous break and a late burst. But after years of languishing at the back of the financial services profit pack, insurers relate to the cycle that rules their businesses as more of a marathon than a sprint. Not since 2001 – when the collapse of HIH saw capacity vanish from the market almost overnight – has the industry been able to charge aggressively. Finally, after years of promises and posturing, insurers seem ready to make their break. Premiums are finally on the rise, but by how much and how quickly remain to be seen. True to the marathon analogy, insurers are not pushing things too hard too early. According to the annual JP Morgan Deloitte General Insurance Industry Survey, released last month, commercial classes of insurance increased by an average of 4% in 2009, while personal lines jumped 8%. It’s a marked rise from the previous five years. Since rates last rose in 2003, they have
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he dawn of w cycle?
Keeping rates down: - Regulatory pressures on CTP classes - Steady or increasing capacity in personal and commercial lines - New entrants into personal lines - Soft US premiums - EU premiums only experiencing small increases - Aggregation platforms delivering multiple commercial quotes to clients
consistently been slashed year on year; $100 of premium in 2004 would only cost $73 in 2010, not counting inflation. “This is a real turn in the cycle since there have been premium decreases in a majority of classes for a number of years,” JP Morgan senior insurance analyst Siddarth Parameswaran says. “The more moderate increases in the commercial markets reflect some financial discipline in the industry, which was willing to respond to the impact of the financial crisis and reduced reserve releases before they were reflected in significant losses.” The insurance industry’s combined ratio, a measure of profitability, in 2009 was 101%, up 7% from the previous year, a poor year for profits where anything above 100% means zero addition to the bottom line. The combined ratio for domestic classes was 102% on average, while commercial classes were marginally profitable at 95%. Among the most unprofitable lines of commercial insurance were directors’ and officers’ (D&O) – with a combined ratio of 109%, Western Australian workers’ compensation at 100%, fire and industrial special risks (ISR) at 99% and commercial motor also at 99%. Premium rises were most evident in commercial motor (up 10%) and D&O (up 6%), while workers’ compensation in WA bucked the trend falling by 6%, and in Tasmania, the Northern Territory and the Australian Capital Territory fell by 5%. In personal lines, the largest increases were in householders and compulsory third party (CTP) classes; Queensland CTP shot up 14%, while CTP in New South Wales rose 10%. The extent of CTP losses were somewhat “masked” by significant reserve releases in long-tail lines. Increases in premiums were almost inevitable. The global credit crunch may not have hit the local insurance industry – flush insuranceNEWS
February/March 2010
15
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Salaried staff
72%
72% Branch network
Commercial Lines Distribution (%) Now Two Years
mium Split
Workers’ Compensation 5%
Professional Indemnity 6%
ability 7% Other 16%
cial %
Domestic Motor 22%
8%
House 17%
Brokers General Insurance Agents
Five Years
71 9
72 10
72 10
Underwriting Agents Other Financial Intermediaries Call Centre Branch Network Strategic Alliance Partner
7 4 3 2 2
6 3 4 2 2
6 3 4 2 2
Affinity Groups Salaried Staff Direct Mail Internet
1 1 0 0
0 1 0 0
0 1 0 0
Personal Lines Distribution (%) Now
Two Years
Five Years
Brokers General Insurance Agents
7 10
6 9
6 8
Underwriting Agents Other Financial Intermediaries Call Centre
1 5 41
1 3 41
1 3 36
Branch Network Strategic Alliance Partner
21 3
22 3
21 3
Affinity Groups Salaried Staff Direct Mail
0 1 3
0 1 3
0 1 3
Internet
8
11
18
with more than $1.6 billion in fresh equity before the crisis unfolded – as painfully as others, but with combined ratios climbing towards triple figures, profits had been squeezed for too long in the absence of action. Workers’ compensation is one line that has long suffered the price squeeze. Since 2007, premiums have fallen by 21% in Tasmania, the NT and ACT, and 26% in WA. While losing further ground last year, workers’ compensation is one area in which insurers are no longer resigned to losing money. Insurers say they will force price rises on average between 6-8% this year to restore some level of profitability into these lines. WA’s booming economy should also benefit combined ratios in workers’ compensation; claims generally fall during good times due to the abundance of employment opportunities. Premiums in D&O lines, which according 16
to the survey rose by 4% and 6% respectively in 2009, will be aggressively priced this year. Expect to see rises in professional indemnity of 8% and D&O of 9% in what the survey describes as “superimposed inflation trends”. “The more moderate increases in rates in the commercial markets reflect some financial discipline in the industry, which was willing to respond to the impact of the financial crisis and reduced reserve releases before they were reflected in significant losses,” Mr Parameswaran says. Deloitte actuarial partner Elaine Collins defines premium rises in much the same terms as a pre-emptive strike. “In 2001, rates turned after the blood bath,” she says. “Now we are seeing rates turn before that happens.” Premium rises have arrived at a time of economic resurgence. Equity markets have recovered significantly since March last year. Gross domestic product is expected to reinsuranceNEWS
February/March 2010
turn to a benchmark 3% in the next year and fixed income returns are making ground on pre-2008 levels. Inflation is being kept in check. A low consumer price index and the rising Australian dollar are seen as benefitting local operations. Insurers have also rearranged their investment portfolios, downsizing allocations in Australian bonds and equities and international bonds in favour of cash – a safer haven in troubled times. But while insurers are hoping revenue streams from the resurgent economy will be accompanied by larger cash flows from premium increases, there’s a catch. In 2001 it was capacity – or lack thereof – that allowed insurers to price products so high after HIH imploded. In lieu of another corporate disaster, insurers see the downturn as the impetus for another hardening
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Source: JP Morgan Deloitte General Insurance Industry Survey 2009
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INMAG Feb10:page layouts
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21%
22%
1% 3%
1% 3% 3% 1%
41%
5% Premium rate movements 1994-2009 1% 10% 8% 1996
1997
1998
3%6%
4% 2% 10%
3% 1% 8%
1995 7%
1994
1% 3% 3% 1%
41%
9% 6% 1999
11% 2000
2001
10% 6% -7%
7% 5% 1%
8
200
Domestic Classes Domestic Motor Householders CTP (NSW)
Commercial Classes
3% 4% 8%
9% 6% 13%
5% 94%
Commerical Lines Distribution Now
1% -15% 3%
Fire & ISR (Commercial Property) 1% 4%1% -5% Commercial Motor 1% -1% Liability 4% -2% Professional Indemnity 6% 7% -2% Workers’ Compensation 1% 1% 9% Workers’ Compensation (WA) Workers’ Compensation (TAS, NT & ACT) Source: General Insurance Industry Surveys (1994-2009)
Source: General Insurance Industry Surveys (1994-2009)
of the insurance market. But in 2010, no such capacity gap exists. In fact, commercial lines are flush with capacity. Insurers are more willing than ever to write business in professional indemnity, D&O, workers’ compensation and ISR. Capacity in other commercial lines is unchanged, but public and product liability is scheduled for a 5% rise in 2010. “While premium rates are forecast to continue to rise according to the industry, we suspect that the extent of increases may be kept in check by surplus capacity,” the JP Morgan Deloitte survey notes. “We believe rates turn most quickly in markets where there has been a significant reduction in capacity. We don’t believe we have those conditions at the moment. “This will provide some headwind against the sharp increases in Australian commercial market prices that are forecast by the industry.” Competition between insurers remains just as fierce, and soft international markets will also hinder local insurers pushing up premiums to meet ambitious targets. But it’s the emergence of so-called commercial aggregators that is, according to the survey, an “even greater threat” to the best of well-laid pricing plans. Aon is one broker to adopt the aggregator approach for small-to-medium clients. Under this approach clients undergoing the renewal process can compare quotes from competing insurers. It’s the personal lines equivalent of commoditisation, and it gives clients even greater power over insurers to buy purely on the basis of price. “Other brokers are working on similar platforms,” the report says. This evolving trend is reflected in the report section listing insurers’ major concerns. But while brokers and insurers share similar views on issues affecting insurance, they differ on the order of importance. The JP Morgan Deloitte survey shows the industry’s main two pillars share four of the top five issues – weather/climate change, regulation, profitability and staffing – but it’s 18
Two Years 1%2%4% 13%
-12% 3%-1% 2% -6% 2% -8% 6%4% -12% 2% 11%10% 14% -
-18% -8% -17% -18% 1% -
-3% -12% -9% -2% -
3% 4% 2% 3%
71%
weather, catastrophes and climate change that keeps insurers up at night. While global insured catastrophe losses in 2009 were less than half the previous year’s $US52.8 billion, insurers placed it ahead of regulatory changes and increased competition on their worry sheet. Concerns over regulation stem from fears the International Association of Insurance Supervisors will lean on the Australian Prudential Regulation Authority to tighten controls in the aftermath of the global credit crunch, even if the present regulatory system seems to have worked well. The aforementioned fretting over competition is largely concentrated in domestic motor lines.
11% 17% 12% 19% -
16% 10% 18% 23% 9% -
11% 11% 5%
Fiv
45% 11% 51% 51% 5% 1
72% “One quarter of respondents were concerned about attracting and retaining staff,” Deloitte’s Elaine Collins says. “This was down significantly from last year’s survey, where 80% of respondents raised ‘attracting and retaining staff’ as an issue.” Brokers, on the other hand, name attracting and retaining staff as their most pressing concern, followed by taxes and regulation, poor pricing, the global financial crisis and weather events. Whatever 2010 brings, one thing is certain. Insurers have touched the bottom of the cycle. As for whether prices gallop or merely crawl towards the next peak, only time will tell.
Com
Gross Premium Split
Broke Workers’ Compensation 5%
Professional Indemnity 6%
Liability 7% Other 16%
Commercial Motor 6%
Gene Unde
Other Call C Branc
Strate Affinit Salar Fire/ISR 13%
Direc Intern
Domestic Motor 22%
CTP 8%
Pers
Broke House 17% Source: Australian Prudential Regulation Authority (December 2008)
insuranceNEWS
February/March 2010
Gene Unde Other
Call C Branc Strate
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001
2002
2003
2004
2005
2006
2007
2008
2009
7% 5% 1%
11% 11% 5%
7% 7% 3%
2% 5% 2%
2% 3% -4%
0% 4% -5%
2% 4% -1%
3% 4% 3%
4% 6% 7%
16% 10% 18% 23% 9% -
45% 11% 51% 51% 5% -
14% 5% 27% 29% -6% -
-7% -8% 3% 6% -9% -
-14% -6% -11% -12% 0% -
-7% -8% -10% -7% -9% -7%
-9% -2% -10% -9% -14% -11%
-3% 9% -6% -7% -12% -8%
4% 8% -1% 0% -6% -1%
Brokers singing a different tune Intermediaries are the canaries in the insurance coalmine By Ben Oliver TALK TO INSURERS AND THE MESSAGE BEING CONVEYED without equivocation is that rates are hardening. There’s nothing new in that message. According to the latest research by JP Morgan and Deloitte, insurance premiums have begun an upward ascent and will only climb higher as a necessary market correction occurs. Insurance brokers, however, take a more nuanced view on supposedly universal rate increases. In their December report, Marsh and Deutsche Bank found commercial rates weren’t growing as expected, and were unlikely to rise while capacity remained abundant and capital reserves well-financed. Marsh Senior Placement Executive Roger McCallum told Insurance News brokers have played a stoppage role by “countering” price pushing by insurers with some aggressive marketing of their own. Marsh’s Insurance Market Review says rates are only rising in select classes such as trade credit insurance and professional indemnity (PI) in financial institutions, but are not widespread enough to warrant a call of uniform escalation. “In general terms, an analysis of the market cycle and historic movements in ratings suggests that rates across the board should rise,” it says. “Insurance buyers, however, have enjoyed a period of relative stability through a period of significant catastrophic losses and unprecedented financial upheaval. “Therefore, as economic conditions are likely to improve, there is no solid basis upon which to expect an immediate hardening in the market.” Where JP Morgan sees stumbling blocks in surplus capacity, new entrants and weak demand, Marsh, Deutsche Bank and Finity Consulting – which in July this year predicted the upswing wouldn’t arrive until 2011 – see walls. “The professional liability classes have not been as heavily iminsuranceNEWS
pacted by pricing changes as initially expected,” the Marsh report says. “With some exceptions across particular classes of insurance and within certain industries, insurance conditions have remained relatively flat.” While the two other global brokers operating in the local market declined to comment on premium movements – Aon is releasing its own market survey in March, while key staff at Willis were on leave – small intermediaries such as brokerage InterRisk confirm what Marsh has to say on rate rises. Managing Director Dennis Guy says while domestic premiums are unmistakably on the up, commercial rates are not moving in tandem, but on a case-by-case basis. “There is still a substantial degree of competition between underwriters,” he says. “Liability remains very competitive, and in directors’ and officers’ we haven’t see much of a change unless there is a client with a potential for adverse loss experience. “The market is being driven more by clients’ perceived loss experience.” Melbourne-based brokerage PSC Tartakover Account Manager Helena Lay says the largest rises have been in the small-to-medium sector and private motor, where premiums have leapt by up to 15%. PI is “holding steady”, but “everything else is going up, not down”. Brisbane-based JW Bell and Associates Director Caitlin Bell says in the domestic portfolio, price hikes of up to 60% have occurred in accidental damage and householders insurance. “Insurers have recognised accidental damage claims are being made on lost or stolen items such as Blackberrys and iPods,” she says. “They are discouraging people from taking out this style of policy and would like them to go back to traditional insurance.” The National Insurance Brokers Association has not released a report since July last year, which showed 72% of brokers reported premium increases.
February/March 2010
19
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NATURAL CATASTROPHES:
Calm before the storm 2009 was relatively quiet for claims, but Jamin Robertson reports that’s cold comfort for worried reinsurers A QUIET HURRICANE SEASON IN THE UNITED STATES IS the main reason reinsurers recorded such a dramatic drop in natural catastrophe losses in 2009. It was also a year in which the number of deaths from natural disasters also fell. Munich Re’s annual summary of natural disasters estimates total economic losses in 2009 of $US50 billion ($54 billion), with insured losses of $US22 billion ($24 billion). The figures are well down on the heavy losses incurred in 2008, when economic losses were estimated at $US200 billion ($215 billion) with insured losses of $US50 billion. Preliminary figures from Swiss Re are in line with those of its rival reinsurer, with total losses from both natural and man-made disasters estimated at $US52 billion ($56 billion). Swiss Re estimates insured losses from natural catastrophes were just $US21 billion ($23 billion). A quiet North Atlantic hurricane season served to restrict global losses, with just three storms reaching hurricane force – well below the recent annual average of 7.5. However, a total of 850 destructive events was higher than the long-term average of 770. 20
insuranceNEWS
For that reason, Hong Kong-based Swiss Re Director of Client Markets Clarence Wong believes potential catastrophe losses actually increased despite a benign year for global losses in 2009. He puts this down to ongoing economic growth in emerging markets, increased insurance penetration and dramatic population growth in exposed areas. “We’re seeing increased concentration of risk in areas vulnerable to windstorm or earthquake which is likely to drive up the severity of loss over the longer term,” he told Insurance News. From a global perspective, a relatively calm 2009 is reflected in the Munich Re estimated death toll of 10,000, which compares to 220,000 deaths the previous year and an average of 75,000 people killed in each of the past 10 years. The Swiss Re estimate of 12,000 deaths in 2009 is slightly higher than Munich Re’s estimate, but still among the lowest recorded in 20 years. By contrast, the devastating Haiti earthquake last month may have already put this year’s death toll beyond 100,000, according to early reports of the disaster. It was another earthquake, on the Indonesian island of Sumatra February/March 2010
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Reuters
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Looking for survivors at the Ambacan Hotel in the Indonesian city of Padang after a massive earthquake in September killed 1100: while 2009 was a relatively quiet year for disasters, the number of destructive events globally was higher than the long-term average
in September, that caused the highest death toll from a single event last year. The 7.6 magnitude quake brought down thousands of homes and killed more than 1100 people. Elsewhere in Asia, three severe typhoons brought widespread destruction and the loss of more than 1700 lives in Vietnam and Taiwan. European storm Klaus ranked as the costliest single event of the year, with 195kmh winds bringing havoc to northern Spain and southwest France in January. Total economic losses climbed to $US5.1 billion ($5.5 billion) with insured losses of $US3 billion ($3.2 billion). Climate change continues to ride high on the reinsurance agenda due to increasing weather-related events, which together comprised about 45% of total insured losses for the year. Reinsurers were therefore disappointed in the United Nations Climate Change Conference, held in Copenhagen in December, for failing to achieve a breakthrough international agreement on carbon emission reductions. Munich Re Chief Executive Nikolaus von Bomhard says the failure of the Copenhagen conference “has left me somewhat stunned”. insuranceNEWS
The company’s Head of Geo Risks Research, Peter Hoeppe, cites as an example the rising exposure from US tornadoes and thunderstorms; American losses have soared from an inflation-adjusted annual average of $US4 billion ($4.3 billion) in 1980 to $US10 billion ($10.7 billion). “Initial analyses indicate that, apart from socio-economic factors, this is already due in part to climate change.” Munich Re further points to a global three-fold increase in the number of major weather-related natural disasters since 1950. Australians may not require much convincing after Victoria’s February 7 Black Saturday bushfires were exacerbated by unprecedented conditions, including a record Melbourne temperature of 46.4 degrees. Devastating bushfires, aided by strong winds and tinder-dry conditions, ripped through areas of regional Victoria killing 173 people. Munich Re figures for the Oceania region estimate the Victorian bushfires caused economic losses of $2.04 billion, with insured losses of $1.2 billion. Queensland storm and flood activity also kept insurers busy [see table]. Scott Hawkins, Munich Re’s Underwriting Manager for February/March 2010
21
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Ranking by overall losses (2009)
Date
Country/Region
Event
Ranking by overall losses (2009) 23-25 January
France, Spain
Winter Storm Klaus
10-13 February
United States
Tornadoes, severe storms
Date
Country/Region
6 April
Event
Italy
Earthquakes
Fatalities 26
Overall Insured losses losses $US million $US million 5,100
3,000
Overall Insured 2,500 1,350 Fatalities losses losses 295 $US million 2,500 $US million 260 15
10-18 23-25 June January
United France,States Spain
Tornadoes, severe Winter Storm Klausstorms
1 26
2,000 5,100
30 September-1 10-13 February October
Indonesia United States
Earthquakes Tornadoes, severe storms
1,195 15
2,000 2,500
1,100 3,000 <50 1,350
23-24 6 AprilJuly
Europe Italy
Hailstorms, Earthquakessevere storms
11 295
1,800 2,500
1,200 260
9-11 10-18April June
United United States States
Tornadoes, Tornadoes, severe severe storms storms
9 1
1,700 2,000
1,150 1,100
7-10 August 30 September-1 October
China, Philippines, Taiwan Indonesia
Typhoon Morakot Earthquakes
614 1,195
1,600 2,000
110 <50
25-26 23-24 March July
United EuropeStates
Severe storms, hailstorms, Hailstorms, severe storms tornadoes
11
1,500 1,800
995 1,200
7-28 9-11 February April
Australia United States
Bushfires Victoria Tornadoes, severe storms
173 9
1,300 1,700
770 1,150
7-10 August
China, Philippines, Taiwan
Typhoon Morakot
614
1,600
110
1,500
995
173
1,300
770
25-26 March
United States
Severe storms, hailstorms, tornadoes
7-28 February
Australia
Bushfires Victoria
Ranking by insured losses (2009)
Date
Country/Region
Ranking by insured losses (2009)
Event
23-25 January
France, Spain
Winter Storm Klaus
10-13 February
United States
Tornadoes, severe storms
Fatalities 26
Overall Insured losses losses $US million $US million 5,100
3,000
Overall Insured 2,500 1,350 Fatalities losses losses 11 $US million 1,800 $US million 1,200 15
Date
Country/Region
Event
23-24 July
Europe
Hailstorms, severe storms
9-11 23-25April January
United France,States Spain
Tornadoes, severe Winter Storm Klausstorms
9 26
1,700 5,100
1,150 3,000
10-18 10-13 June February
United United States States
Tornadoes, Tornadoes, severe severe storms storms
1 15
2,000 2,500
1,100 1,350
25-26 23-24 March July
United EuropeStates
Severe storms, hailstorms, Hailstorms, severe storms tornadoes
11
1,500 1,800
995 1,200
20-21 July 9-11 April
United United States States
Severe storms, hailstorms Tornadoes, severe storms
1 9
1,000 1,700
800 1,150
7-28 10-18February June
Australia United States
Bushfires Victoria Tornadoes, severe storms
173 1
1,300 2,000
770 1,100
8-9 October 25-26 March
Japan United States
Typhoon Melor hailstorms, tornadoes Severe storms,
4
1,000 1,500
625 995
7-9 May 20-21 July
United United States States
Tornadoes, severe storms Severe storms, hailstorms
7 1
850 1,000
600 800
7-28 February
Australia
Bushfires Victoria
173
1,300
770
Australasia, says rising insured values 8-9 of October coastal areas is one example Japan of the type of risk facing Australia from future catastrophic events 7-9 May United States “such as cyclones in southeast Queensland and earthquakes in Sydney”. “The concentration of values in these areas means any loss sustained there will be disproportionately large when compared to a potential loss in other parts of the country,” he told Insurance News. Though fires and floods continue to punctuate the Australian landscape, the wider Oceania region last year followed the global trend in recording lower economic and insured losses. There was some good fortune for locals when a category 5 cyclone named Laurence bypassed populous areas to make landfall on
theTyphoon remote northwest Australian coast 4prior to 1,000 Christmas. The Melor 625 storm brought winds of more than 280kmh, tearing trees from the Tornadoes, severe storms 7 850 600 ground and damaging the few buildings that stood in its path. “The regions in its path were for the most part uninhabited,” Munich Re reports. “If a town had been hit, the losses would probably have been substantial, but fortunately there was relatively little property damage.” All of which is no reason to assume a false sense of security, says Torsten Jeworrek, the Munich Re board member responsible for global reinsurance business. “We need as soon as possible an agreement that significantly reduces greenhouse gas emissions because the climate reacts slowly and what we fail to do now will have a bearing for decades to come.”
Why reinsurers want governments to wake up
Reuters
Experience and research back up some uncharacteristically blunt language
Asleep on the job: major reinsurers were upset by the Copenhagen conference’s lack of action
22
insuranceNEWS
REINSURANCE SECTOR LEADERS ARE MAKING THEIR feelings very clear in the wake of the failed United Nations Climate Change Conference in Copenhagen in December. Their willingness to criticise the crawling pace of international agreement on climate change has frustrated the reinsurers – particularly Munich Re and Swiss Re, whose preferred low profile approach is crumbling as political leaders squabble and debate over issues of responsibility and fairness. The summit ended with a hastily concocted agreement to restrict global warming. It was not legally binding to signatories and set no specific targets for carbon emission reductions. Munich Re Chief Executive Nikolaus von Bomhard described the conference outcome as “baffling”. After issuing a statement describing climate change as “one of February/March 2010
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LEFT Cleaning up after Typhoon Morakot hit Taiwan in August: three severe typhoons brought widespread destruction to parts of Asia BELOW Seconds from disaster: a satellite picture shows a tsunami wave bearing down on Tafuna International Airport outside Pago Pago, Western Samoa, on September 29. The wave â&#x20AC;&#x201C; generated by a large earthquake â&#x20AC;&#x201C; killed more than 100 people in the Samoan islands and caused considerable damage
Reuters
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the biggest challenges facing mankind”, he called for a strict climate agreement, adding, “and we need it fast”. “Climate change is a global problem and a challenge for humankind. If the players do nothing but pursue their national interests, we are headed for a climate catastrophe.” Both Munich Re and Swiss Re have previously called for a 50% cut in 1990 levels of global emissions by 2050. The two reinsurance giants know the consequences of inaction Significant events 2009 Oceania (as at December 22, 2009) better than most. Munich Re has been researching the issue for at least 30 years – long before “climate change” and “global warming” were common topics of discussion. There’s a hard-edged reason behind the two reinsurers’ uncharacteristically vocal efforts to force governments and insurers to heed the implications of their extensive research: the cost of natural catastrophes is climbing to unsustainable levels. Swiss Re summed up its case last year, stating: “The impact of hazardous events is continuing to rise, driven by interacting forces, including global warming, population growth, density of assets and the increasing vulnerability of ageing infrastructure.” Few appear immune to the risks of climate change. A Swiss Re report last year warned that Munich Re’s Nikolaus von Bomhard: action needed, and fast climate change risks could cost developing countries up to 19% of their gross domestic product by 2030. It also said that by the end of the 21st century storm surge events previously classified as once in a millennium could inundate northern Europe every 30 years. While cynics might suggest reinsurers have good financial reason to partake in doom and gloom forecasting, governments and insurers recognise the depth of the expertise Munich Re and Swiss Munich Re, Geo Risks Research, NatCatSERVICE Re, Copyright: in particular, have gained. And there’s also respect for their leadership in climate mitigation. The reinsurers’ initiatives include the promotion of technological solutions, formulation of public-private partnerships to facilitate risk transfer in developing countries, issuing catastrophe bonds and developing micro-insurance, and continuing support of climate change research.
$A
$A
Reuters
INMAG Feb10:page layouts
Fire and flood kept insurers busy: apart from $1.2 billion in claims for the massive Victorian bushfires in February, Australian insurers are also increasingly exposed to flood, like this one at Smithton in NSW in May
Significant events 2009 Oceania
Date
Loss event
Region
Fatalities
9-29 January
Floods
Fiji
13 January-25 February
Floods
Australia: Queensland
15-17 January
Bushfires
Australia: Western Australia
27 January-8 February
Heatwave
Australia: Victoria
29 January-2 February
Floods
Solomon Islands
10
7-28 February
Bushfires
Australia: Victoria
173
11
12 February-16 March
Floods, landslides
Papua New Guinea
8-9 March
Cyclone Hamish
Australia: Queensland
28 March-15 April
Floods
Australia: Queensland, NSW
5 April
Tropical Cyclone Lin
Tonga
11 May
Severe storms, hail
New Zealand
21 May
Severe storm
Australia: WA, Queensland
16 July
Earthquake
New Zealand
29 September
Earthquake, tsunamis
American Samoa, Samoa, Tonga
6-20 December
Bushfires
Australia: New South Wales
Copyright: Munich Re, Geo Risks Research, NatCatSERVICE
Copyright: Munich Re, Geo Risks Research, NatCatSERVICE
24
insuranceNEWS
February/March 2010
7
Overall Insured losses losses $AU million $AU million 46 210
20
100 347 2,035
1,200
45
30
70
37
8 2
192
8
2
75
48
2
1.5
179
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SMALL TRADE ASSOCIATIONS SEARCHING for ways to remain effective for their members without going broke are watching with interest a new approach being taken by the Australian and New Zealand Institute of Insurance and Finance (ANZIIF). The risk insurance industry’s peak training body has signed a deal with the Risk Management Institution of Australasia (RMIA) to provide all its operational and administrative functions. It’s part of an ANZIIF strategy to widen its exposure to the local industry at the same time as it expands its international operations. Chief Executive Joan Fitzpatrick says ANZIIF is well placed to provide similar arrangements to other small industry associations. “We have been in discussion with other organisations and believe we can allow smaller associations to meet the needs and demands of their members with our strong technical capability and service,” she told Insurance News. “I think it is something we will see unfolding over the next few years.” The Australasian Institute of Chartered Loss Adjusters (AICLA) revealed in November it had been approached by ANZIIF with an invitation to “integrate/merge with them”. AICLA President Ian McWalter says that under the proposal AICLA would become “a subset or special unit within their existing structure” under an ANZIIF strategy to “create special interest groups or niche areas”. More than half of AICLA’s 850 members in Australia, New Zealand and around the Asia-Pacific are formally affiliated with ANZIIF, which already provides training facilities and jointly hosts the annual industry Claims Convention. Under the terms of the agreement with the risk managers’ peak body ANZIIF will provide a dedicated service function, including access to education and event management resources, membership support services and marketing and promotional support. With about 2000 members RMIA will 26
Page 26
ANZIIF’s Joan Fitzpatrick: wants to help small associations
ANZIIF opens its doors Expect more small associations to follow the risk management group’s lead By Jamin Robertson
insuranceNEWS
February/March 2010
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remain a separate organisation and retain its existing membership, brands and industry events. The RMIA board will continue to govern and set the strategic direction of the organisation. RMIA had been concerned about the ongoing cost of maintaining an executive management structure and the infrastructure required to achieve sustainable growth throughout the Asia-Pacific region. Its President, Brian Roylett, believes the move is a â&#x20AC;&#x153;fantasticâ&#x20AC;? way to deliver improved services to the RMIA membership. â&#x20AC;&#x153;Our primary focus is to get access to the technology and quality service members need and the reweâ&#x20AC;&#x2122;ve been sources struggling to provide,â&#x20AC;? he told Insurance News. â&#x20AC;&#x153;This allows us to access all sorts of products and services ANZIIF has developed.â&#x20AC;? A unanimous vote in favour of the proposal from the RMIA board followed six months of consideration. Mr Roylett says the move has the widespread support of RMIA members. He is confident absorption of RMIA operations into a much larger ANZIIF structure will enhance rather than detract from the organisationâ&#x20AC;&#x2122;s identity and membership base. â&#x20AC;&#x153;We will retain our independent functions and I think thatâ&#x20AC;&#x2122;s not going to materially change at all,â&#x20AC;? he said. Three of its permanent staff have moved across to ANZIIF, and Ms Fitzpatrick says RMIA members will enjoy the benefits of a larger central organisation. â&#x20AC;&#x153;We have a full-service marketing department and a high level of capability in that area to support promotion of the RMIA brand, and we will be focused on professionalism and the growth of risk management.â&#x20AC;?
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ANZIIF has 14,000 members in 34 countries including offices in Shanghai and Hong Kong, while RMIA also has interests in the region. She says both organisations have identified significant growth potential in the Asia-Pacific region. â&#x20AC;&#x153;We have a pretty successful footprint in Asia and itâ&#x20AC;&#x2122;s natural for us to support and promote the RMIA brand. â&#x20AC;&#x153;Thereâ&#x20AC;&#x2122;s a lot of work going on in China, Hong Kong, Indonesia and Vietnam to develop risk management and a strong desire for risk management training.â&#x20AC;? In addition to providing access to professional development for RMIA members, ANZIIF will continue to administer existing risk management qualifications including the award of diplomas and advanced diplomas as well as short courses in risk management. â&#x20AC;&#x153;RMIA does not deliver qualifications but operates great workshops and seminars, so there is a nice complement within the area of professional development,â&#x20AC;? Ms Fitzpatrick says. Less likely is a return to merger discussions with Britainâ&#x20AC;&#x2122;s Chartered Insurance Institute (CII), after an initial proposal was abandoned in December 2008, and Ms Fitzpatrick says much has changed since the CII walked away. â&#x20AC;&#x153;In this world I would say never say never, but the economic environment in the United Kingdom is very challenging and I think the CII is very, very busy and focused on handling its own customer base. â&#x20AC;&#x153;The whole UK financial services sector is going through difficult times, so while there is still some background possibility itâ&#x20AC;&#x2122;s not likely in the short term.â&#x20AC;?
â&#x20AC;&#x153;Our primary focus is to get access to the technology and quality service members needâ&#x20AC;?
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IF THERE IS ONE RULE THE GLOBAL financial crisis â&#x20AC;&#x201C; recast under the vapid acronym GFC â&#x20AC;&#x201C; has cemented in perpetuity, itâ&#x20AC;&#x2122;s that society loves a scapegoat. In the wake of the biggest failure of financial institutions since the Great Depression, anguish and accusation received equal billing as banks, governments and even individuals suffered the 21st century equivalent of a mass stoning. Few have thrown up their hands in declaration of mea culpa, and risk managers are just as unwilling to stand idly by to be accused of being complicit in financial treachery. In fact, a white paper released by the Risk Management Institute of Australasia (RMIA) in December comes out swinging in defence of the industry. The three-page piece opined against â&#x20AC;&#x153;misconceptions about risk managementâ&#x20AC;&#x2122;s role in the GFCâ&#x20AC;?, pardoned risk managers, and pinned blame on industry-wide failures to practice sound risk management. RMIA says a misunderstanding or ignorance of risk by those â&#x20AC;&#x153;paid
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Sorry, but donâ&#x20AC;&#x2122;t blame us Risk managers blame poor management rather than themselves for the global financial crisis By Ben Oliver
handsomely to know betterâ&#x20AC;? â&#x20AC;&#x201C; and not the risk managers and procedures they followed â&#x20AC;&#x201C; were to blame for the current mess. It named legislators, regulators, boards and executives as culpable parties, but conceded the crisis did not flow from a single channel. â&#x20AC;&#x153;The causes are complex, involving failures in legislation, regulation and governance practices,â&#x20AC;? RMIA President Brian Roylett says. RMIA singled out two commonly held beliefs about the financial collapse as false: conventional risk management was junk, and organisational resilience is the be-all and end-all to business success. Management failed risk mitigation, not the other way around, Mr Roylett says, citing three key flops: a focus on funding instead of managing risk, over-reliance on computer modelling and ratings agencies, and the absence of â&#x20AC;&#x153;human judgement or allowance for outsized eventsâ&#x20AC;?. A companyâ&#x20AC;&#x2122;s resilience based on corporate governance and risk management was also not an assurance process for two reasons. Firstly, resilience is defined as the
â&#x20AC;&#x153;adaptive capacity of an organisation in a complex and changing environmentâ&#x20AC;? and is therefore the outcome of the risk management process. Secondly, RMIA cited corporate governance as preoccupied with control assurance, the latter requiring an organisation to anticipate and manage uncertainty. â&#x20AC;&#x153;Resilience is therefore an organisationâ&#x20AC;&#x2122;s state of being, resulting from the management of uncertainty in a complex dynamic environment,â&#x20AC;? Mr Roylett says. â&#x20AC;&#x153;Corporate governance is about control assurance, which in turn is reliant on the ability of an organisation to anticipate and manage uncertainty in a complex dynamic environment.â&#x20AC;? Staying true to risk management principles was the sure-fire way to avoid another catastrophic credit meltdown, he says. â&#x20AC;&#x153;An organisation that effectively manages uncertainty will also have sound governance and be resilient.â&#x20AC;&#x2122;â&#x20AC;&#x2122; In short, businesses should stop bleating about failed risk guidelines and start using them.
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RMIAâ&#x20AC;&#x2122;s Brian Roylett: management failed risk mitigation
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Code of controversy The General Insurance Code of Practice review disappoints critics – but how much change was justified? By Jeff Morse AUSTRALIA’S NEW GENERAL INSURANCE CODE OF PRACTICE “Insurance companies want to run everything over the phone,” Ms wasn’t designed to please everyone, and on that score it has succeeded Lane told Insurance News. “There are people who’ve had a car accident admirably. with third-party insurance and they have no clue whether the whole Actuaries and consumer advocates are among those asking how efmatter has been paid or not, because insurers have not communicated fectively the code will address the demands on the insurance industry in writing to them.” over the next three years. Other consumer advocates’ submissions called for affordability When independent reviewer Robert Cornall handed down his recmeasures to be written into the code, such as fortnightly premium payommendations on October 30 last year he concluded that the code ments through Centrelink’s bill payment service and a flexible operating since July 2006 had worked well overall. approach to the payment of excesses. Helping him draw that conclusion were the high proportion of While encouraging insurers to “assess their commercial policies claims paid (98%) and the fact that no sanctions had been imposed for dealing with low-income, unemployed and disadvantaged inon any insurer under the code. sureds”, Mr Cornall says this is a matter for The Insurance Council of Australia (ICA) accommercial judgement. cepted all 10 of Mr Cornall’s recommendations on He notes that in considering submissions The General Insurance Code of November 18. which could, for example, increase premiums, the Practice was established in 1994 In the five-month review process he heard from interests of all insurance consumers have to be by the Insurance Council of Australia. and consulted with industry, consumer and regulaweighed up. tory representatives. “As excesses reduce premiums, they offer sigIt establishes industry standards Among those groups, loss adjusters aren’t nificant savings to insureds who do not have a and is voluntary. happy about the lack of action over their call for claim,” the report says. “If any change proposed in The code was designed as a service providers such as builders to be subjected to this review prejudiced the willingness of insurers to “living” document that would the same training standards as insurance company offer excesses and consequently increased preevolve in line with changing employees who deal with claims. miums, it would be detrimental to all insurance circumstances. The Australasian Institute of Chartered Loss customers.” Its objectives are to: Adjusters (AICLA) told Mr Cornall service The charitable organisation Brotherhood of St providers may be skilled in building, plumbing or Laurence unsuccessfully sought fortnightly pay• Promote better, more informed electrical services but fall well short on expertise to ment and flexible excess options, as well as a new relations between insurers and accurately assess a loss in terms of insurance law approach to levels of cover and payment triggers their customers; and regulation. for low-income earners. • Improve consumer confidence The loss adjusters also believe there’s plenty of Microfinance Manager Genevieve Sheehan in the general insurance industry; potential for conflicts of interest between their says the group wants to work with the Insurance work and their duty to an insurer. Council of Australia and its members to improve • Provide better mechanisms for the resolution of complaints and “Customers may miss entitlements under a access to insurance for disadvantaged people. disputes between insurers and policy that they may otherwise have been eligible to “It was good that we had the opportunity to be their customers; receive,” the AICLA submission said. “Inaccurate involved in the consultation process, and it’s great loss adjusting can undermine the quality and inthat the review encourages insurers to assess their • Commit insurers and the tegrity of the claims-handling process and the policies if they’re dealing with disadvantaged professionals they rely on to higher standards of customer confidence of customers in that process.” people,” she told Insurance News. service. Mr Cornall’s report sidesteps the loss adjusters’ Community lawyer and Financial Ombudsman concerns, saying insurers have a clear incentive to Service board member Denis Nelthorpe is less conensure service providers meet acceptable standards ciliatory. of service because they are required to handle complaints relating to He points to changes in financial hardship (third-party recoveries) or received by their service providers. provisions that he says put up to 95% of people on very low incomes “Insurers pointed out that [AICLA’s] suggestion is impractical, outside the code’s coverage, because internal dispute resolution is now given the number of service providers they could use, the frequency linked to three repayment options, all of which are useless to people or infrequency with which they engage them and their likely turnover without the capacity to pay. of staff.” “The two most likely solutions to a debt problem for all lowIn its December newsletter, AICLA says it seems to be “business as income clients are a waiver or a reduced offer,” Mr Nelthorpe says. usual”, at least as far as claims are concerned. Representatives deMr Cornell’s report concludes insurers should consider waivers clined to comment further when approached by Insurance News. for third-party debts on a case-by-case basis, and recommends that “A giant disappointment and a huge opportunity lost,” is how they not be obliged to do so through the code. He points out it’s not Insurance Law Service Principal Solicitor Katherine Lane sees the review. a requirement in other financial services codes. “What concerns me is that the Code of Practice is an excellent opMs Lane believes the code review was “doomed to failure from the portunity to really push best practice, and that didn’t happen,” she start” because its terms of reference were too conservative. told Insurance News. That’s hardly surprising. The general insurance industry isn’t The service’s submission to the review calls for all rejections of known for being radical, and insurers face massive challenges in balclaims or decisions on complaints to be made in writing. If the inforancing social expectation with the need to make profits. From the mation has been given verbally this should be followed up in writing industry’s perspective, the Cornell review has struck an acceptable bal within 14 days. ance – at least for now. 30
insuranceNEWS
February/March 2010
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Business first, cluster second
25 years on, Austbrokers’ unique ownership model is standing up well in a changing world By Terry McMullan AUSTBROKERS IS AN INDUSTRY success story. Built from unlikely beginnings 25 years ago, the company buys into general insurance brokerages using a unique ownership model that has seen it grow into a highly profitable public company. But adherence to a 25-year-old model doesn’t prevent Chief Executive Lach McKeough from capitalising on the changing face of the broker market. The company’s development strategy includes using authorised representatives as a key building block, along with a range of ownership arrangements. Today Austbrokers has around 40 brokerages, underwriting agency businesses, an increasingly successful joint venture with the Insurance Brokers Network of Australia (IBNA) and growing financial services operations within the brokerages. What makes Austbrokers different is that it doesn’t take a controlling shareholding – usually holding at 50% – and is keen on having the existing principals continued…
insuranceNEWS
February/March 2010
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“I do think some brokers have, to a large extent, lost the art of selling.” (or a successor) retaining equity. Mr McKeough, who has run Austbrokers since its inception [see panel], refers to the arrangement as “keeping skin in the game” – a strategy that results in principals being focused on building the business, including buying competitors. “Our model isn’t about control – from either side,” he says. “I know your typical corporate play isn’t to go out and buy a 50% stake in a business, but at Austbrokers it’s truly a partnership.” When Insurance News interviewed Mr McKeough in Sydney in mid-January, the company was preparing to announce its half-year results. That put financial discussions and specific planning out of court, but enabled Mr McKeough to focus instead on the wider issues. He has kept the company focused on the core strategy worked out a quarter of a century ago. As far as he is concerned, the model still works very well. If it didn’t, he would have found another. “Sure we’re a cluster, but the ‘cluster’ part is a result of the common equity ownership,” he says. “We’re a business. It’s important that we do all the other things that clusters do, but we’re a business first and a cluster second.” Each of the major Australian cluster group business models is different. For example, the largest cluster, Steadfast, has some 280 members. It has no financial interest in their businesses, but provides centralised services and considerable negotiating and buying power. Austbrokers’ member services are essentially marketing, administrative support, IT and other back-office systems, compliance and risk management. The company’s willingness to share those resources proved a major enticement when Mr McKeough started talking to rival cluster group IBNA in 2006. With 78 independent members and $800 million in gross written premium, IBNA was a significant player in the broker space, but hadn’t built up the sort of centralised services that Austbrokers could provide. Mr McKeough’s team proposed a joint venture structure in which IBNA members would retain their independent ownership and identity, while pooling resources with Austbrokers. Nearly three years after inception, Mr McKeough says the A & I Member Services joint venture (better known as 32
While other cluster groups have been formed by brokers intent on scale and greater market power, Austbrokers was originally formed by an insurance company. In the mid-1980s Lach McKeough was a senior executive working for major general insurer Mercantile Mutual, which was 50% owned by Dutch financial services company Nationale-Nederlanden (later part of ING). To counter NZI’s decision to buy up brokerages to enhance distribution of its commercial products, Mercantile Mutual decided to acquire interests in brokers and assist them to develop their businesses thereby protecting its own distribution. Mr McKeough was managing Mercantile Mutual’s northern New South Wales operations, and was given the job of making the acquisitions. At that time most small towns had their own insurance branch offices, and the retention of independent brokers was essential to maintain and grow distribution. “I realised very quickly, however, that I had some serious conflicts of interest managing the insurance company operations and having a closer involvement with brokers where an interest had been acquired.
1986. It became a listed public company in November 2005. In the last financial year – a difficult one for an industry labouring under a cycle at rock bottom and intense market competition – Austbrokers recorded an 11.1% rise in aftertax profit to $15.9 million. Shareholders who bought Austbrokers shares when they first listed in 2005 achieved a 124% return on their investment up to the end of the 2009 financial year – a 34% annual return. Austbrokers enjoys some significant shareholders, including the investment management arms of Challenger Financial Services (5.7%), AMP (6.8%) and Westpac (6.1%). But the largest single shareholding is held by QBE, which spent $41 million in February 2007 buying a 14.9% stake – a purchase that QBE Chief Executive Frank O’Halloran described as “strategic, long-term and friendly”. A few months later Allianz Australia bought a 5.1% shareholding.
“And that was the foundation stone of Austbrokers.”
The insurers’ stakes are regarded as a security measure to protect a valuable distribution channel should any other insurer make a move on Austbrokers.
The first brokerages were acquired in 1985, with the Austbrokers name being adopted in
This way they have their own “skin in the game”.
AIMS) is progressing nicely. “It’s early days still, but it’s bedded down very, very well,” he says. “I think we’ve achieved quite a lot for the members of both networks, and also for our underwriting partners.” Many of the IBNA businesses are large and successful, with their owners approaching retirement. Some have already moved across to Austbrokers, and Mr McKeough believes others may well follow over time. “We expect IBNA to continue to be a source of acquisitions for Austbrokers as the need for succession solutions arise. Certainly we value our closer relationship with IBNA members, and we would like the opportunity to have a seat at the table if they want to sell.” A number of Steadfast members have insuranceNEWS
February/March 2010
also moved across to Austbrokers, and Mr McKeough makes it clear the affiliation of the company is not an issue in negotiations. “If the deal’s right, we’ll do it. It’s the business we’re interested in.” He agrees Austbrokers has bought into some of the broking sector’s “cream” companies over the past decade, but insists there are many more prospects out there. “We’re very pleased with the group that we have, but, there’s still good businesses out there and we’ll continue to look for acquisitions.” He believes the broking sector will continue to consolidate over the next four to five years. “Brokers at some point are going to sell or at least be looking to pass the baton to somebody in their office,” he says. “We’re not going to buy every brokerage that be-
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Ray Lawler Studios
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A lot of value in local brands: Lach McKeough at last year’s AIMS conference with wife Jo (left) and Austbrokers members Simmone and Stephen Markey
comes available, but we certainly want to be in play and we’re positioned nicely.” Flexibility is evident in the fact that Austbrokers now holds ownership of more than 50% in some of its members. Mr McKeough says the arrangements are flexible and the offering can be tailored to suit the requirements of most principals selling their brokerages. Some Austbrokers members have acquired shareholdings in other brokerages and bolted them on to their own operations. In some instances, member businesses have acquired 50% or less to make the deal work, with the understanding of additional equity in time. “Where it facilitates succession, Austbrokers has taken up an additional shareholding,” Mr McKeough says. Assisting with the succession may become more common as principals in large – hence more expensive – brokerages decide to sell up. Some member companies have grown to a point that affordability is an issue for individuals who want to take up the retiring principal’s share. “There’s not too many people who have the sort of money that could buy a sizeable stake in some of these bigger businesses, but we’ve found the ‘owner/driver’ model works regardless. “If somebody borrows serious money to take up a stake, then they’ve got skin in the game. They treat the business as their own and the model continues. “There are a number of businesses where we have moved to over 50% to accommodate succession, but that’s more about facilitating the opportunity.” Mr McKeough sees the emergence of the authorised representative – a broker 34
operating under a centralised licence – as a very positive development brought about by the rising cost of buying into and running brokerages. “If you’re a young Turk looking to start out and you’ve got the money, you can come along and buy a share in a business and join in Austbrokers,” he says. “If you haven’t got the money but you’re prepared to have a go and back your arm, then the authorised rep model may well be the answer. “We’ve got a number of businesses now that are very serious in that space, and getting involved in that area was a deliberate strategy on our part.” Insurance Advisernet Australia, the country’s largest employer of authorised representatives, is an Austbrokers member, as is Adelaide-based MGA, which also has a large authorised rep workforce operating under a sophisticated model. “A number of our other brokers have authorised reps, and I don’t have a problem with it at all,” Mr McKeough says. He acknowledges some older brokers’ concerns about the emergence of authorised reps, but says it’s not true they are leading to a deterioration in skills. “The authorised rep model has nothing to do with knowledge gaps. I think it can be the new breeding ground for good brokers who want to have equity in their own operation without having the burden and distraction of administration functions.” Branding is becoming more important for the cluster groups as members gain the confidence to compete with the international brokers. Mr McKeough agrees the need to build awareness of the Austbrokers insuranceNEWS
February/March 2010
brand is significant when it comes to dealing with larger client companies, but he’s not going to force the issue with his members. “There’s also a lot of value in the local brands,” he says. “Just look at Markeys in Newcastle or Oxley in Port Macquarie, for example. There’s a risk that if you just switch to using the Austbrokers name, you can lose the ‘local’ identity. “But as we move into bigger commercial accounts, there’s certainly an advantage to having a known brand up front. In an ideal world the solution would be a combination of both. “We’ll keep working on that, and I think things will evolve over time.” Mr McKeough also keeps a wary eye on direct insurers’ moves into the commercial insurance sector, but says the complexity of commercial risk products has to be factored in. He believes brokers must do more to enhance their relationships with their clients, and that successful marketing is vital for brokers to expand their business. “Direct underwriters aren’t so much the risk to brokers,” he says. “But I do think some brokers have, to a large extent, lost the art of selling. “I think we’ve got to examine how we go about doing our business. We’ve got to get alongside clients, and we’ve really got to understand what the client wants and needs.” He says that at present account executives “are too often becoming order-takers. We’re not on the front foot, and that’s the risk.” “Once we do work harder on the relationship, the real value of a professional broker shines through and the direct un derwriter risk is diluted.”
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FRAUD Daylight robbery A global survey identifies insurers among firms most at risk of fraud By Jamin Robertson
Fire or car crash, there’s always a risk: tougher financial times and staff cuts make fraud more prevalent
36
A PERSONAL INJURY CLAIMANT shuffles about suburban Brisbane with a deliberate limp. A Gold Coast woman uses an inflated home insurance claim to upgrade her television and add a laptop computer. In Sydney, a middle manager at an insurance company uses some creative accounting in order to hit his monthly financial target. While these examples might be fictitious, a survey by PricewaterhouseCoopers (PWC) in November confirms fraud is a global reality. The Global Economic Crime Survey poll of more than 3000 executives in 54 countries found fraud affected nearly a third of all firms last year. Asset misappropriation or theft is the most common form of economic crime at 67% of reported cases alongside financial statement fraud, bribery and corruption, intellectual property infringement, money laundering, tax fraud, insider trading and espionage. “The global economic downturn has significantly increased pressures on organisations and individuals to perform, creating more incentives for fraud, and generating more opportunities for fraudsters to perpetrate their crime,” the report says. Local PWC partner Malcolm Shackell says local firms are not immune from fraud despite Australia’s relative resilience to the global downturn. insuranceNEWS
February/March 2010
“There is a link between the financial turmoil of the past 18 months and an increase in the numbers and cost of economic crime,” he told Insurance News. “We have seen an increase in incentives to perpetrate fraud such as financial hardship, loss of bonuses and threat of redundancy, while fraud controls have been relaxed as companies cut staff.” The insurance industry stands out among those industries most at risk of fraud, with only the communications industry a more common target. The high incidence of reported cases among the insurance industry continues a decade-long trend, with fraud in the hospitality and leisure and transportation and logistics sectors also prevalent. The economic downturn has had predictable ramifications on the survey results with more than 40% of global respondents reporting an increase in fraud over the past year, with large firms particularly vulnerable. It comes as 62% of respondents report a decline in company revenue. “The recent economic times have seen insurance companies, like many other businesses, falling off the curve,” Mr Shackell says. PWC believes the downturn has led to a shift in focus, with firms steering resources away from fraud control despite greater pressure among employees to meet incentives.
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Types of economic crimes
Fraud reported by industries Firms are being stretched thin as they face up to fraud on two fronts; internal fraud – often involving staff, and external fraud, which is typically carried out by customers. While the survey reveals 53% of cases involve those working inside an organisation, for insurance companies it is external fraud that is the greater concern. Fraudsters such as false insurance claimants comprise 65% of all perpetrators reported by insurers, with local insurer Vero confirming an increase in suspect insurance claims across both commercial and personal portfolios. Relevant declined claims on its books include a 43% rise in commercial property fires, a 24% increase in domestic home fires, a 31% rise in commercial property theft and a 40% rise in staged motor accidents. In December local insurer Vero noted the increase in fraud “has prompted Vero to look at smarter ways of investigating suspected cases of customer fraud and dishonesty, and requires ongoing vigilance from both brokers and insurers”. Taken at face value, the PWC figures certainly indicate a significant level of fraud within the insurance industry, but they also tell another story: Industries that report a high incidence of fraud are often those most adept at detecting it. “Organisations in these industry sectors
tend to have more robust and proactive antifraud measures,” PWC said. “They both suffer and detect more fraud than other sectors.” It‘s no surprise that insurers, with sophisticated claims investigation systems in place, are near the top of the list. They report many cases of fraud because they are more adept at weeding them out, whereas firms in other industries may be blindly oblivious. G4S Compliance & Investigations Australia Managing Director Kieran Milne spends a lot of time working with insurers to investigate suspect insurance claims and pinpoint fraudsters. He concurs with that perception. “Like many financial services firms, insurers employ many people and many processes,” he told Insurance News. “Insurers are pretty good at putting those internal controls in place.” Mr Milne says local insurers generally have a sound anti-fraud culture but customers may mistake insurers’ public silence on fraud as evidence of a soft target. “It varies by individual insurer,” he says. “Some insurers are very, very strong in fighting fraud, while others may not have that strength. “The public may not appreciate that capability, particularly compared to the United insuranceNEWS
February/March 2010
Source: PricewaterhouseCoopers
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Factors contributing towards increased incentives/pressures to commit fraud
Taken for a ride Insurers report an increase in fraud in step with the economic downturn By Jamin Robertson
Source: PricewaterhouseCoopers
States where it is promoted far more widely that insurance fraud is tackled head-on.” Looking at some of the global trends to emerge from the survey, those countries with the highest levels of reported fraud comprise a mix of developing and advanced economies, with Russia (71%), South Africa (62%), Kenya (57%) and Canada (56%) heading the list. Australia is also prominent at 40%, slightly below the UK (43%) and New Zealand (42%). At first glance, Japan (10%), Hong Kong (13%) and Turkey (15%) appear to have a limited exposure to fraud, but PWC again issues a note of caution. “Organisations in territories where relatively low levels of fraud were reported have either failed to detect it or have been reluctant to report it once uncovered,” it says. Effective fraud mitigation is a lesson PWC urges all firms to learn, with financial statement mismanagement in particular thought to cost more than $US1 million ($1.1 million) in at least a quarter of all cases. The report says firms are increasingly using anti-fraud controls, with 14% of respondents naming fraud risk management as a key mitigation measure, compared to just 4% in 2007 and 3% in 2005. Internal audits, internal and external tip-offs and plain pure chance round out other common methods of fraud detection. PWC urges firms to build further resistance through organisational loyalty and the introduction of clear sanctions for those who commit fraud, regardless of their position in the company. “The combination of an anti-fraud culture and effective anti-fraud controls… appears to be improving the detection of eco nomic crime,” the report says. 38
IT’S A COMMON SCENARIO. TRAVELLING closely behind a slowing car, the driver is late to react and slams on the brakes too late. Crunch. It’s just another claim for an insurer – and how will they know it’s fraudulent? Routine insurance cases have become common targets for insurance fraudsters in recent years as legislative and technological changes discourage car theft and rebirthing. Queensland police closed in late last year after a high number of accidents involving cars insured at inflated prices. Suspicion grew as drivers in these cases sustained few injuries despite extensive damage to their cars. Crime detectives have reported an emerging trend across Australia in step with the economic downturn, with insurers recording an increase in suspect claims. The number of Suncorp claims declined due to fraud has risen 30% in the last financial year, though it must be remembered that cases of fraud represent less than 1% of all claims lodged with the insurer. Executive General Manager Commercial Claims Paul Smeaton says suspicious cases of arson, motor vehicle accidents and inflated claims all come under the microscope in difficult financial times. “Some people may believe that staged accidents, arson and theft can be an avenue for accessing funds or paying for existing damage to their property or vehicle,” he told Insurance News. “People may look at different ways to access funds or stop payments, and they believe that lodging fraudulent claims is just one way to do this.” That has resulted in a 15% rise in the number of claims referred for investigation among Suncorp property lines and personal and commercial motor portfolios. It is a similar story at Allianz Australia. “There are some very devious people out there who make a full-time living ripping off insurers,” Managing Director Terry Towell says. “Allianz has had to get smarter.” SRS Underwriting Agency Chief Executive Paul Lynam has noticed similar trends among commercial lines, with an increase in fraud cases along the eastern seaboard.
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“There’s definitely evidence that suspicious claims are on the rise, including large claims,” he told Insurance News. “Claim numbers aren’t high but the severity is. “These aren’t little campfires.” Mr Lynam believes difficult financial conditions may have painted some commercial operators into a corner. SRS figures record a 120% rise in firms entering external administration between 1999 and 2009, as the number of cases rose from 4314 to 9500. “Along the east coast most insurers are experiencing their share of suspicious cases,” he says. “If an insured is under stress they may look at other avenues to solve their financial woes.” Insurance fraud is often sheer folly. Insurers devote an impressive level of resources to fight fraud, using everything from expert agencies to voice analysis software to weed out the bad apples. Analytical fraud software is typically combined with state-of-the-art mapping tools in the hunt for evidence including the work of forensic investigators. Allianz is currently looking at investing in cutting-edge predictive modelling technology which is able to cross-match the customer profile to examine external relationships and their effect on the claim and surrounding circumstances. Mr Towell says “experience, judgement and highly sophisticated intelligence systems” are being used by the Allianz national investigation unit to prevent the loss of tens of millions of dollars in bogus claims each year. “We’ve moved on from the old days where we relied on gut feeling and assumption, to actually putting some science into the role of fraud detection.” Insurers work with the Insurance Council of Australia and state and federal police to ensure that emerging trends in insurance fraud are quickly identified and addressed. In the months ahead, improving economic conditions suggest there may be a decrease in the number of cases of fraud handled by insurers. But Mr Smeaton warns that increased interest rates and unemployment still persist – and insurers will maintain a watching brief.
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Progressively competitive The crowded online motor insurance market attracts a giant US auto insurer By Jeff Morse
PROGRESSIVE INSURANCE HAS 10 MILLION customers in the United States. The Ohiobased insurer’s arrival in Australia during December signals an even more competitive year ahead in the local online retail motor insurance market. It’s hard to be low-key when you’re one of the world’s biggest motor insurers and a Fortune 500 company, so the image of a gunslinger arriving in a sleepy wild west town should come as no surprise. Yet the Melbourne-based Progressive Direct operation is but a tadpole compared with its much more diverse American parent. For now, anyway, it is just one more of a growing collection of motor insurers taking the cheapest route to motorists’ hearts. Progressive’s Australian model is avowedly 100% online – quotes, claims and policy management – and its only focus is motor insurance. Claims by phone are possible but not encouraged. The insurer says this specialist focus and online orientation is the key to its low prices and admits it won’t be every insurance buyer’s ideal for doing business. Those customers who do come on board are promised uncompromising cover and reliability plus a strong cultural focus on customer service with prompt and convenient completion of claims. Country Manager for Australia Simon Lindsay says Progressive Direct anticipates modest results in the near to medium term, given that online business currently accounts for just 8% of the total market. “You’re already starting with a fairly small piece of the pie but the business model is designed to be profitable with fairly low volume,” Mr Lindsay told Insurance News. Tom King, Progressive’s Business Leader for International Operations, says Australia “seems to be a good fit” for the company because it has “high broadband penetration and a large proportion of consumers who embrace online self-service”. Just how big an incursion Progressive and rivals such as Budget Direct, Youi and Real can make on Australia’s $6 billion direct personal lines motor market remains to be seen. Growth will largely come from wresting business away from established players IAG 40
and Suncorp, which between them hold more than 75% of the direct motor market. Their offerings are largely traditional call centre-based operations, but they have also developed their own low-cost online operations like The Buzz and Bingle. Credit Suisse analyst Arjan van Veen says while the online motor market is growing, it’s already looking decidedly crowded. “They’re all niche models, so only one or two of those four [Budget Direct, Youi, Real Insurance and Progressive Direct] could get to a critical mass – but definitely not all four,” he told Insurance News. “IAG and Suncorp, and even Allianz with 1Cover, have been smart by throwing another internet brand into the space, so you actually have seven or eight brands competing for what is quite a niche market.” Mr van Veen says traditional motor insurance products are by no means unassailable, with their marketable “comfort” factor and multi-policy discounts that promote retention of business. RMIT University Marketing Professor Michael Beverland says online motor insurers will use “breaking the rules” through innovation as a key survival factor, because similar levels of pricing will make products increasingly hard to distinguish. “This is typically hard for Aussie firms, because they’re not that innovative,” he told Insurance News. “But in the case of insurance and financial services there is some form to suggest they could do so. “The basic insurance product is cominsuranceNEWS
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moditised, but the services and benefits consumers get are not. When you buy insurance, you buy peace of mind.” Professor Beverland says the biggest, lowest-cost player will inevitably win the largest niche market share, but they will find they can only grow through mergers and acquisitions and by tapping increasingly lower value – and, in this case, higher-risk markets. In the US, Progressive Insurance is known as an innovator. It introduced online car insurance to the world in 1997 and has pioneered technology-driven usage systems, the most recent of which is the MyRate wireless device which enables American customers to receive discounts based on their driving habits. There’s no sign of that in Australia yet, although rival Real Insurance already offers a “pay as you drive” option under which customers report their odometer reading and pre-pay based on the distances they drive. Progressive’s Australian comprehensive insurance policies have pet cover included, and the company is promoting this as a point of difference. But Professor Beverland says this can be quickly copied by competitors and could become part of the commoditised product bundle. Market watchers will no doubt be interested to see what sort of trump cards insurers will produce to stay competitive in the online motor field. Time will tell how long online stays a niche market.
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Tower’s view is improving Jim Minto accentuates the positive – in attitudes and profits By Jamin Robertson
Tower Australia’s Jim Minto: the life business shouldn’t be driven by distribution
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SEVEN YEARS AGO NEW ZEALANDER JIM MINTO “crossed the ditch” to join Tower Australia. It wasn’t an easy assignment: The company wasn’t performing and the life insurance business in Australia was stagnant. Charged with restoring the Australian side of the then trans-Tasman business, the veteran Tower executive had his work cut out for him. The company had reported a half-year loss to March 31 2003 of $NZ154.4 million ($121.9 million). It required some radical surgery, and that’s just what it got. The troubled company embarked on a $NZ200 million ($157.9 million) capital-raising and emerged a year later with a return to profitability. Now, more than three years since the demerger of Tower’s Australian and New Zealand operations, Tower Australia is ticking along nicely. The company last year reported net profit of $46.4 million and, under its preferred yardstick of underlying profit, defied the global downturn to raise returns by 10% to $74.5 million. “Tower Australia is now seen as a respected leader of life insurance in the non-bank sector,” Mr Minto told Insurance News. “We’ve earned a reputation as a quality business and we work hard to maintain that every day.” As a chartered accountant – a profession whose members seem to make the transition to risk insurance with ease – Mr Minto started his career in the trust industry in New Zealand before moving into estate planning. His record at the top end of the Tower organisation reflects the changing fortunes of the company itself. He arrived at Tower in 1988, working his way through a number of executive roles before being appointed Chief Executive of Tower NZ in 2002. Not long after, he became Chief Executive of Tower Australia, before a promotion in 2005 saw him heading back to NZ to become Chief Executive of the transTasman Tower Limited Group. A demerger the following year saw him return to Sydney. In operating a successful business, it’s not surprising to discover the convivial New Zealander places a strong emphasis on people – be they staff, shareholders or customers. “Positive leadership is critical,” he told Insurance News. “Strategy and direction is about having the right culture and values and maintaining that customer focus. You may have your blips, but if you maintain the confidence of your stakeholders you will grow the business.” With the life market forecast to double by 2024, the major players – and Tower Australia counts itself as one – are poised to cash in. Growth opportunities are reflected by ongoing consolidation at the top end of town, with National Australia Bank (NAB) swooping on Axa Asia Pacific Holdings in December in an attempt to gazump a bid by AMP. NAB clearly likes what it sees in the local life market. Its bid for the local operations of Axa follows the $825 million acquisition of life and investment company Aviva Australia last year, which it intends to fold into existing subsidiary MLC. Mr Minto agrees the global downturn has brought financial protection products – and the industry – into sharp focus. “In a buoyant job market people are confident, they are well placed, resilient and feel there is less need for
protection,” he says. “In tighter economic conditions people are more aware of the risks. “While most are still acquiring life protection through their adviser or super fund, at least people are starting to understand it.” There’s plenty of scope for growth. KPMG Actuaries’ analysis of data from 2004-06 puts the average claim payment for death, total and permanent disability and trauma at a little over $132,000 – little more than twice the average annual wage. While Mr Minto points out that a significant number of policyholders have more than one policy, he agrees that many Australians’ life coverage is manifestly inadequate. Both general and life insurers have long grappled with the problem of underinsurance, and while general insurers can point to a multitude of government levies and taxes as a cause, he believes the life industry mainly has itself to blame. “Predominantly it’s the industry’s fault,” he says. “Travel insurers and car insurers have managed to get their messages into the mainstream. “Life shouldn’t be driven by distribution, but rather by communicating to people an awareness of their needs.” Although default cover available through superannuation typically provides Australians with a base level of coverage, he says such cover is typically limited. “A lot of people have some cover, but most simply don’t have anywhere near enough. Trustees can’t just dial up the numbers because it is coming out of people’s super fund.” Tax-neutral treatment of cover purchased outside of super could encourage consumers to take out appropriate cover, but he says life insurers also need to work on standardising products and marketing to avoid sending mixed messages to consumers. Achieving this may help insurers maximise those growth projections. “We’ve got income protection, trauma insurance and critical illness insurance and all these other descriptions and you just think ‘Wow, how is the consumer going to understand that?’” A considerable advertising budget is one way Tower goes about trying to “simplify our world”. The life industry’s growing push into the online space is a further reflection of trends that it shares with the general insurance industry, and Mr Minto believes the two have a lot in common. “Culturally we’re a long way apart, but the reality is we could work far more closely together.” He sees the direct market as an opportunity to cater for about 80% of the community who do not use financial services providers, although projections suggest only limited growth in this market in the short-to-medium term. Where consumer awareness about life cover is limited, life insurers are hopeful that initiatives such as the industry’s “Lifewise” public awareness campaign will help turn things around. “I like the fact we’ve all got ourselves on the one page,” Mr Minto says. “I started out in estate planning in the public sector, and seeing the impact of life insurance had an immediate effect. “We’re part of the social fabric and we do a great job for people. We need to remind ourselves of that.”
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The trials of life
Australia’s life insurers are doing a very good job – shame so much of it is done in the face of apathy and ignorance By Sarah Schwager
Not overly concerned, but life insurers are: too many Australians fail to protect themselves and their families against financial and physical loss
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LIFE INSURANCE HAS BEEN HAMMERED IN the media recently, with financial advisers seemingly unable to do a thing right. Yet according to the insurers, most Australians know little about how to buy life insurance, the importance of protecting their family and assets or even what’s on offer. Despite being around for 150 years, the industry has a long way to go in establishing itself as the indispensable service that life insurance is regarded as in other developed countries. The life insurance industry does many good things for people, but like its general insurance cousin it has consistently failed to blow its own trumpet. It probably doesn’t help that Australians are known for being some of the most optimistic people on the planet, and so not overly concerned about their fate. But local life insurers are continuing to kick goals in terms of the products they provide, with fiinsuranceNEWS
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nancial services researcher Cannex releasing its annual ratings on the industry in late September, naming Zurich Financial Services and ING Life as the top performers. Tower Life Australia, Asteron, CommInsure, Axa, Macquarie Life and AIA Australia also received five-star awards for some of their term life, trauma, total and permanent disability, packaged life and income protection policies. So what are the most important issues facing the sector? Here’s a list, compiled with the assistance of some industry insiders:
UNDERINSURANCE Despite underinsurance being touted as one of the biggest issues in life insurance, little traction has been gained by the industry in solving the problem. Gerard Kerr, Head of Marketing, Product
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Development and Reinsurance at ING Life, says underinsurance is not only a huge challenge for the industry but also a great opportunity. And he says recent disasters have done a lot more than just demonstrate the low level of general insurance people have on their assets. They’re even worse at protecting themselves and their dependents against financial and physical loss. “The Victorian bushfires demonstrated just how little life and associated cover people had,” he said. “These events become energy-boosters – they’re a barometer of how much we’re connecting with people.” Tower Australia Managing Director Jim Minto says the issue of underinsurance still worries him greatly and should worry the whole life industry. The Investment and Financial Services Association’s LifeWise program has received great support from the industry in bringing greater public awareness to the issue. Zurich Life National Manager Sales Strategies and Research Marc Fabris says the issue of underinsurance is an opportunity for the industry more than a challenge. “We have seen some strong growth in the last couple of years and we have strong growth potential into the future.” AIA Australia Chief Executive Damien Green says underinsurance is a “significant social and economic problem” for Australians. He says the Federal Government may look at the problem as part of the recently announced Productivity Commission inquiry into disability insurance in Australia. MLC Insurance General Manager Advice Products Sean McCormack agrees. He says Australians are “grossly underinsured” compared to other developed countries. “We have a significant challenge here, because we suffer from our natural optimistic disposition that ‘she’ll be right’.” He says MLC is focusing on one key area of underinsurance – critical illness cover – in which Australia (3%) lags behind countries such as the United Kingdom (25%) and Singapore (more than 50%).
QUALITY OF ADVICE
AIA’s Damien Green: underinsurance is a social and economic problem
Macquarie Life’s Justin Delaney: significant lift in sales
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The quality of financial advice provided by financial planners has become a cause celebre lately, with changes likely as the Federal Government moves to protect consumers from poor advice. What these changes might mean are a weight at the back of many life insurers’ minds. “The mere fact that investigations are happening makes you wary of where they will take you,” Mr Kerr says. “As long as it’s the right decision and an informed decision and as long as it’s not reactionary change, then that’s got to be for the greater good. “Because at the end of the day if we can raise awareness, education, and raise the capability, then that’s in all our interest.” Michael Paff, Director of Wealth Protection Products at AMP Life, says while there is a lot of discussion at the moment around financial advice and how people are going to pay for that advice, he doesn’t think that will change the underlying need for insurance. KPMG partner Paul Ruiz says advice is an important aspect of life insurance. “And with a number of the failures Australia has experienced in recent years, advice is very much insuranceNEWS
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under the microscope,” he says. “So that has the potential to significantly change the business model of a number of the insurers, particularly around financial products.” Mr McCormack says MLC strongly believes in the value of advice and that all dealings with clients should be open and transparent. “It’s critical that clients are clear about what they are getting and paying for. We have been at the forefront of the industry with our support of fee for service.”
FINANCIAL CRISIS Since the global financial crisis hit in 2008, local financial services companies have held up remarkably well in the face of some searching scrutiny. And there has been a big upside from the crisis for life insurers. As investment markets fell through much of the past year, people started turning back to life insurance. There’s been a big boost in sales. Mr Paff believes the financial crisis has brought the reality of some risks closer to home. “The investment markets have continued to improve year on year for some time and I think typically Australians are quite optimistic about their future,” he told Insurance News. “Seeing the effects of the recession, I think they are asking what else they need to protect themselves against.” When life insurance originated in Australia it was a combination of life insurance and investment products. When those products were unbundled in the 1980s and 1990s, people moved away from life insurance, preferring instead to invest for their future through assets. “Now we’ve almost come full circle again, where life insurance is more at the front of people’s mind and people recognise it as part of a quality financial plan,” Mr Paff says. Macquarie Life Head of Insurance Justin Delaney believes the effects of the global recession have made more consumers open to life insurance as they become more risk-averse. “That has helped in terms of dialogue with advisers, and consumers are more open to suggestions,” he told Insurance News. “We have certainly seen a significant increase in sales.” But Mr Ruiz says it’s somewhat ironic that a year after the collapse of US investment bank Lehman Brothers there are still so few products offering protection from investment market falls. “Taking advantage of the global financial crisis to offer protection to investors from significant downturns will be something that insurers will be considering how to do.” Zurich’s Mark Fabris says the global crisis impacted on profitability for life insurance companies due to an increase in claims during the downturn. On the other hand, people became more risk-averse and more willing to discuss catering for their risk needs. AIA’s Damien Green agrees. While the global financial crisis impacted on the life insurance industry in the same way as other companies affected by the market conditions, it did lead to a greater focus on life risk. “In a volatile market people consider the downside risk and look to protect themselves,” he said. “It’s ironic, because they should be doing that in a strong market, but they tend to focus on investments.” Australia’s prudential regulation stood the industry in good stead during the crisis, he says.
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REGULATION Insurers are very concerned that regulation – much of it contained within the Financial Services Reform Act – is too restrictive. Mr Minto told Insurance News the FSR legislation prescribes an onerous process of statements of advice and full disclosure and prevents people who want to ask questions from getting answers. “One of the biggest challenges facing the life insurance industry continues to be the difficulty of consumers obtaining advice.” He says there is speculation that the taxation review conducted by Federal Treasury Secretary Ken Henry addresses the issue of state-based stamp duties on general and life insurance policies. “At present, each state has solid amounts of stamp duty payable and different rates and processes for assessing this,” Mr Minto says. “The system causes confusion for the industry and imposes extra costs on consumers.” He hopes the system is changed to either a lowcost consistent system or is removed completely. Mr Fabris says some of the recommendations of the recent Ripoll inquiry could have more impact on the life industry than the financial services reform legislation did. “All insurers put a lot of effort and money into complying with new regulations for customers who want short and sharp advice.” Mr Ruiz says the Henry Review is being closely monitored by the life insurers. If there are significant tax reforms, there is the question of what will become of superannuation as a primary savings vehicle outside the home.
CONSUMER EDUCATION Listed as most life insurers’ top concern is the need for more education and awareness of life insurance. Mr Kerr says people need to get a handle on how much cover they should have. He says the umbrella of underinsurance brings with it many challenges and these are things the industry will have to deal with for many years to come. AIA’s Damien Green says the life insurance industry needs to take responsibility for improving education by shifting its focus from distribution to customers. He says life insurance has fallen behind other industries by not embracing innovation and new ideas. Mr Paff agrees the life insurance industry lags behind other industries when it comes to consumer education. “Quite often people ignore their mortality or the fact they might not be able to work and so don’t see the need for the product,” he said. “Life insurance has always been sold through intermediaries, so people only really get a life insurance policy if they go and seek advice or default into superannuation.” Mr Delaney says insurance is still “not a wanted purchase”. “It’s a bit of a grudge purchase, so it does need
to be sold, not bought,” he says. “I don’t think we as an industry have done much to change that.”
CUSTOMER RETENTION The retention of ageing customers is another problem that the life insurance industry would like to gain a better handle on. Mr Delaney says one of the characteristics of the market is that premiums increase as people age. “When the probability of something happening increases is probably when premiums are getting more expensive and people are questioning the value of it. Affordability will always be an issue for all products.” Mr Fabris says Zurich understands the whole industry “needs to get smarter” with life insurance products that cover people for a longer period so they don’t let their policies lapse when they retire and become more cautious about balancing their budgets. Mr McCormack says MLC believes this is an issue for many Australians now and will become an even bigger issue in the future. “The economic conditions also drive people to reconsider their financial commitments and often insurance is cancelled as a result, generally due to affordability. This is very worrying, as most Australians have a long-term need for insurance.” Why do premiums increase with age? He says stepped premiums – the most common arrangement – increase every year as the client ages. “Clients who have a long-term need should have their insurance structured in a way that enables them to continue to afford it, so they can keep their cover.” ING’s Gerard Kerr says it’s a constant challenge ensuring clients continue to see value in their cover throughout the life of the policy. And he doesn’t think the industry does enough to continually revisit whether the customer is still comfortable with their cover, and still sees the value and importance of it. “If they need to adjust, increase, decrease, or change the type of cover, then let’s help them with that.” He says whereas life insurance has always previously been seen as just a transaction, now when someone asks to cancel a policy or it lapses, ING is asking why. Insurers can then offer new options, such as freezing the premium so it stays at the same level or waiving it for a couple of months. Or with income protection, people might choose to go to a 90-day wait instead of a 30-day wait.
DISTRIBUTION METHODS As a natural evolution of life insurance, direct products are now coming onto the market. Most insurers say while the policies themselves can’t compete with those offered through advice in terms of value and cover, any opportunity to open up the market to a wider customer base is a good thing. Mr Kerr says direct insurance is reaching a segment of the population that an adviser may never come across. “I hope over time that all these different segments learn to interact with each other and support each other rather than being sceptical of each other,” he says. “We know the underinsurance issue is so large it’s going to need all these different segments working together.” Mr Paff says what is on offer on the web is usuinsuranceNEWS
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The trials of life
But MLC’s Sean McCormack says while the crisis helped to activate a latent demand for insurance, there was a downside. “We’re seeing some people choosing to cancel or lapse their cover and even cancelling their cover without seeking further advice.” He says that by falling out of the market, however temporarily, policyholders could find it difficult getting cover in the future.
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ally a cut-down version, which at times can be more expensive and inferior. But he says it definitely improves awareness of life insurance. “Life insurance typically has quite a detailed application process that goes with it. We’ve got to question whether we need to find easier ways for people to access their life insurance.” Mr Fabris says Zurich has seen direct insurance products “balloon” across the industry in recent years. The increased use of the internet for commerce also means so many more life insurance providers have greater market presence. “It’s making cover more available for that middle market space that doesn’t get serviced by financial advisers,” he said. But Mr Green says direct life insurance products aren’t yet opening up the market in the same way as they are in general insurance. But it may yet happen as more simple products come into the market. Mr McCormack says several new players have emerged recently who are offering “simple no-frills solutions” to people who would not otherwise seek advice either by choice or because of cost. “The direct insurers have definitely helped raised consumer awareness about some of their insurance needs,” he said. “It provides consumers with choice, which is good.” Mr Minto says the three-channel distribution model at Tower, with direct products available through InsuranceLine, retail advice products, and products for employees through group and workplace schemes means the consumer can access wealth protection in the way that meets their needs. “There is still a lot to do, but the industry is moving forward.”
Unlike general insurance, life offers guaranteed renewability, meaning the insurer can’t do anything to the policy as long as a client continues to pay the premium. However, not many people would know that. Also, once someone has a severe health problem they will probably never be able to get insurance, and so the message to buy insurance young is important. “I don’t think as an industry we’ve sold that very well,” Mr Paff says. He believes a lot of non-working people who don’t have superannuation but want to protect their assets or family probably wouldn’t know where to go to buy life insurance, whereas they know exactly where to buy their general insurance. Macquarie Life’s Justin Delaney says anyone who has worked in life insurance knows a multitude of stories in which people’s lives have been transformed from a potential disaster because they had adequate cover. “Culturally Australians probably don’t want to talk about those things very often,” he says. “But the reality is, if someone has a problem, life insurance or living insurances can offer significant benefit. “We don’t get that message out there. “I’m not sure what is the best way to achieve greater knowledge. I think the message really needs to be about peace of mind.” Mr Fabris says the industry has failed to promote the value of advice. People need to be able to relate to the value of insurance itself and the problems it can solve for them. “If people can’t relate, then they don’t engage.”
AMP Life’s Michael Paff: lagging behind on consumer education
ING’s Gerard Kerr: if change isn’t just reactionary, it’s good
Like all industries, the need for speed is constantly triggering changes in technology. “People talk about Generations Y and X but before we know it Generation Y will be old,” Mr Kerr says. “We just need to be mindful of their emerging needs and how they want to transact. We will probably be amazed at how IT-savvy Gen Y will be.” Mr Paff says life insurers need to continually enhance their products to be competitive in the marketplace. “It requires investment and continued improvement of what’s there. That’s just the way in which the world has evolved.” Mr Minto says putting the consumer first is integral to life insurance. He says the consumer wants “simpler and easier” access to insurance, whether through advice or other sources, and the industry is responding with new technologies. Mr Fabris says life insurance companies are becoming more efficient in providing business services, including the use of electronic applications that have improved turnaround times and reduced error rates. “The next wave is more integration between systems used by advisers and life companies. By them becoming more efficient they can provide more assistance to their clients.”
PROMOTING THE INDUSTRY MLC’s Sean McCormick: the industry brims with talent
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At the forefront of the underinsurance problem in life insurance has been the industry’s failure to promote itself. insuranceNEWS
February/March 2010
A number of internal issues plaguing the life industry are often overlooked. Mr Kerr says it is important the industry doesn’t lose sight of the need to attract talent and maintain continuity by keeping good qualified people in the industry. “That’s been the lifeblood of the industry – it’s a people industry, he says. “We need to ensure we continue to be an attractive industry for graduates or people wanting a good, fulfilling job.” Mr Paff says there’s always a bit of a war for talent in terms of retaining good staff and it’s about creating a good working environment and having purpose for people to operate within. Mr McCormack is more sanguine. He says the life industry is booming and, in MLC’s experience it’s “brimming with talent.” Mr Fabris says life insurers are “always struggling to find talent” – in particular underwriters and technical experts such as risk specialists. Mr Green agrees, saying AIA’s focus is on “retaining good people and attracting recruits through promotion opportunities, a good work environment and flexible work practices”. But recruiting isn’t the only big internal issue. The other important thing to take notice of over the next year or so may well be mergers and acquisitions. “I do expect there will be more buyouts,” Mr Ruiz says. “A few years ago we had a bit of a wave of consolidation, and MLC’s recent acquisition of Aviva has changed the market a bit. “Whether some of the other smaller players are going to survive in their current form is going to be interesting.”
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Reuters
Hank Greenberg makes peace 50
insuranceNEWS
February/March 2010
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The AIG legend settles with the company he built into a global superpower By Jamin Robertson
AT THE AGE OF 84, INSURANCE INDUSTRY legend Maurice “Hank” Greenberg has finally called time on his long-running stoush with American International Group (AIG), the insurer he built from a mid-sized insurance company into a global superpower. It has been nearly five years since then New York Attorney-General Eliot Spitzer sank both Mr Greenberg and former AIG Chief Financial Officer Howard Smith by alleging a number of improper accounting transactions had distorted the financial health of the company. A sham reinsurance deal led to prison sentences for the executives involved and the departure of Mr Greenberg, who was forced out by the group’s board. Lawyers later accused him of siphoning AIG stock through former subsidiary company Starr International to make it the group’s largest shareholder. The company – set up to invest senior managers’ incentive payments – remained under his control following his departure. Mr Greenberg scored an important win last year when a jury cleared Starr of any liability in a $US4.3 billion ($4.8 billion) case brought by AIG. In November the dispute with AIG culminated in a settlement that nullified all outstanding claims between the group, Mr Smith and Mr Greenberg. An independent third party will rule on the payment of legal fees and expenses, with the insurer bound to pay up to $US150 million ($169 million) in compensation. It followed an earlier agreement by Mr Greenberg to pay $US15 million ($17 million) to settle civil charges brought by the United States Securities and Exchange Commission without admitting liability. Other civil fraud charges remain unresolved. Mr Greenberg’s legacy at AIG runs deep. Cornelius Vander Starr founded the company in Shanghai in 1919, and Mr Greenberg became its second chief executive in 1967. A fiercely determined character, his achievement in cranking AIG’s market value from $US300 million ($337 million) into a $US180 billion ($202 billion) giant earned him rich rewards and legendary status among both the insurance industry and wider business fraternity. At its zenith, AIG was the world’s 18th-largest public company and the largest insurance and financial services provider. Mr Greenberg became a regular on the Forbes rich list with an estimated $US2.8 billion ($3.1 billion) fortune. Just five short years ago AIG reported an $US11.05 billion ($12.5 billion) profit. It was a structure that would later be described as too big to fail. Late in 2008 Mr Greenberg could only look on from the Starr International office in New York as AIG’s disastrous foray into financial derivatives sent it spinning into near-oblivion. Though he stopped working for AIG in 2005, Mr Greenberg remained its largest shareholder through Starr International. But after AIG shares tanked, his name dropped off the rich lists as his fortune evaporated. “I’ve lost my entire net worth, literally my entire
net worth,” he told US ABC television in September 2008. With most of his fortune tied up in AIG stock, Mr Greenberg retained about 5% of his wealth, according to analysts. His own role in the catastrophic failure remains the subject of much speculation, given his reputation for pursuing a strategy of aggressive growth that promoted AIG’s push into diversified areas of financial services, including establishment of the financial products unit in 1987. Harvard Business School Professor of Management Practice Bill George is unequivocal that Mr Greenberg was the key figure in driving a culture of excessive risk – a view shared with many commentators and senior AIG managers. In an article for BusinessWeek last year, Professor George described Mr Greenberg as “the architect” of AIG’s problems. He says the AIG’s 165 businesses were managed “for growth and short-term profitability, instead of financial soundness and solid risk management”. Last April Mr Greenberg fronted a congressional hearing in Washington to deny steering the group down the path of no return. He claimed critical investment in credit default swaps accelerated only after his departure. “When I left the company, it was a healthy company,” he said. “AIG’s business model did not fail – its management did. I think they got greedy.” House Oversight Committee members were less than convinced, telling Mr Greenberg the origins of AIG’s problems began “on your watch”. While Mr Greenberg’s reputation has undoubtedly suffered, others must certainly share the blame. AIG spent more than seven decades under the control of just two men, but the departure of Mr Greenberg ushered in a string of short-term leaders. Successor Martin Sullivan didn’t stay too long after the company reported a quarterly loss of $US7.8 billion ($8.8 billion) in May 2008 which although substantial, looked like pocket change against the record corporate loss of $US61.7 billion ($69.4 billion) that would follow. A company once admired for its stability began leaking staff almost as quickly as money. Mr Sullivan was replaced by US Government appointment Edward Liddy, who was parachuted into the role in September 2008. Mr Liddy famously took on the job – and a tremendous amount of public backlash – for an annual salary of $US1. An initial $US80 billion ($90 billion) in federal aid later swelled to around $US180 billion ($202 billion). Robert Benmosche followed Mr Liddy less than a year later. It was the retired MetLife Chief Executive who was responsible for thrusting the olive branch Mr Greenberg’s way as mutual respect between the two old campaigners served to thaw frosty relations. The gesture paved the way for a settlement that, among other things, will allow Mr Greenberg access to the archive material he needs to write his memoirs. A divided legacy is the unavoidable conclusion. insuranceNEWS
February/March 2010
Maurice “Hank” Greenberg was born on a dairy farm in New York state in 1925. He served in the United States Army in Europe during World War II and in the Korean War, where he rose to the rank of captain. In 1952, having earned business and law degrees, he began work for the Continental Casualty Company. In 1960 Mr Greenberg joined American International Underwriters, the company known today as AIG. Initially tasked with developing an overseas accident and health business, he was chosen by AIG founder Cornelius Vander Starr in 1962 to run the group’s struggling North American businesses. He anointed Mr Greenberg as his successor five years later before dying in 1968. Mr Greenberg and wife Corinne had four children, with sons Evan and Jeffrey also rising to prominence within the insurance industry. Both initially worked in senior positions at AIG, but fell out with their father. Jeffrey is a former Chairman and Chief Executive of Marsh & McLennan – mirroring his father in leaving a company following a Spitzer probe. Today Jeffrey works in private equity. Evan is President and Chief Executive of Ace Insurance.
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What’s an insurer worth? Crunch time is near for an ambitious project to reform the way insurers are valued By Jeff Morse WORLD AGREEMENT ON HOW TO account for insurance contracts could happen as soon as mid next year. Ask any optimist. But less confident observers, mindful of the long, tortuous road travelled so far, wonder if it will happen at all. This year new hope surrounds the International Financial Reporting Standards (IFRS) insurance contracts project, with the two major protagonists reaching tentative agreement on some previously deadlocked core issues. Insurance lags behind other financial services industries with its lack of a genuinely relevant, intelligible and comparable basis of accounting and disclosure. There’s a need to “talk the same language” on accounting for insurance contracts. This stems not only from the general push for convergence of global accounting standards – which was restated at the G20 Summit in September – but concerns for the insurance industry as it competes for capital made scarcer by the financial crisis. The project to provide a common standard dates back to 1997, when the London-based International Accounting Standards Board (IASB) kicked off phase one. By 2004 it had achieved a standard with limited scope. Phase two has faced obstacles such as competing demands for the IASB’s attention, particularly related to the global financial crisis, and initial reluctance by America’s Financial Accounting Standards Board (FASB) to join the project (it finally joined late in 2008). Exposure drafts for public comment are scheduled for April, with a view to finalising a joint standard by June next year. Implementation would happen in 2012 at the earliest. 52
In a recent international survey by PricewaterhouseCoopers, analysts said a lack of transparency in accounting for insurance contracts is increasingly leading to the undervaluation of leading global insurance companies. They called on the IASB and FASB to construct a new and improved reporting framework as quickly as possible. In November a KPMG global survey revealed that insurers are also worrying about the cost and availability of capital. To date, Australian listed insurers haven’t found it difficult to attract investor capital but this is more to do with local equity markets than the transparency of accounts.
“This project has been going on for what feels like forever” Paul Ruiz, a financial services partner at KPMG Australia, is a member of the firm’s global group monitoring developments on the insurance contracts project. He says the recent progress has piqued his interest. “For accountants, it’s actually quite exciting at the moment, because this project has been going on for what feels like forever,” he told Insurance News. He says agreement on expensing commissions from day one – rather than spreading them over the expected life of a policy – is highly significant. “You are going to have this interesting business situation called ‘new business strain’,” Mr Ruiz says. “The cash outflows associated with selling a new policy will be recognised as an expense up front, and the profile of reported profits will change as a result.” William Hines, a consulting actuary with Milliman Inc, cautions that agreement is still insuranceNEWS
February/March 2010
needed on a number of outstanding issues and the outcome of this will determine how much more relevant and comparable any new standard will be. “If it ends up with a measure that has little relevance, it has the potential to be supplanted by supplemental measures such as embedded value analysis,” he told Insurance News. Mr Hines has reservations about the agreement on expensing commissions in which no revenue or income would be recognised at issue of a contract to offset the expense. “I question whether showing a loss at the issue of business expected to be profitable provides relevant information.” Deloitte Financial Services Group partner Stuart Alexander says he’s expecting “significant pushback” from the industry on this point. “It will come from the life companies particularly,” he told Insurance News. “It’s not too bad in Australia, but some of the international companies are paying 150% commissions upfront of first-year premiums. That’s a huge amount.” Mr Alexander says valuing an insurer is difficult, but other industries with intangible assets face comparable challenges. “I think there’s an increasing move away from accounting toward investor reports to come up with a normalised profit.” Mr Ruiz anticipates a varied international reaction to the April exposure draft, although for Australia some aspects will be very familiar and not cause much dissent. “One of the things about the insurance world is that it’s highly varied in terms of different sectors – general insurance, life insurance, investment-type life insurance products, reinsurance and then the different company structures like mutuals and corporates,” he told Insurance News. While the need for relevant, comparable financial information on insurers has assumed a new sense of urgency, the timing of a final international accounting standard may well be, as Mr Alexander puts it, the “$64,000 question”. If the insurance accounting standard project champions can reach broad agreement and sell this to the world, it will be quite an achievement.
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Inefficient, but still alive and feeding The groundswell against insurance taxes continues to grow By Jeff Morse EVIDENCE SUGGESTS THIS YEAR WILL be a watershed for insurance taxes and levies, as pressure continues to mount on governments to remove disincentives to insure. Last month a high-level panel appointed by the Federal Government called for state imposts on the insurance sector, including fire services levies (FSL), to be removed as a matter of priority. The Australian Financial Centre Forum, in its report to Federal Treasury, says the taxes not only contribute to underinsurance and the associated drain on government funds, but make the nation less attractive to new corporate entrants to the insurance sector [see story below]. The Federal Government is in the process of mulling over the Henry Review into Australia’s future tax system. Review Chairman Ken Henry made his views known on insurance taxes in October, calling them “highly inefficient”. While every state hauls money out of the insurance premium through stamp duties, it’s the major states of New South Wales and Victoria which are regarded as cynical opportunists by critics. And it’s in Victoria that most observers
expect to see the issue ignite most debate. While NSW imposes levies to maintain its fire services and even the State Emergency Service, its political focus is centred for now on the government’s ability to survive the next election. Victoria, however, has been singled out by critics because its charges are comparatively high and because the Black Saturday bushfires on February 7 last year present a particularly compelling case study. For commercial insurance consumers in rural Victoria the fire services levy now stands at 84% of the base premium. In November, the 2009 Victorian Bushfires Royal Commission released a discussion paper inviting comment on possible reforms to the FSL and insurance. Submissions closed in late December. The Victorian Government has announced its own review of funding of state fire services, with submissions set to open in June and close in mid-July. The timing allows the Government to take into account the final report of the Bushfires Royal Commission and consequences of the Henry tax review. But the February 2011 release date for a
white paper also allows the Government review to straddle the state election scheduled for November 27. Among the outspoken critics of the FSL is LMI Group Managing Director Allan Manning, who says the Victorian Government – and more particularly Premier John Brumby – wants to keep a lid on the issue with the timing of its review. “Probably what it needs is the political will of the Federal Government to step in,” he told Insurance News. But he says that if or when that will happen is anyone’s guess. Dr Manning can’t see any particular problems for Victoria in adopting a FSL collection system based on local council rates, as happens in other states. The only real issue standing in its way is the short-term political pain. “I don’t think it ever hurt Queensland, or South Australia or anyone else,” he says. “People have realised, particularly after the bushfires, the importance of fire services and that everyone should contribute.” The key issues of the causes and effects of non-insurance and underinsurance, and the potential drains on public funds they represent, will keep the issue on the boil.
A high price to pay An influential policy group calls for the urgent abolition of insurance taxes By Ben Oliver THE REMOVAL OF THE FIRE SERVICES LEVY AND STAMP DUTY on insurance products is among five major recommendations by the Australian Financial Centre Forum, chaired by former Macquarie Bank director Mark Johnson. The findings, delivered to the Federal Government in November and made public last month, closely mirror conclusions by various federal, New South Wales and Victorian government bodies on the controversial subject of insurance taxes. The forum says the abolition of taxes on insurance products would lift insurance take-up rates in Australia – ranked among the lowest in the developed world – and bolster Australia’s attractiveness as a financial services hub in the Asia-Pacific region. “The range and diversity of state taxes adds significantly to the cost of insurance, especially for those businesses operating on a national level,” the report says. “They are undoubtedly a factor contributing to underinsurance, with consequent increased demands on the public purse. “Along with the variety of state non-prudential regulations, they also act as a barrier to new entrants to our insurance sector.” 54
insuranceNEWS
Taxes on insurance products deliver $4.25 billion to state coffers each year. NSW, Victoria and Tasmania still finance their fire services through levies on insurance policies, which insurers argue is responsible for the non-insurance rates. The forum’s report says while Australia’s insurance sector emerges from the global financial meltdown in rosy health, local taxes are hampering global ambitions. Australia is ranked fourth in the Asia-Pacific region in premium volume ($71 billion) behind Japan, China and South Korea, and is 12th overall. “Domestic business has been affected by high indirect taxes and, to a lesser extent, by non-harmonised state regulation,” the report says. “The resultant higher costs can lead to underinsurance and complicate the operation of a national business. “These complications can also act as a barrier to entry and competition.” The report by the financial centre says the forum is “conscious that the cost of removing state taxes and levies is substantial”. February/March 2010
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One year on, where are the houses?
The foliage is slowly returning to the hills devastated by last year’s Black Saturday bushfires in Victoria – but the houses aren’t. New figures from the Insurance Council of Australia suggest many of the 2000 homes destroyed in the February 7 fires won’t be replaced. Only 8% of the insured propertyowners have applied to rebuild their homes, the rest instead opting for cash settlements. This compares with around 80% rebuilding after previous natural disasters in Australia.
Esther Raworth
More than 90% of the 10,280 February 7 claims have been settled at a cost of $1.1 billion. The low rebuilding rate is again raising questions about underinsurance and whether insurance taxes make premiums unaffordable.
insuranceNEWS
February/March 2010
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Big fish in a small pool D&O cover is under increasing scrutiny as shareholders take up class actions By Jamin Robertson
Combined D&O policy clauses Side A Cover for directors’ and officers’ liability where no indemnity exists Side B Company reimbursement cover for indemnity payments to directors Side C Company cover for securities claims
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DIRECTORS’ AND OFFICERS’ (D&O) liability cover is under the underwriters’ microscopes, with shareholder class actions set to rise in light of the global financial downturn. That’s had a clear impact on premiums, especially in the financial services sector. Local rates have typically increased from between 5% and as high as 25% depending on the risk profile, although other brokers are reluctant to quantify a figure, citing a patchy local market. In the US and UK, Aon reports rates have risen by 15%. But it’s not only premium prices that are under review. High-profile legal cases involving firms such as James Hardie and Sons of Gwalia have sent directors scurrying to talk to their insurance brokers and read their policies line by line. They need to ensure their D&O cover is going to cover them, and their focus is on three underlying clauses included in a common D&O policy which are intended to indemnify directors and officers for personal liability incurred in the management of a company. The first two clauses, known as Side A and Side B cover, essentially ensure the policy lives up to its name. Side A provides liability cover for directors and officers, while Side B takes care of reimbursement for the company concerned (see box). It’s the third clause that is providing a few headaches for managers and directors. Side C, established in Australia in 1999, provides protection to companies against claims from shareholders. And it’s there that the heat is rising, with the rising prominence of litigation funders in Australia giving shareholders greater leverage in setting up class actions. “An individual shareholder might not have enough money or a big enough loss to bother with legal action, but multiply insuranceNEWS
them together with the advent of no-win no-fee litigation and you have the potential for numerous meltdown situations,” says James Sinclair, Managing Principal for Professional & Financial Risk at InterRisk Australia. In a recent client briefing, insurer Chartis claims “extraordinary amounts of damages are currently being sought and defended in the courts”, with sharemarket volatility likely to bring further action. Chartis says securities actions are the largest contributor to D&O losses. Those issues have raised concern that claims brought by companies under the Side C section of the D&O policy could completely drain policy funds originally intended for the senior managers. The entire Australian D&O premium pool is estimated at just $250 million, and Chartis estimates that total market reserves are just 50% higher than market premiums. When the time comes to cash in on the policy, there are fears there could be nothing left for senior managers, and brokers say they’re fielding more enquiries as a result. “Directors are more concerned as visibility has increased dramatically in light of recent cases,” Mr Sinclair told Insurance News. Chartis Regional Manager Australasia Financial Lines Mike Pryce says the local market is exposed to a high number of claims for breaches of continuous disclosure, leaving companies reliant on “very, very limited” defence mechanisms under current legislation. The insurer has responded to those concerns by moving to protect directors by separating off Side C cover and repackaging the provision as a “separate companion policy”. Chartis claims the proposition has attracted strong interest February/March 2010
from directors, solicitors and professional associations. “The separation of Side C allowed us to provide the best available cover for D&O,” Mr Pryce says. “It also means that we can offer more cover under the Side A and B covers. We’ve broadened those covers as a result.” He agrees Chartis may need at least a full renewal cycle to encourage policyholders to unwind existing combined policies, particularly at the large end of the market. Brokers say it’s a prudent move and one that promotes a healthy degree of risk management. They point out that other insurers such as Ace have also moved to address Side C concerns by ring-fencing other clauses for the benefit of directors. Damien Sullivan, Ace Insurance’s Chief Executive Australia and New Zealand, says the insurer’s Elite Side A policies are in hot demand, with continuous sales growth since their release last June. “Our experience at Ace is that companies are picking up the bill for our Side A product, ensuring their key people are covered,” he told Insurance News. Clients will have to weigh up those advantages against the cost considerations that two separate covers may present. “While it has been expected that Side C would be offered as a separate element of cover the market is generally likely to settle on a combined limit,” said Aon Corporate Risk Services National General Manager Paul Venning. “Competition appears to be pushing things that way. The disadvantage of separated cover can be additional cost and inflexibility in applying limits between directors and entity claims and along with issues involved in selecting a number for entity cover. The combined policy can offer more flexibility.”
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lawNEWS
More power to the regulator APRA’S oversight of insurers will increase under new proposals By Dean Carrigan, a partner, and senior associate Amanda Taylor, at Arthur Allens Robinson DRAFT FEDERAL LEGISLATION PROMISES to substantially enhance the power of the Australian Prudential Regulation Authority (APRA) over regulated entities, with the intention of strengthening the authority’s ability to manage a financial sector crisis. Released for public consultation on January 19 by Financial Services and Corporate Law Minister Chris Bowen, the proposed amendments will substantially enhance APRA’s powers over banks and life and general insurers. The proposals follow the introduction of the Financial Claims Scheme in October 2008. They will require banks and general insurers to provide information relating to the scheme in their product disclosure statements. The explanatory material released with the bill notes that the review of APRA’s powers to manage a financial crisis is consistent with developments overseas, where countries such as the United Kingdom and United States have sought to review and strengthen their financial frameworks. The proposed amendments are intended to enhance APRA’s powers to: • Investigate and detect risks to prudentially regulated institutions and the financial system, and to promote financial system stability; • Compel compliance with, and rectify breaches of, prudential requirements; 58
• Act when regulated financial institutions are at risk of experiencing financial distress and ensure that distress is resolved without undermining financial stability; • Administer the Financial Claims Scheme which protects deposits in Australian banks, credit unions and building societies (currently up to a limit of $1 million per depositor) and eligible policyholders of general insurers; and • Collect data that APRA or the Government requires to identify and respond to developments in the financial sector. The bill proposes amendments to a number of current acts, including the Life Insurance Act 1995 and the Insurance Act 1973. In some cases, the proposed amendments are intended to ensure consistency between the powers that APRA has in respect of life and general insurers, and its powers in respect of authorised deposit-taking institutions under the Banking Act 1959. The bill proposes amendments to APRA’s general powers to regulate life and general insurers, including the following: • APRA will be permitted to make prudential standards for consolidated general insurance groups as a whole, or with respect to parts of a consolidated general insurance group. • APRA will be permitted to exclude assets or amounts from being included by a general insurer as “assets in Australia”. • Amendments are also proposed to the Insurance Act to clarify that the assets of a general insurer in liquidation must first be applied to meet its liabilities in Australia. • APRA will be permitted to set criteria by legislative instrument for granting an authorisation to carry on a regulated business in Australia, or to become a non-operating insuranceNEWS
February/March 2010
holding company in respect of a regulated business. • Where APRA revokes a life or general insurer’s authorisation, it may provide that the authorisation continues in effect in relation to a specified matter or specified period, as though the revocation had not happened, for the purposes of a prudential law. • Amendments are also proposed to enhance APRA’s direction-making powers over a material deterioration in a life or general insurer’s financial condition – at present a direction can only be issued where the deterioration is both material and “sudden” – and in respect of a subsidiary of a general insurer, life insurer or non-operating holding company. A number of amendments are proposed to APRA’s failure management powers in respect of life and general insurers. A person seeking to appoint an external administrator to a general or life insurer must provide APRA with a copy of the application for the appointment, and a copy of all the documents that will be filed in a support of that application. The proposed amendments will clarify that APRA has the right to be heard in proceedings related to the replacement of a judicial manager. Further amendments are proposed to the judicial management provisions, so that a judicial manager of a general or life insurer is vested with the powers of the insurer’s board of directors. This would align the powers of a judicial manager of an insurer with the powers of a statutory manager under the Banking Act. The bill proposes new powers for APRA to order an insurer to recapitalise or to transfer its business to a third party. The regulator will be permitted to direct an insurer
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lawNEWS
Not falling for that one Edgy approach: a wine show shouldn’t be dangerous
to recapitalise in circumstances equivalent to those that would presently allow APRA to appoint a judicial manager to those entities. It would be a criminal offence for an insurer to fail to comply with such a direction issued by APRA in certain circumstances. Amendments are also proposed to permit APRA to require the compulsory transfer of a general insurance business to another general insurer. That legislation currently only applies to life insurers and authorised deposit-taking institutions . It is also proposed that in certain circumstances APRA could require a compulsory transfer of aspects of a life or general insurer's business to another entity that is not an authorised insurer. The Government also proposes amendments to clarify that APRA may commence or continue an investigation after a regulated entity enters external administration. It is also proposed to make amendments to insurance and banking legislation to clarify that a person must comply with a requirement to provide information or produce books or documents to APRA or face disqualification. Additional requirements will be imposed on life and general insurers to keep records relating to their insurance business in Australia at a location notified to APRA and that the records are kept in or are readily convertible into English. Finally, the bill will also make amendments to harmonise the requirements of auditors and actuaries under insurance and banking legislation, and will effect changes to the financial sector levies frameworks that have been recommended by the 2009 Report of the Review of Financial Sector Levies. The closing date for submissions on the bill is March 16.
An unconventional defence focuses on ‘dangerous activity’ By the insurance team at DibbsBarker THE COURSE OF TORT LAW REFORM rarely runs smoothly. Attempts to legislate for so-called “common sense” outcomes sometimes result in highly improbable arguments being run, as a recent case from New South Wales illustrates. On 1 July 2005, Mr Perrett, who operated a recruitment agency for the wine industry, went to the Convention Centre at Darling Harbour during the Good Food and Wine Festival to interview a potential recruit. Having met the person, he was then leaving the centre when he fell down three steps in the foyer, sustaining injuries. He sued Sydney Harbour Foreshore Authority as the owner and occupier of the Convention Centre, and Darling Harbour Convention and Exhibition Pty Limited as the occupier and manager of the premises. By the time of the trial, the issues between the defendants had been resolved and they had common representation. Mr Perrett’s case was essentially that, owing to the uniform appearance of the tiled surface of the area and the absence of edging to delineate the presence of the steps, they were difficult to see when he was approaching, and that in fact he did not see them at all. He also claimed that a sign on a column at the foot of the steps required him to look up as he was walking towards the steps, contributing to his
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failure to see them. In the NSW Supreme Court, Justice McCallum found the defendants were liable in negligence, as the exercise of reasonable care required them to place contrasting grip tape to delineate the steps and to reposition the sign to the car park. But the defendants raised a highly unusual argument, based on section 5L of the NSW Civil Liability Act. That section provides that a person is not liable for harm arising out of an “obvious risk” of a “dangerous recreational activity” engaged in by a person. Although Justice McCallum had already found that the risk posed by the stairs was not “obvious”, the defence was considered nonetheless. The defendants argued that the definition of “recreational activity” included “any pursuit or activity engaged in at a place (such as a beach, park or other public open space) where people ordinarily engage in sport or in any pursuit or activity for enjoyment, relaxation or leisure”. Even accepting that the convention centre was such a “place”, the defendants had to establish that Mr Perrett was engaging in an activity that involved a significant risk of physical harm. Justice McCallum expressed doubt that attending the convention centre at Darling Harbour for the purpose of a work interview was capable of being characterised as a “dangerous recreational activity” within the meaning of the Act. In any case, the “dangerousness” of the activity had to be determined by reference to the activities engaged in at the relevant time. Walking through the convention centre from a meeting to find a car did not amount to “dangerous recreational activity” in the relevant sense.
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Who cares? The insurer does Parliaments keep blocking the loopholes, but there’s always another one By Brady Cockburn, Special Counsel at Cooper Grace Ward Lawyers in Brisbane ANOTHER AMENDMENT, ANOTHER loophole. That has been the story confronting workers’ compensation insurers over the past 13 years as they campaigned for the removal of claimants’ entitlement to gratuitous care damages. [“Gratuitous care” refers to services like nursing and domestic care provided without payment to an accident victim. – Editor] By November 2004 workers’ compensation insurers had thought they had finally seen the end of gratuitous care. But another loophole was exposed in November last year. The right to gratuitous care damages was controversially created by the High Court in the late 1970s in Griffiths v Kerekemeyer. On numerous occasions the High Court has been asked to depart from the decision, most recently in 2000, where it again endorsed its previous view that the decision was “too deeply entrenched in this part of the law in Australia for the court to reopen it”. Many states have over-ridden or modified the decision by legislation. That has also been the attempt by the Queensland Parliament in the context of personal injuries law generally. The current prohibitions are found in sections 308A-308E of the Workers Compensation and Rehabilitation Act 2003 (Qld), which have not previously been the Filling a loophole: it wasn’t a “household”, so the subject of reported judicial scrutiny. claimant got $90,000 for yard work In most cases these statutory prohibisince the accident but not by a member of tions operate to exclude a claimant’s the [claimant’s] family or household or a entitlement to recover past or future paid or friend. unpaid care and assistance, the need for In the scheme of things the loophole is which is accident-related. But this prohibifairly small, and the latter category would retion does not prevent the court awarding quire an unusual set of circumstances to damages for accident-related paid care (past apply, as this case demonstrates. or future) provided only by a commercial Here the claimant had lived alone prior carer at commercial rates if the claimant has to the accident and was totally independent. outlaid money for this care since the acciHe did not require or receive any care prior dent. to the accident. Most claimants, of course, cannot afford Following the accident he moved into to do so, making this loophole somewhat ilshared accommodation with two adult lusory. males. The housemates shared tasks with the The case under discussion has created a claimant, who typically did some of the innew loophole which effectively means that door tasks while the housemates did the yard the court may have the power to award damwork. ages for future care in circumstances where Although the facts of the case are far the claimant is likely to require care in the from clear, the court accepted that the future and such care has not been provided claimant had not received any assistance since the accident; or has been provided 60
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with indoor domestic tasks at any time since the accident. It followed that he was entitled to damages for future gratuitous care for these domestic tasks. The more difficult question was whether he was entitled to damages for future gratuitous care relating to yard work, given the adult males were performing this work. This involved considering whether the adults were members of the claimant’s “household”. If they were, section 308C would have excluded such a claim. Had they been members of his family or his “friend”, section 308C would also have excluded the claim. Although the court did not say, it seems to have been accepted that the housemates were not the claimant’s “friends” or indeed were ever going to become “friends”. After quoting from extensive sources, Justice Jones preferred the definition of “household” adopted in 1987 in Gray v Insurance Corporation of British Columbia (1987): “The word ‘household’… implies a ‘householder’, which in turn implies some form of relationship between the ‘member’ and the ‘householder’. This relationship imposes on the ‘member’ a certain deference to the ‘householder’, compliance with a degree of propriety and responsibility and an active sense of participation in ‘household’ functions and to defer to the wishes of the ‘householder’ in this regard.” In the Queensland case, Justice Jones did not think the two adult males fell within the category of “household” in section 308C. As such, the claimant was also entitled to recover damages for future gratuitous care for yard work. The judge made it clear it is for the insurer to lead evidence to “enliven the statutory provision”. Practically this means testimony contradicting the claimant’s evidence that they have not received care since the accident; or establishing the claimant’s carer is a member of the claimant’s family, a friend or a true householder. In the end the claimant was awarded $90,000 for future care, based upon six hours per week at an agreed rate of $28 per hour. Will we now see another set of amend ments for claimants to dissect?
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styleNEWS
Say goodbye to the tie
What’s the big deal? That word “casual” means different things to different people. But it’s not all that difficult to achieve 62
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Insurance fashion is in need of some major tweaking By Sarah Schwager and Karin Brawn HAMISH AND ANDY, THE NATION’S MOST POPULAR RADIO entertainers, have what’s affectionately known as pants-off Friday; Jeans for Genes Day encourages us to wear denim to work for a good cause, and then there’s always casual Friday. But casual Friday isn’t really all that casual in some places. There are rules. Change is coming, we’re told, as Generations X and Y move in and workplaces become more workerfriendly and informal. There are signs that the rules are relaxing in the insurance industry, but the pace of change is slow. Insurance people have been wearing suits and ties to work for almost as long as there have been insurance companies. A few now allow staff to turn up tieless, and there have also been signs of relaxation in the form of “casual Friday”. This is where it all gets a bit confusing. Most large companies have rules which define the limits of “casual Friday”, ensuring decorum is maintained by banning gear that’s better suited to nightclubs. Fair enough, but some companies’ rules ban just about everything that’s in the typical employee’s wardrobe. That’s probably one advantage of working for a smaller company. By our measure, the smaller the company, the more likely it is that suits and ties will have been supplanted by gear that’s more appropriate to the weather and the office climate. Until, that is, staff have to meet someone from an insurance company or attend an industry event. Then it’s back into suits and ties and shiny shoes, heels and skirts. So don’t expect the fashion ramparts to come crashing down all at once. As the Baby Boomers move on, things will change and people in large offices will eventually rock up for work in gear that’s appropriate, comfortable and individual. That’s where “smart casual” comes in. It’s not a formal “uniform” like suits, and it’s not thongs and ripped jeans either. This is the sort of gear Insurance News thinks everyone should – and eventually will – be able to wear to the office, to meetings with contacts and clients, to seminars and to company functions. It’s “smart casual” gear that really is smart, casual without being excessive and (we think) appropriate for business. Right now.
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Tony Pantano (left), Catherine Harrington and Glenn Arnold
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Some absolute donâ&#x20AC;&#x2122;ts for the office: gear that looks good in a nightclub doesnâ&#x20AC;&#x2122;t at 9am; gear that looks cool on the beach can be too hot for the office; singlets are out, and so are suggestive slogans, exposed undies, bum cracks, belly buttons, thongs and excessive cleavage
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Casual, with limits Some companies impose dress rules, others rely on common sense “CASUAL FRIDAY” HAS BEEN AROUND FOR YEARS, BUT SMART casual wear in most large companies remains restricted to one day of the week. And most companies have imposed limits on that word “casual”. Allianz Australia, for example, allows staff to dress “smart casual” on Fridays. Its formalised dress code includes shirts with collars, tailored pants and slacks, denim and jeans, tailored jackets and dress shoes. For the ladies it includes knit tops, blouses and skirts. Shirts without collars aren’t accepted, and neither are tops with shoestring straps. Spokesman Nicholas Scofield says the dress code is really just a guideline. “People are expected to use their common sense. But it does get fairly specific in parts, particularly around what’s not acceptable.” Down the road at Suncorp – which doesn’t have a formal dress code – spokesman Sue Repanellis says the jacket and tie remains de rigour, but there are signs of a loosening of the fashion reins. “It’s still predominantly formal business attire,” she told Insurance News. “Suits, pants, ties, jackets, shirts… “But the dress is getting a little less formal and more casual in summer. For those who aren’t meeting with clients, they may leave the jacket or tie at home. Many of our people dress ‘smart casual’ if it’s appropriate for the role they are in.” Suncorp also has a casual Friday, but Ms Repanellis says even then staff realise they’re working in a business environment and don’t generally push the fashion envelope. T-shirts are allowed at Suncorp on Fridays. “Tailored or cargo shorts are okay too – probably more of the longer version of shorts.” At CGU Insurance there are signs of gradual transformation. Ties are optional every day of the week in some cases, collared shirts are a must and denim is out, according to its official guidelines. General Manager Human Resources Lee Heycox says it helps to insuranceNEWS
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styleNEWS have some guidelines as to what “appropriate” actually means. “An example of appropriate attire is a collared shirt for men, with the tie being optional depending on their role, where they are based and what the local office needs are. This applies as much in our customer call centres as in the boardroom.” Some CGU business areas and office locations offer casual dress on designated days – usually Fridays – but shorts, t-shirts or thongs aren’t allowed. “It’s best to keep that kind of clothing for home and the weekend,” Mr Heycox says. He doesn’t think the insurance industry is lagging behind similar industries when it comes to dress standards. “What hasn’t changed is the need to present yourself professionally. At the end of the day, what that means is that you need to dress in neat business attire.” Lesley Woodmore, President of the New South Wales chapter of the Association for Women in Insurance and Special Counsel at Curwoods Lawyers, admits that with a wardrobe full of suits, she doesn’t do casual very well. She says little has changed in the wardrobes of the insurance law fraternity, despite younger people entering the field and older people moving on. “There’s still a certain presentation you have to maintain, especially when going to court.” She does have firm views on what isn’t acceptable. Smart casual for women should be a “nice skirt and a top” without the need for stockings, and definitely not jeans, gladiator sandals, ripped shorts, tank tops or boob tubes. Former Head of People and Performance at OAMPS Insurance Brokers Janelle Leonard says the company has a “professional but relaxed” approach toward how their staff dress for work. “We have a formal policy in place, but within it there’s flexibility,” she told Insurance News. “What we are going for is dressing appropriately for a given situation, environment and climate. Ties are optional.” The warm weather has seen a relaxing of the dress code in OAMPS offices where the climate is hot. Corporate uniforms are also available and staff in remote locations often wear company polo shirts. OAMPS staff around Australia also “go casual” for a good cause once a month, paying for relaxed gear by making a gold coin donation to a charity of their choosing. But there are still rules: no offensive or inappropriate clothing such as rude t-shirts, frayed or torn clothing, sweat pants, tracksuit pants and thongs. “We basically rule out extremes in fashion,” Ms Leonard says. “I don’t want to work next to someone and be forced to look at their midriff all day.” In 2005, the Japanese Ministry of Environment launched a national campaign to tackle global warming called “Team Minus 6%”. As part of the campaign, former Prime Minister Junichiro Koizumi announced a line of comfortable no-tie no-jacket clothing nicknamed “Cool Biz” (which he wore himself) to help reduce summer air-conditioning usage. This meant office temperatures could be raised, people could wear what made them comfortable, and the more relaxed atmosphere was well received among workers. So will smart casual gear ever replace the starchy suit and strangling tie, the formal blouses and what one executive refers to as “girl suits”? We think so, and many workers would say the sooner the better. Formal wear doesn’t make them work smarter or better, and suits don’t make much sense in an Australian summer. The message to employers is simple enough: Chill out, and per haps your workers will too. 66
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Why not? Many people say polo shirts and gorgeous dresses should be acceptable anywhere any time, as people focus on comfort and style rather than formality
February/March 2010
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Lawsons Underwriting Australasia Limited is continuing to provide the following: Labour Hire / Recruitment Combined Liability Package (Vero)
HELP cover for companies that use Labour Hire (Vero)
Our combined package caters for both blue and white collar and includes the following:
Our Host Employer Liability Policy (HELP) covers the liability that the host has if a labour hire and/or contractor gets injured whilst working for them. The benefits of this are:
• • • • • •
Public and Products Liability Professional Indemnity Directors and Officers Liability EPL Fidelity ($250,000) Representation Costs at Inquiries ($250,000) • Statutory Liability ($250,000) • One policy, one insurer, no gaps
• $5,000 standard deductible • No need for indemnities • PL Insurance protected from claims • Cover can be initiated by Host or labour hire provider • Better risk and claims management
Public and Products Liability (Lloyd’s) We specialise in the following: • Nightclubs (includes using own security) • Cleaners (includes shopping centres) • Rail (includes rail contractors) • Engineering • Hotel Groups • Chemicals • Waste Management • Importers/wholesalers
For further details contact one of the following or visit our website on www.lawsonsuwa.com.au: Kevin Corkery 02 8850 0729 kevin.corkery@lawsonsuwa.com.au
Carolyn Meharry 08 9420 8010 carolyn.meharry@lawsonsuwa.com.au
Megan Gobbey 0409 914 899 megan.gobbey@lawsonsuwa.com.au
Lawsons Underwriting Australasia Ltd AFS Licence No. 329017
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peopleNEWS
They’re the toast of two coasts Perth and Sydney participants in QBE’s 2009 eQuip annual professional development program for next generation brokers have celebrated their success at special dinners. Hosted by General Manager Australian Intermediaries Shaun Standfield – who had already hosted similar evenings in Brisbane, Adelaide and Melbourne – said the Perth and Sydney events inspired participants and recognised their achievement. The guest speaker for the Perth dinner was Channel Nine senior newsreader Dixie Marshall, while Sydney attendees heard from dual Olympian Jane Flemming. QBE also used the dinners to welcome successful applicants for this year’s eQuip.
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The cost of churn Losing key staff – or even an entire team – can have very expensive consequences By Ben Oliver POACHING STAFF IS A SOMEWHAT expensive and often embarrassing ploy for the poached. Just ask the Royal Bank of Scotland (RBS). Last month management at the former banking heavyweight, now owned by the UK Government, arose on a Wednesday morning to discover its entire financial markets team had been lured to Bank of America/Merrill Lynch for $US27 million ($30 million) in guaranteed salaries. Nine bankers and traders defected with their boss, RBS co-head of markets Chris Thomas. While the financial bait to hook the markets team has received plenty of publicity in financial circles, the cost to RBS of the loss of an entire team has gone relatively unnoticed. If the formulas are as accurate as commentators say, the cost is $US90 million ($100 million). Staff turnover – or “churn” – is a big problem in the Australian risk insurance industry, too. It’s becoming more and more common for several key people from one insurance company or broker team to skip down the road to another insurer, where they’ll perform much the same job as the one they left, but for more money. Sometimes the practice is condemned in vague terms by chief executives, but it’s not a subject that’s often discussed in public. Maybe it should be. After all, staff churn is believed to cost Australian businesses $100 billion per year in lost productivity, training and recruitment. Recruitment Solutions calculates the cost of losing an employee in their first year at three times the annual salary plus hiring costs. For an employee on $50,000 per year, this equates to a $165,000 write-off. The loss and replacement of an entire specialist team is therefore likely to be a
major cost for any company. As confidence seeps back into the employment market, the rate of staff churn will increase. Employment agency Michael Page says 85% of employers now believe the worst of the downturn has passed, with most companies looking to either maintain or increase staff levels this year. With hiring trends on the mend and once listless job postings swelling with employment ads, recruiters say unsatisfied staff are no longer content to be job-hunting hermit crabs. It’s a familiar issue for brokers and insurers alike, but one few are willing to discuss openly. The latest Macquarie Insurance Broking Benchmark survey illustrates the importance of retaining staff. It says hiring expectations are rising but employers are finding it difficult to find suitable staff. The survey recommends staff retention as the solution to this conundrum. But while it found most employers are now formally recognising staff contributions and value, nearly 15% are not. “To those brokers who are well resourced with high performing staff, do what you can to hold onto them,” Macquarie advises. “While recruitment is an issue that brokers need to focus on if they wish to grow their business, there also needs to be an equal if not stronger focus on looking after existing staff.” OAMPS is one broker to acknowledge and take action on staff turnover. “Staff morale is a key driver to achieving an acceptable level of staff turnover,” Head of People Annabel Rees says. Mrs Rees says company-wide surveys, follow-up action groups, pay reviews, training and regular internal communiqués were some of the measures taken by OAMPS to keep morale high and turnover low. “We are proud to report that within our latest Pulse survey, the vast majority of our people told us that they intend to stay with the OAMPS’ team in the foreseeable future,” she says. Recruiters, perhaps contrary to selfinterest, have long been touting the merits of staff retention. Hays Managing Director Nigel Heap says insuranceNEWS
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that now the employment market has rebounded, staff will start looking elsewhere for career opportunities. “It’s a critical time for employers to focus on their retention strategies,” he says. “While there are many cases of employers that maintained their focus on retention during the downturn in order to get ready for the economic reversal, there are others that pushed retention to the side.” If an employee does choose to leave, Hays says employee and employer must part amicably. “Even something as simple as an exit interview can have a very positive impact,” Mr Heap says. Employers use exit interviews to determine the reasons behind the departure of staff, and to ostensibly avoid those pitfalls affecting others in the future. Exit Info, a Sydney-based group specialising in exit interviews, cites bad managers as the cause behind 20% of staff quitting. “Employers need to be able to differentiate between what is making staff unhappy and what is actually making them walk out the door,” Exit Info director Lenore Lambert says. She believes remuneration is rarely the source of staff unhappiness. In fact, more than 40% of employees would have reconsidered their resignation – but were never requested to do so. While the bottom line may be less a consideration for staying than some might think, it’s enough of an incentive to keep staff pursuing supposedly greener pastures. In a note released to clients last year, Recruitment Solutions says an employee’s longterm future is decided during the first 90 days of employment, or the “onboarding” period. It recommends implementing a creative and structured program that includes sessions on corporate history and values, chief executive strategies and goals, “meet and greets” with senior executives, explanation of performance reviews and a tailored coaching and mentoring program. The message to employers is simple: heed the warning signs of staff disillusionment early, or see your staff poached and your business left to fry. 69
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peopleNEWS Veroâ&#x20AC;&#x2122;s match with a message About 60 Western Australian brokers converged on Lilac Hill in the eastern suburbs of Perth late last year for a cricket tournament with a difference. Hosted by Vero, the event included pointers on technique (or lack of it) from former Australian opening batsman Justin Langer. Vero used the occasion to encourage WA brokers to nominate their own up-and-coming stars for the Warren Tickle Memorial Award, which it has sponsored since the National Insurance Brokers Association launched it in 1990.
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NOVA 2063
The award recognises outstanding industry professionalism, commitment, and contribution to the community among brokers aged under 35. Vero is making sure Young Professionals get the message about the award and its professional development and travel opportunities by holding cocktail nights in Brisbane, Adelaide, Sydney and Melbourne.
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Professional risks liability has the potential to rip the heart from your clients’ business.
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IAA conference hails WA’s Peter Gibbs The Insurance Advisernet Australia (IAA) annual conference and trade exhibition just keeps growing. The latest, held at Royal Pines Resort on the Gold Coast, attracted a healthy crowd of more than 400 delegates and guests including insurers, premium funders and other suppliers. They came from around Australia and New Zealand. Former Victorian Premier Jeff Kennett made a memorable impression on attendees. Kevin Rudd imitator Anthony Ackroyd brought a comedic twist to the awards night, where Peter Gibbs of Gibbscorp in Perth was named Authorised Representative of the Year. The conference theme was “20 Good Reasons” – something IAA Director Operations Adrian Kitchin says related to many things, such as being part of the insurance industry and adding value for clients in tough times. He says the mood at the conference “reflected the spirit of unity, family and purpose Insurance Advisernet Australia aims for”. A charity golf classic held a day before the conference boosted ongoing fund-raising efforts that benefit Beyondblue, Variety, Reach and Youngcare. With the IAA network continuing to grow, the 2010 event – at a venue that has not yet been announced – is expected to attract 450-500 delegates. Images by Ray Lawler Studios
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maglog » OUR ARTICLE IN THE DECEMBER issue listing the 20 people we regard as the most influential in the risk insurance industry has caused a fair bit of debate but, thankfully, little disagreement. Some of the “movers and shakers” listed have taken to referring to themselves by number when Insurance News reporters contact them, and we’ve also received calls from public relations consultants asking how they can get their clients on next year’s list. We did expect comment from readers on the lack of women on the “top 20” list, and we weren’t disappointed. Only one woman made the Top 20 cut: Insurance Council Chief Executive Kerrie Kelly, who has since departed to head up the Association of British Insurers. Plenty of readers – mostly women – have pointed out the anomaly to us in case we hadn’t noticed. Our only response has been to point out that we don’t make people “influential”; we only acknowledge the fact that they are. And if women aren’t included on the list it’s an industry problem, don’t shoot us we’re only the messenger, etc. To the female broker who felt strongly enough about the matter to cancel her subscription we could only commiserate and point out that to include women on the list because they were women would compromise what we were trying to do and – just as bad – expose us to accusations of tokenism. Besides that, we won’t be running the “20 most influential” list as an annual feature. We’d be playing with fire if we started doing regular assessments measuring executives’ movement up and down, noting who’s fallen out of the top 20 and who has risen from the pack. We’ll leave that to their chairmen, thanks. But what we will do is gather information on the leading women in insurance – one of them is featured on page 26 – and come up with an article that’s interesting and hopefully will help move the debate forward. We’re looking for female up-andcomers in management, directors and those who’ve been there, done that. Email your suggestions and comments to editor@insurancenews.com.au. It’s worth noting that while there’s a lack of female managers at the weekly meetings with the chief executive, quite a few women are making the big decisions upstairs in the insurance companies’ boardrooms. We haven’t compared the risk insurance industry with other industries, 74
Terry McMullan Publisher
but a recent survey found that of the 1474 director positions on ASX200 companies at the end of 2009, 128 are held by women. That’s 8.7%. A 2006 survey of European companies by recruitment group Egon Zehnder showed 8.5% of the boardroom seats in the top 300 European companies are held by women. So it’s not just an Australian problem. But it also means it’s not good enough anywhere. A feature in this issue that we suspect will get plenty of attention is our cover story by Sarah Schwager and Karin Brawn on “smart/casual” in the workplace. The article was suggested by a reader who said many younger employees don’t seem to know the difference between beachwear and office gear. We’ve noticed much the same problem at some industry conferences, where the term “smart/casual” often results in some interesting interpretations. You have to wonder whether the business suit will survive the onslaught of Generations X and Y and the continuing casualisation of the workplace (yes, we made that term up, but it has a certain authority about it). Hopefully the tie at least will disappear. A ridiculously expensive strip of cloth with few redeeming features, it belongs in the back of the cupboard, gathering dust with all the striped, paisley and thin black numbers that once were cool and now are useless. Some people to thank: Our models for the “fashion shoot” – Tony Pantano, Catherine Harrington and Glenn Arnold – were pressganged into service. Tony used to work in parent company McMullan Conway’s marketing area and is still regarded as part of the MC family; Catherine is at university with Tony; and Glenn, who is Managing Director of recruitment company Insurance People Australia, just happened to wander into the studio at the right time – for us, at least. The picture on page 55 of Victoria’s Yarra Ranges a year after Black Saturday was taken by Esther Raworth as part of a Year 12 assignment. Esther’s photography is among a range of art by VCE students to be displayed later this year at the National Gallery of Victoria in Melbourne. Her artistry may well be inherited: she’s the grand-daughter of Australia’s greatest post war landscape artist, Fred Williams. insuranceNEWS
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Sheâ&#x20AC;&#x2122;s been away from home for eight long days of back-to-back meetings. She knows things are happening with the competition back home and she needs to keep in touch with the wider market as well.
www.insuranceNEWS.com.au
Being informed is how she stays on top of everything. She reads
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INMAG Feb10:page layouts
8/2/10
12:00 PM
Page 76
Delivering more with you in mind. !T 6ERO WE NEVER TAKE OUR BROKER RELATIONSHIPS FOR GRANTED 3O WElRE CONSTANTLY LOOKING FOR NEW WAYS TO MEET AND EXCEED EXPECTATIONS 7ElVE ADDED NEW PRODUCTS DEVELOPED TIME SAVING TECHNOLOGY INTRODUCED MORE "$-S AND NOW COVER A BROADER RANGE OF RISKS )T MIGHT BE EASIER TO SIT BACK AND SIMPLY HOPE THAT QUALITY BUSINESS COMES OUR WAY p SOME INSURERS DO JUST THAT "UT WE DONlT BELIEVE YOU WOULD BE HAPPY WITH THAT APPROACH WWW VERO COM AU
6ERO )NSURANCE ,IMITED !". 6%2
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28/1/10 11:57:16 AM