THE SUMMER FROM HELL Floods, cyclone, bushfires
Could it ever happen again? February/March 2011
Contents 8 Newsmakers » 10 Summer from hell » Huge floods, a major cyclone and a devastating bushfire stretch the insurance industry to the limit and bring into focus a gap in its coverage.
26 The flood maps dilemma »
lawNEWS 60 What you can expect from your BI policy » Two business interruption experts look at the recent floods and analyse the claims possibilities.
62 Knowing and understanding » How flood victims could mount a case for payment, and why insurers need to be clear.
Is it really just a case of knowing where to look?
28 Time to consider alternatives? » Flood insurance is only one of several ways to transfer the risk.
30 No worries about being eclipsed »
peopleNEWS 64 Focused on training »
Ebix works on new systems and keeps Sunrise shining brightest.
32 10 years after HIH » It took 30 years to build and three years to destroy. Ben Oliver traces the steady rise and spectacular fall of HIH.
46 The D&O pressure cooker » Increases in regulator lawsuits and class actions show why directors and officers need cover.
50 The claims revolution »
Underwriting agencies say they’re doing their bit for the industry.
66 68 70 72 72
MGA assistants discuss the next 10 years » eQuipped to lead the way » Blue Eagle’s island adventures » Chartis forum attracts top end of town » A big repair job »
74 maglog »
Technology is driving the industry’s new competitive battleground – but it’s really all about the experience.
56 Farewell to the fax » From here on the restoration process will be all about systems, not people.
58 The perfect claim » Like the perfect storm it’s a confluence of many factors.
Cover: Bill Wood
Broker cluster Insight has announced two awards – one that will commemorate the memory of early supporter Peter Michell (above) and another to recognise the contribution of foundation member and former chairman Les McInerny. Executive Officer Bill Friend says former National Insurance Brokers Association (NIBA) Operations Manager Michell, who died in 2005, was instrumental in helping get the former Regional Insurance Brokers Association started.
Global trade works:
New Zealand’s troubled – and troublesome – Accident Compensation Corporation (ACC) has moved closer to being privatised with a key Government steering group recommending private insurers should be allowed to offer accident compensation insurance. The ACC privatisation issue has been a political touchpoint in the past, and Prime Minister John Key is taking a cautious and gradual approach. But with ACC Minister Nick Smith saying the corporation is ”haemorrhaging $NZ7.2 billion ($5.4 billion) in losses,” the pace of privatisation will speed up after the national election on November 26. The steering group which includes politicians and independent experts says the introduction of private insurers into the accident compensation market is the best way of “transferring the burden of risk-bearing for unforeseen contingencies and unfunded liabilities arising in the future from current levy-payers and the Crown to shareholders of the private insurance companies”. The ACC reported a $NZ10.3 billion ($7.8 billion) loss at June 30 last year. “Employers will be able to choose their workplace insurer, but ACC will still be a provider,” Smith says.
While the world economy is broadly on the road to recovery, some countries are still inclined to be dodgy bill-payers. Others are experiencing increasing levels of civil unrest. Aon’s 18th annual Political Risk Map – which measures the political risk of 211 countries and territories based on a wide range of criteria including currency, strikes, riots, war, political interference and legal risk, shows 19 countries are more risky than they were last year and 11 others are improving. But Aon says non-payment of debts by some states continues to be an issue. Aon Risk Solutions Associate Director Beverly Marsden says 13 island nations have moved into a higher risk category this year because of
Benevolent 2010: Both general and life insurers had plenty of reason to smile at the end of the year, with both sectors recording improved results during 2009/10. The annual Australian Prudential Regulation Authority (APRA) December reviews of the two industries’ performance in the previous financial year shows the life insurers outperforming their general insurance counterparts when pulling the money in – but making much less on the bottom line. APRA says new life premiums for the 12 months to June 30 last year were $40.1 billion, up from $38.7 billion in the 2009 financial year. Net policy payments were $36.9 billion in 2010, up from $35.4 billion in 2009. And net profits for the life industry were $2.7 billion for the year – up from $1.9 billion in 2009. The general insurance industry reported a $4.4 billion net profit in 2010 – nearly doubling the previous year’s net profit of $2.5 billion. The general insurers’ gross premium revenue for the 12 months to June 30 2010 was $32.7 billion, up from $31 billion in the 2009 financial year. The improved profit position was despite a rise in total expenses for life insurers, up from $21 billion in 2009 to $25.1 billion in the last financial year. Most general insurance business segments reported premium growth in the year to June 30 2010, while public and product liability dropped from $2.1 billion in 2009 to $2 billion.
NIBA CEO quits: The National Insurance Brokers Association (NIBA) is searching for a new chief executive following the resignation in late January of Noel Pettersen. After 20 years running NIBA, Pettersen has given six months’ notice of his intention to retire. New NIBA President David Duffield says the search process will follow a board review.
“Globalisation has had a positive impact on the world’s political and economic stability” the effects of declining tourism on their economies. “The negative effects of the global financial crisis impacted the economies of nations with traditionally low levels of risk,” she says. “Iceland this year became the first Western European country to be downgraded to medium risk.” But there’s also good news. Over the past five years the map has charted an increase of nearly 30% in the number of countries in the middle of the risk rankings – thanks to becoming more prosperous through international trade. Marsden says globalisation – often seen as harming small countries’ competitiveness – has in fact had a positive impact on the world’s political and economic stability. Many countries previously designated as medium-high or high risk have taken advantage of global trade links and have seen political risk levels decrease as a result. But the political risk will continue to be a major influencer for businesses transacting in emerging markets. Political risk will “remain elevated” while markets are unstable, but will return to traditional levels as the global
Private insurance closer:
Winners: Egyptians demand – and receive – political change
Number of times ASIC has used its powers in the past three years to investigate companies and individuals 6
Number of Australians injured at work in 2009/10, according to the Bureau of Statistics insuranceNEWS
Number of claims received up to January 31 for the September 4 Christchurch earthquake and aftershocks
Shaking all over:
New life for West Duncan West quit his Melbourne-based job as chief executive of CGU late last year [see last issue], but he wasn’t unemployed for long. National Australia Bank has hired him to head up its life insurance operations in MLC and NAB Wealth. UK-born West has had a brilliant career in Australia’s general insurance industry. He was the founding chief executive of Vero before the ProminaSuncorp merger saw him temporarily grounded.
Earthquakes are now a common occurrence in the New Zealand city of Christchurch and the surrounding Canterbury province. As these two local schoolchildren (right) demonstrate, ducking for cover has become part of everyday life since the September 4 quake which became the largest single insurance event in New Zealand history. Just four months after the initial quake struck the South Island city causing more than $4 billion in damages and an estimated $1.5 billion in insurance losses, Christchurch continues to be regularly rocked by tremors. For example, an earthquake measuring 5.1 on the
Social media twoublesome:
Richter scale struck Christchurch on January 19, with aftershocks registering 3.2, 3.4, 4 and 3.2. While less severe than the 7.1 magnitude earthquake recorded in September, the latest bout of tremors shook a city still rebuilding from the nation’s costliest natural disaster.
New Zealand Insurance Council Chief Executive Chris Ryan says premium rises are likely in the wake of the earthquake. “The size of increases is very hard to predict as there are forces driving premiums down as well as up,” he said.
Buying up big: QBE
Death mine asset:
Group Chief Executive Frank O’Halloran has started 2011 at a cracking pace, with a couple of big moves keeping analysts away from the beach. The global Australian insurer made a foray into the financial institutions sector with the purchase of the local operations of US-based Cuna Mutual. After that came news of the big one: a 10-year distribution deal for the Bank of America’s Balboa Insurance business. Balboa’s 2009 accounts show gross written premium of $US1.9 billion, which after liabilities gave an after-tax profit of $US443 million. QBE estimates future gross earned annual premium will be about $US1.3 billon, while net earned premium will be $US1.5 billion. Under the deal QBE will make a $US700 million upfront payment to Bank of America for the distribution rights.
Amount in dollars that catastrophes last year cost the global insurance industry
“However, the large part of the $1.5 billion now estimated to be paid to New Zealand comes from international companies, and over the next few years there is likely to be some cost to all insured parties as a consequence."
The receiver of the Pike River Coal mine on New Zealand’s west coast has taken over the management of the mine, where 29 men died in a series of gas explosions in November. Now the best asset of the mine – which previously exported high-quality coking coal to global markets – is its insurance policy, according to PricewaterhouseCoopers receiver John Fisk. He says it could take six months or more to sort out the business interruption claim for the underground mine, but has warned that a final settlement with insurers will probably be “considerably less” than its $NZ100 million limit.
Baptism of floodwater: Most industry leaders get a chance to adjust to new realities when they take up the presidency of the Insurance Council of Australia. Not so new president Rob Scott, however. He assumed the presidency from Allianz Managing Director Terry Towell at the end of the year and almost immediately found himself thrust into the hurly-burly of media and political affairs following the devastating Queensland floods. Mr Scott is the Chief Executive of Wesfarmers Insurance.
Percentage of the general insurance industry’s combined ratio in 2010, according to JP Morgan/Deloitte insuranceNEWS
Amount in dollars that insurers want the Federal Government to spend on flood mapping
“Hashtag”, “twaffic”, “retweet” and “twitsphere” are just some of the terms that insurers – known for their love of jargon – must embrace to keep up with social media, according to the latest JP Morgan Deloitte survey. It says integrating social media presents risks and challenges, but to do nothing could be worse. About 20% of all sales are predicted to go through the internet by 2015, and with 75% of online Australians using social networking site Facebook, the onus is on insurers to develop “appropriate social media policies and guidelines”. “In our view, insurers would be wise to be at the table now, rather than try to catch up later with competitors who have a head-start in embedding social media into their respective business models,” the report says. Besides a lack of social tech savvy, the insurance industry is otherwise doing well despite the impact of catastrophic events, an easing in reserve releases and a two-speed premium market. The survey says the combined ratio for insurers in 2010 improved by four percentage points to 97%, thanks to average personal lines premium rises of 8%. A different story has been told in commercial lines, where premiums fell by an average 1%. “It was a year of two markets,” JP Morgan senior insurance research analyst Siddharth Parameswaran said. “The biggest reductions were seen at the top end of the market, while small to medium-sized enterprises were relatively flat.” Brokers again cited staff recruitment and retention as their number one concern, while reinsurers continued to confront natural catastrophe event losses. More than 40% of insurers also now cite distribution trends as a key threat. In the language of the twitterati, these issues would be hash tagged as #staffhire, #catlosses and #badchannels.
ABOUT THIS EDITION: In this edition we’ve tried to ignore the disaster headlines and get into the issues thrown up by floods, cyclones and bushfire. Are there better ways for a country like Australia to deal with catastrophes that destroy not only homes and businesses, but also massive amounts of infrastructure? What do insurers need to do to understand the risks better – and how much information is sufficient? We’ve tracked the summer of disasters chronologically to show just how mixed and widespread these events were.
Our law section (page 6063) contains some useful advice on legal aspects of the flood claims issue.
White Christmas: New York’s Broadway after the storm
Blizzard buries US As Australia battled its first floods of what was to be an exhausting and wet summer, the United States was experiencing one of the most savage winter storms in 60 years. Snow fell on Christmas Day in some southern cities for the first time in 120 years, stretching all the way across the country to New York and north into Canada. On February 2 it happened all over again, even bigger and nastier. It covered most of the US and brought the so-called northeast megalopolis – a densely populated area covering several states and taking in such cities as Norfolk, Philadelphia, New York, Hartford and Boston – to a standstill, dumping between 30cm and 81cm of snow. Nearly 100 million people in 30 states were
affected by the blizzard, which closed airports, cut rail links and caused massive power cuts. The February storm is estimated to have cost insurers between $US790 million and $US1.4 billion. On the other side of the US, Los Angeles experienced the equivalent of six months of rain in three weeks in late December, causing some of the worst flooding in California’s history. The only positive note from the wild weather was the experience of a depressed New Yorker who jumped from a ninth-storey window, only to be saved by a huge pile of garbage hidden under the snow. It had been too cold for sanitation workers to collect it.
“Nearly 100 million people in 30 states were affected by the blizzard”
PUBLISHER/EDITOR: TERRY McMULLAN McMullan Conway Communications Pty Ltd Tel: + 61 3 9499 5538 Fax: +61 3 9499 5535 Email: firstname.lastname@example.org ADVERTISING: NAOMI CONWAY McMullan Conway Communications Pty Ltd Tel: +61 3 9499 5538 Fax: +61 3 9499 5535 Email: email@example.com 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: firstname.lastname@example.org
SUBSCRIPTION ENQUIRIES: www.insurancenews.com.au/subscribe Email: email@example.com 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
We couldn’t let March go by without a reminder that it’s 10 years since HIH fell over. The HIH disaster also changed governments’ understanding of insurance, teaching politicians of all stripes that a strong and secure national economy isn’t possible without a strong and secure insurance industry. It’s a very well known story in the industry, for good reasons. But for anyone who has joined in the past six or seven years, the story of HIH and the aftermath of its collapse is a little piece of history worth knowing and understanding. For everyone else it’s a story that shouldn’t be forgotten. In this issue we trace the short and dramatic story of HIH and revisit some of the major players who were thrust into the spotlights. Our question to them is, could it happen again?
Material in insuranceNEWS (the magazine) is protected under the Commonwealth Copyright Act 1968. No material may be reproduced in part or in whole without the consent of the copyright holders. The content of articles appearing in this magazine do not necessarily reflect the views of the Publisher. All statements made are based on information that is believed to be reliable and accurate, but no liability is accepted for any fault or omission. We also accept no responsibility or liability for any matter published in this magazine that reflects personal opinion. Printed on FSC paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification.
Summer Huge floods, a major cyclone and a devastating bushfire stretch the insurance industry to the limit and bring into focus a gap in coverage
Brisbane, January 13: Suburbs and industrial areas south and west of the city underwater after the Brisbane River broke its banks. Picture courtesy NearMap
FROM EARLY DECEMBER TO LATE FEBRUARY, AUSTRALIA WAS HIT BY A SERIES OF NATURAL CATASTROPHES AFFECTING HUNDREDS OF THOUSANDS OF PEOPLE. PROPERTIES WERE DESTROYED, THOUSANDS LEFT HOMELESS AND BUSINESSES CLOSED DOWN – MANY OF WHICH WILL PROBABLY NEVER RE-OPEN. TOWNS IN CENTRAL QUEENSLAND HAVE BEEN DEVASTATED BY RIVERS BURSTING THEIR BANKS. IN SOUTHEAST QUEENSLAND, THE CITY OF TOOWOOMBA AND THE ADJOINING AGRICULTURAL HEARTLAND OF THE LOCKYER VALLEY MET THE TERROR OF DEADLY FLASH FLOODS. THE FOLLOWING DAY THE BRISBANE RIVER BROKE ITS BANKS AND FLOODED ENTIRE SUBURBS. Flash flooding in northern Tasmania and the advance of a slow but inexorable inland sea in northwest Victoria drowned one-third of the state, leading to mass evacuations. In early February Cyclone Yasi became the biggest and meanest cyclone to cross the Queensland coast since 1918. The only blessing the category 5 cyclone brought was that it diverted away from the city of Cairns, although the damage it has wreaked on smaller communities south of the city will take a long time – and a lot of money – to repair. Then came a bushfire on the other side of the country which destroyed more than 70
homes on the outskirts of Perth. At the centre of all the action has been the general insurance industry, whose response to the onslaught of flood, cyclone and bushfire has been overshadowed by the long-running issue of flood insurance. While thousands of insurance claims staff laboured through the traditional summer break to assess properties, deal with stressed policyholders and where possible provide assistance, their work is being ignored as politicians and the media concentrate on the long-standing refusal by most insurers to provide flood cover to customers. The result has been a public relations mess
for the industry, with spokesmen struggling against a tide of angry flood victims claiming they have been conned. While community and media hostility against the industry continues, politicians at least have backed away from direct attacks on the industry. But change will come, whether the industry likes it or not. The only question is what form that change will take. A contentious definition of flood that the Insurance Council of Australia (ICA) tried and failed to implement in 2008 is back on the table. The manner in which insurers inform their
The water came from there: Suncorp Commercial Insurance Chief Executive Anthony Day (right) visits a Brisbane client as the flood begins to subside
customers they are not covered against some forms of flood is also being examined by Federal Government regulators – and a gathering gaggle of plaintiff lawyers weighing up the chances of class actions against insurers. Federal Assistant Treasurer Bill Shorten has seized control of the issue, and is negotiating with insurers to find ways to make flood insurance possible. The tough talk behind closed doors is gradually being balanced by a growing realisation that defining flood isn’t the whole answer – or even much of an answer at all. The problem doesn’t just involve a bunch of insurers unwilling to lose money on the near-certainty of flood. It involves governments and councils which have allowed developments on low-lying land, the slow pace of flood mitigation projects, and the often-unrealistic expectations of consumers. Mr Shorten clearly realises the solutions to the issue aren’t going to come from slapping even more controls and obligations on insurers – although there’s obviously some room for movement there. He has told Federal Parliament he intends to set in place a raft of reforms ranging from policy disclosure and consumer protection to landplanning policies and even greater controls on housing developments on flood-prone land. The message is sinking in that flood risk is a vast and difficult problem, and the debate over the best way to protect vulnerable communities has long occupied insurers and governments around the developed world. Many countries have devised solutions, but each is a compromise. There are lessons and examples to study, but Australia will have to devise its own answers. Among them will be proposals that demonstrate the sophistication of the global insurance industry. They range from the relative simplicity of government-controlled reinsurance pools similar to the terrorism reinsurance pool that already exists in Australia, to catastrophe bonds and public-private insurance partnerships. The local insurers favour few if any “solutions” that could act as disincentives to insure properties properly. But their views are hamstrung by the continuing reluctance of most major insurers to get involved with flood insurance. Their arguments, as voiced by the Insurance Council, revolve around the alleged paucity of
accurate flood mapping in Australia. It’s a viewpoint which has attracted many critics and raised questions about why Suncorp can do it – and get reinsurance support – while the others can’t. Now the industry wants the Federal Government to foot the estimated $50 million bill to terrain-map all of Australia, so they can accurately assess the flood risk. It’s an interesting negotiating point, and raises the additional question: why are they asking now? Most people in rural areas have become accustomed to the concept of occasional flooding, and appear to understand that insurance cover against an inevitability isn’t feasible. City folk are different, and they react badly and in numbers to such setbacks. Over the past couple of months insurers with long enough memories have had cause to recall the Wollongong floods of 1999, in which they were castigated for many months by angry claimants, local media and politicians. After Wollongong, most insurers held firm and refused to pay claims for losses that were obviously caused by floodwaters. Eventually people moved on and the issue died away. Not this time. Minister Shorten is a man on a mission, and this time he’s prepared to use legislation and regulation to force a solution on the industry. Whether or not flood victims succeed in getting their claims paid, the period from December to March will cost insurers and reinsurers billions of dollars. It will place considerable strain on industry professionals and thousands of people are going to be blessing the day they paid up for proper levels of cover. But for flood victims, recovery from their loss is likely to be long and bitter.
It was the wettest December on record for the eastern states. What bought about the change in the weather was a strong La pattern in the Pacific Ocean. The December Southern Oscillation Index was +27.1 – the highest December value on record. Other features of this La Nina indicated the strongest event since at least the mid-1970s, and one of the four strongest in the past 100 years. Previous strong La Nina patterns occurred in 1973/4 and 1955, and both were associated with widespread flooding in the eastern states. The first six major rain events occurred in eastern Australia between the beginning of December and mid-January.
Central Queensland floods (November 28 – December 4) A pressure trough stationary over eastern Australia delivered 100-300mm of rain on central Queensland, extending from Mackay to Emerald. Many houses were flooded and roads cut including the Cunningham Highway. The rail line out of Townsville was damaged. An 81-year motorist was also swept to his death on a flooded road in central Queensland.
Eastern Australia floods (December 7 – 13) A cold front moved from South Australia through Victoria and New South Wales and joined a trough that moved slowly across northern NSW and southern Queensland. This produced rainfall of more than 50mm for this area, with some localised falls of more than 100mm. Again flooding was reported in Queensland, but some areas of Victoria and NSW also had localised flooding. In Queensland two people were killed when their cars were swept off flooded roads, and 200 houses in low-lying areas of Rockhampton were inundated. Large areas of crops were destroyed by floods as 13 rivers threatened to burst their banks…
Flood levee: Rockhampton shop-owner Craig Arnold (right) works with friend Garry Dougherty to maintain a flood barrier in Rockhampton
Rockhampton is no stranger to flood, says local broker Peter Peirano. He says the cattle and mining centre has seen it all before, so it was hardly surprising when the Fitzroy River started to break its banks and slowly flow into the town. Mr Peirano, the Principal of Piranha Insurance Brokers, says many residents saw it as “a here we go again moment”.
Central Queensland floods November 28 – December 4 December 19 – 20
“Every crisis brings out the best in people.” – Bundaberg broker Peter Peirano
The gradual swamping of Rockhampton gave many people the opportunity to sandbag their homes and businesses and board up doors and windows. Several very busy weeks later he’s happy that his clients’ claims are “well under control”, but he’s a bit dark on 14
those insurers who “sat on the fence” waiting for hydrologists’ reports before deciding on claims. “It’s just wrong – so wrong,” he says. He says the industry must work towards introducing a standard flood definition, reassessing embargo procedures and working out how to price flood risks. “Other than that, as a community team-bonding experience it has been magnificent,” Mr Peirano says. “Every crisis brings out the best in people.” Regional Insurance Brokers Director Darren Green wasn’t surprised by the floods in his hometown of Rockhampton, but it was a different story in the nearby town of Emerald. He says Emerald copped a bad flood in 2008, but this one was far worse. But he says everyone in town is “jumping in to help clean up the damage and trying to get back to business as usual”. He says the biggest hurdle commercial businesses face is not knowing what the insurance companies might do on meeting claims. “No one knows where the insurers stand now,” he says. But overall he says people are “handling the situation fairly well” and concentrating on recovery.
Central Queensland floods (December 19 – 20) A trough across Queensland was linked to a deep low off Tasmania which produced a further 100mm of rainfall in central Queensland. Some towns were flooded again – the third time in as many weeks – and many roads were closed.
Queensland coastal floods (December 23 – 28) Tropical cyclone Tasha made landfall just south of Cairns on Christmas Day, delivering more than 200mm of rain along the coast around Rockhampton, with lesser rainfall levels extending north to Cairns and south to the Gold Coast. These areas received in excess of 100mm of rain during this period. By the end of December 300 roads and nine major highways in Queensland were closed by flooding, while the coal mining industry had numerous shutdowns due to flooded pits, access roads, rail lines and equipment. Rockhampton was flooded when the Fitzroy River burst its banks, leading to the closure of the airport. Many towns, such as Bundaberg, experienced their worst flooding in 40 years, with the Burnett River bursting its banks and causing extensive damage. Again significant crop damage and stock losses were reported as rural areas became isolated…
Fatal flood: cars are partially submerged as a flash flood races through the centre of Toowoomba
Austbrokers HCI Managing Director Jeff Stevens was outside his office in Toowoomba on January 10, photographing rising floodwaters. What he didn’t know was that two streets away a huge flash flood was charging through the centre of the city, plucking up cars like toys and sweeping people away. “It was just unbelievable,” he says. “I was oblivious to what was
Toowoomba and Lockyer Valley flash floods January 10
“It’s just amazing what brings people together.” – Toowoomba broker Jeff Stevens
happening.” He says there was “a real mixed response” after the flood from insurers in the region. QBE impressed him by promptly declaring the event to be storm-related. “They started processing claims immedi16
ately.” Mr Stevens says the local community pulled together, with many tradesmen offering their expertise and tools to help get the town back on its feet. “It’s just amazing what brings people together,” he says. Broker Ron Fitton won’t easily shake off the sight of a torrent flowing through the streets of Toowoomba. “It was just incredible,” says the Managing Director of Fitton Insurance Brokers. He says most insurers have reacted rapidly and some of his clients have already received cash settlements “to help get them back on their feet”. But Mr Fitton says some of his farming clients are feeling the pinch, as rural fencing is not covered under storm policies. “Some of them are frustrated and disappointed, but all in all people are pulling together, showing great camaraderie by helping each other. “Mostly it’s behind us now, and people are looking forward – they are optimistic,” he says. Mr Fitton says rural businesses in particular will be affected by lost income. “This has a flow-on effect to small businesses in Toowoomba.”
Toowoomba and Lockyer Valley flash floods (January 11) An upper level low combined with a humid easterly airflow resulted in very heavy rainfalls in southeast Queensland and northeast NSW. The area bounded by Brisbane, Gympie and Toowoomba saw threeday rain totals exceeding 200mm, with some exceptional localised falls of up to 648mm. More than 160mm of rain fell on Toowoomba, which sits in a shallow “dish” of about 40 square kilometres. Creeks converge at the northern end of the city centre before heading out onto the Darling Downs. Residents reported an hour of particularly intense rain shortly before the city was hit by a flash flood that tore through its centre, causing a number of deaths, then heading west to the Lockyer Valley. One of the most fertile and intensively cultivated areas in Australia, the valley was no match for the wall of water which rapidly pushed its main creek to a record height of 18.92 metres, exceeding the previous record set in 1893. The flood was described as an “inland tsunami” with towns such as Grantham devastated. Almost every home and business in the valley suffered some damage, with a number of houses being declared write-offs. The death toll from the flash flooding reached 35.
Starting over: a resident adds to a pile of debris as he cleans a flooddamaged West End house after the Brisbane River flood receded
Jackie McDonald, Director of CE McDonald Austbrokers, has waded through plenty of flood-affected car showrooms and businesses before. But nothing could have prepared her for the sheer scale of the Brisbane floods of 2011. “When you see the devastation you just think, what are our clients going to do? It’s just absolutely overwhelming. Your heart just drops when you see it.”
Brisbane floods January 11 – 13 She says it’s impossible to compare past claims – “a major fire and storms with lots of hail, but I’ve never seen anything like this”. And she says while insurers were taking a beating in the media, staff were out and about “doing everything possible to make life a little easier for brokers and their clients”. She says the biggest problem brokers have been faced with is the “millions of questions” from clients about their claims and the recovery process. Like other brokers, she’s seen enough to know the resilience of Australians and the spirit of local communities is undiminished. 18
One of her clients, a car dealership, had more then 100 volunteers pitch in to help clean up. “It was just amazing.” Jardine Lloyd Thompson Australia’s Senior State Executive in Queensland, Russell Ditchburn, was monitoring the weather situation from his Brisbane office. His summation: pretty scary. “When it became pretty obvious the rain wasn’t stopping we made a quick decision to send staff home,” he says. “By lunchtime both our Brisbane offices were evacuated.” Having gone through the 1974 Brisbane floods as a teenager, he had a fair idea of what to expect this time. “I had a lot of recollection of the areas affected, and I just hoped it wouldn’t be as bad.” He says JLTA managed through the flood crisis “reasonably well” because managers were able to remain operational with a lot of remote access – one of the benefits of modern technology. For the most part clients showed great resilience, “and it was good to see a lot of the insurance companies looking to pay as quickly as they could”. He says the road back for Queensland will be a long one, “but it has been fantastic to see everyone roll up their sleeves and get to work”.
Brisbane floods (January 11 – 13) The water then moved downstream towards the coast. On January 11 the Brisbane River, which winds it way through the Queensland capital, broke its banks. It flooded the city centre as well as such areas as Fortitude Valley, St Lucia, West End, Rocklea and Graceville. The city’s iconic Riverwalk broke up and headed out to sea, along with pontoons and boats from riverside homes. The city’s giant Suncorp Stadium filled up with two metres of water. The damage was extraordinary as whole suburbs were submerged. A considerable number of major business premises were also damaged. The river peaked at 4.46 metres, but still 20,000 houses in Brisbane were flooded. At the same time the Bremer River in Ipswich peaked at 19.4 metres, flooding the central business district and about 3000 houses. Shortly after the flood came the media – and a rising storm of anger as many people realised their homes weren’t insured against riverine flooding…
Going under again: Charlton in northern Victoria sinks under a sea of floodwater for the second time in four months
People in regional Victoria see flooding rain as “just another fact of life”, according to Ford Kinter and Associates Managing Director Doug Ford. He says country people are showing their resilience, picking themselves up and getting on with what has to be done. Mr Ford says the vast majority of his clients were covered against flood. And he believes large-scale flooding of homes is inevitable as long
Victorian floods January 12 – 15 as people are allowed to build in floodprone areas. He says stormwater drains need to be maintained to carry high volumes of water, and the fact that they’re not is leading to a lot of anger in the community. “Clients are angry that the Government has allowed infrastructure to deteriorate.” He believes the biggest challenge for flood victims will be dealing with a lack of tradesmen to help with rebuilding. It’s never easy giving people bad news, and Bendigo Insurance Brokers director Phil Hetherington says it was “heartbreaking” knowing the vast ma20
jority of flood victims in Victoria wouldn’t be insured against flood. “All we could do was prepare to give them the bad news,” he says. In the end, it wasn’t too bad. Mr Hetherington found most clients prepared for the worst and “most took it better than I expected”. “A lot of people were well prepared a number of days or even a couple of weeks before the floods, and in some instances had removed all their furniture, sandbagged their homes and businesses and even had plastic tarpaulins in place — but even that wasn’t enough.” Mr Hetherington says clients now have to make the hard decision of staying, picking up the pieces and rebuilding, or moving away. “They could face this same issue at a later date if it happens again, and even if they do stay and try to purchase flood cover at a later stage, I doubt there would be an insurer willing to grant it.” The damage caused by the floods has shocked many Victorians “who live miles from any river system and just didn’t see flood as a possibility”. “I’ve never seen anything like it, and neither have some of our clients whose families have lived in the area for more than 100 years.”
Victorian floods (January 12 – 15) Tropical air was drawn into much of Victoria, Tasmania and western NSW producing rainfalls in excess of 100mm over four days. In Victoria the Avoca, Campaspe, Wimmera and Loddon rivers broke their banks flooding towns such as Rochester, Charlton, Horsham and Warracknabeal. Rochester, in the centre of one of Victoria’s dairying regions, was the hardest hit, with the milk processing plant – the town’s main employer – inundated. Some 200 houses also were flooded. For many towns the floods were the second in just five months. Dozens of towns were cut off, 13,000 properties were flooded and 3000 people were forced to leave their homes. Some 40 towns were affected, with weather experts saying it was the worst flooding to hit northern and northwestern Victoria since records began. The floods moved slowly toward the Murray River, swamping large areas of Victoria farmland and causing widespread crop damage and livestock losses. Towns such as Kerang on the Murray were cut off for a while as flooding affected 4000 people, but levees at Swan Hill saved the town from serious flooding…
Breathing a deep sigh of relief down the phone, Innisfail-based broker Doug Olsen says the north Queensland town flattened by Cyclone Larry in 2006 received a “get out of jail ” card when Cyclone Yasi swept through the area. Mr Olsen, a director of Far North Insurance Brokers, says Innisfail escaped relatively unscathed – a fact he attributes in large part to the new
Tropical Cyclone Yasi February 3 building code brought in after Larry. He says it has been a different story in nearby Tully and Cardwell, where many of the damaged buildings were older and therefore didn’t meet the new cyclone-resistant standards. “People are generally coping pretty well,” he says. “There haven’t been any major meltdowns. “Everyone understands the industry has been stretched to its limits with all the recent catastrophes. “There’s a huge amount of work out there to be done,” Mr Olsen says. “The sheer magnitude of this thing and the claims assessing work is already being compromised by the other disasters that also have to be dealt 22
with.” Townsville-based Ausure NQ Director Doug Button says many people in Townsville and Cairns had a very lucky escape when Yasi passed through. He says the Townsville area missed out on a lot of the damage, with just a few isolated cases of trees causing structural damage to houses. Most Townsville people were handling the recovery process really well, and the biggest issue for him was being able to get through to insurers’ claims offices. “Some of our guys have had to wait on the phone for more than an hour, and when they do get through they’re having to put in seven or eight claims at once,” Mr Button says. “But the insurers are also under a lot of pressure at the moment.” He says that although Townsville once again escaped a major cyclone with minimal damage, trees planted around the city by the local council caused some damage and are now lying everywhere. “It’s going to take eight or nine weeks to pick up all the rubbish and put it through the council mulchers.”
Tropical Cyclone Yasi (February 3) Severe Tropical Cyclone Yasi started developing as a tropical low off the northwest coast of Fiji on January 29, and began moving westwards, growing into what was to become the largest cyclone to cross the north Queensland coast since 1918. The system intensified to a cyclone north of Vanuatu, and was named Yasi (Polynesian for sandalwood) by Fijian weather authorities on January 30. It maintained its westward track, intensifying to a category 2 cyclone on January 31, then growing in intensity to a category 3 storm by 4pm the same day. It was upgraded to a category 4 cyclone on February 1 while starting to accelerate towards the north Queensland coast. The following day the cyclone was upgraded to a category 5, meaning it carried winds gusting up to 275kmh. Although it was first estimated to be heading for landfall around Cairns, it crossed the coast to the south at Mission Beach between midnight and 1am on February 3. Most damage was confined to Mission Beach and the small neighbouring communities of Tully, Tully Heads and Cardwell. Yasi destroyed about 150 buildings and “significantly damaged” 650…
Marina mess: boats lie tangled after Cyclone Yasi swept past the tourist town of Cardwell, between Townsville and Innisfail
Burned out: Paul Bosweld sifts through the ruins of his Clifton Hills home
There’s a really distinctive smell about a suburb that has had a bushfire go through it, says a claims assessor working in the southeastern suburbs of Perth. “It gets you after a while. It’s not just the trees, it’s the smell of burned houses.” The assessor, who declined to be named, says most people whose homes were destroyed in the February fires have come to terms with their loss.
Perth bushfires February 7
“It’s a fact of life we all learn to deal with.” “The insurance companies have been really good in providing support. Some of them were on the spot within 24 hours, organising money and emergency accommodation.” The assessor says he expected his role to be relatively easy when he was assigned homes to be visited on the day following the bushfires. After all, a destroyed house doesn’t need a lot of examination other than to confirm that it doesn’t exist any more. 24
“I didn’t expect there would be so many houses damaged. Some were just singed a bit, others were pretty badly burned, with lots of secondary smoke and water damage, and there’s all sorts of variations in between.” Just as random as the damage were the fires themselves. In some streets the twisted remains of houses stand between untouched neighbours. In other streets undamaged houses with pristine gardens are surrounded by fire-blackened ruins. Rob Cory, Corporate Affairs Manager at SGIO, says people whose neighbours have lost everything can be “incredibly distressed” for them. He visited the affected suburbs shortly after the fires went through – SGIO is dealing with about 50 claims of varying seriousness – and says that in the circumstances things are going quite well. “We set up a mobile claims centre at the Armadale Arena and were able to start helping our customers straight away, sorting out their immediate needs.” He says bushfire is an everpresent threat in Perth during the long, hot summers. “It’s a fact of life we all learn to deal with.”
Perth bushfires (February 7) An ongoing drought and blustery weather combined to create ideal conditions for a bushfire to run out of control near Perth. On February 6, a high pressure system off the West Australian coast combined with a low to the north of Perth to create wind gusts of up to 70kmh in the Champion Lakes area southeast of the city. The following day the weather patterns remained similar, but with a pressure trough extending from north of Exmouth to south of Perth creating even stronger winds, with gusts of 72kmh. While a fire ban was in place, an off-duty policeman in the southeastern suburb of Roleystone allegedly operated an angle grinder, the sparks from which started a grassfire. Fanned by the high winds, fires swept through areas of Roleystone and Kelmscott, destroying 72 homes and damaging 32. The high-pressure system in the Great Australian Bight was pushing winds from the east and as it moved away the next day sent winds east southeast with gusts of up to 37kmh. The winds did pick up later, gusting to 81kmh, but by then the fires had been brought under control. An estimate of the insured losses from the fires was not available when this edition went to press.
The flood maps dilemma: Is it really just a case of knowing where to look? By John Wilkinson FLOOD MAPPING IN AUSTRALIA is very similar to the popular children’s game “pass the parcel”. Responsibility for it has been passed from the Federal Govern-ment to state governments to local authorities. And at this point the parcel has stopped, with some authorities consigning it to the “too hard” basket. Others just appear to be reluctant to make the information they have available, possibly because of the potential litigation over bad planning decisions or the impact on property values. While a certain amount of flood mapping has been undertaken in Australia, it has been piecemeal. Only in Melbourne and Brisbane
available online showing areas of inundation. The only other city to have comprehensive flood mapping is Brisbane. This was started in the 1970s. A Brisbane City Council spokesman told Insurance News the initial information was provided to the public through handwritten reports. But in 2004 Brisbane Lord Mayor Campbell Newman made the reporting publicly available at no cost, and in November 2009 it became available online. The council offers two services to the public: flood flag maps and floodwise property reports, which cover all suburbs and properties in Brisbane. The free flood flag maps visually depict predicted flooding from creeks,
Follow the flags: a flood map for Milton in Brisbane shows areas at risk
has the work been done, with comprehensive flood mapping on a property-by-property basis available online for the general public. But neither city has seen a dramatic take-up of insurance risks by the major insurers other than Suncorp and Zurich. In Melbourne the mapping was produced by the local water authority Melbourne Water. The project started in the mid-1990s due to concerns about the increasing probability of houses and developments being flooded. Today Melbourne property owners can go online and request a report on the likelihood of their property being flooded. For residents in rural Victoria, the Department of Sustainability and Environment also worked on flood mapping and again there are maps 26
rivers, storm tides and overland flows for a defined flood event. “The maps build on existing knowledge and information and use computer-generated mapping to show areas that may flood in a period of intense rainfall or extreme storm events,” the spokesman says. “For property-specific information, the free floodwise property report provides details on anticipated flood risks for a specified lot or property.” But flood maps can become inaccurate if the database is not kept up to date. Changes such as new roads, developments and natural earth movement could alter the paths of floods. Brisbane City Council does review its floodwise property report database when there are significant changes in ground level, new survey data, new developments or new rainfall information.
Insurers such as Suncorp do use these maps to help price flooding risk, but they are one of the few insurers offering flood insurance in Australia. The Insurance Council of Australia (ICA) has been working on a national database based on information from local authorities and water catchment bodies. But ICA seems to have conflicting views as to what information is available, and has now called on the Federal Government to fund a $50 million national mapping program. Chief Executive Rob Whelan says ICA’s National Flood Information Database (NFID) does not cover every flood-prone region in Australia, claiming some local authorities and water catchment bodies haven’t released their data. “In Queensland more than 90% of catchment flood-mapping data is still to be sourced for the NFID,” he said. However, ICA’s Current Issues Brief on flood insurance says many rural areas do have flood maps, and “approximately 80% of all flood loss occurs within these areas”. But if a homeowner obtains a flood map from a local authority, can it be used against an insurer to settle a claim legally? According to the City of Brisbane, its flood-mapping services are for reference only and should not be used in place of advice from a registered engineer. Immediately after the Brisbane flood, Perth-based aerial photography specialist NearMap was asked by the Brisbane City Council to provide comprehensive coverage of the Brisbane flood. NearMap says it has noted a “huge increase” in requests for material from insurers since the floods began. So does the insurance industry actually need a new flood-mapping database? It would seem there is a lot of accurate information available, although there are some noticeable gaps – such as Sydney. It is also possible some information is buried in municipal engineers’ offices, waiting for somebody to ask to look at * them.
Time to consider alternatives? Flood insurance is only one of several ways to transfer the risk By Tania Martin
WHILE INSURANCE COMPANIES don’t particularly like the idea of reinsurance innovations being adopted to meet the shortfall in flood cover, major broker Marsh Australia has surprised the market by coming out strongly in favour of a reinsurance pool. Marsh Chief Executive John Clayton puts his case simply: Technical data like flood maps is all very well, but it won’t help provide the protection that people and businesses in flood-prone areas want. He told Insurance News that although the Insurance Council of Australia’s (ICA) preference for a 10-point plan and the introduction of a centralised flood definition have merits, it’s not going to fix the problem. He finds the council’s opposition to a natural disaster scheme or reinsurance pool “rather bemusing”. “I would think they would be more open to other options as opposed to being narrow-minded about the matter. “Insurers are there to make money for their shareholders, and their mantra is to underwrite risk and avoid certain risks,” Mr Clayton says. “At the moment I am not seeing a pure insurance solution put forward, and I don’t believe the solution is just for the insurance industry.” He would prefer a “collaborative approach” between all levels of government and the industry – and that would include looking at planning laws and regulations. Mr Clayton points out that Marsh’s perspective on flood insurance is customer-driven. “Nothing we have seen so far has provided a clear solution for the clients.” He says flood-related issues are becoming more common, and one obvious option needing examination is a reinsurance scheme similar to the terrorism reinsurance pool set up by the Federal Government in 2003. But Allianz Australia’s General Manager Corporate Affairs Nicholas Scofield – whose company does not provide flood insurance – says such schemes are usually set up only when there is market failure which result in the lack of available cover. And as some insurers offer automatic flood cover, “there is no market failure”. Swiss Re Head of Australia and New Zealand Mark Senkevics has also suggested a public-private insurance 28
partnership – under which a state could purchase insurance cover which is triggered by the physical characteristics of a catastrophe, such as a windspeed, rather than pure damage. The reinsurer would pay out any time a cyclone of agreed windspeed passed through a defined geographic area. Mr Senkevics says payments can be used for a variety of purposes, including funding emergency response, replacing lost tax revenues, rebuilding infrastructure or funding future increases in insurance expenses. Catastrophe bonds, better known as cat bonds, transfer the risk of natural disasters to investors, who receive a yield in return for agreeing to cover future damage. There are other options to examine, of course. The United States Government’s National Flood Insurance Program offers cover to homeowners, renters and business owners if their community participates in flood mitigation schemes. France moved into the flood insurance market following devastating floods in 1982. Under its natural disaster compensation system, people who have car, home or business insurance that covers fire, water damage and theft are automatically covered for damage from flood, landslide, drought, avalanche or earthquakes. Germany uses a similar scheme which offers flood cover as a supplement to building or contents cover. New Zealand’s Earthquake Commission was established in 1945 to provide earthquake and war damage cover for those with fire insurance, but later expanded to cover other natural disasters. Like most successful government-managed schemes, it is available only to those who already have private sector insurance. The United Kingdom currently has a system in place which provides government financing for flood mitigation, in return for private sector insurers providing near-universal cover. However, the cash-strapped UK Government has decided to hold back more than £200 million ($321.3 million) in flood defence funding. Under a 2008 deal with the Association of British Insurers (ABI), the Government agreed to maintain flood defences until the end of 2013 in exchange for ensuring cover would remain widely available.
London-based JLT Partner for European Real Estate Bill Gloyn told Insurance News the insurers are currently considering their position, but a 17% reduction of expenditure on flood defences “hasn’t won a lot of positive comment”. He says a reinsurance pool is one last option that could work to solve the problems associated with flood cover in the UK. A prescient presentation in November by Chris Latham, Peter McCourt and Chris Larkin of PricewaterhouseCoopers at an Institute of Actuaries seminar asserted that the current arrangements for natural disasters actually create uncertainty. They said the Federal Govern-ment is already a large funder of costs and that a formal scheme such as a reinsurance pool or natural disaster insurance scheme would recognise the reality, remove the uncertainty and enable better funding. Marsh’s John Clayton says complacency may have set in following Cyclone Tracy, but that doesn’t make it right. He says at the time many believed it wouldn’t happen again – “but now it has, and these kinds of events are on the rise”. “It would be pretty poor if we didn’t find some kind of appropriate solution to this.” The Federal Treasury has declined to speculate on the possibility of a reinsurance pool, saying it’s concentrating on the Government’s package of spending cuts and a flood levy to support the recovery process. The issue may get a hearing at the impending commission of inquiry ordered by the Queensland Government. But with insurers cool at best to the concept of a reinsurance pool and the Federal Government intent on making it more difficult for the insurers to avoid providing flood insurance, there is a risk that more sophisticated risk transfer so* lutions will be ignored.
No worries about being eclipsed Ebix works on new systems and keeps Sunrise shining brightest By Michelle Hannen
ON PAPER IT’S AN IMPRESSIVE SET OF FIGURES. MORE THAN 900 broking firms transact 68 insurance products covering 23 classes of business with 12 insurers. Just under 6 million transactions were processed in the past year, representing gross written premium of $1.7 billion. Are these the statistics of one of Australia’s leading brokers, perhaps? No. Leon d’Apice, the managing director of insurance software specialist Ebix, rattles them off with pride because they relate to Sunrise Exchange, the online transaction platform his US-based company acquired from Telstra three years ago. Mr d’Apice says – with what he admits is a degree of arrogance – that the platform is without peer in the Australian insurance landscape. “It’s a fact,” he says. “There’s no other facility out there that’s got even a million transactions.” Under Telstra, Sunrise Exchange was “a good facility but it had some restrictions”, he says. Namely that it was limited to quote, bind and policy lifecycle. By merging Sunrise Exchange with an e-commerce solution – iClose – that Ebix already had under development, Mr d’Apice says Ebix has been able to expand connectivity to enable brokers to now claim, submit settlements and handle negotiated risk using the system. “iClose is effectively the next generation. So when we talk about e-commerce now, we talk about Sunrise and iClose.” However, uptake of the iClose solution has been limited to date, with only one insurer – QBE – using it for claims and settlements. “It’s moving forward slowly,” he agrees. “The adoption rate is very much dependent on the insurers and in some cases they’ve got a degree of inflexibility because of their backend infrastructure.” However, due to the “efficiencies to be gained” Mr d’Apice remains confident of broader market usage. Comparative quoting on commercial lines is another potential extension of iClose which could be rolled out during the year. In 2010, Austbrokers members piloted a facility which Ebix built to enable them to electronically generate comparative commercial lines 30
quotes from the insurers on the Austbrokers-IBNA joint venture’s panel. Mr d’Apice says additional development work is currently being done, and while the rollout will initially only be to Austbrokers members, further rollouts are on the cards. “We do have the potential to take it to the broader masses, but a lot depends on the appetite of the insurers,” he adds. One persistent criticism of Sunrise Exchange is its cost. But while Mr d’Apice says a lot of “myths” have circulated around the market, he admits that Sunrise Exchange “has traditionally been a very expensive market for an insurer to participate in” – a factor which has more to do with development costs than fees. He adds that the addition of iClose has cut insurers’ development costs for a single new product from “a couple of hundred thousand up to a million previously” to “tens of thousands”. Timeframes have also been slashed, from six to 12 months down to mere weeks. “This means tier two insurers and underwriting agencies can take advantage of ecommerce so you’ll see more insurers and more products.” With regards to transaction costs, which are only paid by insurers, he says: “It’s less than a cup of coffee.” Regular feedback indicates that transaction costs are not of concern to insurers. “For the insurers it’s petty change, and brokers only pay a couple of thousand dollars a year to connect to Sunrise Exchange.” Aside from Sunrise Exchange, Ebix operates three broking software systems – WinBEAT, CBS and eGlobal – which collectively have an 80-85% share of the Australian market, covering the smallest firms up to global giants Aon, Marsh and Willis. But Mr d’Apice is adamant that despite its market share, Ebix isn’t resting on its laurels. New versions of WinBEAT and CBS will be released in 2011, both of which provide the company with a “platform for growth”. WinBEAT4 is a “complete rewrite” of that system, shifting it to Microsoft’s new .net framework, while CBS7.1 will have policy processing added to it for the first time. The new upgrades will be supplied free to existing subscribers. Also on the slate for this year is the release of a new customer relaFebruary/March 2011
“A universal system is the goal of the insurers, and that’s why Sunrise Exchange has been the de facto industry standard for the past eight years” – Ebix Australia Managing Director Leon d’Apice (right)
tionship management application, SmartOffice. It has been fully integrated with the Ebix broking systems, allowing brokers to handle business generation such as sales campaigns, leads and sales pipeline management through their existing database. “Increasingly there’s pressure in that sales space and brokers have a real need to be able to manage that whole area.” Mr d’Apice says there has been a “huge amount” of interest in SmartOffice since its launch in October last year. The conversation is less easy when the recent decision by IBNA to invest in a joint venture with technology company InsuranceConnect is raised. Mr d’Apice says he questions the broking group’s motives in trying to develop its own broker management system. “What concerned us most is that the IBNA board claims to have gone out and talked to all the technology vendors,” he says. “They certainly didn’t talk to us.” He says that since the deal was announced, no IBNA broker has notified Ebix of plans to change systems. He concedes there will be “a few” who will make the switch, but says that so far, “there has been zero movement to the best of our knowledge”. “Will it affect us? I doubt it. They’ll still have to talk to the insurers
through Sunrise Exchange – at least that’s what the insurers are telling us.” He also questions claims that BrokerCentral offers substantially improved functionality and workflow efficiencies which could not be found in comparable products. “BrokerCentral was launched in 2005 and there are four broking firms using it. If it’s so good why are there only four brokers using it?” He says the BrokerCentral system is one of 13 systems which transact through Sunrise Exchange, and any interface built by the joint venture to bypass it would need insurer support. “Why build it? It’s just another layer of cost for the insurers.” Mr d’Apice admits such situations do cause him concern – but not because he’s afraid of Sunrise Exchange being eclipsed. “Every time somebody comes along and says they want to create a new way of transacting business, it will cost the insurer a couple of million dollars,” he says. “A universal system is the goal of the insurers, and that’s why Sunrise Exchange has been the de facto industry standard for the past eight * years.”
10 years after It took 30 years to build and three years to destroy. Ben Oliver traces the steady rise and spectacular fall of HIH
“From time to time as I listened to the evidence about specific transactions or decisions, I found myself asking rhetorically: did anyone stand back and ask themselves the simple question – is this right?” – Justice Neville Owen, remarks in HIH Royal Commission findings
TEN YEARS AGO, ON MARCH 15 2001, AUSTRALIA’S SECONDlargest general insurance company, HIH, went into liquidation. It was the largest collapse in Australian corporate history, leaving a $5.3 billion hole and placing hundreds of thousands of policyholders in economic limbo. Who remembers HIH now, except as a blip on the industry landscape we’d all rather forget? It’s been three years since the company’s founder and chief executive, Ray Williams, walked out of Silverwater Prison in New South Wales having served three years of a four-and-a-half year sentence. On January 13, 2008, the former titan of the insurance industry made a brief statement to waiting media outside the jail. “Before I retire I want people to understand that the last thing in the world I wanted was for HIH to fail, for people to be hurt and suffer financial loss,” he said. “I’m very, very sorry. “I’d like to leave it at that, please, I just want to go.” Ray Williams has never spoken publicly about his part in the collapse of HIH. Today he lives in peaceful retirement in the upmarket Sydney harbourside suburb of Seaforth. Bradley Cooper, the former burglar alarm salesman and motivational speaker who was jailed in 2005 for, among other things, offering cash bribes is another who is keeping his own counsel these days. He was released from Kirkconnell Correctional Centre last October last year after serving five years of an eight year sentence. Could Cooper re-emerge in the business world, and would it accept him? Should he ever need inspiration, he could turn to his former friend and colleague, Rodney Adler. Unlike Williams and Cooper, Adler has been anything but idle since his release in October 2007 from St Hellers Correctional Centre – one of nine prisons where he served two -and-a-half years of his four-and-a-half year sentence. Almost from the start he has been schmoozing the media while rebuilding his business credentials. If he’s sorry for the part he played in the collapse of HIH, it doesn’t show. Adler remains vocal, pugnacious and, despite his rebuilt personal and professional life, unwilling to take responsibility for any part he may have played in the failure of HIH. In September last year Adler gave an extensive interview to The Sunday Telegraph, where he detailed what many knew but few could believe: Rodney Adler is back in business. Adler, the article claims, is now a “changed man”. His once infamous short fuse has fizzled out. He devotes more time to his wife Lyndi and their four children. It may beggar belief, but the man jailed for lying and making unsavoury share market transactions is back in business as an adviser on ethical conduct and corporate governance. “Who better to talk to than a person who has fallen foul of the law, apologised, done his time, come out and can speak the language of the executive?” Adler said. Less forthcoming about his new business partners, Adler prefers they insuranceNEWS
stay silent, listing their industries under leasing, entertainment, materials handling, corporate travel and energy. While he’s less tight-lipped about HIH than Williams and Cooper, he is intransigent about his role in the giant company’s demise. HIH acquired Adler’s company, FAI, in 1998 for $300 million, without conducting due diligence. HIH wrote off $400 million in FAI bad debts within a year. Interviewed by business reporter Peter Switzer in October last year, Adler opined that executives can unwillingly get into trouble by “innocently trying to do the right thing”. Switzer, seizing the link offered by Adler, retorted that he was “clearly in the wrong” over HIH. A judge had found him guilty, Switzer asserted, and these were not “innocent mistakes”. Adler’s response was telling. “Are you sure?” he said. “I pleaded guilty to four charges… but my charges do not relate to the collapse of HIH. “Everything I did, I did with the solicitors’ and accountants’ advice. I don’t want to give the impression I was reckless and I did it in isolation.” Adler still maintains that FAI, described as “toxic” by Williams, was immaterial to HIH’s collapse. “FAI was a profitable acquisition for the company,” Adler said. “No one forced HIH to bid for FAI.” Adler’s account of HIH’s downfall centres on systemic mismanagement, chronic under-provisioning, unchecked expansion and poor due diligence. “They made the classic mistakes. They grew too fast and they did not have the mental capacity to cope with the size of the company and its growth,” he told Switzer. “In my humble opinion, there was no fraud and there was no malice in (management’s) heart. They just got out of control and did what they could to keep the ship alive.” Ten years after the collapse, many of HIH’s legion of creditors are still awaiting payment. Liquidator Tony McGrath has so far recovered roughly $1.2 billion for them, although some 2200 cases remain open. At least 50 new long-tail claims arrive on Mr McGrath’s desk every three months. While HIH’s debt has been downsized from an original estimate of $5.3 billion to around $3.6 billion, it remains the largest collapse in Australian corporate history. The last of HIH’s creditors won’t receive some form of resolution until 2014. In the words of Justice Neville Owen, who chaired the royal commission formed to investigate the collapse, the company not only failed but did so in “an egregious way”. How did Williams, Adler and the rest of HIH get it so wrong? Next page: Could it happen again? Page 36: A brief history of HIH
Surviving the train wreck: Financial Services Minister Joe Hockey (right) speaks at a media conference as the HIH crisis deepened in mid-2001. Insurance Council Chief Executive Alan Mason (left) and ICA President Raymond Jones wait their turn
The HIH collapse led to reforms and a greater understanding of just how essential insurance is NO ONE COULD HAVE PREDICTED THE enormous impact the HIH collapse would have on the community at all levels – business, government, the law, investors and ordinary Australians. It brought home to governments in particular the essential nature of insurance and the impossibility of building and maintaining a modern society without it. Perhaps the sheer scale of the industry, and its seeming invincibility in meeting claims large and small, had lulled the regulators and the industry itself into a false belief that a major insurance collapse simply wasn’t possible. Yet by mid-2000, many industry insiders were expressing unease about the secondlargest Australian insurer’s viability. One insider was then QBE Managing Director General Insurance Raymond Jones, who was also President of the Insurance Council of
Australia at the time HIH collapsed. Now a professional director, Mr Jones remembers hearing “pub talk” in the year before HIH collapsed that all was not going well at HIH. “The pub talk escalated when HIH showed an interest in FAI,” he told Insurance News. “Some well-placed people I knew told me there was no way FAI’s profits could be right, and after Ray [Williams] expressed an interest in buying FAI, the scuttlebutt got a lot stronger.” What followed was a slow-motion train wreck. It thrust the insurance industry into the public spotlight, and made a media personality of Mr Jones. The former marketing manager had worked in radio early in his career, and his distinctively deep voice became a feature of the industry’s public struggle to deal with the many issues that followed the collapse – particularly Federal Government fury. “People didn’t know how the Government was going to react,” he says. “Anger flooded in, and while we attempted to get all this sorted out [then Financial Services Minister] Joe Hockey got very passionate. “He abused me and (then New South Wales Treasurer) Michael Egan at one stage. “But once that passed the Government’s reaction overall was very professional.” Less than three months after the HIH crash the Federal Government and ICA had
established an industry-administered scheme, HIH Claims Support, with the Government funding claims for small policyholders and small businesses. The scheme closed to new applications in February 2004, by which time it had paid about $245 million on 10,900 claims. It was finally shut down in December 2008. The NSW Government was less friendly in its approach to the problem. It set up the Insurance Protection Tax Act 2001 to finance builders’ warranty and compulsory third party claims policies left high and dry by the collapse. It also banned insurers from passing on the cost of the tax to consumers, and it remains in force until July 1 this year. But some of the problems were less easy to address because they were so complex, and the solutions led to massive controversy and lasting bitterness. The death of fun and tort reform HIH was the largest commercial insurer in Australia and the dominant player in the public liability market. Its collapse left a vacuum of cover that the rest of the industry scrambled to fill. But the industry couldn’t – and didn’t – automatically pick up all the HIH business, much of which had been drastically under-priced. A rapidly hardening market and the
September 11 2001 attacks on the World Trade Centre in New York, coupled with insurers’ reluctance to pick up unknown or difficult risks, led to what the newspaper headlines referred to as “the death of fun” – more properly known as the public liability crisis. In the 12 to 18 months following the HIH crash, premiums in some lines skyrocketed by as much as 200%. Alan Mason was Chief Executive of the Insurance Council of Australia (ICA) at that time. He says the fallout as a result of HIH’s sudden exit from the public liability market was a “shock to the system”. “Theme parks were shutting down, pools were closing and playgrounds were shutting down,” he told Insurance News. “The community’s day-to-day life was being affected.” Organisations like pony clubs and school fete organisers couldn’t get public liability insurance, but the insurers insisted premiums had to rise following years of underpricing by HIH and the rising cost of liability payouts. Product and public liability covers had been running at a loss since 1997, while the number of claims had doubled from 1996 to 2000. Meanwhile, claims expenses rose by 22% over the same period. To howls of anger from the legal fraternity, which in some states had built an entire industry around liability lawsuits, the insurers began to push hard for tort reform. Raymond Jones is unmoved by the legal profession’s continuing muttering about the effects of tort reform. “We had this litigious mentality that was driving liability pricing through the roof, and HIH had taken on these risks at half the price they should have been charging. “With some of the decisions coming through the court system, pricing the product was almost impossible.” The federal, state and territory governments appointed a panel chaired by NSW Appeal Court judge David Ipp to review the law of negligence, with the terms of reference noting: “The award of damages for personal injury has become unaffordable and unsustainable as the principal source of compensation for those injured through the fault of another. “It is desirable to examine a method for the reform of the common law with the objective of limiting liability and quantum of damages arising from personal injury and death.” In October 2002, Justice Ipp handed down his findings, recommending limitations on damages as well as the types and quantum of damages awarded. Consumer groups, law firms and academics opposed the findings, citing assumptions in the report’s terms of reference and a lack of evidence linking a cap on compensation payouts with reduced insurance premiums. The states and territories subsequently adopted the report’s recommendations, some more enthusiastically than others. Following
the passing of the Civil Liability Act 2002 (NSW), anecdotal evidence suggested 10% of NSW’s barristers allowed their certificates to lapse. According to the Tort Law Reform Institute, new civil liability laws removed at least 70% of personal injury claim payments on business and household policies. Even Justice Ipp, speaking to The Australian newspaper in 2007, said tort reform had gone “too far”. But Alan Mason argues tort law reform was essential and HIH was only the trigger for what was in reality a long overdue change. “I don’t think tort law reform would have happened organically over time,” he says. “There hasn’t been an OECD country that has succeeded with the sort of tort reform we achieved.” Raymond Jones agrees. “In the end the outcomes were good. You got structural reform, regulatory reform, legislative reform, and some long-term things like policyholder protection. “I think if you look back 10 years and ask, ‘Are we in better shape now than we were then?’ you’d have to say, absolutely yes.” The HIH Royal Commission: demanding change In the wake of the HIH collapse the Howard Government established a royal commission to investigate HIH’s – and the industry’s – flaws. Western Australian Supreme Court Justice Neville Owen released his findings in 2003, recommending sweeping changes to how the insurance industry was regulated. “I think HIH really shaped APRA’s role,” Raymond Jones says. “There was an overreaction at first, but APRA’s approach was painfully inadequate. HIH’s collapse had some positive aspects, and one of those was to focus APRA’s role as a regulator.” The regulator admits its role fundamentally shifted after the HIH collapse. “The royal commissioner concluded that APRA needed to become ‘more sceptical, questioning and, where necessary, aggressive’ in its approach to prudential supervision,” a spokesman told Insurance News. “APRA has taken that message to heart. The consequence has been a cultural shift in APRA. “APRA has become a more active supervisor, not relying on the market to self-regulate. “Staff here have a clear understanding of the importance of the prudential role and the impact of issues across the financial sector.” Since 2003 nearly all of Justice Owen’s recommendations relating to prudential regulation have been implemented, although many were already under construction before the royal commission’s findings were made public. It’s for this reason that former ICA Chief Executive Alan Mason believes HIH’s influence
on prudential regulation is sometimes overstated. “You can’t actually say the new prudential regulation was a consequence of HIH, although it was accelerated by HIH,” he says. “The new APRA prudential standards and the risk-based capital approach had been underway for two or three years (before HIH).” While many insurers criticised APRA’s newfound confidence as being overbearing, Mr Mason sees Australia as a world leader in prudential oversight. “The model we have certainly would not have developed as quickly, and it’s getting close to being mirrored in other parts of the world,” he says. All of which begs the question, could HIH happen again? APRA says it must always rely on the accuracy of the information it receives from insurers, but a more intensive supervision program means such cracks that HIH was able to cover up are not as easily hidden. APRA now conducts more “targeted” onsite reviews, has increased its board-level communication and strengthened requirements for senior staff to attest to the accuracy of information provided to APRA. “Audit and actuarial review processes have also been strengthened, including specific reports to APRA on the insurer’s financial condition and reinsurance management – two critical areas,” the spokesman says. Alan Mason says the likelihood of another HIH-type collapse is always possible – but unlikely. “If you look at the APRA policy statement, their prudential standards are built around a probability of ruin of 0.1%. That’s as close as you can get to total protection. “It’s always the thing you don’t know about, something external which you have no control over, like the global financial crisis, which could trip you up. This time it was the banking system, but next time, who knows?” Raymond Jones says the likelihood of a company failing in the same manner as HIH is low, although no amount of regulation could save an insurer from a calamitous natural event. “I don’t think an HIH could occur again. The degree of adequacy of their claim reserves was far too low,” he says. “But the big problem today is the risk management process. This flood situation in Queensland is, I think, going to stretch a number of players who in setting their reinsurance underestimated how far this flood would go. It could really blow their reinsurance covers. “But the big one everyone is waiting for is the Nepean basin [the network of catchments and rivers that surround Sydney].” “The estimates are it could be 40,000 or 50,000 homes inundated. “Governments can scream about this all they like, but ICA has for years been saying
From start to finish, a tragic story of conflict, hubris and mismanagement RAY WILLIAMS WAS AN INSURANCE MAN WITH SOME BIG ideas. In 1964 he met London underwriter Michael Payne and the two hit it off immediately. Four years later, they launched what would years later become HIH Insurance – MW Payne Liability Agencies. Williams was named chief executive and director, with Payne a director. Starting in Victoria, Williams quickly expanded the business into Tasmania and later South Australia. George Sturesteps and Terry Cassidy joined the company in the early 1970s, and both went on to become executive directors. Cassidy would later be jailed for 10 months after HIH collapsed for making false statements to the Australian Prudential Regulation Authority (APRA) and failing to discharge his duties as a director. In 1971, MW Payne Underwriting Agency was acquired by UK group CE Heath and changed its name to CE Heath Underwriting Agencies. Williams was retained as chief executive. CE Heath was original a workers’ compensation underwriter, but legislative changes forced Williams to diversify into other classes – and markets. In 1987, the company established a workers’ compensation underwriting operation in California, the first in a series of aggressive overseas expansions to follow. CE Heath floated on the Australian Stock Exchange (ASX) in 1992, but it wasn’t a complete success. Before the float proceeded, Cassidy, Sturesteps and Williams had agreed to purchase additional shares. Williams even had to borrow $10 million to meet his commitments as a sub-underwriter.
Bankrolled via the public listing, Williams now had the means to match his appetite for expansion. FAI Insurance was sized up early and from 1993 onwards Williams took an interest in the group to build HIH’s short-tail lines and Australian footprint. After the US operations of CE Heath were astutely sold in 1994 for $118.6 million – banking a pre-tax profit of $24.5 million – Williams hit the acquisition trail. CIC Insurance, then Australia’s 10th largest insurer in a market far more crowded than it is today, was identified as a merger target. CIC was 67% owned by Swiss company Winterthur, which at first resisted the idea of a merger. The company’s concerns were quickly allayed, and in April 1995 CE Heath acquired CIC through a share issue. Winterthur came to control 51% of HIH ordinary shares but did not get board control, having only three directors on the seven-person board. Tensions between Williams and his new majority shareholder materialised almost immediately. Winterthur had an understanding that the re-badged HIH Winterthur would remain primarily an Australasian group. Williams had no such understanding, and aggressively pursued acquisitions in the US and UK, where Winterthur had its own interests. The Swiss company’s due diligence report noted that HIH had failed to “complete transition from an entrepreneurially run company influenced strongly by senior management… to that of an ASX-listed company run primarily in the interests of shareholders”. At one point, Williams stated the corporate cultures of HIH and CIC were diametri-
RODNEY ADLER, 51 Managing Director, FAI 1988-1998 HIH director 1998 – February 2001
“I was a non-executive director of HIH. None of these charges relate to the collapse of HIH. And it’s important issue for me because I think a lot of what’s going to happen this morning is because of the perception that these charges relate to the collapse.” – Rodney Adler on April 14 2005 as he entered a NSW jail HIH director Rodney Adler was sentenced in April 2005 to four-and-a-half years in jail, with a non-parole period of two-and-a-half years. He had pleaded guilty to four criminal charges after his defence team negotiated with the Commonwealth Director of Public Prosecutions to drop stock market manipulation charges. He had already been ordered to pay a fine of $900,000 and compensation of $5.3 million to HIH creditors, and was banned from acting as a company director for 20 years. In the civil case mounted by ASIC, NSW Supreme Court Justice Kim Santow said Adler had given “no expression… to indicate that he would not offend again” despite being found to have breached the Corporations Act on 185 occasions. Two of the criminal charges alleged he disseminated information knowing it was false; one that he obtained money by false or misleading statements; and one of being
intentionally dishonest and failing to discharge his duties as a director in good faith and in the best interests of the company. The charges revolved around an Adlercontrolled company, Pacific Eagle Equities, which purchased more than 13.7 million HIH shares on June 15-19 2000 using $10 million provided by HIH. Adler then told a finance journalist he had purchased the shares for himself because he believed the HIH share price was undervalued. In October 2000 Adler sought a $2 million investment from HIH in Business Thinking Systems, another company in which he had an interest. Ray Williams gave evidence that Adler told him he had raised $2.5 million and was prepared to invest $500,000 of his own if HIH would invest $2 million. He had not raised the money and had no intention of investing his own, either.
Adler then told an HIH executive he had invested the $500,000. The HIH board discussed and approved the $2 million investment in November 2000. Adler attended the meeting and did not disclose his financial interest in the business or his knowledge of its financial affairs. Adler’s appeal against the severity of his sentence was dismissed and he was released from jail on October 13 2007 after serving two-and-a-half years. Last year he was reported to be providing consulting services on ethical business practices.
cally opposed and CIC staff needed to “embrace our culture” or get out. HIH’s culture was defined in many ways by an unhealthy cult of personality surrounding Williams, who seemingly ruled with an iron fist. Justice Owen later noted that an unwillingness among senior staff to question Williams’ strategic direction partly contributed to HIH’s downfall. Central to Williams’ strategic thinking was aggressive expansion. After CIC was absorbed, he turned his attention back to FAI. From 1995 onwards, HIH kept an acquisition brief under constant review, despite numerous reports warning against a takeover. In June 1995, consultancy firm Hambros sent Williams a summary note on an FAI acquisition, now codenamed “Project Vitamin”. It did not paint FAI as a company in rude health; Hambros pointed to FAI’s fourth annual loss in five years and warned Williams to approach any acquisition with caution. Williams and Adler met in January 1996 to discuss a takeover. Adler assured him FAI’s claims reserves were being managed and had been assessed by Coopers & Lybrand and Trowbridge Consulting. Williams left the meeting reassured of FAI’s position, but while the FAI purchase was being debated internally, Winterthur’s concerns with HIH’s international operations were coming to a head. HIH’s internal audit general manager Greg Waters had prepared a report on HIH’s UK operations. The report failed to appease Winterthur, which in May 1996 began a strategic review of all HIH overseas operations and reinsurance. The report recommended immediate action to bring the loss-making UK operations under control. Subsequent reports by Waters failed to show any improvement, blaming expansion into marine excess-of-loss whole-account lines for most of the losses. Payne – who was running HIH’s UK operations – offered to resign but this was rejected by Williams. Instead, Simon Bird was recruited as man-
aging director to allow Payne to focus on underwriting. Amid aggressive expansion at home and abroad, HIH director Willi Schurpf became concerned directors were being kept in the dark on new major projects. These concerns were illustrated by the disastrous decision to move back into the US market. Sold for a profit three years earlier, HIH’s former Californian workers’ compensation business had since been through a tough stretch. Legislation released months after its 1994 sale opened up the market to greater competition, leading to plummeting premiums. Buoyed by anecdotal evidence that the bottom of the market had been reached, HIH was keen to re-enter. Despite Winterthur’s strong objections, HIH reacquired HeathCal. Very little due diligence was performed on the $US67 million purchase which would ultimately cost HIH $620 million. Following the acquisition, Winterthur chairman Peter Spalti addressed the HIH board to air his grievances. HIH must give Winterthur enough time and information about new projects, he said, “so as not to be confronted by a fait accompli”. By the time Winterthur was acquired by Credit Suisse in August 1997, Winterthur was desperate to get out of the company it owned 51% of but did not control. Problems in HIH America and inadequate price controls combined with the rapid, unchecked growth of the UK portfolio and lack of control at a board level had placed the Swiss company in an untenable position. A hostile letter from HIH Chairman Geoffrey Cohen to Winterthur Holdings Australia head Brian Self regarding the “negative implications for HIH Winterthur” of the Credit Suisse deal was perhaps the final straw. In December 1997, Winterthur decided to get out and sell its holding in HIH. By March 1998 the UK branch was haemorrhaging at an alarming
RAY WILLIAMS, 75 Founder and Managing Director of HIH 1968-2000
“Upon any view the evidence as to his character and community contribution is prodigious, and he must be given some credit for it, although… where the need for general deterrence is strong, the courts generally give less weight to good character.” – NSW Justice James Wood sentences Ray Williams
A personable man who built an empire from a small start in workers’ compensation, ironwilled businessman and philanthropist Ray Williams was sentenced in April 2005 to a maximum term of four years and six months. Having been sued by ASIC, fined $250,000 and ordered to pay $2.6 million compensation, he was also banned from being a director for 10 years. In the criminal case he pleaded guilty to three charges: The first – authorising the issue of a false prospectus in October 1998 – revolved around a converting notes issue to be co-underwritten by Societe Generale Australia Ltd (SGA), which would also take up an allocation worth $35 million. What the prospectus didn’t say was that HIH would pay SGA $35 million in a “total return swap”. The second accused Williams of making misleading statements in HIH’s 1998/99 annual report by overstating the operating profit of $102 million by $94.4 million. HIH had entered an arrangement with Hannover Re, which purported to be two contracts of “traditional reinsurance” but were in fact useless “financial reinsurance” contracts which boosted the reported operating profit. The third charge said Williams was reckless and failed to discharge his duties for a proper purpose. This related to an October 2000 letter sent to noteholders in subsidiary company FAI Insurances stating that FAI was being managed to meet its obligations. In fact, among other things group shareholders’ funds for FAI and its subsidiaries had fallen below the minimum requirement of $200 million. Williams served two years and nine months of his sentence. News Ltd newspapers reported Williams, who was declared bankrupt, had reportedly transferred property now around $21 million to his wife’s account before his conviction.
rate – yet the acquisitions kept on coming. Despite the UK branch making a core earnings loss of £1.2 million for the three months to March 31, in April, HIH Winterthur acquired the Cotesworth Group, a managing agency of four Lloyd’s syndicates.
FAI – the last straw In testimony to the royal commission, Williams gave his account in pre and post-1998 terms. While heralding the beginning of the end, the seeds of HIH’s destruction were already sown; the under-performing US and UK assets, extensive under-reserving and poor internal controls were already ingrained in the DNA of HIH before 1998. But it was from 1998 onwards that the group’s finances entered a terminal decline. HIH was now heavily relying on one-off year-end transactions to improve profit and its share price. A takeover of FAI was considered by the HIH board in February 1998. However, the discussions were inconclusive. But in September, after FAI posted an operating profit of $8.6 million before tax, Adler sent the results to Williams via courier with a note attached: “I look forward to our next discussion”. Suddenly FAI was back in play. What Williams didn’t know was that FAI was having serious problems of its own. In June 1997 the forerunner to APRA, the Insurance and Superannuation Commission, considered FAI to be under-provisioned by $40 million. In October, Swiss Re detailed numerous problems with FAI’s provisioning practices, including a failure to monitor claims under $100,000. Reserve levels at FAI were being chronically mismanaged. At June 1997, FAI’s cash reserves were $108 million short. In December the same year, FAI Corporate and Professional Division General Manager Ashraf Kamha estimated his division had a $112 million reserve shortfall – a figure he later claimed he had given to Daniel Wilkie, the incoming chief operating officer. Wilkie denied any such conversation took place. FAI used reinsurance in creative ways to obscure its under-reserving problems. It was used increasingly to offset reserve increases on the balance sheet, with a corresponding recovery under a reinsurance contract. The company’s results in September were improved dramatically by financial reinsurance contracts which helped the company bank $57 million in profit using accounting practices politely described as “questionable”. The 1997 results piqued Williams’ interest. It had been a tough six months for the embattled chief executive; attempts to persuade the
Winterthur board to keep its shareholding – a meeting conducted almost entirely in German – had failed, as had any attempts to find anyone willing to pick up Winterthur’s 51%. Fortis and Liberty Mutual were both reportedly interested in acquiring the shareholding but backed away due to a lack of due diligence and board control. An audit of the UK operations in 1998 also found the marine operation had been technically insolvent since December 1997. It was under these circumstances the perceived opportunities from the FAI acquisition may have been a pleasant distraction from HIH’s problems. After receiving Adler’s courier, Williams ordered chief financial officer Dominic Fodera to examine FAI’s results. His assessment was hardly glowing and cast serious doubts on its finances, suggesting FAI’s share price was over-rated. Williams was unmoved. He met with Adler once more, this time asking for due diligence on FAI’s books. He also asked for access to Andersen Consulting’s 1998 audit papers. Adler blocked both requests. Still Williams went ahead. The September 22, 1998 meeting of the HIH board, called to vote on a takeover of FAI, was shambolic. Nearly half the board members were absent overseas and were given no notice. Two of the directors attended via video conference, and only three were been given copies of relevant documentation. Williams estimated the synergy benefits from the takeover were nearly $60 million, based purely on his “gut feel”. The board – such as it was – voted unanimously to approve the takeover.
HIH post FAI Justice Owen estimated losses stemming from the FAI acquisition at $590 million, but Williams believes the figure is much higher. In testimony to the royal commission, he said uncovering the level of under-reserving at FAI had a domino effect on HIH. “The market questioned how deep was the black hole of FAI,” he told the royal commission. “We told the market we had increased reserves, bought more reinsurance – in all, we indicated everything was under control as then believed. “We then came out with horrific figures in June 2000. Subsequently we were forced to sell our domestic classes of business. “The market asked, ‘Have you got it all? You said in June 1999 you had it all’. This does great damage to the share price, but more importantly it scares off investors and makes it near impossible to raise extra funds, and which had a major impact on the ongoing viability of HIH.”
BRAD COOPER, 51 Chairman, Home Security International
Sydney businessman Brad Cooper was sentenced in the NSW Supreme Court in 2006 to eight years in jail with a minimum of five years. Although the royal commission found his activities did not materially affect the collapse of the company, Justice Neville Owen found it was an example of the overall mis-management of the company. Cooper was convicted on 13 charges – six related to corruptly giving a series of cash benefits to influence an agent of HIH, and seven charges for publishing false or misleading statements with intent to obtain
a financial advantage. The 13 charges related to $124,000 he paid in bribes to HIH General Manager Finance Bill Howard to push through false claims totalling $4.9 million, plus the forgiveness of a debt owed to HIH of $1.79 million. The last payment was made on the day HIH crashed. In December 2003 Howard was sentenced to three years’ jail, with the sentence fully suspended on the basis of his assistance to the HIH investigation. Cooper was released from jail last October after serving his five-year minimum sentence.
“The jail term handed down today to Mr Bradley Cooper should send a strong message, and should also act as a deterrent to corrupt behaviour by any person who attempts to influence company officers to misuse company money for their own gain.”
Throughout 1998, FAI negotiated new reinsurance arrangements that gave the appearance of a risk transfer. There was none. “These and other arrangements allowed FAI’s under-reserving problems to be concealed,” the royal commission found. One of the more poisonous elements in the FAI takeover was the acquisition in 1990 of Home Security International (HSI), the security group started by entrepreneur Brad Cooper. He and Adler had become friends. Williams had no interest in a home security business, but conceded it would take time to sell HSI. He was particularly concerned about $113 million owed to HIH by HSI and FAI Finance Corporation (FFC), including $28 million in HSI equity. HSI had been steadily losing money for years, and Williams feared the market impact of an FAI-branded company falling over. Adler requested regular payments to keep HSI afloat, which Williams approved, and HSI was never extracted from HIH. Cooper later joined a flood of investors, HIH staff and consultants riding the “rivers of cash” in the insurer’s final months. Under-reserving problems at FAI were quickly discovered by HIH post-acquisition, although the full scale of the deceit wasn’t uncovered until much later. By December 1998, FAI had a case reserve shortfall of $84.2 million and Adler responded defensively when confronted by Williams, arguing reserve problems “could happen to anyone”. As HIH grappled with the scale of FAI’s reserve shortfall, the deterioration of HIH America’s financial position was accelerating. Internal audits in October 1998 and February 1999 showed the company was in a dire state. In mid-April, AM Best downgraded HIH America’s rating to B++. Yet many members of the HIH board remained unaware to the extent of HIH America’s precarious position; in June 1999, an internal audit on HIH America was removed from the board’s agenda. Williams told the royal commission he removed the report because he was concerned policyholders in the US might hear about it, therefore jeopardising future legal proceedings challenging policy claims. Justice Owen described the argument as “illogical”. HIH’s UK results were equally alarming. In the first three months of the year, the UK operations lost £10.8 million on gross written premium of £76.8 million. Yet from all outward appearances the division appeared healthy. HIH’s half-year results to June 1999 booked a pre-tax profit of $52 million, including $92.4 million on reinsurance arrangements.
But the corporation’s profits were a house of straw. Its reinsurance arrangements were a sham and intangibles had now increased to an incredible 60% of total shareholder equity. It was at this point, an APRA officer would later testify, that regulatory intervention would have been required to save the company. But it wasn’t until late 1999 that warning bells at APRA began to sound. And when they did the regulator was slow to react. Much blame has been attributed to APRA for fiddling with internal politics and procedures while the HIH empire burned. By late 1999 APRA was aware HIH was spending an unusual amount of money on its reinsurance program, and in early 2000 APRA began suspecting HIH was using reinsurance for “profit-smoothing”. The regulator missed key signs of the company’s poor state and failed to act swiftly once those signs were discovered, but in attempting to unravel HIH’s tangled finances, APRA was hamstrung on two counts. Created in July 1998, APRA was still grappling with its new role and was very much an organisation finding its feet. The relocation from Canberra to Sydney had also had a destabilising effect. But APRA had a much larger problem; it was being actively misled by HIH. In March 2000, APRA finally met Williams and Fodera to discuss the company’s problems. The regulator’s officers were told HIH was “optimistic” about its UK operations and an upturn in the market was imminent. What Fodera and Williams didn’t say was the UK assets were in terminal decline and a decision to place the business in run-off had already been made. Two months later APRA wrote to Williams requesting an on-site review. By this point concerns about HIH’s fiscal position were becoming more public. The company’s shareholder equity was now 75% intangibles, and media reports were questioning HIH’s viability. The company had already recorded $530 million in inter-related losses and now its banker, Westpac – with $320 million exposed to HIH – sought assurances at a meeting with Williams and Fodera in June. In the same month APRA received a report from an anonymous former HIH employee which exposed its precarious capital adequacy. APRA visited HIH in August, noting numerous problems with the company’s risk management processes. In a letter to Williams, the regulator noted HIH’s investment strategy was “based on the premise that the group’s business risk arising from underwriting performance and its reinsurance policies should not be compounded by the investment risk”.
DOMINIC FODERA, 52
TERRY CASSIDY Managing Director, HIH Sentenced in April 2005 to 15 months’ jail – released after 10 months.
Finance Director and Chief Financial Officer, HIH
ANTONY BOULDEN Financial Controller, FAI Corporate and Professional Insurance Division
Sentenced in June 2007 to three years’ jail for authorising a prospectus in October 1998 seeking to raise up to $155 million of converting notes that contained a material omission. Sentenced in November 2007 to three years and four months in jail after pleading guilty to a further charge of knowingly or recklessly failing to act honestly in the discharge of the duties of his office, and dishonestly intending to gain an advantage for HIH, namely a beneficial accounting treatment. Prosecutors said he failed to inform the HIH board and its auditor of the true terms and effect of the financial reinsurance arrangements negotiated with Hannover Re in 1999. The sentence was partly concurrent with the earlier sentence, giving Fodera a total
Sentenced in December 2006 to 12 months’ periodic detention.
ROBERT KELLY Assistant Company Secretary, HIH Sentenced in November 2006 to 500 hours of community service.
FREDERICK LO Company Secretary, HIH Sentenced in February 2007 to nine months’ jail. ASIC also accepted an enforceable undertaking from General Re Australia, which provided for the payment of $27.2 million to the HIH liquidator.
Allianz and the end of the road
dipped their noses in the corporate trough during a shameless cash grab in the final months of HIH – a period that came to be known as the “rivers of money”. Among the most offensive of payments was more than $13 million paid to Brad Cooper for services rendered to HIH – services from which Justice Owen would later say were “difficult to see what, if any, benefit HIH obtained”. Cooper paid HIH Finance General Manager Bill Howard $124,000 in bribes to grease the wheels. At least 10 payments were made to Cooper, often on the same day an invoice was received. In February, the board approved a retrospective increase in directors’ fees. Bonuses were given to several HIH senior managers immediately prior to the company going into administration. Even HIH’s legal counsel got in on the act. Knowing full well HIH’s reserves were exhausted, the firm requested $1 million in outstanding fees. Payment was made the same day; the law firm wasn’t even required to provide an invoice. On February 22, HIH was suspended from trading. The company announced it would not release its interim financial results until March 16 and a belated APRA investigation finally commenced on February 26. Three days later, APRA served notice on HIH to show cause why an inspector should not be appointed. HIH launched a series of frantic, 11th-hour moves to keep the company afloat, including a sale of its share of the Allianz joint venture back to Allianz, all of which ultimately failed. Ernst & Young told the HIH board that regardless of the release of funds from reinsurance contracts, the company faced a cash crisis. By March 14 it was all over. KPMG told HIH it was “at best marginally solvent” and that it would recommend to the board the company be placed into administration. On March 15, HIH went into voluntary administra* tion.
Williams, Fodera and the rest of HIH senior management knew the company was in deep trouble. Compounding their woes was pending regulatory changes that meant HIH would need to increase its level of tangible assets against intangible assets. Options for a restructure were put to the board. Among them was the controversial joint venture with Allianz. The Allianz deal seemed attractive enough, on the face of it. Both companies agreed to move their personal and compulsory third party insurance products into the joint venture, placing assets equal to liabilities into the fund ($500 million in HIH’s case). In exchange, HIH would take a 49% share of profits and an up-front payment of $200 million in cash. The HIH board approved the joint venture in just 75 minutes, and on September 12 2000 it was announced. It was a toxic deal for HIH on two fronts. Firstly, the $200 million cash injection went straight into the fund to cover part of HIH’s $500 million claims liabilities. Secondly, HIH was cut off from the fund’s premium revenue, roughly $1 billion per year, until an actuarial assessment that was some five months away could be conducted. Westpac wasn’t told about the joint venture. When it did find out the bank began to distance itself from HIH, seeking to reduce its liabilities to $160 million by March 2001. As the year went on, APRA became increasingly aware of the severity of HIH’s problems, but did little to arrest HIH’s slide. By September, the regulator was aware HIH was overstating its solvency position. And in October, HIH top brass told APRA in rather dramatic fashion there was “blood on the floor, blood on the walls, blood on the ceiling” in its UK business. In October, the US operations were placed in run-off and Williams stepped down as chief executive. A month later, Westpac’s faith in HIH became so strained it appointed Ernst & Young to report on HIH’s now parlous cashflow. HIH directors were told on November 29 the group’s position was “delicately poised”, but “from a top-down group perspective, they had not seen anything to indicate that HIH was insolvent”. The report was forwarded to APRA in December, but, incredibly, wasn’t read by senior staff until February the following year. By the end of the year, HIH’s outstanding claims were undervalued by at least $1.9 billion, possibly as high as $4.3 billion. As the Allianz joint venture began, the subsequent loss of liquidity had a paralysing effect on HIH. Terry Cassidy, by now managing director, ordered Allianz to freeze claim payments until further notice. But as clients and creditors were being denied payments, HIH staff suffered from no such cash crisis. Executives, contractors and advisers all
“By March 2001 the pressures on HIH that had been building over the years could no longer be controlled or contained. There was a huge implosion. The end, when it came, was sudden and spectacular.” – Justice Neville Owen, remarks in HIH Royal Commission findings
“I will maintain to the end of my days that, although I accept responsibility for what, in respect, may have been errors of judgement, if errors they were, they were made in good faith and solely with the interests of the company as the overriding consideration.” – Ray Williams, written submission to HIH Royal Commission
“I’m pretty well qualified to talk to companies about what they can and can’t do. Likewise I can talk about the consequences of getting it wrong.” – Rodney Adler, speaking in 2010 about his new consultancy role
“And when you go through life, there are so many ways you can impress people by being honest, by being sincere.” – Brad Cooper, excerpt from corporate motivational video 44
The D&O pressure cooker Increases in regulator lawsuits and class actions show why directors and officers need cover By Tania Martin
A NEW SOUTH WALES COURT OF Appeal decision quashing the banning of seven James Hardie directors might have one unexpected benefit: it could help ease pressure on the stressed directors’ and officers’ (D&O) insurance market. Legal commentators believe the rising number of class action cases being mounted, along with increased Australian Securities and Investments Commission (ASIC) enforcement actions against directors, have been driving these pressures. Insurers believe the recent appeal decision could actually be good for the D&O market – because it proves it’s doing its job in protecting policyholders against class actions like the James Hardie case, and will encourage others to take up the cover. Lawyer Greg Skehan, a senior partner at Colin, Biggers & Paisley, says it’s hard to tell what sort of impact the case would have on the current D&O landscape. He says the failure of the ASIC banning action against the James Hardie directors was more about ASIC not proving its case than setting a legal precedent. “ASIC didn’t nail the non-executive directors, and I think it will make them more careful in the way they run such cases in the future.” That remains to be seen. At the time of going to press ASIC was awaiting leave from the High Court to appeal the New South Wales Court of Appeal decision. insuranceNEWS
Mr Skehan believes this particular case is a good example of the need for differentiating rules for non-executive and executive directors. “There is a real difference in knowledge or duty between the two types of director,” he told Insurance News. Zurich’s National Underwriting Manager for Financial Lines Susan Elias says the James Hardie decision can only be a good outcome for the D&O market. “What people need to keep in mind is that they buy D&O cover to respond to actions against them, and it’s never a bad thing when there is a claim,” she says. “I think it is positive in the scope of the cover if the insured walks away happy – it’s a good thing. And we need to keep in mind that the policy is there to protect the directors and officers. “Some of these cases might not be fought at all if we didn’t have D&O cover,” Ms Elias says. The NSW appeal decision will now see the seven James Hardie directors being given the opportunity to return to serving on company boards despite being found guilty of misconduct. In their Supreme Court trial the court ruled that the former board members of the construction materials company breached the Corporations Act by making misleading statements about the firm’s ability to pay for asbestos victims’ compensation. ASIC first initiated the case after it was re-
vealed in 2003 that the compensation fund faced a $1 billion shortfall. This deficit was a direct contradiction of an earlier press release issued by the James Hardie Corporation, which claimed the fund would provide certainty for asbestos victims. The company said in the statement that a Medical Research and Compensation Foundation would be set up with a start-up bank balance of more than $284 million. It also outlined a separate fund of $3 million, which would be set aside for scientific and medical research for finding a cure for asbestosrelated illnesses. However, just two years after the release of this information it was revealed the fund was facing a deficit. The seven non-executive directors were banned from serving on a board for five years and fined $30,000 each for breaching the Corporations Act. But in December the Court of Appeal – NSW Chief Justice Jim Spigelman and appeal judges Margaret Beazley and Roger Giles – found that ASIC’s failure to call all relevant witnesses to the case had negated a fair trial. “We do not think ASIC discharged its burden of truth,” the judgement says. “We are not satisfied that the non-executive director appellants voted in favour of the draft announcement resolution.” The Australian Institute of Company Directors (AICD) says the decision to overturn the appeal shows the benefit of having an independent judiciary. It says the case was related to market disclosure rather than whether or not the directors
had acted incorrectly. AICD Chief Executive John Colvin says the appeal highlighted the importance of applying proper procedures in regulatory proceedings, including the presentation and use of evidence. It served as a reminder to all directors and boards that they have a responsibility to be diligent in their decision-making, and highlighted the risks involved. “It also again puts the spotlight on continuous disclosures as a potentially extremely difficult area for listed companies and their boards,” Mr Colvin says. Despite the verdict being quashed, ASIC Chairman Tony D’Aloisio says the case was essential in highlighting the fundamental responsibilities of public companies, their directors and executive officers in releasing information on company decisions. “The case has done that and has provided important findings for public companies and executive officers and non-executive directors in these and similar situations,” he says. Ms Elias says this decision won’t add further pressure to D&O cover but does prove that this kind of insurance is essential in protecting responsible individuals against such litigation. She told Insurance News these highly publicised cases also tend to heighten awareness for directors about their duties. “It’s almost like a form of education and that could be nothing but good from a corporate governance standpoint.” Recent research shows 60% of insurers have experienced a doubling of D&O claims since the beginning of the global financial crisis
“What people need to keep in mind is that they buy D&O cover to respond to actions against them”
Litigation funders are here to stay THE ROLE OF COMMERCIAL LITIGATION funders is changing the face of corporate lawsuits. While class actions have been happening in Australia for more than 20 years, they are becoming more common as the funders ramp up their activities in a potentially profitable new market. And they’re organised, using advertising and the internet to attract participants into class actions, which they will fund in return for a share of any financial settlement. In 2009 the High Court ruled that funders are essentially running a managed investment scheme because they were business entities with shareholders. The ruling also said such businesses needed to be licensed, but this decision was appealed, with a groundswell of support from the media and politicians who see the funding option as a good way to ensure the “little person” continues to have access to highcost legal actions. Susan Elias, the National Underwriting Manager for Financial Lines at Zurich, says a National Economic Research Associates’ (NERA) report last year showed a dramatic increase in the number of cases from three in 2007 to six in 2009. Although figures are not yet available for 2010, she suspects it will show a similar number of class actions being mounted last
year. “And already for 2011, I think we will see a lot of activity as the media is already throwing around the names of companies and institutions.” The NERA report into the trends of Australian securities class actions from January 1993 to December 2009 shows a dramatic increase in the number of fillings since 2004. The first class action was expected to open the floodgates when it was launched in 1993, but it was another six years before a second one was mounted. Until 2004 there was an average of one case per year, but since then the number of cases has steadily increased to a record six in 2009. However, this strong growth holds nothing against the number filed in the United States, where 215 class actions were launched in 2009. More than 30% of the actions launched in Australia since 1993 have related to the financial and insurance sectors, with real estate making up 21%. Since 2004 17 out of 22 class actions have been financed by commercial funders, compared to all six prior cases being taken out by named applicants or law firms. “The growth in commercial litigation
funding can be attributed to a series of legal developments that have gradually established that practice’s legitimate application in securities class actions,” the report says. Ms Elias says these increases have led to distinct changes in D&O cover to include securities cover over the past 10 years. “Basically it has been added to address allocation issues for securities claims for named directors and officers,” she says. Ms Elias told Insurance News that as these pressures continue to grow companies and their boards of directors need to have broad D&O policies from insurers which have good reputations and are financially stable. She doesn’t believe over-regulation is leading to increased D&O claims, but acknowledges the rise of the funders is making more class actions feasible for litigants who have lost money on their investments. “Ultimately I think we are seeing more claims because of third-party litigation funders, coupled with the global financial crisis,” Ms Elias told Insurance News. The NERA report supports that view, but warns class actions are also likely to become more popular. “With the number of recent common law developments having resolved many areas of uncertainty, it is likely that the rate of growth
in 2008. According to a survey by Colin, Biggers & Paisley, the global recession created a “perfect storm” blending the outrage of shareholders, creditors and regulators. Releasing the new data in December, Mr Skehan told Insurance News there has been a surge in the number of legal actions being taken against companies and directors. He says this is coinciding with investors and liquidators trying to recover their losses as ASIC attempts to crack down on “corporate crooks”. And the pressure cooker that is now D&O cover is not expected to diminish in the next 12 months, with many insurers predicting class actions will be a major challenge. Ms Elias says the proliferation of thirdparty litigation funders has led to an increase in class action claims. Third-party funders are usually companies which “invest” in a legal action against directors and officers. Ms Elias says in most cases these funders take the risk out of bringing a claim because they provide funding up-front. After a case is concluded, these companies then take a share of the settlement awarded if the claim is proven or walk away empty handed if the action is lost. “Because of this there is a greater likelihood that shareholders who are unhappy will join class action claims against directors and officers, increasing this activity,” Ms Elias says. She says in addition to this, the market is seeing an increase in shareholders launching securities claims against companies for corporate liability. “The company might have made inaccurate earnings predictions in their annual reports 48
or prospectus documents, or there might be evidence of improper accounting. The litigation funders will then file a class action against companies.” Out of 30 D&O insurance providers surveyed by Colin, Biggers & Paisley, 12 responded with evidence which supports the theory that this kind of cover is in real trouble. It showed 20% of respondents’ policies did not fully cover their costs in 25% of claims, and 10% indicated the policy was not sufficient to cover costs in 25% to 50% of cases. Mr Skehan says policy limits have dropped dramatically, with 44% of respondents saying this was one of the most significant changes over the past 12 months in their policies. It showed 75% of policies now offer limits of $30 million or less; but 22% of those were settling class actions worth $50 million-$100 million. “Clearly then, where big ticket class actions are concerned D&O protection can be highly illusory,” Mr Skehan says. He believes this is a “deeper” issue than companies just being underinsured for big class actions. “If a company doesn’t have a large enough amount of cover it can be exhausted just defending itself, leaving nothing left for protecting the directors and officers,” he told Insurance News. Ms Elias says D&O insurance is still readily available and quite affordable. “Back in the early 1980s when I was working in the United States there was a real hard market,” she says. “It was expensive and we saw limits reduce dramatically. “But there is so much capacity in the market [in Australia] at the moment it’s very affordable.” insuranceNEWS
Mr Skehan says directors are also being left out of pocket with investigation costs, which are largely a by-product of ASIC “upping the ante” on enforcement actions. He told Insurance News if a company’s cover has investigation costs included in a $30 million policy, then services like investigation can be allinclusive. But if the policy has a sub-limit, it is invariably only covered for about $250,000 for these costs. “The regulator’s more active investigative role has meant that limits for representation costs are being eroded at a very early stage, so there’s often very little left in reserve for when proceedings develop into serious litigation,” Mr Skehan says. “And if you have eight or nine directors involved, it’s not going to go very far.” Ms Elias says further pressure is being applied by the number of enquiries the corporate regulator now makes. She says ASIC has used its powers to investigate companies and individuals an astounding 18,625 times in the past three years. Companies need to make sure they have broad D&O cover to protect against these pres* sures.
The claims revolution
On the job in post-quake Christchurch: the speed and quality of the claims service is important
Technology is driving the industry’s new competitive battleground – but it’s really all about the experience By Tania Martin
ANY ARTICLE ON CLAIMS SHOULD START WITH a disclaimer: insurers do not look for ways to decline a claim. And it’s been a long time since claims staff spent hours scrutinising the fine print to find an exclusion that might just do the trick. In fact, it’s been a long since fine print actually existed. Despite the controversies surrounding flood cover at present, the claims process within insurance companies is now the centrepiece of their strategic thinking. These days the “customer experience” is a top priority, with technology being used extensively to help increase efficiencies in all areas of claims. Insurance companies are now working harder than ever to find new ways to improve their face-to-face contact and meet growing pressures and expectations. Suncorp Executive General Manager Personal Insurance Claims Jason McCracken says there has been a significant shift in the attitude towards claims in the past 20 years. “The old attitude of trying to reduce your claim costs or get out of claims is absolutely gone,” he told Insurance News. “I think the biggest focus is now around the whole customer experience and making sure all legitimate claims are managed in accordance with the policy.” Mr McCracken says the system is now managed around pricing the policy correctly in the first place, so that when a customer has a claim it’s just a matter of paying it. “I would say that we are seeing this right across the in50
dustry,” he told Insurance News. “The real difference now is that we try to maintain a competitive advantage by the speed and quality of the customer experience. “It’s about making sure you have your whole supply chain backed up to support and manage it.” EBM Insurance Brokers’ General Manager Ward Dedman believes the continuing improvement of the claims process is being brought about by technology. “Fundamentally the process has stayed the same but we are now more technology savvy, reporting claims electronically or over the phone,” he told Insurance News. “There are still some classes of claims that need the documentation, but now we can process a motor vehicle loss without the written correspondence.” Mr Dedman says the biggest advance by far has been the drop in excessive amounts of paperwork, which used to be a standard requirement for processing even the simplest claims. Brokers previously filled out mountains of forms for something as small as a windscreen repair. Now there has been a dramatic shift away from spending hours filling out forms, faxing or mailing them off and waiting for the reply. “Administration used to be a nightmare, but now some of that paperwork has fallen away with the use of websites,” Mr Dedman says.
“Staff can now sit at a desktop computer and assess the claim – you don’t have to send an assessor out there. We have the ability to download photographs and see the damage by just sitting at a computer.” The battle to win the hearts and minds of insurance customers through efficient and trouble-free claims experiences wasn’t always the industry standard. The rising tide of consumerism in the 1980s found insurers well short of the mark, accused of having very little regard for the needs of their customers, and a fixation on the exact wording of legally confusing policy wordings which could drag out a claim for months or even years. Expensive court action was consumers’ only means of redress, and through the 1980s only one company – the state-owned SIO in Victoria – had an independent claims review system. A customer attitude survey commissioned by the Insurance Council of Australia (ICA) in 1981 found “the industry’s failure to communicate information clearly and simply, as well as not being easy to talk to, not helpful with problems and not caring about customers, [are] areas of concern. Significant improvement… is essential.” By the late 1980s the ALP government of Bob Hawke had provided the consumer movement through the Australian Federation of Consumer Organisations with considerable support and influence. The federation said in 1990 that the insurance industry
Zurich’s Head of Claims Stephen Brooks says events like those experienced in the past month with the Brisbane floods forces the industry to look at its processes. He says catastrophes always end up creating an interesting situation when talking about change. “Technology also means paperwork isn’t essential before a claim can be processed,” he says. In large-scale disasters the Zurich decision to give each state its own claims team is a “huge advantage” as all the work can be shifted electronically from one office to another. “It’s easier to transport 300 files electronically than move 300 files in a box across the country.” Mr Brooks believes service providers such as loss adjusters are also taking advantage of new technologies, working with more technical building systems. “One of the big changes in this area has been the digital processing of motor vehicle claims, which has completely cut the paperwork element out. “Staff can now sit at a desktop computer and assess the claim – you don’t have to send an assessor out there,” Mr Brooks told Insurance News. “We now have the ability to download photographs and see the damage by just sitting at a computer.” He says technology is cutting down on claims costs and improving efficiencies, and it’s being seen right across the board. But looking at the claims themselves, Mr Dedman says little has really changed. “The policy wordings still haven’t changed and I think the settling of claims is still the same, and everyone is generally pretty open-minded about that. If they’re not, that’s when conversations need to take place. “Everyone is now trying to be more efficient, but it’s vital not to lose the fundamentals of getting it right.” insuranceNEWS
“does not recognise itself as a service industry with a responsibility to improve community awareness about its products and to deal with complaints promptly and fairly”. In 1991 ICA set up the General Insurance Claims Review Panel, an industry-supported but quasiindependent body with the power to adjudicate on disputed claims and impose a settlement on insurers. The service was free to consumers. During the same period the Government also introduced a compulsory code of practice for general insurance. In 1994, after extensive industry lobbying led by the formidable ICA Chief Executive Peter Daly, the Federal Government agreed not to move forward with the statutory code, agreeing instead to a “self-regulatory” code. But in 1997 allegations that some non-ICA insurers were not adhering to the code led to further tightening-up, with the code being made part of the Insurance Act 1973. Adherence to the code was made a condition of registration for general insurers. Today disputed claims are handled by the Insurance Ombudsman Service, part of the Melbourne-based Financial Services Ombudsman.
CGU National Claims Manager Personal Lines James Merchant says the claims sector has seen a dramatic wave of consolidation in the past few years, technology has become far more important. Many of the larger insurers are dealing with an increasing level of claims and a wider geographic spread, and they’re coping by internalising services such as assessing, investigations and claims staff. “This has been a significant benefit, giving greater control and flexibility on how you react or resource your claims,” Mr Merchant told Insurance News. He believes the internalising of claims processes has led to better support of the company’s brand, because employees will invariably have a better knowledge of the corporate service issues and the policy than an outsider would. Mr Dedman agrees the claims process is now more userfriendly, but says insurers still have a long way to go. He sees the claims process moving even further away from paperwork to online claims forms, as well as the use of iPad “apps” and other tablet-enabled technologies. But he emphasises the need to use technology for efficiency gains – not to lower the level of human interaction. “Individuals are still going to be very vital,” Mr Dedman told Insurance News. “But in cases of major situations like the Queensland floods, the need for human involvement can slow down the process.” Mr Merchant says the move from paper-based processes to business-to-business capabilities is a vital step. “There has been a significant reduction from a staff perspective in double-handing, which also results in a significant saving to the customer in terms of response times.” He says the process will only continue to get better as the use of new technologies becomes more and more accepted.
Recovering with determination in Brisbane: it’s insurers’ jobs to give claimants peace of mind
And despite the complaints by many Brisbane flood victims, the media and politicians that there’s too much “fine print”, Mr Merchant says the technological revolution is making information more accessible for customers. He says product disclosure statements have been made easier and even use pictures and diagrams or cartoons in some cases. “We have a better use of claims language now, and the speed of the response to a claim is where the customers really win,” he says. “A claim can put a person in a position of stress, and it’s our job to give them peace of mind and process the claim as quickly as possible.” He says the increasing use of technology will also see greater input from customers to make the company’s claims processes more efficient. For example, they could be asked to rate suppliers online and to upload claim descriptions. Most customers already have the capability to take digital photographs of damage to their homes or cars, and he believes that will become more common in the future. But the customer is not the only winner in this battle to become more technology-savvy. Mr Merchant says there have been staff benefits in shifting from “clunky” mainframe systems to intuitive Windows-based navigating tools. One huge benefit is the dramatic cut in training times and the rise in service-awareness. He says many claims staff were previously spending more than 70% of their brain capacity on trying to drive the system in front of them and only 30% on customer service. “You no longer have to have six or seven windows open – you just have one screen. This all leads to a better outcome for customers and for cost and time efficiencies.” Suncorp Executive General Manager Commercial Claims Matt Pearson agrees technology has the potential to improve the experience for brokers and their customers, as well as reduce costs to the insurer. But he says the customer experience remains the top priority. He told Insurance News the efficiency of their claims service is insurers’ “moment of truth” – the time when they deliver on what they have promised their customers. “Technology will provide greater opportunity to do business with us and provide better service internally, and claims management will be a whole lot easier.” 52
But Mr Pearson says technology is only as good as the people supporting it, and ultimately the key to moving forward lies in customer relationships. He says this means having a certain degree of “empathy” when dealing with people in their times of need. That’s something technology can’t do, and is the basis for Mr Pearson’s belief that an insurer is ultimately only as strong as its people. He says Suncorp has invested in recruitment and training to make sure customers have a “quality experience” when they put in a claim. He says this has included a shift towards recruiting people with “soft skills” – those who have good customer service credentials and empathy. Mr Pearson says the biggest test of the modern claims process is already upon the industry, thanks to the series of natural catastrophes which have engulfed eastern Australia in the past three months. CGU’s Mr Merchant agrees. “Most insurance companies have different ways of reacting and have flexible workforce arrangements in periods of bushfire and floods. “But the reality is we now have to become more proficient in managing these events.” But Mr McCracken says Suncorp – the dominant personal lines insurer in Queensland – views the Queensland floods as nothing more than “business as usual”. He says specialised customer response teams known as “storm-chasers” have been introduced to help cope with the extra workload following a catastrophe, because it’s “vital to have teams on the ground to respond in person” to customers’ concerns. “When you have a company of our scale and size it’s not unusual to have multiple events running at the one time,” he says. In March last year Suncorp doubled its personal lines claims from 60,000 to 120,000 with a number of significant events occurring simultaneously – the massive storms in Melbourne and Perth and flooding in New South Wales. “We delivered on all of that and I haven’t had one complaint,” he says. “We had a couple of issues but we can manage that with our dedicated event team.” Mr McCracken says there has also been significant relationship advances between claims departments and consumer groups.
Sorry, you’re underinsured Too many people and businesses take the risk, say claims experts WHOSE PROBLEM IS underinsurance – the claimant’s or the insurer’s? When it comes to domestic claims, Jason McCracken is facing this issue constantly. And the Executive General Manager Personal Insurance Claims at Suncorp says there’s nothing he can do once the claim is made. He estimates that more than 16% of Suncorp’s customers face this scenario – and it makes the job “incredibly hard” for claims professionals. “When we front to someone’s who’s lost their home to a house fire and they don’t have sufficient contents or property cover, there’s nothing we can do,” Mr McCracken told Insurance News. “The policy limit is the limit, and we won’t pay extra just because they haven’t taken out sufficient cover.” Unlike those Australians who choose not to insure their assets, the underinsured are simply people who just don’t think of increasing their cover as they buy new possessions. “They might put a second television in or increase their wardrobe and suddenly a year later they’ve spent an extra couple of thousand or more and haven’t touched their contents cover,” Mr McCracken says. For example, contents cover of $45,000 is quite usual – even though it “would barely cover the cost of a new kitchen these days”. “It’s absolutely devastating for the customer and it’s pretty difficult on our staff as well,” Mr McCracken says. In 2005 an Australian Securities and Investments Commission report estimated that up to 81% of homeowners are underinsured, and that between 7.5% and 59% only insure their homes for 70% or less of the total cost of rebuilding. Five years later, the figures are likely to be far worse. Matt Pearson, Suncorp’s Executive General Manager Commercial Claims, says it’s a massive issue for the business sector as well. According to a Cameron Research report last year only 40% of small businesses have
business interruption cover, 93% have public liability cover and 83% have fire insurance. These figures, compared with a startling 90% who believed they were adequately covered, reveal the scale of the underinsurance problem. “The low up-take rates of business interruption cover by SMEs is an issue,” Mr Pearson says. “And if a small business customer who is insured can’t recover because they don’t have enough business interruption cover, it doesn’t reflect well on our industry.” EBM Insurance Brokers General Manager Ward Dedman says exorbitant state taxes on insurance are a major deterrent to higher levels of insurance take-up. Apart from the contentious fire services levy in Victoria, New South Wales and Victoria, there’s also stamp duty imposed by all state governments and GST for the Federal Government. The Australian Bureau of Statistics says taxes on insurance in 2007/08 alone were $4.2 billion – compared with $2.1 billion in 2000. A Centre of International Economics report in 2005 said Australia was by far the most heavily taxed country when it came to insurance. Apart from the decision by Victoria last year to scrap the fire services levy next year – and balanced by a new State Emergency Service levy on premiums introduced by NSW in 2008 – little has changed. Except that property and asset values in Australian homes and businesses continue to increase. “Taxes in Victoria and NSW alike are almost as much as the premium,” Mr Dedman told Insurance News. CGU National Claims Manager Personal Lines James Merchant says in some ways technology could be one weapon in dealing with the underinsurance issue, with more and more insurers providing online calculation tools for home, building and contents. However, he admits there’s also a downside. While propertyowners can now more accurately calculate the replacement value of their homes, many people would find it financially difficult to increase their premiums.
He says there were some pressures from time to time around hardship or the speed of a settlement, but overall the businesscustomer relationship is “relatively benign”. “I even think the media is now more reasonably balanced, and with close to a million claims a year you are going to occasionally have issues. “You might get the odd Today Tonight story, but on the whole the industry has done a massive job on improving the claims experience for customers.” But Mr McCracken says continuing development is essential. “Customer expectations are going up and up, and things are happening faster, so staying ahead of the curve is really important.” According to consumer group Choice, most customers in all areas of personal lines insurance from home to contents and comprehensive car cover are satisfied with the service they receive from their insurers. A survey last August showed 76% of home insurance customers are satisfied compared to 79% for contents. In both areas claims were mainly settled in two weeks or less. Comprehensive car insurance also scored high on the satisfaction rating, with 83% of people with one or more claims having them settled within a week or less. Choice says the majority of customer complaints in all areas settle around complicated claims procedures, delays in handling claims and delays in repairs. Mr McCracken says the quality of the customer experience will become increasingly essential as lifestyles continue to move faster and faster. “Insurance companies will win or lose on the claims experience. “If we keep improving experiences by taking inefficiencies and costs out of the process it’s going to give us a massive competitive advantage.” Zurich’s Mr Brooks says understanding the customer is the key to expediting the claim – and in some cases it’s requires a willingness to cut through the red tape. “A classic example is getting a call from a customer of five or six years who has never made a claim but who right now is kneedeep in water in his basement. Sending out a claim form is not going to be the answer!” He says claims departments need to look beyond the process and “red tape” in such situations to find immediate solutions. “We need to know the customer’s needs and be prepared to act straight away, even if it means finding ways to cut out all the excess paperwork.” EBM’s Mr Dedman says customer pressure for speed and efficiency is now very high. “Everyone is so used to email and the internet and that instantly responsive world,” he says. “They expect it to be done quickly and efficiently, which isn’t a bad thing.” Mr Dedman says the need to recognise the customer as an individual remains vital. That includes writing policies which recognise the individual needs of the customer. He says the key is still to make the claims process more efficient by simplifying policies so they don’t have a rigid one-size-fits-all attitude. This is already happening in some cases today. “We need to ensure that exceptions come into it, depending on individual circumstances, but the big * advancement will be finding more efficiencies.”
Farewell to Repair specialist Brian Siemsen in central Brisbane: systems, not people
From here on the restoration process will be all about systems, not people THE TECHNOLOGICAL revolution in claims offices has spread. Gone are the days of shuffling through pages of claims notes or mountains of fax messages. Now it’s about being able to manage the entire claims process – from placement to completed repair – online. Brian Siemsen is one of the leaders in using technology to simplify and speed up the process. The chief executive of insurance repair specialist Siemsen Group is an iPad-carrying advocate for instant information available anywhere it’s needed. He says technology is the only way to remove inefficiencies and ensure quality customer service every time. The group has launched its own system, called IntelBuild, which addresses the move forward from the fax. IntelBuild has been in operation for only six months, but its design and implementation has been happening for more than four years. It has taken 147 manualbased claims processes and condensed them into 60 automated functions. Mr Siemsen believes everyone in the claims process needs to con56
tinually improve their claims procedures or risk falling behind on quality and service. But he agrees this isn’t a viewpoint that will be accepted overnight. Mr Siemsen set up his business in 2002. Last year the company handled 9000 claims following seven natural disasters across five states and one territory in just 90 days, using teams of tradesmen. He says such a concentrated response was only possible through the use of multiple systems that put teams of specially trained tradesmen in place where and when they’re needed, using automated response plans suited to the situation. But when he first started talking about the use of online tools to streamline the claims process many people he spoke to believed it was unachievable. “As recently as 2005 email was a significant advance from the old system of using fax machines,” he told Insurance News. “And at the time Insurance Australia Group was one of the only ones in the industry using email in the claims process.” He says the industry is now being pulled rapidly into the future, and it’s obvious that the claims process is changing for the better. Mr Siemsen says it’s all about streamlining the customer experience; they all want the same quality of service and expect the claim to be processed as quickly as possible, no matter how high an ininsuranceNEWS
surer’s claim volume may be. “To be able to provide different suppliers in 50 different ways in 21 regions is a whole new way of looking at and expecting a consistent outcome,” he says. The former South Sydney Rabbitohs rugby league player started working in the insurance recovery area more than 10 years ago after a career as a professional footballer. About four years ago he decided to do something about finding better ways to manage claims. But it wasn’t until the 2007 Queen’s Birthday storms in the Sydney and Newcastle regions that Mr Siemsen realised he should do much more than think about it. It was the first real big weather event he had experienced, and he was given 3000 claims to deal with over a four-day period. “I realised then the system didn’t have the capacity to deliver high volumes of claims and still deliver consistent outcomes,” he says. “At the time I was already working on building the system, but I was doing the Hokey-Pokey – putting one foot in and one foot out. “But I realised we needed to get this done really quickly, and I tried a whole heap of systems. But there was nothing really available out there specifically for the insurance industry and for high-volume repair management,” Mr Siemsen told Insurance News. So he went ahead on his own, basing his system on the model pioFebruary/March 2011
neered by US global postal service FedEx, where a package can be tracked online from its origin to delivery. “We wanted to take the same sort of approach where you have an automated system that uses SMS and online access for all stakeholders – insurers, loss adjusters and customers,” he says. “That became IntelBuild.” The system is continuing to be refined but the benefits are already proving significant for the company, with the average lifecycle of claims being cut by more than half from 120 to 41 days. He’s enthusiastic about major players like Suncorp and IAG adopting the Guidewire end-to-end claims processing system. QBE also uses elements of Guidewire technology in its claims system. Suncorp is rolling out the Guidewire system at present and IAG announced in August last year that it will also install Guidewire. “It’s a huge American beast that is on the same sort of platform as we are and has a whole range of integration solutions,” Mr Siemsen says. “We’re really excited to see it coming into the Australian market, because it closes the gap on true business-to-business communication. “Instead of sending a fax to a trade partner, the information can be keyed into their system and our system at the same time. There is no need for human interaction. It’s
far more efficient in terms of cost and time.” Suncorp Executive General Manager Personal Insurance Claims Jason McCracken says that by May the Suncorp, GIO, AAMI and APIA brands will be working together on the Guidewire platform. “Some offices had old greenscreen arrangements – tab this, tab that,” Mr McCracken says. “But now we are putting in a brand new Windows-based web-enabled environment and using it across our entire claims business. Mr McCracken says such advances in new technologies are enabling claims staff to manage the supply chain by using just one program. “For our suppliers to interact with us electronically is a massive step forward,” he says. “That’s really going to make our customer experience that much better. “Anything we can do to get paper out of the process is really what it’s all about. “We still believe customers want to have that face-to-face contact, but it’s becoming an increasingly online process with our partners and suppliers.” Mr Siemsen worries that some insurers are lagging behind in automating their claims processes, and says technological advances are especially effective after major catastrophes such as floods, where a great deal of information is needed quickly. “We are now talking about being anywhere at any time and being able to access information,” he says. “Gone are the days of faxing every little piece of correspondence to all the stakeholders – now it’s about getting the information instantaneously at the click of a button. “Give it another two years and you’ll see just how effective it is. “Five years ago we had faxes talking to people. Now we are going to have systems talking to * systems.”
The perfect claim Like the perfect storm it’s a confluence of many factors FINDING JUST THE RIGHT INGREDIENTS FOR the perfect claim is about as easy as picking winning lottery numbers, but many claims specialists believe there is a key to this extremely complex puzzle. While once it may have relied on the solidity of the policy wording, CGU National Claims Manager Personal Lines James Merchant says the success of the claim hangs on the customers’ experience. He told Insurance News the perfect claim is a balance between being able to ease the customer’s stress while handling the claim as quickly and cost-effectively as possible. “Our mantra is ‘cost, quality and timeliness’,” he says. “If you can get these components right it’s usually a pretty smooth process. “But first and foremost it’s the job of claims staff to listen to the customer and relieve their stress. It’s often about finding ways to cut out the middleman to resolve it quickly.” The experts interviewed for this article agree that ultimately the perfect claim comes down to how the customer feels about the whole process. If they experienced a smooth ride all the way through they are likely to remain happy and confident in their insurer and share their experiences with others. But Suncorp Executive General Manager Personal Insurance Claims Jason McCracken admits it’s not always as easy as it might sound. He told Insurance News that when a claim goes wrong it’s almost impossible to get it back on track again. And the difficult claims, or those that end up in the complaints process, are often regarded as a “gift” because they reveal systemic shortcomings that can be addressed. “We track complaints on a monthly basis, and in my experience it’s a bit of a gift because only one in 10 will actually complain,” Mr McCracken says. “Most will just bitch to their mates over coffee or at a barbecue.” “But when they do complain to you they are giving you the chance to fix it.”
Claims departments can then assess the trends and what “rub-points” are appearing as problems, which usually focuses around service and customer experiences. Mr McCracken says the essence of a good claim will live and die by the lodgement process. “If it goes wrong from this point, there usually is no way to get it back on track – it’s doomed from the beginning.” He says this is why Suncorp is focusing on the lodgement process with four virtual call centres and 700 workers lodging home or motor claims across the group’s multiple brands. This set-up is critical when it comes to storms, fires or a big event like last month’s flood crisis, as resources can readily be diverted from across the various brands and regions. Mr McCracken told Insurance News all this leads back to the most important component of the claim – the customer experience. He says Suncorp has also launched a new internal campaign to remind staff that behind each number and process there is a person and a story. “We got a camera crew and filmed real-life stories through our staff network to remind us to get away from looking at numbers – to remember that behind each one of those numbers is a person.” EBM Insurance Brokers’ General Manager Ward Dedman says his top priority when processing a claim is getting the information right. “We need all the information upfront – otherwise you end up going back and forth all the time,” he says. “The key is the information and the need for all parties – the insurer, the client, the broker and the loss adjuster – to understand that information. “If you don’t get communication updates it creates more work, more calls and more delays. “To complete a good claim you just need to concentrate on communication and information.”
What you can expect from your BI policy Two business interruption experts look at the recent floods and analyse the claims possibilities By Richard Jowett and Andrew Dunn, partners in the Melbourne office of Holman Fenwick Willan, a global law firm which advises on international commerce. The firm is advising clients over the 2008
THE SEVERE RECENT FLOODING IN Queensland, New South Wales and Victoria, followed by further damage caused by Cyclone Yasi, will result in repair and rebuilding costs and lost business income totalling billions of dollars. Business interruption (BI) insurance is often a key component of a company's business continuity plan. As businesses owners have outsourced in recent years, they have had cause to focus on the risk of interruption to their businesses as a result of the inability of their suppliers or customers to operate, or from the interruption of critical services like utilities. Increasingly, businesses buy contingent business interruption insurance which is capable of being triggered in the absence of physical damage to the insured’s own property. While the responsiveness of domestic insurance cover has been well canvassed over the past month, the weather event losses are also likely to raise difficult issues when considering business insurance claims, whether they are for property material damage, BI and contingent BI, or other claims. The effects of the flooding, followed by Cyclone Yasi, will impact on a vast number of industries, including mining, energy, manufacturing, utilities, tourism and agriculture. State municipal property and operations will also be impacted. Australia is the world’s largest exporter of coking coal, a substantial proportion of which originates in Queensland. Production in the first quarter of this year is expected to shrink by 2550% as a result of flooded mines, denial of access, damage to roads and rail networks and restricted port capacity. It remains to be seen how long the interruptions will last and the extent to which lost exports can be made up following the resumption of production. Agricultural producers will also be affected severely, and many commercial enterprises and SMEs are suffering direct and/or indirect impacts, such as suppliers or customers being 60
unable to operate.
Trigger of cover In considering whether insurance cover has been triggered, a threshold issue in each case will be: “Is [flood] damage covered at all and, if so, on what terms?” Personal lines insurers often do not offer flood cover, but it is usually covered in industrial special risk policies insuring against property/material damage and BI. However, even where flood cover is provided, the use of different definitions for “flood” or “flooding” or “storm damage” means the scope of protection varies. The assessment of whether insurance cover has been triggered may be contentious and involve a combination of legal and factual issues. For example, it may not be clear whether temporary inundation per se constitutes “damage” – for example, where an access road is under water – or whether or not it must also cause damage to insured property for the policy to be triggered.
Contingent business interruption While BI insurance typically only responds where loss flows from physical damage to insured property, it is often extended by agreement to include “contingent business interruption” resulting from, for example, denial of access or by loss of supply or of utilities, or even by “loss of attraction” – cover which is often bought by hotels or travel operators. The existence of contingent BI extensions in a policy may not always provide the level of cover an insured might expect. For example, in cases where the insured’s property is inaccessible, perhaps because of physical impediment or restrictions imposed by civil/statutory authorities, and the insured invokes a “denial of access” or “civil authorities” contingent BI extension, it will be necessary to consider whether the extension requires the insured’s property also to be damaged. Similarly, where the interruption is caused insuranceNEWS
by damage to a supplier’s property – perhaps a railway line – the supplier may have to be a direct supplier to the insured as distinct from an indirect supplier, further up the supply chain. Where an insured may seek to invoke a utility or services interruption extension, there may be a requirement for the supply to be interrupted as a result of an insured peril. In other words, an interruption by itself may not trigger the extension.
Calculation of loss Business interruption claims often lead to some of the most complex and contentious claims. This is primarily due to the many factors that can impact on the calculations of loss. Key issues affecting the calculation of loss may include: Basis of indemnification The policy will set out the basis upon which the business interruption claim is to be calculated. This can be limited to a loss of gross profit, due to a reduction in turnover. However, there may be the option of making a claim for a reduction in output or a loss of production income. Often the starting point of the calculation will be to look at the financial year immediately before the date of damage in order to assess standard turnover or output. Increased cost of working/additional increased cost of working claims The policy may incorporate cover for the additional expenditure reasonably incurred by the insured for the sole purpose of diminishing the loss in turnover or output experienced as a consequence of the damage. Issues may arise as to whether the additional expenditure incurred was solely to reduce the loss. There may be a further extension to the policy in excess of the limits already provided. This is known as the “additional increased cost of working”. A key issue in respect of claims involving these
Pallets lie in the mud at a Brisbane transport depot: different definitions for “flood”, “flooding” and “storm damage” means the scope of protection varies. Picture courtesy NearMap
elements is documentation of the decision-making process and costs, which is often overlooked in the haste to get back to business. Analysis of the cause of lost production/ selling lost production Other factors that may influence the rate of production will need to be taken into account, and an insured will need to show that what is claimed as lost production was in fact due to the property damage or other business interruption trigger. Similarly, the ability to sell the lost production “but for” the damage can be a significant issue. There may be a number of reasons why the business may not have proceeded along the course it had done in the previous financial year or years. For example, in the context of the 2008 Queensland floods, the global financial crisis may have had a detrimental impact upon customers’ and clients’ requirements for particular services or products, which may not clearly have been caused by the property damage. Indemnity period The insurance will not provide an unlimited period of cover. Normally, the indemnity provided will be limited to a particular length of time, commonly 12 or 24 months. Other/special circumstances clause This allows the parties to take into account other circumstances which may impact upon turnover/production and the calculation of the
business interruption. Its aim is to ensure that the amount indemnified is as true as possible to the actual amount lost by the insured as a result of the damage. For example, if the company affected is a major coal exporter and the damage incurred is so extensive it creates a price spike for coal globally, the insured could benefit once the business gets back on track. Whether this should be taken into account or not, and how this is included in the loss calculation, can create significant discussions and debate for the insured, insurer and reinsurer. As with the assessment of whether cover has been triggered, expert evidence or advice may be required to properly assess a number of these issues. Flood-affected businesses should keep comprehensive records relevant to the assessment of lost production/turnover/ sales and additional expenses incurred due to the flooding. They should notify their broker or insurer promptly of any potential claim or loss or damage which may give rise to a claim.
clause in the reinsurance policy, they may insist on control of the claims, or otherwise seek to participate in the investigation, adjustment and settlement of losses. Key reinsurance issues might include: (a) triggers and aggregation and excess/attachment points; (b) reinstatements; (c) payments on account and how these should be managed, particularly where there is a reinsurance program with multiple layer and potentially non-aligned interests; and (d) where there is a captive or fronting arrangement, whether the insurance and reinsurance are truly back to back and the role the captive/front should play in claim investigation and negotiation. The timing of the events will also be important in allocating losses from the rainfall and flooding. In cases where insurance may have been renewed on January 1, the rain events could span different periods of insurance and reinsurance * cover.
Reinsurance and retrocession Due to the limited capacity in the Australian market, many BI claims arising from the recent flood events will result in reinsurance claims in the London, Bermuda and other international reinsurance markets. This is likely to impact on the speed and manner in which claims presented by insured Australian businesses are settled. Reinsurers will be concerned that the claims at the insurance level are being handled effectively and efficiently. Where there is a claims control insuranceNEWS
Knowing and understanding How flood victims could mount a case for payment, and why insurers need to be clear By Kate Stewart, Senior Solicitor at Gold Seal Legal
FLOODS AND INSURANCE HAVE NEVER been happy bedfellows. Even if you hadn’t been reading the newspapers in the past few weeks, it would have been easy enough to predict the headlines. From consumers: I thought I was covered for flood and now I find there is a loophole in the fine print. From politicians: Insurers should show compassion and not apply “black letter interpretations” of their policies. From insurers: Insurers stand firm on policy coverage. But there may be some scope for holders of home and contents policies to recover if they can establish that they were not “clearly informed” of the flood exclusion in their policy when they took it out or renewed it. Under the Insurance Contracts Act 1984, insurers who offer domestic home building and contents insurance which excludes destruction or damage caused by or resulting from flood can only rely on the exclusion if the insurer can prove that, before the insured entered into the contract, the insured either: 1. was clearly informed in writing of the exclusion, or 2. knew, or a reasonable person in the circumstances could be expected to have known, that the policy did not provide flood cover. This is because the prescribed standard cover for home building and contents insurance includes “destruction or damage to the home, or destruction or damage caused by or resulting from storm, tempest, flood, the action of the sea, high water, tsunami, erosion or landslide or subsidence”. If the insured was not clearly informed that this was excluded or did not know (and a reasonable person would not have known) about the exclusion, then the standard coverage applies. This would entitle the insured to recover the minimum amount required under the standard coverage – which is “an amount sufficient to indemnify the person”. Insurers will need to be able to prove that they clearly informed the insured of the exclusion. This obligation will be met if it was clearly explained in the policy documents – that is, the policy wording and certificate or schedule – and the product disclosure statement (PDS). However, the 1924 case of Maye v Colonial 62
Mutual Life Assurance Society Ltd established that exclusions cannot be “hidden in a multiplicity and generality of words”. So brokers and lawyers advising insureds on this issue should look at the context of the PDS and policy documents and all of the circumstances in which they were provided to work out whether an insured has been clearly informed or should have known they weren’t covered. Policy documents are now commonly written in plain English, and a PDS is required to be worded in a clear, concise and effective manner. Despite this, some policies may fall short. The key areas to consider are: • The form and content of the PDS and other documents. For example, how complex are the documents, how prominent is the flood exclusion and where is it located? • The actual drafting of the flood exclusion (is it clear and unambiguous?); and • The circumstances in which the documents were provided to the insured. For example, could the insured’s understanding of the exclusion have been affected by marketing or advertising material that influenced their decision to purchase the insurance, or representations made to them when they purchased the policy? It is possible for insurers to comply with this requirement in a number of ways, including by giving the insured a copy of the policy document or PDS before they purchase or renew the insurance. However, last year the Supreme Court of South Australia held that while section 35(2) of the Insurance Contracts Act recognises that in some circumstances the provision of the policy may be enough, “it does not deem the provisions of the terms of the policy to be a sufficient disclosure in all cases”. In that case, the only information given to the insureds about the cover was in the policy documents that the insurer provided. The court acknowledged that the provision of policy documents to an insured had been accepted as enough to “clearly inform”. But it still found that in this case, when read by a reasonable person in the position of the insured, the information about the exclusion in the policy documents was not enough to clearly inform them that they would not be covered for the events which occurred. The Financial Ombudsman Service (FOS) insuranceNEWS
has applied the same approach in disputes about flood coverage under home and contents policies. Other issues that are likely to occupy FOS are the many different definitions of “flood” and sub-limits on cover. It will ask whether consumers understand the implications of the definition or the limitation – for example, the difference between “riverine” and other types of flood? There may be scope to argue that these are technical, ill-defined or not described with sufficient clarity. Alternatively, the construction of the policy may not be clear or incomplete information may have been given to the insured when they purchased the policy. If the policy was purchased through a call centre or via a website, it may be difficult for insurers to establish that they clearly informed the insured “in writing” before the policy was first issued. The Insurance Contracts Act doesn’t allow insurance notices to be given electronically, and some can’t be given orally. Remember, however, that if clear information was given in writing within 14 days, the insurer will have complied with the requirement. For policies sold on the phone, insurers will need to be able to produce accurate evidence of what was discussed during telephone calls. They may need to rely on other evidence (such as call centre scripts) to show that sufficient information about the flood exclusion was given when the insured purchased the policy. In short, if an insured did not properly understand they were not covered for flood, it would be worthwhile seeking advice from a broker or lawyer on whether the policy document was clear enough and whether any other information was given to the insured about the flood exclusion at the time they decided to purchase the insurance. Unfortunately for small businesses, there is * no such protection for them.
Focused on training Underwriting agencies say they’re doing their bit for the industry By Tania Martin UNDERWRITING AGENCIES ARE OFTEN portrayed as small businesses run by middleaged and older professionals who have spent their careers perfecting their knowledge of a niche class of insurance. But the Underwriting Agencies Council (UAC) says it’s a stereotype that is no longer accurate. As the agencies continue to grow they’re investing heavily in education to build the skills and knowledge of their employees – the next generation of experts. UAC Chairman Damien Coates says underwriting agencies are investing more in the development of their local staff than most insurers. In December, one of the country’s major insurers suggested the specialist agencies aren’t doing enough for the wider industry by failing to develop young talent and produce good claims networks. “We are employing local staff who ultimately have ownership over the business rather than these branches or subbranches of internationally owned entities operating in Australia,” Mr Coates told Insurance News. He was responding to comments in December by Zurich Australia’s General Manager for General Insurance, Shane Doyle, who questioned the widely held belief that over-capacity in the Australian insurance market is good for consumers. He told insuranceNEWS.com.au that most underwriting agencies in Australia aren’t investing in the industry’s future. “This is all to the detriment of the consumer.” But Mr Coates insists agencies are investing in the future of their niche businesses. He says UAC’s membership is growing each year and the organisation plans to continue increasing training options for members and their staff in the next 12 months. Last year the first stage of a three-year education plan was set up with an inaugural professional development and training day. Mr Coates says this was just the beginning. “It’s one of the first building blocks towards establishing a wider plan for underwriting agencies’ staff to gain better qualifications.” 64
Shortly after being elected Chairman of UAC in 2009 he undertook a survey of members which showed underwriting agencies earned a collective $2.5 billion premium a year and more than 1600 people working in the industry. Mr Coates says the number one priority highlighted by members was the lack of specialised qualifications for underwriting agents. This being addressed through a new arrangement with the Australian and New Zealand Institute of Insurance and Finance (ANZIIF), which will develop special modules
for a new Diploma of Financial Services (Underwriting Agencies). Mr Coates says the qualification will be internationally recognised and the modules are expected to be in place this year. He told Insurance News the inaugural training day in Sydney late last year with ANZIIF attracted more than 85 members and their staff, and will this year be taken on the road to include insuranceNEWS
Melbourne. “Training was the number one area in the survey which members wanted addressed. There is a lot of training in the market for insurers and brokers but not much for underwriting agencies.” “We addressed some of these issues at our inaugural training day by looking at cross-selling and time management, which are real drivers for the underwriting agency business.” UAC also aims to build more strategic relationships this year after Lloyd’s came aboard last year as a major supporter. “We’ve had approaches from several major insurers looking to invest resources in UAC,” Mr Coates says. “It could further enhance our service to the industry. He says as a not-for-profit organisation, UAC must build strategic relationships to help develop services for underwriting agents. He says the underwriting agency sector in Australia is more highly developed than in New Zealand or Asia, and UAC will continue to develop strategic relationships with organisations in the region. “The fact that underwriting agents in other countries are looking to adopt what we have done as an advanced model it just fantastic.” He says underwriting agents in Australia “realise there’s a need to continually raise the bar to remain relevant to the wider insurance community”. UAC’s membership is continuing to grow as the agency market flourishes. Last year it gained seven new members to bring its corporate membership to more than 70. Now the council is considering employing some full-time staff this year rather than relying solely on volunteers. “The underwriting sector needs to continue to grow to meet the needs and challenges of * clients,” Mr Coates says.
MGA assistants discuss the next 10 years Adelaide-based national company MGA knows mixing business and pleasure is a recipe for success, so it provided a bit of something for everyone at its annual Broker Assistants conference at the seaside suburb of Glenelg. Apart from the heavy business – the event’s theme was “The Big 5 for the Next 10”, calling on the assistants to highlight the things they like would like to see improved in the next decade – there was plenty of entertainment, too. The two-day event’s leisure activities ranged from wine-tasting and a visit to the zoo to a relaxing cruise. Nearly 60 delegates from around the country attended the conference. Members of MGA’s operations team also attended. The following day saw delegates dress in pink in aid of the Jodi Lee Foundation, a local charity that raises cash for bowel cancer research. The day also included an inspirational talk by local mountaineer Katie Sarah, who reached the summit of Mt Everest last year.
peopleNEWS eQuipped to lead the way QBE has toasted another group of emerging young talent at functions across the country as it brought its 2010 eQuip program to a close. The program aims to develop the capabilities of Australiaâ€™s next generation of industry leaders, focusing on key business competencies for SME clients. More than 50 professionals attended each event in capital cities around Australia, with QBE regional managers from each centre hosting the function. The companyâ€™s General Manager Australian Intermediaries, Shaun Stanfield, also facilitated a panel discussion at each event, which included one staff member, a program participant, a broker partner and a broker principal. The events had a double purpose: they celebrated the achievements of the 2010 eQuip participants while acting as an induction to those entering the 2011 program.
Blue Eagle’s island adventures Brokers around Australia participating in the Allianz Blue Eagle program were given a mystery destination to fly to in December for their annual three-day year-end event. The event rewards and recognises key business partners, who were told to “dress for a range of activities”. Their destination was Hamilton Island, with sailing visits to Hayman and Daydream Islands. Over the three days guests enjoyed a variety of activities ranging from a formal black-tie dinner through to clay pigeon shooting. State pride was also on the line as teams competed against each other in beach olympics, beach volleyball and catamaran races.
Chartis forum attracts top end of town Considering its pedigree as an insurer of major companies, global insurer Chartis can pull an impressive audience any time it likes – even when it’s early on a Sydney summer morning. The company’s Chief Executive for Australia, Noel Condon, and his Singapore-based predecessor Chris Townsend – now Chief Executive of Chartis Asia-Pacific – welcomed business leaders and insurance luminaries to a forum examining emerging risks. The forum at the Sofitel Sydney Wentworth was jointly organised with the UK Financial Times to raise awareness of the risks multinational corporations face today and in the future. Speakers included Westfield Group Chief Risk Officer Eamonn Cunningham, Financial Times Asia specialist Ben McLannahan and Lowy Institute for International Policy Director Mark Thirlwell. Chartis International Risk Management Director Bruce Abrams and Joe Garbutt, Director of Policy for the Institute of Internal Auditors Australia, also spoke at the forum. Pictured here, from left, Ben McLannahan, Mark Thirlwell, Noel Condon, David Lamb (Chartis) and Bruce Abrams.
A big repair job If you want to be the best at repairing smashed trucks, you’ll need something to practise on. That’s the theory behind the presentation by National Transport Insurance (NTI) of a written-off truck for smash repair apprentices at SkillTech Australia’s new $13 million training centre in Queensland. NTI Chief Executive Tony Clark is pictured presenting the truck keys to SkillTech Australia Institute Director Mary Campbell and Automotive Business Manager Chris Kroehn. Mr Clark says truck repair expertise is an important issue to NTI, and the handover of the truck is just part of NTI’s long-term commitment to ensuring apprentices learn their trade on modern vehicles. Truck technology is changing rapidly, and Mr Kroehn says NTI’s donated truck will significantly benefit smash repair trainees because it features modern braking systems, an automatic transmission and engine technology.
Sam Pentecost Contribiutor
Dear Son, Well, it happened again. We had a bit of rain, and then another flood. Not all that much, I said to your dad; not compared with a few weeks ago, or late last summer. You will recall your father has a morbid fear of bodies of water larger than a farm trough, which is probably why he refuses to leave Duck Flats. But these days it sometimes seems like the ocean has come to us, and quite frankly if we have to have it I would prefer the blue version. We’ve been living under big dark clouds stretching horizon to horizon for so long the daisies don’t even bother opening up any more and the snakes are all sluggish and easy to shoot. It must have been raining hard up north, because the creek started to run again last week, and then it was déjà vu all over again for a third time. This time the flood started coming all the way up the drive, past the cowshed and the kennels, and then up around the front porch. And there’s your father on the roof with a crowbar pulling the iron off as fast as he can. Apparently our broker told him insurance companies won’t pay up for water that comes through the door, but they will if it comes in from the sky. So for a few days I was living in a house with big gaps in the roof, looking up at the sky and hoping like mad it wouldn’t rain. The flood decided that for us by coming up through the floorboards, so we moved on to the homestead roof and here we remain. The broker came out to see us the other day to discuss our property insurance. He has a very smart rubber dinghy with an outboard engine, which would be very handy when I need to get to the clothesline. He was a bit surprised to discover he was moored to the tractor shed, and seemed to lose interest in discussing the annual renewals after that. He’s actually a very nice man, if a little more portly than your father, who comes from the scrawny/mangy side of the family. Our broker told me many things that afternoon as we sat on the homestead roof as the sun sank into the red sea and your father searched for the flood exclusion in his product disclosure statement. Most life-changing of all, for me at least, was our broker’s recitation of the Flood Definition, which he says was recklessly cast aside by people who knew no better but which may yet be resurrected. I am paraphrasing, of course, but I could listen to him all day, I really could. Please hurry home for a visit, because I can hardly wait to have you standing before me, albeit at a slight angle on the roof, as I recite to you what our broker taught me: the Flood Definition, a melody of words so pure and simple and easy to understand. Like poetry by Keats, or Yeats or Paul Keating. As Sister Immaculata used to say when I was in boarding school, you can always trust a man who spouts poetry. I have tried to pass on this amazing truth to your father of a night, as we huddle on the roof and watch the occasional dead cow float slowly past in the moonlight. I have tried several inspiring ways of bringing this new enlightenment to him. At first I tried reciting it loudly as I cooked dinner, but then inspiration overtook me and with the right amount of bullying your father raised the old upright piano from the parlour, which was fortuitously roofless, using a block and tackle. Over a couple of weeks I put the Flood Definition to music. Things like that help to pass the time at night, especially if the rescue helicopter stuffs up and forgets to drop the gas for our little lantern. My first musical attempt had a certain Gypsy lilt to it, and the stamp of my Cuban-heeled RM Williams boots as I whirled around the roof avoiding the gaps was, I thought, stirring and authentic. My second attempt was to an African beat, and even though I translated the entire Flood Definition into Zulu it still sounded as beautiful as the words range out sharp and clear into the night. But the banging on the roof with my hand-made assegai was dreadfully badly received by your father, and the week after that he saw through my Polynesian dancer disguise almost immediately, despite it being one of those nights where the gas gave out. Every night now he sits there on the edge of the roof fishing with some old fencing wire and muttering terrible things about flood insurance. I think of our broker and I know that burning inside me like a beacon is the truth, if only your father would listen. But he just sits there smoking rollies and asking no-one in particular how bloody far the ocean has to reach inland before the riverine flood becomes bloody estuarine, anyway? I’m sorry, but I can’t help him when he’s like this. I have agreed to meet our broker in town next Tuesday for further discussion on what he calls “our insurances”. Ooh, goosebumps. This visit will, of course, be dependent on your father repairing the damage he administered to the family rowboat while standing in it cutting wood with a chainsaw. Your sister is still in Western Australia and has taken up with a mining billionaire. She says they’re a dime a dozen over there. Why she doesn’t come home to visit – or you, for that matter – is a mystery to me. Much love, 74
On March 15 it will be 10 years since the collapse of HIH, and the latest edition of our sister print publication Insurance News examines th...
Published on Feb 1, 2011
On March 15 it will be 10 years since the collapse of HIH, and the latest edition of our sister print publication Insurance News examines th...