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Tough times: SME downturn challenges brokers

Power pair: Only two brokers left in the top tier

The coronavirus black swan: How the industry is dealing with a crisis no one was prepared for April/May 2020


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Contents 6 Newsmakers 10 Pandemic: the black swan risk

The unfolding, unprecedented story of the COVID-19 outbreak and its impact on insurance so far

17 Testing times

An economic slide due to the coronavirus will put more pressure on brokers to demonstrate value as clients seek ways to cut costs

20 Talent quest

‘Falling into insurance’ is no longer enough. Solving skills shortages is a key industry challenge

26 A catastrophic summer for insurers

Australia’s three biggest insurance companies are feeling the pain as bushfires and hailstorms start a year that’s shaping up to be extremely challenging

28 Reined in

Euphoria has given way to anxiety as Steadfast and AUB Group count the cost of the pandemic

30 Seven years and counting

Peter Eastwood and Mark Lingafelter look back at the remarkable rise of Berkshire Hathaway Specialty Insurance, while moving forward into a more diverse future

36 Talking and listening

A new committee set up to facilitate communication between Lloyd’s and its local agents couldn’t have come at a better time

42 Where there’s smoke, there should be cover

How smoke haze, lost bees and needy pumpkins added to lost millions this summer – and what insurance can do to help next time

56 Trying harder works

Emerging from challenging times, NZ insurer Tower is using technology to take the fight to the local market’s giants

62 Doing the right thing

Ansvar keeps faith with an ethical insurance approach to protect society’s most vulnerable and contribute to the community

67 Signing off

Insurance Brokers Association of New Zealand chief Gary Young is retiring after 14 years of dealing with big issues and changes

68 A step too FAR

Getting remuneration right for insurers requires the right processes, not oversight imposed by regulators

companyNEWS 72 Giving back

IAG details plan to improve insurance accessibility

72 Cyber navigator

360 launches Compass web portal

peopleNEWS 75 Order in the court! 76 Steadfast takes out Insurance Ashes 78 Adroit marks 20-year milestone 81 Sydney expo draws record numbers 82 Maglog Tough times: SME downturn challenges brokers

Power pair: Only two brokers left in the top tier

48 Shelved, for now

The appetite for mergers and acquisitions has evaporated as the pandemic sends the global economy into a tailspin. But for some, adversity also brings opportunities

52 Lending support

Premium funding plays a key role in cashflow management – in good times and bad

The coronavirus black swan: How the industry is dealing with a crisis no one was prepared for April/May 2020

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In February/March we published 521 articles online. These were made up as follows:

74 Local

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COVID-19 PANDEMIC DEVASTATES ECONOMY Mainstream media headlines have been completely dominated by the ongoing coronavirus outbreak in recent weeks, and insuranceNEWS.com.au is no different. Up until publication, we had run more than 80 articles focusing

on how policies respond, industry event cancellations, home working arrangements, the impact on insurers, brokers and the broader economy, and how the industry can help clients through these troubled times.

We will continue to provide the most up-to-date, accurate information for the duration of this crisis – however 0 long it lasts. Pandemic: the black swan risk – Page 10

Corporate

LLOYD’S CLOSES UNDERWRITING ROOM

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Regulatory & Government

Lloyd’s has closed its iconic London Underwriting Room for the first time in its 330-year history, to counter the spread of COVID-19. The “momentous event” was marked by ringing the Lutine Bell in the centre of the room once. This denotes bad news, and in Lloyd’s early days usually indicated the sinking of a ship.

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Life Insurance

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The Professional

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Two rings celebrates good news, and Lloyd’s General Representative in Australia Chris Mackinnon says “we very much look forward to the day when we will be back together, ringing the bell twice to mark the re-opening of the room”. On a typical day about 5000 people go through the room, but this number fell to about 200 just prior to the 0 closure.

International

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Analysis

116 Daily

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Breaking News More than 31,883 news articles – including 346 breaking news bulletins – have been published since we started in 2001. All articles can be accessed through our archives. 0

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“It’s not about dealing with claims, but making sure businesses survive. We are all pretty screwed if there are no small businesses at the end of this.” NIBA President Eric Harris calls for an industry-wide position to help clients get through the coronavirus crisis.

AON NOW BIGGEST BROKER Aon will become the world’s largest insurance broker after agreeing to acquire Willis Towers Watson (WTW) for $US29.9 billion in shares. It’s the industry’s largest ever deal – and analysts believe we won’t see its like again for a very long time as the coronavirus takes its toll on mergers and acquisitions. The combined company will be worth an estimated $80 billion, eclipsing previous global broking frontrunner Marsh,

which itself acquired JLT in 2018 for $US5.7 billion. The new firm will operate under London-based Aon’s brand, and be led by Aon CEO Greg Case and CFO Christa Davies. WTW CEO John Haley will become Executive Chairman. Mr Case says while Aon “will be bigger, yes”, the deal is not just about size. “This is about better,” he told an analysts’ conference call. “We will fundamentally be more innovative, more capable, more

relevant and more responsive.” He says the combined firm will enable a quicker response to “unmet client need” in a volatile and challenging insurance landscape. “We are not going fast enough,” he said. “There is significant opportunity to accelerate together.” The transaction is subject to shareholder and regulatory approval, but is expected to close in 0 the first half of next year. Shelved, for now – Page 48


SUMMER CAT BILL SOARS Insurance losses from catastrophes since the start of the last bushfire season have raced past $4.5 billion. Losses from the bushfire catastrophe which hit New South Wales, Victoria, South Australia and Queensland have risen to $2.2 billion from more than 31,000 claims, according to the latest Insurance Council of Australia (ICA) figures. About 36% of building claims are already closed, along with 70% of contents claims. January’s hailstorms across NSW, Victoria, ACT and Queensland have generated losses of $1.2 billion from almost 108,000 claims, with about 15% of building claims and 15% of motor claims closed. Losses from floods and storms in Queensland and NSW last month have risen to almost $677 million from 77,598 claims, while losses from a Queensland hailstorm in November are now estimated at $368 million from 25,000 claims. Smaller fires in Queensland and NSW in September and October had combined losses 0 of $56 million.

QBE TO CUT 200 JOBS QBE has confirmed it intends to cut 200 jobs in its Australia Pacific division over the next 12 months. A spokesman for the company declined to give details of positions under threat, but says staff are being kept fully informed. “We continue to explore ways to make our Australia Pacific business leaner and more sustainable in a highly competitive market, and we are focused on streamlining our costs and operating model,” the spokesman said. “We have been open with our people that this will include some reductions in headcount in our Australia Pacific business to ensure we have a fit for purpose operating model going 0 forward.”

AAP Long haul: fires burning in Illinbah, Queensland, in September last year

PREMIUM FUNDER LAUNCHES BROKER CAMPAIGN A leading premium funder has unveiled a broker support campaign to highlight the value provided by intermediaries, at a crucial time for the industry. Premium Funding has launched a new website featuring a series of videos explaining why customers are better off with a broker, and the digital campaign will target business owners and people conducting insurance research online. The website, developed after extensive consultation with the industry, explains the importance of intermediary expertise in assessing risk and arranging appropriate cover, and emphasises the role brokers play in fighting

a customer’s corner in the event of a claim. It says the “time is right” to promote the integral role that brokers play. “We felt there was an opportunity to help build awareness and remind the business community of the importance of insurance brokers,” Premium Funding Director Ross Hayward said. “From policy research, to risk advice, through to claims management, the value insurance brokers provide cannot be overstated. The campaign features a series of high-quality videos and display ads that will be pushed to more than 400,000 businesses through Google, LinkedIn and Facebook. The resources are also available for brokers to use and distribute. 0

AUB HOLDS OFF ON MGA AUB Group will not go ahead with the planned $140 million acquisition of Adelaidebased MGA Whittles Group that was announced in February, after assessing the impact of the coronavirus outbreak. “The parties have agreed not to proceed to completion of the proposed transaction announced to the market,” AUB says in a COVID-19 update to the Australian Securities Exchange. “The parties intend to revisit the proposal as soon as practicable and remain firmly committed to the existing partnership in the interim.”

AUB, which currently has a 49.9% shareholding in MGA, said on February 17 that it planned to acquire the remaining 50.1%, as well as 100% of strata specialist Whittles. The decision to hold off means AUB will not pay the proposed cash amount of $29.1 million or make the proposed share issue and will not be required to repay the existing debt facilities of MGA Whittles. AUB also announced in February a $132 million deal for a 40% stake in online distribution platform BizCover. This acquisition has completed.

BizCover was formed 11 years ago, and AUB says it is a highly profitable and rapidly growing business that has targeted micro and smaller commercial clients that complement the Austbrokers SME client base. “In addition, this strategic relationship will enable Austbrokers members to benefit from BizCover’s exceptional technology and their innovative culture,” AUB CEO Mike Emmett said. BizCover co-founder Michael Gottlieb will continue as MD, with co-founder Brad Miller and other key leaders also remain0 ing in current roles.

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From the

PUBLISHER

WILKINS NAMED QBE CHAIRMAN QBE Group has appointed former IAG CEO Mike Wilkins as chairman, to take over from Marty Becker, who will retire from the board on April 30. Mr Wilkins led IAG for seven years and has more than 30 years’ experience in financial services. He has been a QBE board member since November 2016, chairs

the insurer’s people and remuneration committee and sits on the audit, operations and technology committees. He retired from the AMP board in February after playing a key role in steadying the financial services group during its tumultuous postHayne royal commission 0 period.

BUILDING COVER FOUNDATION OF COMPLAINTS Australian Financial Complaints Authority (AFCA) data shows home building cover was the most complained about insurance product in the second half of last year. AFCA progressed 1450 home building complaints, representing 7.2% of the total across all financial product groups. Motor insurance complaints were close behind, totalling 1405. A breakdown by financial firm type shows AFCA received

a total of 7114 complaints about general insurers, making the sector the second-most complained about. There were 14,096 complaints about banks, 4643 against credit providers and 2787 about superannuation funds. The breakdowns are published on the AFCA Datacube which launched last year to detail complaints received, how they have been resolved and naming financial firms 0 involved.

The term “black swan” was popularised by US academic Nassim Taleb, who argued that because black swan events are impossible to predict, it is important for people to always assume a black swan event is a possibility and to plan accordingly. Well, no one did. Taleb gives us an excuse by noting that a black swan event is explained in hindsight as if it was actually predictable. Well, it was. Many experts warned of the consequences of another virus like SARS getting loose. But who could have imagined it would quickly lead to billions of people locked in their homes and businesses shut down? Other things have happened recently that also deserve classification as minor-grade black swan events. For example, who could have foreseen a couple of years ago that the top end of the global broking sector would be dominated so completely by a merged Marsh and JLT, and a merged Aon and Willis Towers Watson. The formation of two dominant players at the top of global broking does follow a 19th century economic theory that all industries end up being dominated, at least for a while, by two competitors. And no one in Insurance News ever envisaged that one day they would be checking art proofs for this issue in the car park of our printer, because we weren’t allowed inside. The production of Insurance News involves a varied team of people and skills, and this is the first edition ever to have been compiled with everyone working from home. It has been an education for us all, as I’m sure the “stay home” experience has been for tens of millions of people around the world.

Terry McMullan

PUBLISHER:

ADDRESS:

TERRY McMULLAN Email: editor@insurancenews.com.au

Insurance News Pty Ltd Tel: + 61 3 9499 5538 PO Box 116, Ivanhoe VIC 3079 Australia

MANAGING EDITOR: JOHN DEEX Email: editor@insurancenews.com.au

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It’s hardly surprising that this issue of Insurance News leads off its coverage of the industry’s big issues with an article on the coronavirus pandemic and its impact on the insurance industry. What is worth noting is that the cover story in the last issue was about the industry’s hugely effective response to the massive bushfires that overwhelmed several states during the spring and summer. Who would have believed that a season of massive catastrophes would so quickly be sidelined in our thoughts by a microscopic virus that will have an enormous financial and personal impact on us all? That’s why our cover graphic shows the virus itself behind a black swan – the globally recognised metaphor for an unpredictable or unforeseen event, typically one with extreme consequences.

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PRINTING: Printgraphics, 14 Hardner Road, Mt Waverley VIC 3149, Australia www.insurancenews.com.au/magazine

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.

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 PEFCTM certified paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification. ISSN 1837-4972


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Pandemic: the black swan risk The unfolding, unprecedented story of the COVID-19 outbreak and its impact on insurance so far By John Deex

T

he coronavirus pandemic is moving fast – extremely fast – and what we know now will be quickly overtaken by new threats and new strategies to meet them. By the time this article is read, the 693,244 cases and 33,106 deaths worldwide will have increased significantly. The Chinese city of Wuhan, where this all started in December last year, might have returned to normality. Italy may be over the worst, but another country will have taken over as the epicentre of the outbreak. Many consider this pandemic a “black swan” – a high impact, unforeseen event on a par with 9/11. Others say it should have been entirely predictable, and it must be admitted that insurance policies, at least, were prepared for such an incalculable risk. What we do know already, and what isn’t going to change, is that it will have an unprecedented and lasting impact – socially, politically and economically. The economic impact will be worse than 2008’s Global Financial Crisis, and no country or sector will escape unscathed. Australia’s last recession was in 1991, but another looks unavoidable now. General insurance will likely take a significant hit, both financially and reputationally. Online Insurance News has published more than 80 stories since COVID-19 was identified, covering a huge range of impacts from cancelled local events to global industry trends. Here is our summary of the most valuable and relevant of that information, in an effort to understand the incomprehensible.

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Insurance cover It seems a long time ago, but at the start of the outbreak Australians were primarily concerned with the impact on their international travel – and how travel insurance would respond. It quickly became apparent that most insurers have either a blanket pandemic exclusion, or a “known event” exclusion, under which COVID-19 claims were kept to a minimum. All insurers take a different approach, and so consumers are always advised to “check your policy”; but chances are that cancellation isn’t covered, especially if insurance was purchased after late January. As travel restrictions tightened, there was a knockon effect on the tourism and hospitality industries. And now that all of Australia is under varying degrees of lockdown, pretty much all businesses are suffering to some extent. But business interruption policies also have pandemic exclusions. The Insurance Council of Australia (ICA) says “some specific policies may differ” but the majority are likely to contain exclusions relating to losses caused by diseases notifiable under the Quarantine Act or the Biosecurity Act. Similar restrictions apply to event cancellation. Sports events, music festivals and industry conferences have all fallen victim to the virus, but most event cancellation policies contain a communicable diseases exclusion. An extension can be written in, but now the


Reuters A French rescue team carries a COVID-19 patient at Strasbourg University Hospital

outbreak is a “known event” it is impossible to get cover specifically for COVID-19. Workers’ compensation claims could increase as a result of the outbreak. If an employee can show that their job significantly contributed to them contracting the virus, then a claim could be made. And life insurance policies, in the main, will pay out. The Financial Services Council says that if cover was taken out prior to March 11, and if policyholders followed government travel advice, there are no exclusions that would prevent payment of a coronavirus-related death claim. However, if arranging new cover customers may be asked about their risk of exposure to COVID-19 and exclusions may be applied.

Impact on insurers With claims curtailed for the most part, the direct impact on insurers is predicted to be equivalent to a “moderate natural catastrophe”. ICA declared COVID-19 an official insurance catastrophe but is yet to give any update on claims totals. However, insurers will not escape unscathed. Their own business continuity problems, plunging investment returns, reduced demand for certain types of cover, and even reputational issues will all play their part. “The general insurance industry will not be one of the most heavily impacted sectors,” Finity Consulting Principal Estelle Pearson says. “However, the impacts are not necessarily immaterial, and careful thought is required to enable insurers to get a handle on the

implications.” Willis Towers Watson says the main concern for insurers and reinsurers right now “is the reductions in the investment side of the balance sheet”. The pandemic could wipe $US1.3 trillion from the world economy – 25 times more than the economic loss from the SARS outbreak in 2002/3 – and insurers will need to renew most of their annual insurance and reinsurance contracts while the catastrophe is still ongoing. Deloitte US insurance leader Gary Shaw says the big-picture concern is how the outbreak might affect the global economy and, in turn, prospects for growth and profitability in insurers’ underwriting and investment portfolios. “Financially, insurers will likely need to adjust their budgets and implementation plans, cashflow expectations and investment portfolios in light of recent developments,” Mr Shaw says. Many listed Australian companies, including QBE, Steadfast, AUB Group and Genworth, have withdrawn their earnings guidance. Almost the entire industry is working from home, which has had some impact on efficiencies no matter how well you’ve prepared, and ICA says disruptions caused by social distancing and shutdown measures are taking their toll. Repairs following $4.5 billion of summer natural catastrophe losses have become much harder to complete, and the closure of many overseas call centres used by Australian insurers has also created difficulties and delays. Travel insurers have suspended sales of

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“When you look at the record amounts of stimulus being put in by the Government, you get a feel for how big losses could be.” international travel products due to the Federal Government’s travel ban. And some insurers have placed an embargo on the sale of landlord insurance policies, or are adjusting what can be covered in future policies. While insurance is considered an essential service, and will remain functional, nobody is trying to claim that it will be “business as usual”. Far from it.

Impact on brokers The next few months will also be very challenging for brokers as fears grow for the SME sector. Brokers say they expect some COVID-19 impact, through reduced demand for their services or an inability to actively engage with clients. “There are going to be clients who may, unfortunately, lose their businesses,” says Dianne Phelan, Group Operations Manager with BJS Insurance Group and Vice-President of the National Insurance Brokers Association (NIBA). “Any reduction in insurance needs is going to have an impact on revenues. So yes, I think brokers themselves need to be engaging their risk management plans that they will have or should now have in place for this eventuality.” About 29% of businesses surveyed by SME-focused consultancy Cameron Research say the virus outbreak has already had a significant impact on their operations and more than 50% predict problems over the next three months. There is also a growing awareness that the actions of insurers to either extend concessions to customers, or to limit their exposures, can expose brokers to loss of income. For example, IAG’s announcement in late March of a range of concessions (see further down this article) included a decision to allow small businesses experiencing financial hardship to defer premium payments for up to six months. The move has upset brokers, who say they weren’t consulted by IAG prior to the announcement. They say the move will impact on their own revenue – in some cases severely – and that brokers dealing in the SME market are, for the most part, themselves SME businesses. And the Government’s imposition of strict rules on March 29 limiting meetings to two people, enforcing a 1.5 metre separation distance and defining “non-essential meetings” all but eliminates brokers’ ability to hold face-to-face meetings with their clients. “That has challenges in terms of being able to work effectively and efficiently,” NIBA Chief Executive Dallas

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Booth says. “Brokers’ primary role is to service and help their clients and we’re already seeing very significant disruptions to small businesses.”

Reputational risk While the general insurance industry may be protected from large numbers of insurance claims, it remains vulnerable to attacks on its reputation. Pandemic exclusions are there for good reason, but some consumers and commentators interpret them as the industry squirming out of its responsibilities when the world most needs its help. ICA Head of Risk and Operations Karl Sullivan says insurers exclude items for two reasons: either because they don’t understand the exposure, or because they do understand it and it is beyond their appetite. “We are dealing with the latter here,” he tells Insurance News. “We are talking about tens of billions of dollars in losses. When you look at the record amounts of stimulus being put in by the Government, you get a feel for how big losses could be.” Mr Sullivan says reinsurers introduced exclusions following modelling developed after the SARS outbreak, and this filtered through to insurers. “It’s a very large uninsurable risk,” he says. In the first days of the crisis travel insurance was high on the public’s agenda. While some insurers have since moved to calm the issue by refunding premiums on unused travel policies, the barrage of criticism was intense. John Durie, a leading business columnist at The Australian, said “a reasonable person may assume that, having taken the prudent step of taking out travel insurance on the advice of your agent, if the host government had put up the shutters because of an out-of-control virus then you would get coverage”. “Some sections of the travel insurance industry are providing a textbook lesson in why they should be avoided at all costs in the future”. Finity’s Ms Pearson says “community standards” must be considered, and researchers warned that travel insurance risks being labelled “junk insurance”.

Political pressure The banking sector was swift in announcing industry-wide measures to ease customers’ financial burdens, which resulted in the insurance industry coming under considerable pressure from the Federal Government to join in. The rationale behind the Government’s push for insurance to do the same as the banks was logical enough.


“We have gone to great lengths with the Government to explain that we are not the banking sector.” It was devising a series of extensive measures to help Australian businesses and workers, and wanted the financial services sector to step up. But the dynamics of insurance are very different from the banks. While the banks have been prepared to make a range of concessions to customers, the actual financial losses they experience as a result are not that significant. And the major “four pillars” banks, in particular, are enormous retail-oriented operations that hold around 80% of the nation’s banking assets. Four of the top six companies on the ASX200 are banks. The concessions will not hurt them for long – if at all. Compare that with general insurance. In the case of travel insurance, for example, insurers couldn’t waive pandemic exclusions and pay all claims, because to do so would have reinsurance repercussions and wipe out a whole year’s business. Doing the same for business interruption would be even more crippling. But that is not to suggest the insurance industry isn’t willing to do all it can to help customers maintain the security of their businesses and homes.

Finding ways to help Through March and early April the Insurance Council of Australia (ICA) worked with its member companies to devise an industry-wide set of measures to help consumers. That’s not as easy as it may seem. ICA’s 56 member companies form an unwieldy mix of local and international companies, each with their own way of working and unique approval channels, some of which are very long. While the members reached broad agreement by the end of March that unused travel premiums should be refunded, and there was also consensus on a range of other measures to help small business clients survive and keep their cover in place, getting final sign-off on an industry-wide announcement proved tricky. ICA’s Mr Sullivan says an industry-wide position is still “a work in progress”, but that a number of measures have been agreed and members are free to implement them as they see fit. “It has been incredibly complex,” he says. “We have gone to great lengths with the Government to explain that we are not the banking sector. “Saying that a customer doesn’t need to pay a premium for six months sounds easy, but it isn’t. “With travel insurance, if you are a monoline travel insurer that works through agents it can become very complicated to refund those premiums.” Insurance News understands that some insurers also held concerns that reaching agreement on an industry-wide agreement could be considered

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anti-competitive conduct, so any announcement would have to wait while Australian Competition and Consumer Commission (ACCC) approval was sought. But Mr Sullivan says the ACCC – which had already indicated its willingness to be flexible in such matters – was not the real hurdle. “It’s more about the number of players involved and the variety of processes,” he says. “It has not been possible to announce an industry-wide position yet, but we have put together a package and those measures are sitting there for insurers to use.” IAG, blessed by short managerial reporting lines and impatient to get its own initiatives out into the market, pushed ahead and unilaterally announced its own measures. They are: • Travel insurance refunds for any unused proportion of premiums • Deferred premium payments for up to six months for small businesses experiencing financial hardship • Refunds on the unused portion of premiums for small businesses who cancel their insurance, with no administration or cancellation fees • Small businesses which need to close premises due to the impact of COVID-19 can maintain full insurance cover on the premises with no changes to premium • Reduced timeframes in making payments to suppliers from 30 to no more than 15 business days. IAG enjoyed media praise for its actions, which stung other insurers who are working to present a unified front. IAG’s measures are also thought to reflect those on the verge of being agreed by the wider industry – including rival insurers Suncorp and QBE. It’s all a bit messy. The Insurance Council of New Zealand has taken a different approach. Rather than trying to secure agreement on industry-wide measures, it has published 10 principles to guide insurer responses, leaving the responses themselves to the individual companies. Thoughts have already started to turn to how this could be done better next time, and whether the insurance industry should or could be offering more protection. “This is a once-in-a-100-year-type event,” Prime Minister Scott Morrison said on March 17, adding, “we haven’t seen this sort of thing in Australia since the end of the First World War.” And while there will always be ways to learn from this event, in the same way as war is excluded, recovery from such pandemics may need to remain primarily an 0 issue for governments, not insurers.


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e y

Testing times

An economic slide due to the coronavirus will put more pressure on brokers to demonstrate value as clients seek ways to cut costs By Wendy Pugh

B

rokers will have their work cut out convincing Confidence levels looking ahead are mixed. SME business owners that insurance is not the When asked what specific impact slowing revenues area to cut as business conditions become inwould have on insurance, more than 60% of SMEs said creasingly difficult. they would make some sort of change to their insurance That’s one of the findings from the latest edition of mostly by reducing their cover, pushing Chapter 2 - Economic impacts on businessarrangements, insurance the annual Vero SME Insurance Index survey, which for better deals or changing the way they buy. took place last year when commentary about an ecoThat’s an ominous indication for brokers. Of parnomic downturn was already prevalent and the ticular concern should be the finding that 12% of SMEs Figure 2.5: SMEdirect. insurance tactics to handle declining business Medium-sized businesses are consider Reserve Bank was cutting interest rates. would purchasing prospects, by business size mostinsurance likely to say that they SMEs at that time flagged changes the in their Vero Head of Commercial Intermediaries Anthony would change their insurance arrangements as a possible response to sliding revePagano says brokers can assist clients in difficult times arrangements if their revenue nues, and events have since taken a sharp turn for30% the would by ensuring they appreciate the increased risks they are declined. Only do worse as social restrictions imposed due to the coronataking on if they reduce29% their insurance. nothing, while 24% would push 27% virus pandemic take an economic toll.back on their broker for a better “When things are tough the25% last thing you want to 25% 25% 24% 22% S&P Global Ratings says a deep recession the look beto doing is making yourself vulnerable to a large loss deal andacross 18% would 20% 20%by move their (see your balance sheet,” he tells Insurance News.17%17% Asia-Pacific region is guaranteed following aninsurance enor- direct exposing 14% Figure 2.5). This inmeans that“Reducing it is mous first-quarter shock in China and subsequent insurance cover can be a big risk for even more important for brokers ternational shutdowns. SMEs, which is why brokers need to be alert to their clito understand the situations of A Roy Morgan snap SME survey of 621 Australian ents’ situation and provide them with support through their medium-sized clients. businesses last month found more than half believe the the various lifecycles of their business.” nation is in its first recession in nearly three decades. Medium-sized businesses, an important clientele Reduce Reduce numbertheir insurChange Push back on The Vero survey shows revenue declined over the for brokers, are particularly likely to change of of things covered insurer current broker past year for 41% of respondents, while a similar proance purchasing amount behaviour, and the report says their cover for a better deal portion say they experienced growth of less than 5%. requirements may need special attention.

past year Figure 2.5: SME insurance tactics to handleThe declining business prospects, by business size has been quite difficult

so nowprospects, by business size SME insurance tactics to handle financially, declining business

o sh er

29% 27% 25%

25%

25% 22%

ee t is ers of

ult

Chapter 2 - Economic impacts on business insurance

Reduce amount of cover

Reduce number of things covered

I really pay more attention to how 24% much I’m paying 20% 20% for17% insurance and 17% 14% what’s being covered. I’m more interested now because every dollar counts. Change

Push back on

Wendy, insurer Tutoring current broker

38%

35% 30%

16%17% 14%

18% 14% 12% 5% 5%

Go without insurance

Move to direct insurance

8%

Change broker and insurer

Nothing (would have no impact)

for a better deal Micro (1-4 employees)

Source: Vero SME Insurance Index

Small (5-19 employees)

Medium (20-199 employees)

38%

35% 30%

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SME Index identified a significant

e levels of distrust SMEs are feeling rance companies and brokers.

ta shows that ins high but urance companies y increasing for Figure 4.1).

Figure 4.1: Mistrust attitudes Mistrust attitudes

43% 42% 35%

33%

38%

16%

At the end of the day, you can’t trust insurance companies 2018

At the end of the day, you can’t trust insurance brokers 2019

2020

Source: Vero SME Insurance Index

This year’s SME Insurance Index results show broare still to be swept up in a Hayne-recommended inkers are increasingly going the extra mile to help their quiry that will scrutinise intermediary commission clients. payments. ’t the news The data is not showing any using a broker, with 39% of direct Perversely, satisfaction levels have reached an allVero greater transparency is the key to trust, pe to hear, it is correlation between trust and users who don’tsays trust brokers time high even as trust issues remain a concern. and includes explaining all areas of broker operations note that this is part broker usage or satisfaction – that saying that they wouldn’t consider Mr Pagano says the survey findings reflect a new and insurance, such as reasons for premium increases ader trend. Many is,wave SMEs who say they don’t using in risks the future, of information and engagement and the shiftbrokers and how are assessed. The sensitive area of fees awaybrokers from a traditional transactional doing and be part of discussions. shown that levels trust are no more or lessmodel ofcompared tocommission only 24%should of allalso direct business, as brokers become more astute in responding “There is4.2). a need greater transparency and clarw in society at the likely to be using brokers, and users (see Figure Infor a similar to individual preferences and requirements. ity towards broker remuneration as a result of recent just in Australia theirDiscussions levels of around satisfaction with vein, around 1 in 5 direct buyers client needs and community exscrutiny, and customer expectations,” Mr Pagano says. .g. Edelman Trust their brokers are no different. say that they don’tcan usebebrokers pectations have come to the fore following the Hayne “Trust influenced by many factors. royal commission, and broker training and education However, our experience www.edelman. due to lack of trust (see Figure tells us that one of the activity has also increased in recent years. strongest and most consistent ways of building trust ometer). The SME Lack of trust appears to have a 4.3). Qualitatively, interviews “Brokers are now doing things a little bit differentis transparency.” that attitudinal somewhat bigger impact on the and the with SMEs Currently, reveal that lackof respondents are having disly,” Mr Pagano says. “The environment landonlya14% ut this mistrust behaviour of direct buyers. Direct of trust can be awith strong reasonabout commissions, despite scape has changed.” cussions their brokers The who surveydon’t finds 70% of brokers broker clients facttothat 70% of them are very or somewhat interhaving only buyers trust are are satisfied for SMEsthe not use brokers. – up from 66% a year earlier – while the percentage ested in knowing the commission rates their broker ct on behaviours. slightly more likely not to consider who buy all or most of their insurance through a broker receives. has rebounded to 27% after dipping to 16%. “The research suggests that more knowledge of On the worrying side of the ledger, trust ratings remuneration could impact SMEs’ behaviours and atcontinue to deteriorate, seemingly contradicting other titudes, and more interestingly, improve trust,” Mr on’t consider using a broker Figure 4.3: Reason not using a broker improvement measures. Pagano says. the future, by mistrust (direct buyers) Some 38% of respondents agree with the proposi“Client SMEs understand that brokers are also tion that “at the end of the day you can’t trust insurance SMEs. They understand that they need to earn an inbrokers”, which compares with 33% last year. come to run a business.” 39% Two years ago, before the royal commission, senThe survey shows a surprisingly high number of timent was much more positive, with only 16% of reSMEs don’t really understand the difference between spondents concurring with the statement. their broker and the insurance company, with 36% 24% 23% Vero says brokers are caught up in wider social20% thinking they are one and the same. 16% trends, which show trust in institutions and financial The factors that cause premium rate changes are services remains low globally. often little understood, and SMEs can be particularly The royal commission and scandals elsewhere in frustrated when their prices jump despite not having financial advice also continue to affect brokers, who made a claim.

Total 18

At the end of the day, you NEWS can’tApril/May trust 2020 insurance insurance brokers

I don’t trust them to offer me the best policy for my business


RYNO UNDERWRITING

Tailored solutions for Blue Collar Hospitality

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Half the clients in the survey say their broker has explained a premium increase, and 80% of those people found that to be helpful. Respondents whose brokers haven’t explained a change say they would be interested in understanding more. Receiving proactive updates about insurance issues is a key reason for using a broker, according to 31% of respondents. Some 52% of respondents say brokers provide case studies and examples to help understanding, up from 36% two years ago, while 69% say brokers provide in-depth information and analysis on all the options available, up from 57% in 2018. SMEs whose brokers undertake such tasks tend to be more satisfied than average, and the hardening market has provided an environment where more explanation and assistance is appreciated. In further positive signs, the number of direct buyers who say they would consider using a broker in the future has risen to 48% from 41% last year and just 34% two years ago. Many of the findings in this year’s Vero report highlight the fact that brokers’ efforts to better respond to clients are gaining traction, and they are well placed to build trust as they assist businesses in difficult times. “It’s clear that SME clients value brokers for their expertise and the value-added services they provide,” Mr Pagano says. “I think we are only going to get to a much 0 stronger place moving forward.”

Blue Collar | Hospitality | Property Owners Call 1300 017 966, visit rynouw.com.au or email hello@rynouw.com.au Ryno Underwriting is a division of East West Insurance Brokers ABN 83 010 630 092, Australian Financial Services License No. 230041. Ryno Underwriting acts under a binding authority agreement on behalf of certain Underwriters at Lloyd’s. Refer to the Product Disclosure Statement or Policy Wording or call us on 1300 017 966.

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Talent quest ‘Falling into insurance’ is no longer enough. Solving skills shortages is a key industry challenge By Wendy Pugh

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tories about accidentally entering insurance are so common it’s a surprise when someone says it was their top career choice, but the up-to-chance pathway is fuelling a talent shortages problem. “I have been in Australia for 17 years or thereabouts, and ever since I have been here I have noticed that the insurance industry hasn’t done a great job of bringing in entry-level candidates,” global recruitment company Hays Regional Director Carl Piesse tells Insurance News. “As a rule of thumb there hasn’t been a big enough focus on bringing in talent that they can train up through the ranks. The method of operation has been very much to hire experienced people from a competitor to do a role.” When it comes to experienced staff, shortages of claims personnel and compliance staff have come to the fore recently after natural catastrophes and Hayne royal commission recommendations, while workplace changes, cost-cutting, technology, demographics and wage levels have contributed to shortages, according to various views Hays’ latest insurance report says Australia faces a “massive talent gap” in 2020 as skills shortages afflict financial services. That includes property claims consulting, broking, compliance and underwriting – an area where Mr Piesse says there is typically not a lot of candidates. “People tend to stay in their roles for a long time as well, so when there is a vacancy there is not a big talent pool that is actively wanting to move,” he says. “So that can be quite challenging.” Underwriting Agencies Council (UAC) General Manager William Legge agrees finding people who can step straight into a role, or who at the very least

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understand insurance, is an ongoing issue. “There have always been more jobs available in insurance than people willing to commit, and that applies across the industry,” he says. “Insurance is often viewed as a grudge purchase, so it’s hard to attract talent to an industry that needs to develop a better reputation as a go-to career opportunity.” Underwriting agencies poach from insurance companies, and there is cross-over between brokers, agencies and other industry sectors. “Some agencies take people with other business skill sets and teach them to adapt those to the insurance industry, depending on the agencies’ specialisations,” Mr Legge says. An example might be someone with deep understanding of the motor trade who converts those skills into underwriting for a motor specialist agency, and there are many other areas where specialised knowledge provides a valued platform. Australasian Institute of Chartered Loss Adjusters (AICLA) President Jaye Kumar says entrants usually come into loss adjusting after gaining experience and qualifications from other areas, including engineering, building, law and accounting. “Few young students say, ‘I want to be a loss adjuster when I graduate’,” he tells Insurance News. “Most of us fall into the profession because someone recommended we give it a go or an opportunity came along. That’s good, because it’s a profession that draws on the experience gained from other areas of work and practice.” Mr Kumar says strengthening the profession relies on the support of insurers and brokers to only use qualified claims professionals, such as loss adjusters, moving away from the practice by some insurers in recent


years to tap builders and tradesmen to assess and settle claims. That may be warranted for simple, low-value claims, but the long-term effect will be to diminish the future pool of trained claims professionals, and the benefits must be weighed against the consequences. The profession has also seen the retirement of some experienced practitioners recently, and balancing supply and demand is affected by the impact of large-scale natural disasters that generate surges in claims. “It is an ongoing challenge to have adequately trained loss adjusters to meet the market needs,” Mr Kumar says. “And to weigh the current demand against having them ready in the future.” AICLA has worked with the Australian and New Zealand Institute of Insurance and Finance (ANZIIF) to develop the Diploma of Loss Adjusting, and Mr Kumar also advocates more industry involvement in skills development. A welcome approach would be for insurers to support an industry-based traineeship program, where loss adjusting companies, brokers and insurers work collaboratively in the training of loss adjusters during a period of potentially three to five years. “In practice, the trainees would be supported to handle low-value and simple claims and become qualified as loss adjusters, leading to the development of skills to service insurers better in the future,” Mr Kumar says. Outside Australia, AICLA has strong representation in New Zealand and has increased its membership in Asia, where it now totals more than 250. “The majority of these international members are well qualified, having completed the ANZIIF Diploma of Loss Adjusting and are able to assist in cat events,”

Mr Kumar says. “Allowing qualified and experienced international members to enter Australia on temporary work visas would offer some relief in the short-term to fill this gap in loss adjusting resources at a time when we need it most.” The focus on formal qualifications and continuous professional training is likely to become more vital following the Hayne royal commission, with claims-handling to become a financial service regulated by the Australian Securities and Investments Commission. ANZIIF offers courses and training in areas including claims, underwriting, broking, loss adjusting and related areas, and the programs reflect a societal trend toward continuous learning. Studies are usually undertaken by people already in the industry, while the decision to enrol also often marks a conscious career turning point. “We find that people are in their late 20s to 30s when they begin formal studies, and that is reflecting the fact that they have decided to commit to insurance as a career,” ANZIIF Chief Executive Prue Willsford says. “The breadth and range of roles that are available in insurance are not that visible in the community, so what happens is people fall into it and then after a couple of years they say, ‘Actually, this is more than a job; I can make a career of this’.” In a difficult recruitment market, continuing education learning opportunities also offer a retention incentive, both for those appraising future prospects and for people relatively new to the workforce. “What young people want is a clear career path,” Ms Willsford says. “If as an industry we don’t show those career paths and show that investment in training and skilling, they will take their human capital elsewhere,

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Selling point: ANZIIF’s Prue Willsford says insurance “rebuilds lives”

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where that is evident.” ANZIIF is also promoting awareness of the sector more widely to students at schools and universities, and has worked with industry on the Careers in Insurance initiative, developing the program after researching general concerns about skills shortages. Ms Willsford says the “social purpose” element of insurance is a feature that should be highlighted when encouraging people to consider entering the industry. “We know that working with organisations with a true sense of social purpose is an attractor for employees. “Insurance in its higher purpose does rebuild lives and does help people, and I think we could tell that story more strongly than we do,” she says. “I also think it is an incredibly hard story to get out.” The National Insurance Brokers Association (NIBA), one of the supporters of the Careers in Insurance program, has seen positive responses long after delivering talks to a group. A presentation in 2018 at a careers advisers event by Tim Wedlock, who was NIBA president at that time, and NSW Director Rebecca Wilson, has continued to generate inquiries. “Even 18 months later we are getting emails about it,” Ms Wilson says. “I have an email from a high school in the Hawkesbury area asking me to come and speak at their careers day at the school. If we can attract young people to come into the profession that is a really great thing.” Ms Wilson, who is Austbrokers ABS Managing Director, says those already working in the industry are a valuable resource in communicating the many opportunities and benefits it offers. “It doesn’t have to be over-complicated. While it’s great to participate in careers nights and careers days,

April/May 2020

it is also about having proud conversations about the work that we do and engaging the interest of family, friends and young people generally.” Firms will typically tap their own networks, advertise and use a recruiter to find staff. Ms Wilson says Austbrokers ABS will take on people with or without experience, depending on the requirements and the candidates. “It is a bit of a juggle between the two, but certainly if it is the right person we are willing to train and develop them. If it is an area where we need experience, then we are willing to do what we need to do to recruit those people.” Besides technical know-how, sought-after attributes mentioned by industry participants include self-motivation, client service skills, enthusiasm, an ability to learn, communication and interpersonal skills, and generally good attitudes and behaviours. Cameron Watson, the Manager for Insurance and Wealth Management at Fuse Recruitment, says insurance underwriting has seen shortages for some time, with contributing factors including demographics, technological change and the lack of a pathway to develop the required skillset. “The emergence of technology has certainly enabled business, but it has also created a gap in the capability development of people,” he says. “We have had some very experienced underwriters move out of the market through natural attrition and retirement, and it has left a big gap in terms of that true underwriting capability. As more of the experienced people have dropped out of the market, the bigger the issue has become.” He says employers have every incentive to increase their focus on retaining certain experienced staff, to prevent compounding their problems, contributing to


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“Smaller organisations are not in a position so much to recruit junior people and train them up because they have less resources and they need people to come in and hit the ground running.”

a relatively small number of people looking to make a change in some areas. “People will move where they are presented with the right opportunity, but we don’t see the market as being particularly active in that sense. “If we put up an ad on Seek we will get some applications, but if you compare it with other industries they will have more applicants coming through that are relevant to the role.” Mr Watson says aligned financial services sectors offer a suitable talent pool for some roles, particularly in compliance and risk capabilities, which is a current hotspot for candidate shortages. “Particularly when it involves regulatory compliance and those things, there is a clearly transferable skillset,” he says. “Stemming from everything coming out of the royal commission, compliance has become a really significant matter for the large majority of businesses in the market.” In other more generic areas, insurance is competing with the wider world beyond financial services for capabilities such as digital and IT-related skills, where there is a finite supply of candidates. Larger organisations are often better placed to take on entry-level staff and train them with experienced members of a team providing support and taking on the more complex matters. “Smaller organisations are not in a position so much to recruit junior people and train them up because they have less resources and they need people to come in and hit the ground running,” Hays’ Mr Piesse says. On the other hand, smaller companies may offer more flexibility, and many people appreciate a non-corporate environment that is not bound necessarily by the rigidity that exists in some large organisations. People seeking to move interstate or from overseas can be a fresh source of talent, including those travelling home after exploring international insurance market opportunities. “We do get a lot of interest to try and find Aussie

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returners, tapping into that pool of people who might be working in the UK or Asia who are coming back to Australia and have experience,” Mr Piesse says. The Hays report says building issues and the recent catastrophe season has put pressure on major insurers to recruit talent that can assist with highly complex, high profile claims, and employers need to consider the salary gap for experienced professionals if they are to secure strong candidates. In underwriting, as the market becomes more competitive, employers require personnel who can actively meet and develop relationships with brokers who work in their specialty area, it says. “Technically sound candidates are still available but underwriting agencies very rarely match their salary expectations.” The report suggests that sometimes linear progression is not the key objective for underwriters, and exposure to a different product line can offer them opportunities to gain wider experience and knowledge that will help their long-term career advancement. Industry participants say that there are many ways for firms to attract and retain staff, including through the variety of opportunities insurance offers across many roles and the myriad of business sectors it touches. But making people more aware of the industry in the first place is critical. Mr Watson says at the graduate level insurance is competing with the brand recognition of firms such as Deloitte and PwC, but workplace opportunities may well be greater in the insurance arena. Fuse has introduced a specialist graduate program in conjunction with clients. “You can line up any university degree against a role in insurance,” he says. “The breadth we have in insurance is amazing in terms of roles. “We keep saying that people ‘fall into’ insurance. I dislike that term now, because we should have people wanting to join insurance as a career, because it is 0 an amazing industry.”


A catastrophic summer for insurers Australia’s three biggest insurance companies are feeling the pain as bushfires and hailstorms start a year that’s shaping up to be extremely challenging By Bernice Han

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here was never any doubt that the bushfire season was going to hurt Australian insurers. As the season broke out earlier than usual in the spring and spiralled into the worst bushfire summer since Black Saturday in 2009, concerns mounted over the scale of the fallout on the industry. So by the time QBE’s financial results came out on February 17, a week after Suncorp and IAG reported their earnings, it more or less confirmed the industry has indeed taken a battering. For IAG and Suncorp, the financial hit has been particularly acute, with the two leading personal lines insurers returning weaker first-half earnings for the six months to December 31. At IAG, net profit slumped 43% to $283 million, although some of the drag-down effect was caused by the sale of its business in Thailand last year and an expensive customer remediation program. Of particular significance was the decline in the reported insurance margin to 13.5% from 13.7% a year ago, thanks to the bushfires. Bracing for a potentially bumpy road ahead, IAG again cut its full-year reported insurance margin forecast on the day the first-half results were released. The insurer’s latest forecast calls for a 12.5-14.5% reported insurance margin, down from a revised January estimate of 14.5-16.5%, to take into account the impact of the bushfires and also other natural catastrophes that broke out this summer.

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IAG also raised its full-year net natural perils allowance to $850 million from $715 million to factor in the storms and other wild weather events that have made this summer an extremely costly one for the industry. IAG’s Chief Executive and Managing Director Peter Harmer says reinsurance costs are likely to rise and there will be some event-driven claims inflation. Increasing catastrophe costs are likely to be reflected in next year’s allowance, but the company won’t “over-react to what seems like an unusually high period of perils,” he said. Before the downgrade in January, the insurer was hoping for a reported insurance margin of 16-18%. It’s likely that a further revision will be necessary once the impacts of the coronavirus pandemic are better understood. Over at Suncorp, its Australian insurance business suffered a 3.9% fall in after-tax net profit to $123 million in the December half while insurance trading earnings declined 22.5% to $148 million. The insurer incurred about $519 million in first-half natural hazard costs, busting its $410 million allowance by $109 million. While QBE enjoyed a 41% rise in full-year net profit to $US550 million in 2019, its Australian Pacific business was not spared as net cost of catastrophe claims worsened to $US193 million or 5.4% of net earned premium. In 2018, the portion was 2.8% of net earned


premium or $US106 million. QBE has since been forced to withdraw its guidance for financial targets this year due to the uncertainty caused by the coronavirus outbreak. The insurer had previously flagged a combined operating ratio of 93.595.5% and an investment return of 2.5-3.0%. Analysts say the financial results of the Big Three insurers, viewed widely as an indicator of the state of the industry, suggest they have appropriate reinsurance measures in place to absorb the natural catastrophe losses. “Despite the impact of the bushfires, the sector’s resilience is highlighted by the high levels of reinsurance protection, particularly with respect to natural catastrophes,” Frank Mirenzi, Vice President and Senior Credit Officer with Moody’s Investors Service, tells Insurance News. “We expect insured losses will continue to mount from adverse weather events in January and February, but the reinsurance protection is likely to absorb much of those costs. We expect some premium rate rises are likely, which will benefit the sector into next year.” Morningstar’s Equity Analyst Nathan Zaia does not rule out the possibility of earnings downgrades between now and the end of this financial year. But he says the Big Three do have some positives that give cause for optimism. “Natural perils definitely took centre stage of the insurers’ results this earnings season, which is not

surprising given the number and severity of events,” he tells Insurance News. “We try to not get too hung up over the next 12 months earnings though. We like some of the underlying trends, with Suncorp returning to volume growth in motor and home. “IAG is continuing to reduce the underlying cost base and it leaves the businesses in better shape under more normal circumstances. “While more frequent and severe weather events becoming the new norm is a risk, we think the insurers will pass it on to customers in the form of higher insurance premiums. Ultimately, all players in the industry will be experiencing higher claims.” Figures from the Insurance Council of Australia show insured losses from the November-declared bushfire catastrophe have risen to $2.2 billion, surpassing Black Saturday’s $1.76 billion in normalised value. When combined with this summer’s other wild weather events, such as the damaging hailstorm in Canberra, overall insured losses from declared catastrophes since November have cost the industry more than $4.5 billion. Of course, the three insurers’ results were announced just as the emerging coronavirus in China’s Wuhan province was coming to light. Since then a lot has changed, and the impact on insurers’ earnings from whatever the resulting pandemic brings to the Australian market 0 in economic terms is impossible to estimate.

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Reined in Euphoria has given way to anxiety as Steadfast and AUB Group count the cost of the pandemic By Bernice Han Withdrawing guidance: Steadfast chief Robert Kelly

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n the blink of an eye, an invisible but deadly pathogen has punctured the upbeat mood of Steadfast and AUB Group. The two titans of Australian broking had been brimming with confidence, buoyed by stellar first-half results for the six months to December 31. But that was in late February, when they informed investors of their results, before the coronavirus pandemic arrived in March and crippled the Australian economy in a matter of days. Since then the business outlook has soured significantly, forcing Steadfast and AUB to withdraw their initial confident earnings guidance for this financial year. AUB also put on hold its planned $140 million acquisition of Adelaide-based MGA Whittles. Steadfast had been on track to perform at the top end of its earnings forecast, with projected underlying net profit after tax of $100-110 million and underlying earnings before interest, tax and amortisation (EBITA) of $215-225 million. The business now expects to provide a revised update and the impact of the still unfolding COVID-19 fallout “when practical”. “Given the events that have unfolded during the month of March 2020 and the implications for numerous businesses and employees, the board of Steadfast considers it prudent to withdraw its guidance,” Steadfast says in a statement. “In making this decision, the board notes that the general insurance sector will continue to provide the necessary insurance products that allow businesses to continue to trade and the community to protect their

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assets and that Steadfast Group as the largest given that, you become conservative,” Chief insurance broker network in Australasia will Executive Mike Emmett told insuranceNEWS. continue to play a major role.” com.au, the online publication of Insurance In the December half Steadfast achieved News. a 39.1% rise in underlying net profit after The suspension of the deal and the decitax to $53.2 million from a year earlier. The sion to defer until September 3 the interim results were driven partly by the addition of dividend of 14.5 cents per share, totalling Insurance Brokers Network Australia (IBNA) $10.7 million, reflects precautionary measmember companies and other purchases. ures to conserve liquidity, he says. Underlying EBITA improved 27.5% to $108.9 AUB presently has a 49.9% stake in MGA, million. and the acquisition, announced in February, Acquisitions contributed $16.3 million to would have seen the business acquire the reunderlying EBITA including $4.3 million from maining 50.1% as well as 100% of strata speIBNA, which joined the Steadfast Group in the cialist Whittles. second-half of last year. The IBNA transaction In the December half, AUB Group had is about $72.7 million post-tax and will add achieved a 25.3% rise in adjusted net profanother $1.25 billion in annual gross written it to $21.3 million. The Australian broking premium to the Steadfast business. arm, its largest division, enjoyed a 6.2% 0 Every shareholder in the independently increase in commercial premiums. owned group voted in favour of the Steadfast takeover. Subsequently underlying EBITA contribution from IBNA this financial year has been raised to $8.3 million from $4.8 million, which was made based on an 80% acceptance rate. Like Steadfast, AUB has been forced to reassess its business outlook for the year. The business had almost doubled its earnings targets after a strong first-half, raising its adjusted net profit growth estimates to 16-18% from 8-10%. It will also defer payment of the interim dividend. “No one can predict what the next six months will look like and Cautious approach: AUB’s Mike Emmett


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On track: Mark Lingafelter, left, and Peter Eastwood

Seven years and counting Peter Eastwood and Mark Lingafelter look back at the remarkable rise of Berkshire Hathaway Specialty Insurance, while moving forward into a more diverse future By John Deex

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n April 2013, US-based Berkshire Hathaway Specialty Insurance (BHSI) was born, with ambitions to grow into a truly global commercial property and casualty player. Seven years down the track, President and Chief Executive Peter Eastwood is more than happy with its progress. The business has a physical presence in 14 countries, more than 1000 employees (or team members as BHSI likes to call them), and annual gross written premium of $US3 billion. And it’s still expanding, with topline growth of 27% last year and recent pushes into France and Spain masterminded by former Australasia president Chris Colahan, who now manages BHSI’s UK and Europe arm. The Australian business, which celebrates its fifth anniversary this year, also goes from strength to strength, with last year’s launch of an Adelaide office and a recent drive into the surety market. Mr Eastwood – who spent 22 years with AIG before spearheading the BHSI launch – says BHSI’s expansion plans are “on track”.

“When we started the business we said with the appropriate level of pace we wanted to build a commercial property, casualty and specialty lines insurance business that would satisfy most if not all of the needs of our broker partners and our prospective customers,” he tells Insurance News during a visit to the Sydney office in early March. “We have done that. We’re in more countries and doing business in more parts of the world than I would have anticipated when we launched, and we are going to continue to build the business.” Mr Eastwood says the growth strategy has two elements. The first is to be physically in markets where there is “indigenous risk” that can be underwritten profitably. The second – to build a multi-national business to satisfy the needs of multi-national customers. “We have a 14-country footprint, but we also have the ability through freedom of services in Europe to get to considerably more countries – approximately 41. “And through the network partnership

arrangement that we have, we can actually satisfy the needs of the multi-national customer in upwards of 200 countries.” Mr Eastwood says that during the launch phase BHSI’s attention was very much on the “larger account space”. But while this focus remains, it’s also broadening. “We’ve always felt that over time we had an interest in moving into the mid-market space, the SME space,” he tells Insurance News. “We have efforts underway in different parts of the world to do just that.” In the US BHSI has been developing a digital platform, Berxi, that sells commercial insurance direct to the customer. “That has us entering the very small customer market segment, for example individual practitioners in the medical professional space. We have other efforts in different parts of the world to enter the mid-market space.” Mr Eastwood says current market conditions create “huge opportunity” for BHSI to grow existing business and products. He says most product lines in most parts

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Huge opportunity: Mr Eastwood says current conditions open doors for BHSI

of the world are seeing “dislocation”, with capacity coming out of the marketplace. “That is giving us an opportunity to step in and satisfy the needs of the buyer and the broker when they are at their greatest,” he says. “This presents very substantial growth opportunities for us, as we are still a relatively new market entrant.” BHSI’s Australasia President Mark Lingafelter tells Insurance News that four key principles outlined by Berkshire Hathaway Chairman and Chief Executive Warren Buffett form the basis of the company’s underwriting discipline. These are: • Understand all exposures that might cause a policy to incur losses • Conservatively assess the likelihood of any exposure actually causing a loss and the probable cost if it does • Set a premium that, on average, will deliver a profit after both prospective loss costs and operating expenses are covered • Be willing to walk away if the appropriate premium can’t be obtained. “We try and run the business based on those four principles, but we face the same challenges that the whole market has faced,” Mr Lingafelter says. “In the last 120 days the devastating bushfires, the hailstorms, the flooding, have certainly impacted our business as well. “It’s not easy but we’re very committed

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and we don’t pursue growth for its own sake. We follow a set of underwriting disciplines that we are committed to. “The market dislocation that is currently underway allows us to have confidence that eventually our approach will result in a profitable book of business.” Mr Lingafelter says BHSI uses “dials instead of on-and-off switches” and urges its teams to be “active portfolio managers”. “We are getting data every quarter and as the data starts to emerge there is a real opportunity to step into that. “We talk about not kicking the can down the road, but owning the portfolio and the results, and taking the right underwriting steps to deliver a reasonable level of underwriting profitability. “Our business target is a combined ratio of 95%. In a world of very low interest rates that is an extremely reasonable target for the capital that we are putting at risk. “As our portfolios mature, that is a weekly, monthly, quarterly discipline that we are bringing to our business.” He says in some sectors, such as public directors’ and officers’ cover, customers may disagree with pricing, but it’s important to put forward terms that are “reasonable and sensible”. “The ability of a strong underwriter to set terms and conditions that are sustainable provides the customer and the broker with a more consistent transfer of their risk,” Mr

Lingafelter says. “I think that there is too much capital in our industry, and that does lead to people mis-pricing, entering the market, offering what may be attractive solutions in the short term. “But when people have to exit, that withdrawal of capacity, that dramatic change doesn’t serve the customer well. So there is a role for a strong underwriter to bring a consistent, stable approach to the market.” Mr Eastwood believes claims is also a crucial area where BHSI can be there for its clients. Claims is the product, he says, and the words are backed up by action. BHSI was well represented at last year’s Mansfield Awards for Claims Excellence, run by Insurance News with LMI Group. It was joint winner of the corporate property and casualty segment and a finalist for the overall Gold Mansfield trophy. “When we launched the business we said we were going to find a way to be more customer-centric around claims handling than what we think the buyer typically experiences in our industry,” Mr Eastwood says. “What we have said to our claims handlers is, ‘We want you to endeavour to find coverage under the policy when a claim is submitted to us’, as opposed to endeavouring to find as many ways through the exclusions or definitions of the policy to inform


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Core culture: BHSI believes its values are its foundation

the customer as to why the claim may not be covered.” He says a hard market, rather than sparking a tougher stance, is the “greatest opportunity” in claims. “The way I think about the business from both an underwriting and claims-handling standpoint is that our job is to be there when the needs of our broker partners and the buyers of insurance are at their greatest point. “[In a hard market] insurance carriers are presented with losses, and prices are inadequate to satisfy the losses that are showing up in the organisation. “But if you are a healthy, well-performing, well-capitalised business it is actually an incredible opportunity – particularly for us. “As an early-stage business, we can go into the marketplace when the need is actually greater than it’s ever been, to bring our capabilities and our financial strength to satisfy the needs of the buyer. “It’s an underwriting opportunity but it’s a claims-handling opportunity as well.” Mr Lingafelter says that being part of the wider Berkshire Hathaway organisation – which has one of the strongest balance sheets in the industry – helps. “I would suggest that there are companies that can be tempted to vary their claims-handling approach,” he says. “For our firm the values around doing

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the right thing and the importance of integrity, which really go back to Warren Buffett, are important, and the business is managed accordingly. So for us there is no temptation. “We have been impacted by the recent bushfires, we have been impacted by the hail. So we are responding to those events right now, but we are doing so in good faith. “We want to run our business with a very long-term view, a forever view, and reputation is everything.” That reputation is enhanced by the way BHSI deals with partners, Mr Lingafelter says. Respect is a core value – respect for the customer, and respect for brokers and partners. “In the current marketplace there is a shortage of capacity in certain lines of business,” he says. “It’s probably a relatively unique occurrence in the life of an underwriter, maybe one year in 10, when our brokers actually have difficulty completing a placement in certain product lines. “The very moment in the insurance business where we could probably get away with being a little bit full of ourselves is exactly when we want to double down on our values. Respect, integrity, excellence, collaboration, passion.” Mr Eastwood says the cultural characteristics that his leadership team have built

over seven years are the foundation of the business. “As I look back over the seven years, the conscious decision that we made to focus on those things, being clear about who we are as an organisation, what we expect of people that work in this organisation, what our business partners can expect of us – the return on that investment gets greater and greater as time goes on. “It gives our team a framework from which to operate the business – a level of consistency across the world.” And in a crowded marketplace, this can be a crucial differentiator. “We show up every day and demonstrate to people why they should want to do business with us. There are a lot of reasons, but it starts with our people. “The thing that I’m most proud of is the job that the team has done in assembling an incredibly talented group of individuals.” And despite recent challenging conditions, BHSI is here to stay. With its financial strength and capabilities, its long-term vision is unshaken. “Even in those moments when the dislocation is so severe that others have retracted, you will find us in the marketplace to satisfy the needs of the buyer and the customer,” Mr Eastwood says. 0 “That’s our business model.”


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Talking and listening A new committee set up to facilitate communication between Lloyd’s and its local agents couldn’t have come at a better time By John Deex

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efore Lloyd’s launched its future strategy Blueprint One, it embarked on the largest consultation exercise the 334-year-old institution has ever seen. As the London-based corporation considers the crucial next steps in its evolution, communicating with the various parts of its broader marketplace has never been so important. In the spirit of continuing that theme, a new Asia Pacific steering group has been established to create closer connections between Lloyd’s and managing agents in this region. The Lloyd’s Asia Pacific Market Strategy Group is chaired by Singapore-based Canopius Asia Pacific Chief Executive Mark Newman, with committee members Alex Dugand, Regional Managing Director for Tokio Marine Kiln, and Christian Stobbs, Managing Director Asia for Markel International. The trio visited Australia in February to get the work of the committee – which is comparable to London’s Lloyd’s Market Association – rolling. “We’re an elected group representing service companies, underwriting divisions and managing agencies with boots on the ground throughout Asia Pacific,” Mr Newman tells Insurance News. “It’s a group designed to represent the interests of all the managing agencies, to protect and promote their interests, and to make sure that we are aligned in common purpose and interest with the corporation of Lloyd’s.” Mr Newman says there was previously “a bit of a gap” between the priorities and strategies of the individual managing agencies, different countries within the region, and the corporation of Lloyd’s. “Knitting together” and aligning the interests of all stakeholders is crucial in the light of Blueprint One.

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“One of the key objectives is actively participating in and working closely with Lloyd’s to shape that Blueprint and the strategy in this region, because it may be different from North America, Europe and the London market,” he says. “There will be no greater tragedy than if the Blueprint at Lloyd’s is rolled out and the managing agencies and service companies don’t agree with it, haven’t had any input or commitment into it and it is completely misaligned. It would fail. “One of the biggest responsibilities that we have is to bridge that gap and make sure that we are helping the corporation to bring along all the managing agencies represented in the region in terms of communication, contribution to its design and just making it come to life. “It’s about winning hearts and minds.” Mr Stobbs agrees that the group has a fundamental role in implementing the Blueprint as it works with Lloyd’s during an “incredibly important and exciting year”. The implementation will need to be carried out with the needs of Asia Pacific firmly in mind, he says. “This group can help gather that consensus and gather input from the market to ensure that we are supporting Lloyd’s in this increasingly important part of the world. “We’re out and about trying to understand from the stakeholders, the brokers, the managing agents and service companies, what the needs and challenges are that we need to represent as Lloyd’s has this very important period ahead setting out its future. “Individually, as service companies and syndicates, we’re all quite small, but collectively we provide a huge amount of support to the market. “In Australia Lloyd’s is the fifth largest provider


of general insurance. We underplay that support, that level of protection we are providing to policyholders in this market. “One of the themes I see this group supporting is that collective market engagement. How we can more effectively collaborate and provide that syndicated proposition? “The history, the roots, the origins of Lloyd’s are about sharing risk, working collaboratively across a platform. We need to ensure that we are bringing that to markets outside of London and providing that great protection to policyholders.” Mr Newman says one of the group’s roles will be to accurately reflect the status of Lloyd’s within the region and correct some recent “mistruths and

miscommunications”. Lloyd’s Chief Executive John Neal early last year outlined his determination to tackle underwriting losses and retreat from “bad business”. But Mr Newman says competitors seized on this and wrongly suggested Lloyd’s was “running for the hills”. “I think Lloyd’s absolutely led the market globally in recognising that premium levels were unsustainable, that there were some poor underwriting practices taking place,” he says. “Lloyd’s quite rightly in my opinion shone a bright light on parts of the market that were underperforming. “It is interesting to see that the company market has subsequently followed suit.” He says Lloyd’s “took a fairly heavy toll from a

Group effort: from left, Chris Mackinnon, Christian Stobbs, Mark Newman, Alex Dugand and Pavlos Spyropoulos

Blueprint for success The Lloyd’s Blueprint One prospectus sets out four ways a new Lloyd’s ecosystem will enhance the current market value proposition. Offering even better solutions for customers’ risks. Customers will be able to choose from a wider and more innovative range of insurance products because Lloyd’s will promote and facilitate innovation, and will make it even more attractive for innovative underwriters to join the market. Simplifying the process of accessing products and services at Lloyd’s. Lloyd’s will work to redesign core activities, making it simpler and more efficient for customers and market participants to trade. The entire insurance lifecycle, from buying a policy to paying a claim, will be transparent and accessible.

Reducing the cost of doing business at Lloyd’s. Lloyd’s will reduce significantly the cost of doing business. For the simpler risks, it will make the market more efficient by using standardised data, automated processes and administration, and IT solutions that allow market participants to plug directly into Lloyd’s ecosystem to trade. The costs of processing and settling claims will be reduced. A services hub will give access to high-quality shared and bespoke services. Building an inclusive and innovative culture that attracts talented people to Lloyd’s. The Lloyd’s market will be built on an inclusive culture, with all stakeholders playing a part in promoting the importance of diversity. A highly skilled workforce will comprise a combination of traditional skills (such as underwriting and claims) with newer skills (such as data science and technology engineering).

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Clear messaging: from left, Pavlos Spyropoulos, Christian Stobbs and Mark Newman

“There will be no greater tragedy than if the Blueprint at Lloyd’s is rolled out and the managing agencies and service companies don’t agree with it.” communications perspective initially”, but has been shown to have been right in the stance that it took. Mr Dugand says a sustainable approach is the only responsible path for Lloyd’s to take. “Critically we are here to service the needs of our clients by paying claims, and the only way we can do that is if we run sustainable businesses,” he tells Insurance News. “It is the foundation of the concept of insurance.” Mr Dugand also emphasises that Lloyd’s remains a natural home for hard-to-place business – even more so as local capacity contracts. “Brokers are being forced to search for capacity elsewhere, and Lloyd’s has got a real appetite for that business,” he says. “We have got the expertise in Australia, Singapore, in various offices around Asia Pacific, and of course in London as well. I would say the participation of Lloyd’s in that sector of the market has probably grown, not contracted.”

Lloyd’s General Representative in Australia Chris Mackinnon says that far from retreating from the market, Lloyd’s participation in the local market continues to grow. “We’ve had around 7% compound annual growth for the past five years in Australia,” he says. But he adds that it’s important to note “there is an element of business that just cannot be written profitably”. He admits to “copping quite a lot of criticism” over withdrawal from some sub-categories and classes. “The work we’ve been doing on remediation and supporting the market has been about identifying those areas where we simply should not be playing,” Mr Mackinnon says. “But you have to remember we were the only ones left writing them anyway, because the domestic [players] had all withdrawn.” Mr Newman says that while the number of Lloyd’s managing agents, service companies and underwriting divisions in the region might have reduced over the

Local strength Lloyd’s is a progressively more powerful player in the Australian market, and there is an increasing appetite for locally written risks. Australia is now the fourth-largest territory for Lloyd’s anywhere in the world, Mr Mackinnon says, and New Zealand business has grown exponentially in the past few years as well. Lloyd’s writes around $6.8 billion a year from Asia Pacific, and 40% of that comes from Australia. “In Australia five years ago just under 50% of the business written on Australian-domiciled risk was written locally,” Mr Mackinnon says. “That number has gone up to pretty much 60%. Given the scale of the operations here that is a huge increase in the amount of businesses being written onshore here.” Mr Spyropoulos says Australian business is increasingly being written through the Singapore platform, due to

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attraction of a similar time zone and access to Australian market expertise. “Lloyd’s managing agents can delegate authority from Singapore to Australia,” he says. “Now we have more coverholders being supported by service companies in Singapore.” He says Australia’s coverholder model could be expanded across the region. “Australia and New Zealand are arguably our most sophisticated coverholder markets, along with the US and Hong Kong, but that model doesn’t really exist elsewhere,” he says. “We are looking to develop it and in the future that might be an opportunity for Australian coverholders as they are looking to expand. “It’s another opportunity for the Australian market in the Lloyd’s ecosystem.”


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Guiding through change: Christian Stobbs and Pavlos Spyropoulos

“Off the back of a loss-making environment there is a greater willingness to embrace change that actually in the long run will reduce costs.” past 18 months, “the strength, capability and commitment from those businesses that do remain is actually much greater”. “We have seen premium volumes grow, we have seen combined ratios improve and we’ve seen headcount from the most committed service companies and syndicates grow in the region. “That is quite contrary to the belief swirling around the market, perhaps started by some of our competitors, that Lloyd’s is running for the hills. It is quite the opposite.” While Lloyd’s has many traditionalists, there has been little resistance to the Blueprint One strategy, or the increased level of communication embodied by the Asia Pacific group. Lloyd’s Head Of Market Development Asia Pacific Pavlos Spyropoulos says the amount of consultation has helped. “When we came to launch the first Blueprint it wasn’t something that surprised the market,” he says. “There is widespread consensus in wanting this to happen. “I’ve been at Lloyd’s for 12 years and I’ve never felt

such a degree of support from the broader market for a strategy.” Mr Stobbs says two years of challenging results makes it hard to argue against operational change. “Timing helps here. The results of 2017 and 2018 were not good, and one of the drivers of that was the expense ratio,” he says. “A lot of what the Blueprint seeks to address is, in the long run, to reduce that expense ratio. That surely is a good thing. “For the traditional underwriters there who might have resisted this in previous years, off the back of a loss-making environment there is a greater willingness to embrace change that actually in the long run will reduce costs.” As Lloyd’s looks to the future, key stakeholders are on board with its bold new strategy. However, communication and co-operation will remain key to its effective implementation. And while there will no doubt be challenges along the way, initiatives such as the new Asia Pacific committee will give this region the best possible chance of 0 helping the market succeed.

Changing a dubious culture The strategy group’s role includes a subject that has attracted unwelcome headlines for Lloyd’s in recent years – culture. The market has already announced several initiatives in the wake of a survey which found about 8% of 6000 Lloyd’s passholders in London had witnessed sexual harassment over the previous 12 months, and that only 45% were comfortable with raising their concerns. The Asia Pacific committee’s terms of reference say it will promote a “culture of integrity” as well as diversity and inclusion. “I think Lloyd’s will put its hand up and recognise some of the criticism that has been levelled at it in the past,” Mr Newman says.

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“It has obviously taken steps to change that and act on that and make sure there is an open, inclusive and fair culture. “I think we will adopt and mirror exactly the same standards and commitment to cultural change as the corporation.” Mr Stobbs says that as Lloyd’s leads in underwriting discipline, it will also lead in terms of culture. “I think one of the interesting and useful things about Lloyd’s in Asia Pacific is that there is greater diversity in terms of the people that work within it. “We can learn from some of the good practices that exist out here already, and make sure that all the good work in London is being replicated out here as well.”


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Where there’s smoke, there should be cover How smoke haze, lost bees and needy pumpkins added to lost millions this summer – and what insurance can do to help next time By Miranda Maxwell

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Hazy days: Sydney has regularly been draped in smoke this year

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efore COVID-19, when toilet paper didn’t come top of consumers’ must-have lists, face masks were already a hot commodity for a very different reason: PM2.5. This stands for particulate matter that is 2.5 microns or less in width and found in the bushfire smoke which reduced visibility and caused the air to appear hazy so dramatically in January. PM2 facemasks, able to filter out these fine particles and prevent them being inhaled, were worn by many Australians for the first time as summer bushfires turned more than a fifth of Australia’s forests to ash – an unprecedented amount to burn on any continent in a single season. Air quality in Canberra and Melbourne during January made headlines for being the worst in any city in the world, inferior to New Delhi, Lahore or Beijing. Chemists and hardware stores rapidly sold out of facemasks. The catastrophic bushfires spewed around 900 million tonnes of carbon dioxide into the atmosphere. That’s roughly the equivalent of a year’s worth of emissions from commercial aircraft worldwide.

April/May 2020

The Medical Journal of Australia estimates that bushfire smoke was responsible for 417 deaths, 1124 hospitalisations for cardiovascular problems and 2027 for respiratory problems, as well as 1305 presentations to emergency departments with asthma. “We did not attempt to estimate health effects for which exposure–response relationships are less well characterised, such as primary health care attendances and ambulance calls,” an article posted online on March 23 says. “Our findings indicate that the smoke-related health impact was substantial. Smoke is just one of many problems that will intensify with the increasing frequency and severity of major bushfires associated with climate change.” Steven Prince, the director of Ovens Valley Insurance Brokers in Myrtleford in northeast Victoria’s Alpine Shire, was evacuated on three separate occasions as the flames


advanced. Weeks later, the crisis over, he is telling Insurance News a story about a pumpkin seed farmer. “I know a gentleman who grows pumpkins for pumpkin seeds, but bees couldn’t pollinate the flowers because of the smoke. All his pumpkin stock is now getting fed to the cattle because it is useless.” While flames devastated property and lives, the agriculture sector, most notably vineyards, lost millions in annual income from the associated smoke haze. The entire 2020 crop in some parts of the New South Wales Hunter Valley and Adelaide Hills wine regions were rendered useless, while many growers are picking only a fraction of their fruit. “There’s no real coverage for smoke pollution,” Mr Prince says. “I know a few people hit hard on the crop side because they haven’t been able to get the crop pollinated. Lots of smoke has damaged it, and because they haven’t been burned out by the fires there are no handouts from the Government.” Smoke haze and its devastating impact on health, activities and business is a largely uninsured peril. But that could be about to change. A policy already available in Singapore may hold some answers for insurers and Australians seeking cover from the fallout of smoke haze.

Alex Pui, Natural Catastrophe Risk Manager Asia Pacific at Swiss Re Corporate Solutions, the commercial insurance arm of the Swiss Re Group, worked with Harvard University engineers and scientists to develop the world’s first parametric smoke haze insurance. Called HazeShield, it was created to allow Singaporeans to insure against smoke haze pollution from Indonesian forest fires. In 2015, fires in Kalimantan and Sumatra caused neighbours Brunei, Malaysia and Singapore to close schools and warn people to stay indoors due to the haze. The 2015 southeast Asian haze crisis impacted Singapore’s transportation, tourism, health and education sectors, leading to estimated economic losses of $US900 million. “The financial consequences of a haze event can be severe, especially when businesses need to suspend operations or close down,” Didier Bélot, Head Southeast Asia at Swiss Re Corporate Solutions, said at the product’s launch in 2018. “Up until now, conventional property insurance did not cover the financial losses resulting from a haze event. We designed HazeShield to bridge this gap, address a local issue and provide an extra layer of resilience.” HazeShield complements traditional property insurance policies, giving clients quick access to money.

Reuters

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“When you get a critical mass impacting people more broadly, that focuses people’s attention and they start asking relevant questions about insurance cover.”

It is pegged to independent pollutant standards index (PSI) metrics measured by the National Environment Agency of Singapore. Businesses receive an automatic payout as soon as the air quality dips below pre-defined thresholds. One variation of the product extends the cover after a number of days below a certain threshold, indicating a protracted and severe bushfire season. Mr Pui tells Insurance News parametric solutions could offer an answer to smoke haze insurance cover in Australia if something similar to HazeShield was adopted here. It leverages technology and data to insure against non-damage business interruption losses. “It addresses similar pain points – like loss of revenue due to tourism downturn [or] outdoor event cancellation,” he says. HazeShield was developed specifically to address the problem that traditional business interruption policies are based on property being damaged – which is useless when such things as unpollinated crops or smoke-affected grapes are considered. “As you can see with coronavirus, businesses are being severely impacted although there is no traditional property damage,” Mr Pui says. “As underlying climate risk and technologies evolve, we ought to adapt insurance products accordingly.” While its impact on events is small compared with the mass closures brought about by the COVID-19 pandemic, major summer events in New South Wales and Victoria were cancelled due to the smoke haze this year. Business interruption or event cancellation policies do respond to smoke haze if it is listed, but Sportscover Australia Chief Executive Simon Allatson tells Insurance News very few, if any, organisations would have air quality listed as a particular risk. “I’d imagine that a lawn bowls club in the middle of Sydney would probably not think that they would need

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to be too concerned about smoke haze stemming from a bushfire that’s happening west of the Blue Mountains or in the Hunter Valley,” he says. “But that is what was experienced this year. “We’ve had no claims regarding that.” The extent of the smoke haze problem this summer will focus attention on how better to manage and prepare for subsequent events, but affordability is likely to be a problem for many sporting and entertainment operators. The more specific cover becomes, the more the premium is likely to increase, which is an issue for a lot of sporting clubs and tourist operators around the country that operate on very minimal revenue streams. “When you get a critical mass impacting people more broadly, that focuses people’s attention and they start asking relevant questions about insurance cover,” Mr Allatson says. “Whether or not that translates into more people taking out this type of cover or not we will have to wait and see.” Some major sporting groups have already moved to include the smoke hazard in their list of risks that need to be managed. The Australian Football League (AFL), for example, advised clubs it would suspend or delay play if the concentration of PM2.5 particulate matter is more than 150, while a reading of above 100 would require officials to make a decision on whether a game started or continued. The Australian Open tennis tournament in Melbourne was badly affected by smoke on its open-air courts this year, and at one point was close to having to call a halt. The organisers hastily devised a new air quality policy after weathering global criticism for allowing qualifiers to play under a blanket of thick smoke haze. The new policy states play may be suspended when


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“Who wants to bring their families to that sort of environment and sit in the caravan park where the index is at 400 plus each day?”

there are between 97 and 200 PM2.5 units present in concentrate readings. If the threshold of 200 units is passed, play will be suspended. Victoria’s Environment Protection Authority rates 97370 as “very poor” and above 370 as “hazardous” in its daily forecasts for likely air quality in the next 24 hours. On New Year’s Day, the particulate matter levels in Canberra rose to more than 800 micrograms, while Sydney recorded 500 micrograms in December. For those closer to the fires, the air quality was even worse. Mr Prince says levels in the Alpine Shire were “pretty bad for about eight days, with the index at 450600 each day”. This has health implications for everyone, and was especially brutal for the tourism and agricultural industries. Yet few companies and organisations, if any, were insured against this type of crisis. Some businesses in northern Victoria were able to claim three weeks of business interruption, helped by a letter from the Alpine Shire Council that they must close their businesses and evacuate. “Without the shire demonstrating that on letterhead, we would have really struggled, I think,” says Mr Prince, who adds that assessors and insurers “have done an outstanding job” and managed claims efficiently in difficult circumstances. Areas further from the flames but still affected by the thick blanket of smoke, such as the Victorian country tourist centres of Beechworth and Rutherglen, lacked an official evacuation order despite decimated tourist numbers in the vital holiday months. “There was no tourism,” Mr Prince says. “Who wants to bring their families to that sort of environment and sit in the caravan park where the index is at 400 plus each day? “Small business-owners have families and you can’t have small kids around you. So they have to keep their

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shops closed, evacuate and stay away from the area – especially if you have kids with asthma or any health issues. “It’s just not safe, but you don’t have that sort of cover built in to your insurance. Wordings aren’t geared up following an evacuation, even a two-week window of indemnity following roads reopening would help business owners for loss of attraction.” Employers are required to provide a safe and healthy workplace for their workers, so there are implications for workers’ compensation. Poor visibility also brings a higher risk of accidents resulting in injury and property damage. Bushfire risk has increased over time as fire seasons start earlier and finish later. Extreme fire weather becomes more severe with climate change. The medical community is urging more government investment in air quality monitoring, forecasting and research on public health messaging, and exposure-reduction measures to protect Australians from bushfire smoke. An “urgent” call for a national health protection strategy published by the Medical Journal of Australia says managing the health impacts of fire smoke should be integral to fire planning and bushfire emergency responses. All these aspects could be made more efficient through the application of parametric solutions, Swiss Re’s Mr Pui says. But proper due diligence must first be performed on the exposures and a deep understanding of the underlying risk drivers developed. “Despite these upfront investments, I strongly believe the benefits of parametric insurance – quick payouts that help with liquidity and definitive claim settlements, and scalability of the solution – once developed, will add tremendous value. “They are key to reducing the protection gap.” 0


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Shelved, for now The appetite for mergers and acquisitions has evaporated as the pandemic sends the global economy into a tailspin. But for some, adversity also brings opportunities By Bernice Han

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n March 9 Aon finally made its move, announcing a near $US30 billion all-stock deal to acquire smaller rival Willis Towers Watson. The union, if approved by shareholders and regulators, will create the world’s largest insurance broker by value of about $US80 billion. Not only is the deal the insurance industry’s largest ever, besting the $US28.3 billion that Ace splashed out in 2015 for Chubb, it is also the biggest merger and acquisition (M&A) of any kind globally so far this year. After abruptly walking away from a merger deal with Willis Towers Watson last year, Aon decided the timing was right. But the powers behind the blockbuster deal might have hesitated again if they had foreseen what was coming within days – financial markets going into meltdown, spooked by grave fears that the COVID-19 pandemic may drag the global economy into its worst recession in decades. Aon shares fell 16% on the day the deal was announced, although whether the merger had much to do

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with it is impossible to gauge. Similar sharp falls were taking place on Wall Street and other key financial markets. The bellwether Dow Jones Industrials index plummeted 2000 points on that day, and oil prices tanked 20%. Since the Aon announcement, investor mood has turned considerably darker, and by extension so has the sentiment for any M&A deal-making. The immediate focus for insurers, like their peers in other industries, will be on the rapidly declining health of the global economy, the result of lockdown measures imposed in many countries to try to slow the spread of the virus. Scott Guse, KPMG’s Brisbane-based Partner for Audit, Assurance and Risk Consulting, tells Insurance News that the M&A appetite of companies here and around the world “is off the table for the near term while we go through this pandemic. Liquidity and cash are kings these days.” KPMG has spoken with two dozen of its M&A insurance clients globally, and it appears the industry is


taking a cautious attitude while the economy remains in a virus-induced coma. “Most expect M&A execution processes will likely slow down while resources are working remotely and management teams are more focused on internal crisis management,” Mr Guse says. “Potential ‘new deal’ processes are on hold. “Existing M&A processes are still trying to move forward. Cross-border deals will take longer than ever to execute given the uncertainty as geopolitical recession accelerates.” Analysts from rival consultancy EY hold similar assessments. They say major M&A activities are looking very remote at this stage as the industry devotes its attention to countering the economic slump. “At this point, very large-scale acquisitions would be less likely in these circumstances,” Tim Coyne, EY’s Oceania Transaction Advisory Services Leader and Financial Services Partner, tells Insurance News. “Cash is absolutely the king at the moment.

“The primary responsibility would be on the immediate crisis.” No doubt many crisis management meetings have been held by now to discuss ways to ride through the economic crisis. It is anybody’s guess as to how long it will take the global economy to recover this time, and there are already fearful whispers of a repeat of the 1930s Great Depression. “As an institution, one would be looking at ‘how to recover’ and if that requires really sitting on cash balances essentially to preserve the institution, you would think that the board and executives would have that as a primary focus,” Mr Coyne says. “We’re in an unknown environment. Certainly, talking with clients, they are dealing with the immediate issues.” But it will not be total silence. As in any business downturns, there will still be shrewd investors out on the prowl, scouting for good buys. And in the insurance industry, it is in the broking and insurtech spaces where

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“The fintech companies will be the ones that really suffer in this environment. They don’t have the capital and they don’t have the financial viability.”

M&As are more likely to occur. The likes of Steadfast and AUB, the two broking giants that have been very active on the M&A trail, will probably be presented with too-good-to-let-go opportunities. Smaller brokerages and underwriting agencies already sitting on wafer-thin reserves before the public health crisis broke out could be in the market, and chances are they could be acquired at relatively bargain prices. “I can see potential upswing in acquisitions occurring in the smaller broker space,” KPMG’s Mr Guse says. “The smaller ones that are owned by individuals rather than large corporations may have cashflow issues, and they may then become distressed. Therefore opportunities may present themselves. “That is where you make a lot of money in this sort of market – buying distressed assets at the bottom of the cycle and turning them around.” The same goes for insurtechs and the broader fintech industry. Many of these promising digital start-ups have yet to produce consistent profits, and some rely heavily on capital raisings to sustain their business models. In the financial environment that is now rapidly developing, it may be tough to convince investors to part with their capital. “Insurance companies acquiring smaller fintech firms are where I see other opportunities emerging,” Mr Guse says. “The fintech companies will be the ones that really suffer in this environment. They don’t have the capital and they don’t have the financial viability. I can actually see an increase in distressed acquisitions in that sort of marketplace.”

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So what was the outlook for insurance M&As globally before the initial cases of coronavirus were confirmed by provincial officials in Wuhan? About 50% of insurance executives surveyed by EY said at the start of the year that they would actively pursue M&A opportunities this year. They were keen on assets that would complement their existing business models, speed up their digital transformations or open new routes to customers. Three-quarters of the executives were expecting an increase in cross-border M&As, driven by technology and digitalisation. And about 65% thought there could be an increase in competition for assets, while 79% were bracing for a “more hostile bidding environment”. A separate report by Deloitte predicted insurance M&A volume and value levels this year would remain similar to 2019. Last year the industry saw 38 property and casualty insurer deals, with an average value of $US448 million. Tokio Marine Holdings’ $US3.1 billion purchase of US high net worth insurer Privilege Underwriters was the top deal by value. “Projected economic, interest rate, and financial market uncertainty, along with a presidential election [in the US], are among the headwinds that may give pause to insurance companies contemplating M&A in 2020,” Deloitte said. “Despite these potential challenges, companies continue to view alliances, investments, and acquisitions as attractive options when market factors make organic growth more difficult.” 0 Not any more.


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Lending support Premium funding plays a key role in cashflow management – in good times and bad By Wendy Pugh Offering solutions: IQumulate Chief Executive Raj Nanra

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he role of premium funding in helping businesses balance financial commitments tends to fly under the radar, but now the funders themselves are looking to raise awareness of their role. Funding firms typically work through brokers to offer business clients a way to spread annual premiums over the year, providing a cashflow management tool whatever the circumstances. “If clients are in a difficult market or their segment of business is in challenging times, we are a good option,” IQumulate Premium Funding Chief Executive Raj Nanra says. “Conversely, if they want to keep reinvesting in their business, there is an opportunity cost of ‘do I spend more money to grow my business or do I pay my insurance premium’. “For a short-term cash flow solution they can look at funding.” When it comes to tough times, recent natural disasters have highlighted insurance affordability issues and the importance of businesses having the right cover in difficult circumstances as they face further cost-cutting pressures. “Some of the challenges are still around underinsurance,” Mr Nanra says. “That is where we believe we can work with the brokers to help their clients and get them

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the right outcome from a coverage perspective.” “No-one wants to hear after major events that there is underinsurance or even no insurance.” Mr Nanra was speaking with Insurance News following the catastrophic summer of bushfires, hailstorms and flooding, which has led to claims totalling more than $4.5 billion. Since then the coronavirus outbreak has escalated, leading to unprecedented economic impacts which are creating more uncertainty for businesses. IQumulate was rebranded in March last year after parent company Steadfast bought out joint venture partner Macquarie Bank and took full ownership. Previously called Macquarie Pacific Funding and with a history dating to 2003, it currently works with more than 600 brokers and in excess of 60,000 clients. The funding firm operates in Australia and New Zealand, and the focus in the first year under the new name and ownership structure has been on bedding-down its strategy and ensuring clients’ needs are being met in the changing environment. Australia’s total premium funded market is estimated at around $6.8 billion, with the offering taken up by businesses of all sizes, and also sometimes for consumer insurance policies. Less than a third of


commercial brokered premiums are funded, which Mr Nanra says is relatively low compared with levels in excess of 50% in the UK. “For me, coming into this industry and looking at Australia as a mature market, I would have thought it would be higher,” he says. “Part of our job is to ensure we raise the level of awareness of what I call a proposition versus a product.” Benefits of premium funding include the quick and easy arrangement of competitive finance, arrangements that sit separately to existing loan facilities, instalments that may be tax deductible and additional flexibility. Sometimes, of course, it’s a lifeline. SMEs in particular can face short-term cashflow management strains as they deal with the uneven nature of their revenues. The sector was hard hit by lending restrictions as the credit squeeze took hold during the global financial crisis a decade ago, highlighting the value of having another option for managing financial commitments. But premium funding is also taken up at the top end of town, with many large companies seeing the benefits of the arrangement. “The product is not just prevalent in SME-land, it is extremely prevalent in high-end corporate Australia,”

says Ross Hayward, the Director of Queensland-based Premium Funding. “There are listed companies out there that fund their premiums. Essentially it is an off-balance sheet form of finance. There are clients with millions and millions of dollars of premium that will fund their insurance at rates that are absolutely rock bottom.” For brokers, premium funding provides another way of assisting clients and ensuring they have the right cover in place, and it contributes to their own revenues through commissions. Insurers are at arm’s-length when it comes to communicating and dealing with the clients as part of the process. Once agreed, the funder pays the insurer upfront. Payments by the insureds to the funder are mainly under a monthly arrangement, while fortnightly or quarterly options are available and term lengths may vary. Multiple insurance policies can also be paid through the one instalment system. Funders are sensitive to the rising regulatory focus on customer outcomes and transparency flowing from the Hayne royal commission, and trust is a key element of premium funding arrangements, particularly given the importance of client-broker relationships.

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“Brokers get to know how funders treat their clients and there is an incredible amount of trust when a broker recommends a client uses a funder.”

“We try our best to make sure we really help with that relationship,” Mr Hayward says. “Brokers get to know how funders treat their clients and there is an incredible amount of trust when a broker recommends a client uses a funder.” For premium funding providers, the offering is lowrisk compared to products elsewhere in financial services. Ultimately, if a client fails to make payments the cover can be cancelled and the balance repaid by the insurer to the funder. Allianz Australia-owned Hunter Premium Funding is the largest provider, while other participants include Bank of Queensland, which acquired Centrepoint Alliance Premium Funding in late 2016. Mr Hayward says there has been some consolidation in the industry over the years, but it is a sector unlikely to draw a rush of new entrants. “The margins are very tight and that is just the nature of the secure product,” Mr Hayward says. “The big end of town is incredibly cheap, so you have ended up with six or seven funders that now do big volumes/high turnover. “It wouldn’t be easy to be a start-up premium funder. To make it worthwhile you need some big volumes because the margins are so low.” Factors influencing uptake include ease of purchase, the degree to which it is promoted as well as business and economic conditions. A hardening market could play into demand for funding, with rates in some classes and geographies recently rising strongly, including liability and higher-risk commercial property, as corrective actions have been taken by insurers following an extended period of weaker conditions. Some clients will simply always prefer to pay upfront if possible, while research suggests that most

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companies which have adopted premium funding once will probably continue with the arrangement for at least the next few years. The level to which brokers highlight premium funding to their clients varies, but technological changes have facilitated the process, reducing the paperwork and making it more visible. That trend is expected to continue as systems further improve. “Fortunately, a lot of the brokers now have a lot more automation around funding and it is offered on the bottom of invoices in a majority of cases, so it is there as an option,” Mr Hayward says. Buying trends across many different services at the smaller end of the market, particularly given the digital transformation of payment systems, are also filtering upward and will potentially have a greater impact, especially in the case of SMEs. “It has just become so common that everyone is paying by the month on home and car and even life insurance,” Mr Hayward says. “The domestic direct-to-consumer insurers are probably assisting us because of the fact that it is so normal that everything is paid monthly these days.” A survey by Premium Funding a few years ago, sent to a cross-section of brokers, found manufacturing, construction and retail were the top industries using funding arrangements. That was followed by accommodation and food, transport, and property. Looking ahead, business conditions across the economy are particularly difficult to forecast in the current environment, but decisions around cashflow are likely to be even more critical. Firms will be considering their investment priorities, financial obligations and required levels of insurance cover, and premium funders will have an 0 important part to play.


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Trying harder works Emerging from challenging times, NZ insurer Tower is using technology to take the fight to the local market’s giants By Terry McMullan

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he underdog in any kind of business that’s dominated by two giant competitors like IAG and Suncorp’s Vero is inevitably going to find the going tough, and New Zealand’s Tower Insurance has had a tougher time than most. But as US rental car company Avis proved with its iconic “We Try Harder” campaign, there are some advantages in not being Number One. Having survived a decade of difficulties that should have seen Tower absorbed by a larger company, it is emerging as a very significant player in the New Zealand market. The Auckland-based insurer is making itself felt through a brave investment in technology that has given it the agility and customer-friendly reach to survive and thrive as the third-largest insurer. A brief history: Tower traces its beginnings back to the 1880s as Government Life, which became Tower in 1987 under a government corporatisation program. It became a mutual and then listed on the stock exchange in 1999. In 2006 Tower separated its Australian and New

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Zealand businesses, with the Australian entity eventually becoming life insurer TAL, which was acquired by Dai-Ichi Life in 2011. Having bought a local general insurer in 1989, Tower dropped its medical insurance and wealth management businesses in 2012 and its life insurance arm the following year to become predominantly a personal lines insurer, although 50% of its business in the Pacific Islands is commercial. The Christchurch earthquakes hurt Tower, just as it did every other insurer operating in New Zealand. Tower became embroiled in legal battles with the Earthquake Commission and a reinsurer over claims, and it’s likely that the acquisition by IAG of Wesfarmers’ Lumley NZ operation didn’t help when it came to certainty about the future. But through all the post-Christchurch shakiness Tower was moving ahead with a plan to raise capital and build a digital-based insurer – a plan that was well underway when Canada’s Fairfax Financial Holdings


Regaining strength: Tower’s Richard Harding

came calling in 2017 with a $NZ197 million buyout offer. It was pretty much a done deal, but then Suncorp pitched in with a 19.9% pivotal shareholding in Tower and a takeover offer worth $NZ236.1 million, which scared off Fairfax. Then the New Zealand Commerce Commission – which caused controversy when it approved the IAG buyout of Lumley – said no to Suncorp’s takeover bid. That put Tower back where it started, sitting at Number Three and still, from outward appearances at least, looking shaky. “They were interesting times,” says Chief Executive Richard Harding, who joined Tower in July 2015. This straight-talking Sydneysider had been running Darwin-based TIO until late 2014, when it was sold to Allianz. Prior to TIO he had spent most of his career at IAG, working as the group’s head of China from 200407 and before that as head of strategy and mergers and acquisitions.

Talking about Tower’s decade of uncertainty in his central Auckland office, Mr Harding is philosophical about the distractions caused by the takeover tussle. In fact, he sees some positives. “We actually had a benefit in that while we had a year of the takeover activity which distracted me and the board immensely and was very difficult at a public level and from a board governance perspective, it did let my team get on and fulfil a whole lot of the business plan that we already had in train,” he tells Insurance News. “We were very consciously trying to separate the corporate activity from the business, and there were a lot of things that just needed to be fixed. We did a lot of that work while the takeover actions were going on over the top. “We actually built about 16 new portfolios, and we also built our first digital platform at that stage. So we were able to do a lot of things then that were sort of under the cover of darkness.

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Putting the boot in: Richard Harding and Tower staff at a “Gumboot Friday” charity event in the company’s Auckland office

“When the Commerce Commission decided Suncorp shouldn’t proceed, we set about trying to bring the business back into the plan we’d already established. That really revolved around recapitalising the business, getting ourselves stable and looking forward and driving the strategy. “That’s when we did the capital-raise and we could start to deal with some of the meatier issues, like replacing the core legacy platform and driving the growth of the business. It was a good place to start really driving the turnaround and making things happen.” Mr Harding emphasises the role that staff played in developing a new strategy even as bidders picked over Tower doing due diligence. “There’s a lot to be said for letting people just get on and do stuff. We’ve invested in our people and we’ve used them to drive the business.” One of the first things he did after arriving at Tower was to implement a leadership program that was designed to empower staff. “We brought in some new insurance capability that wasn’t previously present, and once we had them on board and we gave our people a vision of where we wanted to go, it all really happened without much involvement from me and the board. We were doing other things.” Those “other things” included more than 60 board meetings in 2017 as the bidders sorted out takeover offers and then prepared for a capital-raising. “Raising the capital stabilised the business,” he says. “We then started investing in the IT replacement, which really has now enabled us to leapfrog or at least position ourselves to be in a far more flexible place than a lot of our competitors.”

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And there’s the upside of it all. Tower has ended up with an underlying full-service platform that Mr Harding believes is far superior to the technology Numbers One and Two have available. “It’s fully digitally enabled, it’s fully exposable to the internet, it’s got APIs [application program interfaces, which control how software components interact] for every module, and we’ve just launched the last of our self-service capabilities so customers can come online and do any transaction they want through the self-service portal, including lodging and managing claims.” Tower is converting the data of its approximately 350,000 New Zealand customers over from its legacy system at the rate of about 30,000 a month, he says. “By the end of this year we’ll be in a place where every customer will be able to log on at any time, add something on to their contents policy, change their address, update their car details, lodge a claim, whatever they need.” Tower is already reaping the rewards from a $NZ50 million technology investment that some market analysts saw at the time as a gamble. But now business through its new digital platform accounts for more than 55% of its new business, compared to less than 10% in 2016, and nearly 30% of claims are already being lodged online. “IT will be absolutely fundamental to the future growth of Tower,” Mr Harding says. The strategy was underway before Mr Harding joined Tower, and he credits the company’s board with taking such a brave step in investing in technology in an uncertain period. The directors, he says, recognised that technology “is the only way that we get to compete”


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“What we can do is to work out how to deliver a great customer experience, being simple and straightforward in a way that they can get it easily and cheaply. That’s the digital proposition.”

in the New Zealand insurance market. Tower’s expense ratio shows what it’s up against in competing with IAG and Vero. It hovers around the high 30s, while Mr Harding estimates his major competitors’ would be around 20%. It’s one of the blessings of scale. “We’re never going to be able to compete on scale,” he says. “But we will get our cost base down because of the work on our digital side. And we aren’t going to be out there competing on product differentiation or being specialists on liability or something like that. “What we can do is to work out how to deliver a great customer experience, being simple and straightforward in a way that they can get it easily and cheaply. That’s the digital proposition.” So, with a platform in place that provides new opportunities, how can Tower expand in a market where IAG and Vero dominate and personal lines customers don’t switch insurers easily? One way is to look outside personal lines. Mr Harding is moving Tower’s sights on to New Zealand’s SME and micro market, where it can use its new digital advantages to attract customers, particularly those who are underinsured or not insured at all. “I think there’s a bunch of customers out there in the SME and micro-market who are uninsured,” he says. “There’s about 500,000 small businesses in New Zealand, and of those some 320,000 of those have less than five employees.” Many work from home, “but they think their contents insurance covers their garage full of commercial goods”. “You also get this sense that there’s a group of people out there think it’s all too hard, it doesn’t work for me, I don’t need it, or I’m already covered. There’s a huge opportunity to create something that gives those people a really simple digital offering that they might not otherwise get. “It’s about finding that group that’s unserviced at the moment and making that opportunity come to life.

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It’s about building the right product for here in New Zealand.” Now, with Tower set on a course where it has the ability to compete and thrive, Mr Harding is looking to his own future. Last year he told the Tower board he will leave when his present contract expires towards the end of this year. His daughters have returned to Australia to attend university, and his wife returned to look after them. So for the past two years he has been commuting between Auckland and Sydney most weeks. “I have no personal plans,” he says. “I’m focused on finishing up the transformation here, and I’m still focused what’s going on here. I haven’t really thought too much about what’s going on in Australia and what I might do.” He will leave behind a New Zealand-owned company that has recovered from a near-death experience to become a confident and focused insurer that’s able to at least nip at the heels of its much larger Australianowned rivals. In February Tower announced that gross written premium from the core New Zealand book, including from the Youi portfolio Tower purchased last year, had increased 11% in the period to January 31. The 2018/19 profit of $NZ28 million is a stark contrast with the depressing figures of a few years ago. With a healthy bottom line and a blue-chip list of major shareholders, Mr Harding was able to report to shareholders that Tower “is radically different from the company it was four years ago”. “We are now positioned to take on the New Zealand insurance market and challenge the large incumbent organisations who are slow to adapt,” he said, doubtless with a broad smile. Avis might have recently dropped it’s “We Try Harder” slogan, but it’s a sentiment that still carries 0 plenty of punch.


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Looking out for others: Ansvar’s Warren Hutcheon

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arren Hutcheon says Ansvar, the church-owned ethical insurance firm he has headed in Australia for six years, was an early disruptor when it was established by Swedish teetotallers in 1961, around the time drink driving laws were introduced. Legend has it the cupboards of those seeking insurance cover would be inspected to be sure there was no alcohol at the residence and that customers were all total abstainers. “I’m not sure if they checked the bins or how true that is, but it makes an interesting story,” Mr Hutcheon, the insurer’s Chief Executive, tells Insurance News during an interview at the Ansvar head office in Melbourne. These days, staff are allowed a celebratory tipple at company events and new business is no longer conducted by home visits, with a state-of-the-art digital insurance

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system coming soon that will be managed and hosted by IT group SSP. Ansvar – a finalist in the Insurance News/LMI Mansfield Awards SME property and casualty award category last year – is historically known for its expertise in the faith sector, but offers a range of risk and insurance solutions to the growing sectors of care, community, education and property owners/heritage. “What does Ansvar really do? In one sentence, I would say Ansvar helps organisations protect vulnerable people,” Mr Hutcheon says. “We would consider children, the aged and disabled communities as being vulnerable.” Ansvar strives to be the most trusted insurer within its core areas of business. It’s a unique mix that is particularly pertinent in the wake of three recent royal commissions into aged care, disability, and institutional responses to child sexual abuse, intersecting

precisely with Ansvar’s areas of interest. “Our risk management focus is very much on helping boards and organisations improve their governance and policies to protect the vulnerable,” Mr Hutcheon says. There are only a few insurers in Australia that provide physical and sexual abuse cover (PSA), and Ansvar is one of them. It indemnifies an organisation for any legal liability relating to abuse. But Mr Hutcheon is keen to emphasise that the policy does not provide cover for the abuser. For an organisation to acquire cover requires very effective risk management policies, procedures and frameworks. Ansvar Risk, a separate risk management company, was established in 2018, recognising that for customers it is about the “total cost of risk” – an organisation’s risk maturity, existing and emerging risks impacting their sectors, organisational resilience and so on. It’s topical given the recent departure


Doing the right thing Ansvar keeps faith with an ethical insurance approach to protect society’s most vulnerable and contribute to the community By Miranda Maxwell

of senior staff from St Kevin’s College in Melbourne and subsequent investigation by the Victorian Government into whether the college breached mandatory child safety and reporting standards. The new acting principal has admitted “some serious mistakes were made”. It’s another example of why it is critical that policies related to moral and ethical issues are embedded within the culture of the organisation. Mr Hutcheon says it’s crucial that a culture in which all members are encouraged to “speak up” is fostered. There is also a need to educate employees and volunteers about what these policies mean in practice. “If you look at websites for lots of organisations, many have policies around child protection and how they manage these sorts of things,” he says. “It is one thing to have policies in place, but it is really about how those policies are understood

and work in practice. “You’ve got to be able to bring the policy to life.” Mr Hutcheon has spent 35 years in insurance and is a past chairman of the General Insurance Faculty Advisory Board at the Australian and New Zealand Institute of Insurance and Finance, and has held board positions on government and not for profit organisations. He recommends using examples and scenarios to assist with training so all personnel know how policies should operate in practical terms, and what to do when a given situation occurs. The role of the board is critical, he says, and Ansvar is seeing a push for directors to have better and more relevant information about their organisations’ cultures. “We are seeing directors walking the talk and wanting to be better informed,” Mr Hutcheon says.

“There is not one silver bullet that makes you an ethical organisation. It’s predominantly a culture that addresses the needs of a variety of different stakeholders and functions in a consistent, and professional way.” Ansvar leaders are held to account for non-financial as well as financial performance. All customer complaints and other feedback results are reported to the board and Ansvar takes a “balanced scorecard” approach to its incentive program, giving weight to customer and staff outcomes. “I believe the whole general insurance industry in Australia is striving to improve the way we treat all our stakeholders – customers, staff, business partners, shareholders and the like,” he tells Insurance News. “Most organisations want to do the right thing, and that’s being ethical. It’s a very important journey the whole industry is on.” While there are many challenges and risks as organisations go through various

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“Most organisations want to do the right thing, and that’s being ethical. It’s a very important journey the whole industry is on.”

royal commissions and inquiries, the final result should be that we end up with stronger and better organisations providing improved services, and better outcomes for vulnerable people. “That’s core to what Ansvar does,” Mr Hutcheon says. The insurer is owned by the UK’s Ecclesiastical Insurance Group (EIG), which in turn is owned by Allchurches Trust, an independent registered charity. Ecclesiastical insurance was established in 1887 by two MPs, three clergymen, a barrister and a clerk of the House of Lords after a series of high-profile fires had left parishes with ruined churches and no means of restoring them. One of the founding principles was to plough any profits from the business back into charitable work. Today EIG is a broad financial services group that includes general insurance, investment management and insurance broking businesses in the UK. The group has set itself a five-year target of providing £100 million for the Allchurches Trust, and also operates award-winning ethical investment manager Edentree.

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Ansvar follows the group’s ethical investment strategy, and won’t invest in certain bonds or other investments that don’t meet its corporate responsibility standards. Historically, Ansvar pays a 90% dividend back to its parent, keeping 10% in Australia to fund growth and for community giving. As the firm prepares to celebrate its 60th anniversary in Australia, the future promises plenty of upside as most of the sectors Ansvar specialises in have strong growth projections. This is particularly so in the aged, disability and childcare sectors. The advent of the Federal Government’s National Disability Insurance Fund has created significant opportunities in risk management and insurance for Ansvar. “Faith” is the exception to the overall growth picture, though due to demographic forces faith-based education, aged care and other services are growing. Ansvar’s gross written premium is up 70% since 2014, growing 25% last year, with management increasingly able to reinvest in the business as scale increases. The company competes against smaller specialist insurers, particularly in childcare

and allied health and some faith-based arenas, as well as many of the larger insurers on a number of corporate accounts. “Ultimately we are owned by a charity, but Ansvar is not a charity. Our role is to produce profits and dividends to support the charity,” Mr Hutcheon says. Prior to joining Ansvar he was chief executive of the Victorian Managed Insurance Authority, the risk and insurance adviser to the Victorian Government. The government job involved a cultural and performance turnaround program, and Mr Hutcheon agrees that the Ansvar experience has also involved a focus on rebuilding the business. “It’s very difficult to run a licensed insurer with low revenue, as the fixed costs are substantial,” he says. “However, we have concentrated on improving our sector knowledge and developing a risk-led value proposition for customers.” On larger accounts Ansvar adopts a “trilateral” approach, working with the appointed broker and customer. Last year, the insurer decentralised its decision-making by establishing regional underwriting managers in each state, and following the


appointment of a Canberra manager, it is actively looking at other areas where a regional presence is needed. “As a specialist insurer we try and get decisions made as close to the customer as possible,” Mr Hutcheon says. Ansvar’s Community Education Program, which focuses on sustainable programs for Australians under the age of 25, has been running for 26 years, and contributed more than $10 million to community organisations. In addition, EIG shareholder Allchurches Trust recently contributed $75,000 to Australian bushfire recovery efforts. The initiative provides grants of up to $50,000 for programs supporting Australian youth, promoting healthy lifestyle choices and helping youth at risk or experiencing difficulties such as drug and/or alcohol abuse through rehabilitation and skills training. “Being ultimately owned by a charity, giving is core to our shareholders’ purpose,” Mr Hutcheon says. “It comes back to wanting to be a good corporate citizen and making a contribution 0 to the community we operate in.”

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Signing off Insurance Brokers Association of New Zealand chief Gary Young is retiring after 14 years of dealing with big issues and changes By Bernice Han Face of New Zealand broking: Gary Young

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alling time on one’s career is often a tough decision. But it wasn’t for Insurance Brokers Association of New Zealand (IBANZ) Chief Executive Gary Young, who has become the face of broking in the country. Mr Young formally retired on March 31 this year after 14 years in the role, handing over the baton to Melanie Gorham, formerly QBE’s head of claims for New Zealand and the Pacific. He has been wanting to step down for some time, but was persuaded several times by the IBANZ board to stay on for a little longer. “Now that I’ve reached 71 I think it’s time to go and enjoy a few different things,” Mr Young tells Insurance News. “I finally put my foot down last year and gave them a deadline. It’s time for me to move on, to do some wonderful things like travelling.” Mr Young has achieved plenty in 14 years. IBANZ has emerged as a strong voice for general insurance brokers, and also an advocate for the wider industry. He was also a driving force behind the efforts to lift the professional standards of brokers, successfully pushing for the creation of a dedicated institution. Professional IQ College, formerly known as IBANZ College, equips brokers with the skills they need to service clients effectively in an increasingly demanding business environment. He was managing director of the local branch of global broker Heath Lambert

when it merged with Marsh in 2006, and stepped across to IBANZ, which was itself the result of a merger of two broking-related organisations the year before. The focus of IBANZ in those days was centred mainly around organising conferences and brunch meetings around the country. Mr Young was therefore the perfect candidate for the role. His experience running a major brokerage placed him in good stead to steer IBANZ through the huge changes that have reshaped the broking sector. Today IBANZ’s 150 members account for some 85% of corporate risks written in New Zealand. The organisation had to readjust its focus to stay relevant, Mr Young says. “It was absolutely essential that we change because there needs to be an organisation that can represent the whole sector. “So over the past 10 to 12 years we’ve steadily become more involved in lobbying and advocacy. The fact that we are the single biggest adviser group for financial services means that we do have a voice.” That voice has become increasingly critical over the years as the Government stepped up its oversight of the financial services sector following the Global Financial Crisis. Mr Young says it was vital for the industry to speak as one to manage the raft of legislative changes that followed. Along the way there have been a few bruising battles, most notably in the long-running campaign to convince New

Zealand to stop funding its fire and emergency services through taxes on insurance premiums. Even though he will no longer be involved with the insurance tax battle, Mr Young believes it’s only a matter of time before New Zealand accepts the system must change. He points out that in Australia all but New South Wales and Tasmania have changed to property-based taxes. “I’m sure eventually they will follow Australia,” he says. “The problem you always have is that if governments are getting a source of funding outside taxes, they are very reluctant to give it up. “And our local governments here are very strong. They lobbied against putting it on [property] rates. It will change, but it’s going to change in stages.” As Mr Young prepares for what he hopes will be a less frenetic phase of his life, he says IBANZ will be in good hands. Many challenges remain, such as the growing question of whether disaster-prone New Zealand will become “uninsurable” one day. “The insurance market is not about to disappear out of New Zealand,” he says. “But we have to be sensible and admit it is a difficult market. It’s no good people ranting about their insurers pulling out of high-risk areas. “It’s in everybody’s interest to make sure that we continue to have insurance, and 0 I’m sure we will.”

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A step too FAR Getting remuneration right for insurers requires the right processes, not oversight imposed by regulators By Ewan Taylor Struggling with difficult trade-offs: Wayne Byres says APRA is trying to balance competing priorities and concerns

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e are seeing significantly more interventionist regulation of the financial services sector after the Hayne royal commission – regulation that will give the regulators unprecedented powers and impact the independence and autonomy of boards to do what they believe is best for their organisation. Chief among these interventions are the Australian Prudential Regulation Authority’s proposed CPS 511 and the extension of the Banking Executive Accountability Regime (BEAR) to the insurance industry. These would be administered through the Financial Accountability Regime (FAR), which risks stretching APRA beyond its current capability and adding to costs in the sector. A comprehensive and properly co-ordinated framework based on sound governance principles would be preferable to the current piecemeal approach to reform. This approach is hardly surprising, given the royal commission’s criticisms and recommendations – the Government feels politically obliged to be seen to be doing something. But it is time to make the point that the concepts of good regulation and

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process have not changed because of the royal commission. APRA Chairman Wayne Byres has acknowledged the organisation is struggling with “difficult trade-offs” required to ensure the framework for remuneration to be prescribed in CPS 511 appropriately balances a wide variety of competing priorities and concerns. In a speech last November he indicated that APRA may respond to the consultation feedback and back away from its proposed 50% limit for financial measures in incentive plans. Hopefully APRA recognises that the task it set itself of attempting to prescribe a single remuneration framework for all APRAregulated entities, including insurers, was always impossible. Such a perfect model does not exist. It would be costly indeed if mandatory standards were to constrain the evolution of new or different remuneration frameworks. For example, would the requirement for a set percentage of variable remuneration to be determined on non-financial metrics oblige insurers to provide incentives for “doing the right thing”? Or should an insurer that regards

behaving honestly and in the interests of customers as an expected minimum standard (breach of which results in termination of employment) be able to offer incentives based exclusively on financial performance? A significant challenge of non-financial metrics is that they rely more heavily on discretionary judgement, which is something that boards could still apply to reduce variable remuneration that was, in the first instance, assessed off financial metrics. A better solution that does not involve APRA making too many trade-offs and that will support the highest governance standards would be for it to take an entirely principles-based approach and then police the outcomes rigorously. The goals that Mr Byres has enunciated for remuneration should be broadly embraced. These are: • Achieving a better alignment of incentives with desired outcomes • A more holistic assessment of performance across a range of dimensions • Clearer accountability for (good or bad) performance. These would result in “…remuneration systems that provide appropriate incentives, improve accountability and support


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“More and more prescriptive regulation will not deliver a high-performing financial sector. It is the people in an organisation and the way they behave that determine outcomes.”

the effective management of financial and non-financial risks”. There are no trade-offs involved in APRA adopting these goals as the basis for its regulation of remuneration. No-one will complain if APRA requires insurers to adopt remuneration arrangements that will produce these outcomes, and then seeks to enforce these standards. Already, much of what APRA has proposed in CPS 511 is a principles-based codification of what should be good governance practice. Reactions are mostly focused on the prescribed elements – the 50% cap on financial metrics in variable remuneration for all employees, and the extended deferral and clawback requirements for special-role employees in significant financial institutions. Less attention has been paid to APRA’s positioning of the proposed standards on remuneration as part of its agenda to lift industry practices in governance and culture more broadly. A holistic approach addressing all aspects of corporate culture is required, rather than focusing on remuneration alone. FAR is being rushed into effect, with inadequate time for effective consultation and consideration of its potential implications. More and more prescriptive regulation will not deliver a high-performing financial sector. It is the people in an organisation and the way they behave that determine outcomes. What did the comprehensive prudential inquiry into the Commonwealth Bank of Australia, conducted by an APRA-appointed independent panel, show us? Essentially, the panel’s final report said that having all of the right policies in place will not produce good outcomes if the people involved do not have a proper mindset through which to implement those policies and associated processes. Further, they need a sound frame of reference against which to assess the merits of actions and decisions. There would have been no need for the royal commission if

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financial services entities had always given priority to the best interests of customers over the short-term financial interests of employees and their employers. Which, when you think about it, is pretty startling. It seems obvious that looking after your customers is one of the key ingredients to long-term success and profitability. The royal commission’s interim report in September 2018 heaped the blame on incentives, noting that “…from the executive suite to the front line, staff were measured and rewarded with reference to profits and sales”, leading to “the pursuit of short-term profit at the expense of basic standards of honesty”. The real problem in the cases before the royal commission was not the incentives so much as the dishonesty and lack of action when problems were identified. No amount of regulation will eliminate dishonesty or lack of action on results that are clearly wrong. Rather, honesty and integrity should be basic requirements for everybody in an organisation, not rewarded by incentives – and with breach resulting in dismissal. Reacting to the worst examples of corporate behaviour is not the best way to set the standards to apply in any industry. That will only lead to a level of bureaucracy and costs that are not in the best interests of customers. We suggest the recommendations of the Commonwealth Bank inquiry panel provide a much better model for reform than the necessarily limited review undertaken by the royal commission and the resulting “one size fits all” solutions it is generating. Similar governance, accountability and culture self-assessments have already been conducted by the other big banks and major financial entities at APRA’s request, and by a number of other companies on a voluntary basis. The Commonwealth Bank inquiry panel’s specific recommendations were designed to strengthen governance, accountability

and culture and focused on some key levers of change: • more rigorous board and executive committee governance of non-financial risks • exacting accountability standards reinforced by remuneration practices • a substantial upgrading of the authority and capability of the operational risk management and compliance functions • constantly asking the “should we?” question in relation to all dealings with and decisions on customers, and • cultural change that moves the dial from reactive and complacent to empowered, challenging and striving for best practice in risk identification and remediation. Similar actions are likely to be relevant for insurers, but it will always be best if they are able to follow an approach specifically tailored to their circumstances. In any event, simply complying with minimum regulated standards, no matter how detailed they are, is not the path to success. Boards and management need to get on the front foot and actively ensure their companies are positioned for success. They need a remuneration framework that is tailored to meet the specific requirements of the insurer rather than one determined by the regulator, and that will support the desired company culture to attract and retain high-quality talent. They need governance and management structures that ensure accountability for corporate and individual decisions. The regulators need to set and police standards but avoid intrusion into areas that are properly the responsibility of boards. 0 Ewan Taylor is a Melbourne-based senior executive compensation consultant at Willis Towers Watson


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Facing hardship: some consumers struggle to access insurance

Giving back: IAG details plan to improve insurance accessibility IAG has unveiled a range of measures to help vulnerable consumers gain better access to insurance, after joining a national effort to assist Australians who are financially excluded and face significant hardship. The national effort, known as the Financial Inclusion Action Plan (FIAP) program, is led by Good Shepherd. QBE and Suncorp have already joined the inclusion program. “Access to insurance is important because it provides the financial protection to help people recover when the unexpected happens,” Peter Harmer, IAG’s Chief Executive and Managing Director, said. “In putting together our plan, we considered what’s important in making insurance accessible. This is why our plan focuses on how we can better identify and support people who may experience financial exclusion due to culture, language, gender, disability or other life circumstances. “Our plan includes initiatives to make communities safer and more resilient. This includes detailed actions on how we can work with a broader range of suppliers,

including social enterprises, female-owned, and Indigenous-owned small businesses, to support the growth of these businesses and the communities that they support.” In IAG’s FIAP plan for 2020-21, the insurer will target four areas for action. It wants to provide fair, affordable and accessible products and services; improve financial capability of employees, customers and the community; investigate and advocate for improved responses to financial vulnerability; and remove barriers and provide opportunities for economic security. The inclusion plan aims to reach out to as many vulnerable communities as possible including people with physical or mental disability and victims of family and domestic violence. It will try to offer job opportunities for groups that may typically experience financial exclusion and provide greater support for employees facing difficulties. Resources will also be deployed to support suppliers such as social enterprises as well as female-owned and Indigenous-owned small businesses. “We’re proud to join the Financial

Inclusion Action Plan program and work towards improving financial inclusion and the economic security of our customers, employees, suppliers and the community,” Mr Harmer said. “This plan builds on the work we’re already doing, while also considering new opportunities to help more people.” According to Good Shepherd, three million Australians are severely or fully excluded from insurance and other financial services products. The FIAP program has the support of the Australian Government. “Financial hardship can impact us all, at any stage in our lives. We know that insurance plays a vital role in increasing financial wellbeing, but that barriers to accessing appropriate products and services can exist for those who are financially excluded,” Stella Avramopoulos, Chief Executive of Good Shepherd, said. “IAG is demonstrating leadership by developing a FIAP and has joined an important Australia-wide movement that will create improved social and economic benefits for 0 the community.”

Cyber navigator: 360 launches Compass web portal 360 Underwriting Solutions has rolled out its 360 Compass web portal, offering electronic quote and bind options for a variety of products offered by the underwriting agency. The digital platform was activated on March 16, with 360 Cyber the first product to be made available for key partners. 360 Cyber is designed for small and

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medium-sized businesses, backed by a network of global suppliers to provide 24-hour support in the event of a cyber breach. “This is a very exciting step for 360 Cyber,” Jodie Piddington, National Underwriting Development Manager for Cyber, said. “Having the offering available online,

whilst maintaining our core five underwriting questions for risks with a turnover less than $25 million will allow us to continue to build this business into the future.” The agency plans to add farm and regional, mobile plant and equipment, and construction and engineering products to the 0 portal in the coming months.


Resilium is proud to be a part of our fantastic insurance industry which now, more than ever, is so important to all clients. We wish all of our colleagues, suppliers and competitors the very best through this time - we are all in this together. As an industry, we will stand up as we have through so many disasters before, supporting customers through the tough times. Best wishes The Resilium Team

Resilium Insurance Broking Pty Ltd ABN 92 169 975 973, AFSL 460382 Registered Office, Level 1, 201 Miller Street, North Sydney, NSW 2060 www.resilium.com.au


Specialists in Risk Management & Insurance Solutions Ansvar is a leading specialist in the Care, Faith, Community, Heritage and Education sectors in Australia. We are an ethical insurer, dedicated to creating long-term partnerships, providing bespoke solutions and delivering excellent customer service. We put our customers and their communities at the heart of our business.

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03 8630 3125 mabslom@ansvar.com.au

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Order in the court!

The Lloyd’s Development Group and Australian Insurance Law Association Young Professionals held the third annual Mock Trial at the iconic Banco Court in Sydney in February.

Berkshire Hathaway Specialty Insurance Claims Manager Joseph Hershewe and Berkley Re Regional Reinsurance Officer Richard Pike participated as hypothetical witnesses for the parties.

The event is an opportunity for young professionals to witness how an insurance-related dispute unfolds in court, with this year’s case focused on notifying facts and circumstances that might trigger a claim under a professional indemnity or directors’ and officers’ policy.

New South Wales Supreme Court Chief Justice Thomas Bathurst gave some thoughts at the end of the trial on possible outcomes from various issued raised. A networking event afterwards was held at Verandah, where attendees heard from event sponsors Clyde & Co and Wotton + Kearney.

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Steadfast takes out Insurance Ashes Cricketers from across the insurance industry took to the field at North Sydney Oval on February 19 for the Primary Club of Australia’s 2020 Battle of the Insurance Ashes. Teams from SURA, QBE, CGU and Steadfast, along with special guests from the Primary Club cricketers’ charity, lined up against one another in a round-robin tournament. Steadfast finished the day on top of the ladder, followed by QBE. The event, also sponsored by 360 Underwriting, raised $43,000 and will fund Riding for Disabled Illawarra’s new arena fencing as well as swim training aids for 23 Rainbow Clubs. Primary Club has been providing sporting and recreational facilities to people with a disability for more than 40 years across Australia. Charity development manager Geoff Verco said it was terrific to see the support given by the insurance industry. 76

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Adroit marks 20-year milestone Adroit Insurance and Risk held its annual conference at the RACV City Club in Melbourne and capped it with a Casino Royale-themed party to celebrate two decades in business. The Victorian broker also donated $1500 to support charities providing relief to bushfire-affected communities.

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At the three-day conference in February, Managing Director Fabian Pasquini spoke about the importance of mutually beneficial relationships with clients and partners. Other speakers included representatives from QBE, Allianz, Zurich and Sura. A speed training session with insurers was enjoyed by the broker’s risk advisers and support teams, while a caricaturist was present to capture the session. Annual awards for employee achievements were handed out at the party.


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Sydney expo draws record numbers The Underwriting Agencies Council (UAC) Sydney expo enjoyed huge success, with a record 104 exhibitors and 500 brokers attending. UAC says broker feedback from the event at the Hyatt Regency Hotel in February was very positive, with many calling it “the best ever”. A panel session by Microsoft and business software provider Gratex on the benefits of using cloud computing services was well attended. Participants included Protecsure’s Managing Director Gabriele McDonald, 360 Underwriting Solutions’ Chief Information Officer Theo Stevens and Strata Unit Underwriters’ General Manager Simon Ingham. After the panel session, Gratex and Microsoft delivered a “Demystifying Microsoft Cloud” presentation for underwriting agencies and brokers.

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