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THE COST OF LIVING IN NORTHERN AUSTRALIA As Townsville sinks under an extreme flood, yet another government inquiry ponders insurance affordability

February/March 2019


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Contents 6 Newsmakers » 10 Sinking under a premium problem »

As Townsville flounders after a massive flood, a new report on northern Australia insurance continues an interminable saga

16 Commissions in the firing line »

Brokers have three years to justify why their remuneration arrangements should continue

22 Maintaining momentum »

Zurich is back on track, with a new Chief Executive who’s determined to build on recent gains

26 Higher, faster, stronger »

A recovery in commercial premiums has gathered pace after rates rose more than anticipated last year, the annual JP Morgan Taylor Fry General Insurance Barometer shows

28 Rise of the middlemen »

They’re not universally liked, but consumer claims advocates have come under the spotlight following recent catastrophes

32 A rough ride »

Amusement park operators and other businesses deemed high-risk are struggling with soaring premiums and limited capacity

37 Art and science »

Sedgwick Australia chief Diego Ascani says there’s more to loss adjusting than technical skill

42 Taming the king of cats »

Citizen scientists are providing valuable insight into Australia’s most expensive natural peril – hail

46 Ideal homes and gardens »

Smart design can help country property owners mitigate fire risk without taking a chainsaw to the bush around them

50 Fires reveal shape of things to come »

Under a changing climate, previously rare catastrophes will occur more frequently, writes David Sinai, Head of Property Treaty Underwriting at Swiss Re Australia and New Zealand

52 People power »

How a growth strategy built around culture and reputation is paying off for broker McLardy McShane

56 Loyal to a fault »

If shopping around saves them money, why do so many insurance consumers stay put?

60 Levy failures »

The NSW election presents another barrier to emergency service funding reform

64 Paradise lost »

Californian wildfires dominated another tough year for the US insurance industry, even as natural disaster losses fell worldwide

68 New reality bites »

The virtual world is expanding, creating risks and opportunities for insurers

companyNEWS 72 Global connections »

Sparke Helmore joins powerhouse alliance

72 Growing fast » New Hollard brand targets SMEs

74 Out from the shadows »

An executive development program aims to empower a new wave of broking leaders

peopleNEWS 76 UIG holds birthday bash » 78 All Blacks a hit with AIG guests » 81 Sedgwick celebrates new start » 82 McLardy McShane charity lunch marks decade » 84 Aussie icons invade Insurance House conference » 86 NTI thanks broker partners » 89 Insurers bat for school fundraiser » 90 maglog »

Cover image: AAP

February/March 2019

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Insurance News takes a partner Marketing company The Lead Agency has taken up a significant shareholding in Insurance News Pty Ltd. Insurance News Publisher and Managing Director Terry McMullan says the two companies will operate separately, “but their expertise compliments our own and provides opportunities to expand the range and effectiveness of our services”. The Lead Agency is a specialist B2B marketing agency with considerable experience in the insurance industry. Its founder and Managing Director Andrew Silcox was the marketing manager of major brokerage OAMPS before it was acquired by Wesfarmers. Mr Silcox says Insurance News “has a stellar reputation in the general insurance industry. With its focus on quality journalism and a passion for the industry, it is the clear leader for industry insight and in-depth commentary. “With such a strong foundation, I believe there is huge potential to grow with this everevolving industry.” Mr McMullan has retained his majority shareholding in Insurance News. 0 Insurance News welcomes new shareholder, 4 February

A difficult year ahead This year will see difficult conditions for many insurance buyers as the market continues to harden and underwriters pull out of certain classes, broking leaders have warned. In a quarterly market update, Honan Insurance Group says there will be “a continuation of upward pricing pressures” throughout this year. While brokers benefit from rate rises, Honan predicts a growing discrepancy between low and high-risk business and insurers’ increasing “willingness to walk away” if they are not happy with profitability. “We are already witnessing global underwriting markets in Lloyd’s ceasing to write certain classes of business such as professional indemnity and marine – and we expect this to continue,” Chief Executive Australia and New Zealand Andrew Fluitsma said. “Insurer risk selection and appetite will continue to drive underwriting behaviour leading [to] a growing rating/pricing gulf between low hazard and less desirable occupancies. “Underwriting profitability remains the key performance metric in the medium term as insurers continue to focus on good performing and risk managed businesses”. Insurance Brokers Network of Australia Chairman Gary Gribbin says the year will be “really lumpy”, with business as usual in some areas but others seeing major rate increases. He highlights flammable cladding exposure and the recycling industry as major areas of concern. 0 Welcome to 2019: it’s going to be a ‘challenging’ year, 22 January

Fires hit NSW, Tasmania, NZ Bushfires have destroyed homes in New South Wales as they burn out of control across northern parts of the state amid hot, dry and windy conditions. NSW is the latest hotspot in a burst of bushfires in the region, with emergency crews also working to contain blazes in Tasmania and in New Zealand. The NSW Rural Fire Service says a blaze on the Tingha Plateau near Inverell has burnt more than 5600 hectares. It is spreading quickly and in multiple directions.

Fireball: severe bushfires ravaged Tasmania Credit AAP

Strengthening winds in the north of the state also caused authorities to issue an emergency warning for the Bruxner Highway fire west of Tabulam, between Casino and Tenterfield. The fire had earlier destroyed five properties and has burnt

more than 2700 hectares. Meanwhile, Tasmanian emergency services continue to fight and patrol more than 30 bushfires, even as snow has fallen in parts of the state following a cool change. Tasmania Fire Services says recent rain has slowed the progression of several blazes that could still flare up if hotter and windy weather return. And in New Zealand, firefighters were working today to secure containment lines and extinguish hotspots from a fire in the Pigeon Valley in the Nelson area in the northwest of the South Island. The current fire perimeter is around 33km, covering 2400 hectares.

0 NSW bushfires destroy homes, 13 February

“Our big concern now is obviously the insurance industry. The thing we don’t want to see at the end of this event is price-gouging in premiums.” Townsville Mayor Jenny Hill wastes no time in joining other politicians in bagging insurers who will spend hundreds of millions of dollars rebuilding her flooded city

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NIBA appoints new president The National Insurance Brokers Association (NIBA) has appointed Vice President Eric Harris as its new President, replacing Tim Wedlock, who will remain on the board. Mr Harris, who has served on the board of NIBA since June 2012, is Chief Operating Officer of Business Operations at Aon. Dianne Phelan, the Adelaide-based Group Operations Manager at BJS Insurance Group, replaces Mr Harris as Vice President. The board and Chief Executive Dallas Booth welcomed both appointments. Mr Wedlock also served as NSW Division Representative on the board, and Rebecca Wilson has been appointed to fill that position. Both Ms Wilson and Mr Wedlock hail from the Austbrokers network, as General Manager Austbrokers ABS, and Managing Director Austbrokers AEI respectively. 0 NIBA appoints new leadership team, 7 February

Hayne resets financial services The Hayne royal commission has stopped short of calling for a ban on general insurance commissions, instead recommending a further review.

It also recommends extending unfair contracts terms provisions to insurance contracts, which the Government has pledged to carry out.

Commissioner Kenneth Hayne’s final report was published today, along with the Federal Government’s response.

The Government also agrees to remove the exemption for the handling and settlement of insurance claims from the definition of a financial service, to enable the Australian Securities and Investments Commission (ASIC) to have jurisdiction over claims.

Treasurer Josh Frydenberg pledged to act on all 76 of the report’s recommendations. There had been fears the report would call for all commissions to be banned – a move that general insurance brokers predicted could decimate the broking sector. But instead it recommends a review of measures to improve the quality of advice, including consideration of general insurance commissions, to start in three years and be completed by December 2022. The Government says it “agrees to review the remaining exemptions to the ban on conflicted remuneration”. The report also calls for empowerment of the general insurance Code Governance Committee to “impose sanctions” on subscribers that breach the code.

Addressing each of the case studies considered during last year’s hearings, Commissioner Hayne refers Youi and Allianz to ASIC for potential further investigation and action. For Youi, the matters relate to claims handling and its duty of utmost good faith, as examined in case studies following a Broken Hill hailstorm and after Cyclone Debbie. Commissioner Hayne says the referrals are for ASIC to consider “what action it can and should take”.

0 Hayne calls for general insurance commissions review, 4 February

Emmett takes over at AUB Former Cover-More chief executive Mike Emmett will become Chief Executive of AUB Group from March 11, taking over from Mark Searles. Mr Emmett has formerly held roles with QBE, EY, Accenture and IBM.

He was recruited from QBE by CoverMore in July 2014. The travel insurer was sold to Zurich in April 2017, and reported last insuranceNEWS.com.au September that Mr Emmett would step down in favour of a Zurich global executive.

Mr Searles announced in August that he intended to step down with a view to developing a non-executive director career.

0 AUB appoints Mike Emmett as its next CEO, 24 January

Townsville flood: a roundup Insurance losses from the Townsville floods were estimated at more than $600 million “and rising by the hour” in midFebruary after the north Queensland city was inundated by unprecedented rainfall. The Bureau of Meteorology says the total rainfall from consecutive days of downpours in late January was the most in Townsville since records began in 1888. The

flooding was made worse by the release of water from the Ross River dam upstream from the city. Insurers received up to 16,000 claims, the Insurance Council of Australia said as it sought to assure affected communities the industry will respond “swiftly, fairly and compassionately” to the catastrophe. Some 457 residential properties deemed unlivable are on the insurers’ high priority list. By mid-February the industry had already provided $17.5 million in support, emergency accommodation and repairs. Insurers are aware from long experience that at this stage of the post-disaster process they are walking a tightrope of public expectation, with Queensland Deputy Premier Jackie Trad warning against using so-called “loopholes” to deny claims. The comment came as affected policyholders, mainly businesses, realise

they are not covered for flood damage. Hundreds of business owners did not take out flood cover prior to the devastating storms. About 10% of the claims lodged are from businesses. Industry sources told insuranceNEWS.com.au that as many as three-quarters of businesses in the city are feared to have declined flood cover. The reasons for such a large number of decisions to opt-out of flood cover are not yet clear, with some citing affordability and others claiming their broker did not offer flood cover to them. Insurers are likely to resist pressure to pay where the policy does not respond, and affected businesses are being urged to discuss the situation with their brokers. While all policies generally include storm cover, commercial and domestic customers can decline flood cover.

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Aftermath: hundreds of Townsville homes and businesses were inundated. Credit: AAP

I Sinking under a premium problem

f you want to live in north Queensland, the Northern Territory or northern Western Australia, you should know they’re all in a region where extreme weather risks exist, which means the chance of your property being damaged or destroyed is higher than it is in the rest of Australia.

As Townsville flounders after a massive flood, a new report on northern Australia insurance continues an interminable saga By Bernice Han and Terry McMullan

For insurers this volatile region is, at best, marginally profitable. Which is why insurance premiums in northern Australia are more expensive that they are anywhere else in Australia. It’s a logic that brokers in northern Australia have often repeated to their clients, but it’s only when a cyclone sweeps through the region or floodwaters like the February Townsville event devastate a community that the cost of insurance becomes less important than the fact that it’s people’s only path back to normality. But cyclones and floods are isolated incidents. Nobody can say when or where

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“You have to understand that insurance is expensive in that area for a good reason, the premiums are calculated based on the risk.” the next catastrophe may strike across the vastness of northern Australia. But the risk is always there.

frustrating business of sorting out claims that will inevitably turn up many cases of underinsurance and even non-insurance.

Such risk and unpredictability makes the cost of insurance in the north a constant bugbear to brokers like Stuart Brady of Queensland’s Shielded Insurance Brokers. Speaking to Insurance News from his base north of Brisbane while his colleagues from sister brokerage InsureNQ work long hours helping clients affected by the Townsville floods, he says higher risk “comes with the territory” for northern Australians.

That in turn will again raise among northern Australians the ugly issue of insurance affordability.

“You have to understand that insurance is expensive in that area for a good reason,” he says. “The premiums are calculated based on the risk.” If that sounds easy enough to understand, consider the twists and turns of the Federal Government over the past six years in dealing with such logic while the people who live in the north – voters – pay considerably more for their insurance than people and businesses in “the south”. The insurance industry has long insisted that the only sensible way forward is investment in buildings and infrastructure that are capable of withstanding the extreme conditions experienced in the north. The overall expense would be considerable, but the result would be less damage and lower premiums. In the meantime, the reality of the present situation is illustrated all too clearly in the once-in-a-century floods in Townsville, which serve as a cruel reminder of why the risk of extreme weather means higher premiums for home, contents, strata and commercial property policies. Some of the costliest recent natural disasters to hit Australia occurred in the region: cyclones Debbie in 2017 and Yasi in 2011, for example. The Townsville disaster is in its early stages of recovery, with insurers fully engaged in the complex and often

Solving this politically sensitive and complex issue has proved a Herculean task. Successive governments have come up short despite the spending of millions of dollars and man-hours invested in research. Canberra’s latest crack at the problem – the most recent in a long list of attempts to document the issue without ever tackling the expensive option of investing in solutions – comes via the Australian Competition & Consumer Commission (ACCC), which is overseeing an ongoing three-year public inquiry that began in 2017. The latest report, released by the Federal Government in December, lays out a list of 15 recommendations for immediate adoption. These interim findings get it mostly right in assessing why premiums are far higher in the north, even if some of the recommendations are contentious [see panel]. It says that over the past decade, “insurers’ methodologies for pricing insurance have become much more sophisticated, and combined with access to better data, we have seen a shift towards more address-based risk assessment and pricing”. “In northern Australia, insurers have also incurred some heavy losses due to high claims and increasing costs. As a result, insurance premiums are increasing, especially for those in high-risk areas.” Some of the recommendations, like a call to abolish state stamp duties on premiums – a move that would immediately improve the situation – are hardly new. Others, like banning broker commissions, extending unfair contract terms to insurance policies and making products more comparable

appear more attuned to the ACCC’s national agenda than a solution to a regional problem. “People are genuinely worried about what will happen to their family, to their community and to the development prospects of northern Australia if insurance prices continue to rise without relief,” the ACCC says. “They fear devastation if disaster hits and people are no longer insured.” “The concerns we heard from communities are not anecdotal or isolated. Our analysis confirms that home, contents and strata premiums are, on average, considerably higher in northern Australia than the rest of Australia and have increased more in recent years” [see panel]. While that’s an obvious observation, some of the ACCC’s recommendations are solid and have found strong support from the industry. Not surprisingly, the suggestion to do away with stamp duties is one that stands out. Past government inquiries, independent think-tanks and the industry have long made the case for the abolition of stamp duties on policies. The Queensland Government is a good and very relevant example. While Deputy Premier Jackie Trad called on insurers to treat Townsville flood victims with compassion and said she was “gravely concerned” that “hard-working family businesses have done the right thing [and] paid their premiums”, she wasn’t about to get into the reasons why some people may have elected not to add flood cover to their policies – or bothered insuring at all. Because insurance affordability heavily affected by state stamp duties.

is

Early indications from Townsville suggest that a significant number of businesses and householders opted out of taking up flood insurance, which is sure to lead to the inevitable political handwringing and media portraying insurance workers as heartless.

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Under water: Townsville was hit by record rainfall. Credit: AAP

Townsville floods is a good example. “Brokers are working very hard for their clients at the moment, gathering information and putting the claims through. Many of them have suffered their own damage, but they are still working very long hours on behalf of their clients.” Mr Brady of Shielded Insurance Brokers agrees. “For clients, having brokers by their side working through the claims process at times like this is a huge relief. National Insurance Brokers Association (NIBA) Chief Executive Dallas Booth says the issue of high stamp duties – which rise in lockstep with premiums and are usually calculated on top of the GST component – is hardly a new issue. “There is very significant stamp duty collection, particularly in Queensland, and the ACCC report actually quantifies that,” he told Insurance News. “It’s interesting that when insurance premiums had to increase about six years ago because of the cost of claims… at that very moment the Queensland Government put up its insurance stamp duties. “So the premiums went up, and of course the stamp duties went up with them, and the Queensland Government got a double advantage.” According to the ACCC, the stamp duty on insurance products in Queensland rose to 9% in 2013 from 7.5%. In WA and the Northern Territory, a 10% rate applies. Over the 11-year period to 2017/18, overall tax collected from home, contents and strata policies in northern Australia boosted state and territory coffers from a total $48 million a year to $157 million. “As stamp duties are applied on the GSTinclusive amount of a premium, the effect of these duties is magnified,” the ACCC report says. “Taxes have a significantly higher dollar impact on consumers in northern Australia than in other parts of the country.” If the industry fully supports the ACCC’s recognition of the distorting effect of stamp duties, the regulator’s call for a ban on broker commissions has had the opposite impact. The report says that as premiums have risen, “we also observed that insurers’ commission costs in northern Australia have more than doubled on a per policy basis since 2007-08”. It says commission rates of 15-20% are common, and combined with incentive payments can reach around 30% of the cost of the premium. Remuneration structures

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“inevitably give rise to conflicts of interest, which consumers may not be fully aware of. There is little or no direct relationship between the size of the commission and the work undertaken.”

“It can be a very daunting process for someone to make a claim on their insurance, and it’s tougher again when a disaster on this scale happens. For us as brokers, we do our very best work at claims time.

The report also notes that strata managers were accused by focus groups of “having no incentive to negotiate the best premium, again due to conflicted remuneration arrangements where they receive a share of insurance brokers’ commissions”.

“We are definitely earning the commissions in that respect. We definitely work hard for our clients from start to finish and I believe commissions are necessary for us to operate.”

The Australian Securities and Investments Commission used the forum of the Hayne royal commission to call for a nationwide ban on broker commissions, but senior industry sources have suggested to Insurance News that the ACCC call for a ban on commissions in one region of the country is misplaced and even opportunistic. With a limited number of insurers operating in the region – albeit under a multiplicity of brands – the work of brokers in seeking out coverage at an affordable price in a period when insurers are backing away from higher-risk business is essential to businesses. “Moving to a fee-based system wouldn’t solve anything,” one senior broker who declined to be named for this article told Insurance News. “Smaller businesses in particular would be disadvantaged. The answer isn’t in the direct market either, when you look at the range of particular risks businesses up there face.” Local brokers say the ACCC reveals a poor understanding of their role, because while the regulator focuses on the front end of the process – their payment – it ignores the importance of the broker in assisting clients when disasters strike, as they tend to do with great regularity in northern Australia. That’s when claims need to be made, and the broker’s support and service comes at no charge. Mr Booth says the aftermath of the

There is also the fact that brokers are charged with finding insurers with the best coverages at the best price for their clients. In a higher-risk region like northern Australia, that’s not as easy as it is in the south. Where risks are higher, insurers are naturally more risk-averse. Some choose not to do business in the region at all, while those who are sticking with it are cautious about the risks they will accept. The broker’s relationships and negotiating skills with insurers can mean the difference between obtaining suitable coverage and limited coverage. The ACCC report’s analysis says that in some parts of the north, “insurers are not actively trying to win market share. Instead, they are implementing strategies to manage their exposure to customers they see as highrisk. For example, they may be increasing their premiums so as to lose customers or no longer selling or renewing policies. “We found that insurers can regard price leadership in a market [segment] as exposing themselves to adverse selection (that is, attracting higher-risk customers) or otherwise indicating that they have mispriced risks compared to a competitor. “These unusual market dynamics soften the competitive pressure on other insurers in these areas.” The report also notes the incidence of heavy losses in northern Australia earlier this decade “due to the impact of significant natural disasters which resulted in large claim amounts”. Insurers’ financial


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The ACCC has called for quick adoption of 15 suggestions it believes will bring premium relief to property owners in northern Australia. They are: 1. Abolish stamp duty on home, contents and strata insurance products 2. Re-base stamp duty; use stamp duty revenue for affordability and mitigation 3. Insurers to report their brands and where they are writing new business 4. Standardise definitions of prescribed events 5. Review and mandate standard cover 6. Unfair contract terms should apply to insurance 7. A link to MoneySmart should be on new quotes and renewal notices 8. Better understand information that falls within ‘general advice’ 9. Disclose costs that count towards ‘sum insured’ 10. Disclose the premium, sum insured and excess on a renewal notice 11. Extend the ban on conflicted remuneration to insurance brokers 12. Better information for consumers lodging a claim 13. ASIC approval for the General Insurance Code of Practice 14. Public mitigation works and expected premium reductions 15. Building code changes to better protect interiors and contents

performance in northern Australia has significantly improved since then “but remains poor”. “While some insurers have been profitable, their margins have been lower than in the rest of Australia. Other insurers have continued to operate at a loss over recent years, albeit a smaller one. “While premium revenue is proportionally much higher in northern Australia, so too are insurers’ costs. Costs have risen over the last decade at a greater rate than costs in the rest of Australia. Claims are more frequent, and on average larger, in northern Australia (particularly for strata insurance). “This has also impacted on the cost of reinsurance, which is a significant cost component for insurers.” Would bans on commissions and other “solutions” such as comparison websites solve the insurance affordability and availability problem that continues to dog northern Australia? Probably not, say insurers, because the only real solution is to spend money on serious mitigation strategies, better land-use planning and improvements to the building code. Until that happens – and no one should hold their breath – experts say the industry should focus on pushing the mitigation option and explaining to the affected communities the myriad reasons why insurance in the north costs more than it does in the south. There is an obvious role for brokers in communicating that message. Cairns broker John Devaney believes the industry needs to reassess its communications strategy when it comes to raising public awareness of brokers’ role. “We’re great at talking to ourselves but with the outside we’re not so great, and that’s where we need to invest in that dialogue at a greater level,” he told Insurance News. “We need that united voice saying who and what we are, and we don’t want to leave that too late.” 0

The 13 draft recommendations are: 1. Insurers should estimate a sum insured for customers 2. Prominently publish product disclosure statements and key fact sheets online with product offerings 3. Disclose premium impacts of optional inclusions or exclusions 4. Consider setting up a national home insurance comparison website 5. Renewal notices should give 28 days notice 6. Disclosure where premium increases are capped 7. Consider likely insurance costs before purchasing real estate

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8. Requesting personal information held by insurers 9. Strata managers to be remunerated by body corporate only 10. Clear disclosure of products considered and remuneration 11. Giving consumers more control over how claims are settled 12. Clearly stated mitigation discounts 13. Information on mitigation works that could reduce premiums. The ACCC report says home and contents premiums in northern Australia rose 130%

in real terms for property policies between 2007/08 and the last financial year. For properties in the south, premiums went up about 50% over the same period. Combined home and contents policies are most expensive in northern Western Australia, with a policy costing an average $3500 in annual premiums. In second place is North Queensland on $2400, followed by the Northern Territory where annual premiums are about $2200. Premiums in the rest of the country are significantly lower, with totals around $1300 prevailing in the south of the country.


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C mmissi ns in the firing line Brokers have three years to justify why their remuneration arrangements should continue By Wendy Pugh

C

ommissioner Kenneth Hayne has stated he doesn’t like financial services carve-outs or exemptions and he doesn’t particularly like commissions either – throwing down the gauntlet for general insurance brokers who benefit on both counts. The final report of his Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, released with much fanfare in February, has left the broker remuneration model unscathed for the time being. But brokers remain in the firing line, with regulators lining up against them, confirming fears that they would be caught up in the inquiry’s net. The report recommends a review of the broker exemption from the ban on conflicted remuneration as part of a wider financial advice review. In three years’ time. “The review should preferably be completed by 30 June 2022, but no later than 31 December 2022.” Brokers say no evidence was presented to show problems with general insurance broking commissions, and Commissioner Hayne had no grounds to take immediate action. From that perspective, they have welcomed the more measured approach of a delayed further inquiry. “We have three years to work out exactly where

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we want to be in terms of broker remuneration and to prepare a very strong case for that review,” National Insurance Brokers Association (NIBA) Chief Executive Dallas Booth says in a message to members. “So we have got good news in the short term, but we have some very important work to do over the next couple of years.” The final report clearly targets commissions in other sectors, suggesting they compromise customer service and that, where possible, such conflicts should be eliminated rather than managed. “Any intermediary who seeks to ‘stand in more than one canoe’ cannot,” Commissioner Hayne says in his report. “Duty to client and self-interest pull in opposite directions.” The report recommends a ban on mortgage broker commissions, seeks to end grandfathered arrangements as soon as possible and suggests the proposed review should consider whether declining life commissions should “ultimately be reduced to zero”. The review, to be conducted in consultation with the Australian Securities and Investments Commission (ASIC), will look at whether the conflicted remuneration ban exemption for general insurance products, consumer credit insurance products and non-monetary benefits remains justified.


Eye on commissions: Kenneth Hayne

The carve-out was achieved as part of the 2012 Future of Financial Advice (FOFA) reforms, doubly placing them in Commissioner Hayne’s sights as he sought ways to simplify financial services laws so there is less scope for misconduct.

past and say they are well placed to do so again.

“It is time to start reducing the number and the area of operation of special rules, exceptions and carveouts,” he says.

He says commission levels are roughly the same between various insurers and there is therefore no incentive to switch from one provider to another on the basis of earnings. He also rejects ideas that there is any manipulation of deductibles and premiums to maximise commissions.

“Reducing their number and their area of operation is itself a large step towards simplification. Not only that, it leaves less room for ‘gaming’ the system by forcing events or transactions into exception boxes not intended to contain them.” Scrutiny of general insurance commissions emerged in a policy questions document after the royal commission’s insurance round of hearings, despite the issue not being canvassed to that point of the inquiry. In response, ASIC backed an end to the exemption, while the Australian Competition and Consumer Commission (ACCC) has separately added its weight to the issue by calling for an immediate ban last year as part of its ongoing inquiry into northern Australian insurance. Brokers have argued their case successfully in the

“For FOFA we clearly articulated how we operated and independent people looked at that and said it is not conflicted,” Steadfast Chief Executive Robert Kelly told Insurance News.

“The industry has to show to the ACCC and it has to show to ASIC how we operate and how there is a lack of conflict,” he said. Brokers’ remuneration involves both fees and commissions, with the latter often accounting for some two-thirds of the total. The breakdown must be clearly presented for retail consumer products such as home and motor. For commercial clients only the fee is separately stated, while further information on commissions must be disclosed if requested. The remuneration split covers both the cost of providing advice and arranging the insurance as well as the often-overlooked role of brokers in assisting

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clients when a claim needs to be made. Insurance Brokers Network of Australia Chairman Gary Gribbin says brokers “are providing products that are high quality, much better products than the direct market, and when a claim occurs brokers are demonstrating their value in abundance – and it is that which is the single biggest service”. NIBA’s Mr Booth notes that the commission structure also spreads the cost of administering the process across the client base, assisting those with more time-consuming issues, just as insurance spreads the claims of the few against the premiums of the many. A completely upfront fee raises the risk that businesses at the smaller end of the market are likely to baulk at the cost, disadvantaging clients that would benefit from advice and hitting brokers that provide the service. JP Morgan Insurance Analyst Siddharth Parameswaran says the biggest impact could come at annual renewals when a client may be more inclined to question a significant fee if they are not receiving the same level of service as when cover was first provided. Brokers make a distinction between commissions paid on a policy basis and the more widely criticised volume-based commissions, where a brokerage receives an extra amount for a placing a certain level of business with an insurer. Additional services provided for the insurer may be linked to the payments. “If an insurer comes to you and says, if you give us x amount of premium we will pay you the normal commission plus something more, then that is conflicted,” Mr Kelly says. “In that situation you are not doing the right thing by your client. “Steadfast has never done any of that.”

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Commissions vary widely according to the various classes, and Mr Kelly says they average out at about 20%. Brokers fear they have been swept up in concerns raised about add-on insurance, with the royal commission highlighting commissions of around 70% paid to motor vehicle dealers for sometimes-worthless products. They are also different from life advisers who are seeing high upfront commissions scaling down from an 80% cap introduced last year. General insurance brokers mainly provide cover for businesses ranging from SMEs to large corporations and have less involvement in the consumer end of the market that was examined in the royal commission’s insurance round. Risk Advisory Services MD Tony Cope, whose brokerage operates solely on fees charged to clients, says the royal commission may not have heard evidence about brokers, but asserts that if it had expanded its focus it would have found that conflicted remuneration arrangements are widespread. “We have conducted more than 500 independent insurance reviews since 2007 and uncovered conflicted insurance broking remuneration arrangements in more than 50% of these engagements,” he says in a LinkedIn blog. “After watching [Counsel Assisting] Rowena Orr and Michael Hodge dismantle many financial services executives at the royal commission, NIBA should be very grateful that the conflicted insurance broking remuneration arrangements were not their core focus.” Mr Cope told Insurance News that commission payments become less comparable between insurers as the cover becomes more complex. “The skill of the broker is to design a product that


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Hayne’s action plan The royal commission made 76 recommendations in the final report, including the following key measures affecting general insurance. Broker commissions: A review of measures to improve financial advice will also decide if conflicted remuneration ban exemptions are still justified for general insurance products, credit insurance products and non-monetary benefits. The review should start in three years and ideally be completed by June 30 2022, and no later than December 31 that year. Unfair contract terms: These should be extended to insurance and the Australian Securities and Investments Commission (ASIC) Act amended to define “what is being insured” as the main subject matter of a contract. The duty of utmost good faith in the Insurance Contracts Act should operate independently. Claims handling exemption: The handling and settlement of claims should be included in the financial service definition, meaning Corporations Act obligations to provide services efficiently, honestly and fairly would apply and giving ASIC greater oversight. Disclosure duty: The Insurance Contracts Act should be amended to replace the consumer duty of disclosure with a duty to take “reasonable care” not to make a misrepresentation. Commissioner Hayne says insurers know better than consumers what is considered relevant. Code of Practice: The Insurance Council of Australia (ICA) should empower the Code Governance Committee to impose sanctions for a breach. Commissioner Hayne rejects the idea of sanctions only if an insurer fails to correct a breach. Industry codes should make some areas enforceable by law. ICA should act by June 30 2021 to have provisions that govern the terms of a contract with policyholders designated as enforceable code provisions. Co-operation with the Australian Financial Complaints Authority: Companies should take reasonable steps to co-operate with the authority, which has replaced the Financial Ombudsman Service, and make available all relevant documents and records relating to

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disputes. Commissioner Hayne says there is “little benefit in mandating the existence of systems if there is no obligation to comply with those systems”. Add-on insurance: A Treasuryled working group should develop an industry-wide deferred sales model for add-on products and this should be introduced as soon as possible. ASIC should impose a cap on commissions paid to vehicle dealers. BEAR: The Banking Executive Accountability Regime should be extended to all Australian Prudential Regulation Authority-regulated insurers. Commissioner Hayne suggests it could first be extended to superannuation and to insurers “after a further interval”. No hawking: Hawking of insurance products should be prohibited. This recommendation was sparked by phone sales of life cover to consumers who did not understand what they were purchasing. Changing culture and governance: Financial services entities should, as often as reasonably possible, take steps to assess culture and governance, identify any problems, deal with them and determine whether changes have been effective. ASIC enforcement: ASIC should take as its starting point whether a court should determine breach consequences. Infringement notices should mainly be used for administrative failings, and would rarely be an appropriate enforcement tool for large corporations. Deterrence should be taken into account in deciding whether to accept an enforceable undertaking. A regulator for the regulators: A new oversight authority would monitor ASIC and the Australian Prudential Regulation Authority. It would comprise three part-time members, be staffed by a permanent secretariat and report to relevant ministers biennially. Individual registration: Individual financial advisers should be registered with a new disciplinary body that would complement ASIC’s role. The National Insurance Brokers Association is seeking clarification as to whether the proposal extends to insurance brokers.

works best to match the risk of the client, and those products can be completely different and that will mean there are different commission rates,” he says. Mr Cope says it is time for the broking sector to follow the example of professions like accountancy and law in the way it is remunerated. “If the insurance broking industry is going to be a profession it needs to be able to explain the value that it adds and the amount that it charges for the generation of that value,” he says. Commissioner Hayne’s dislike of carve-outs and exemptions has also had implications in other areas of general insurance. The report recommends claims handling should fall within the definition of a financial service, making it subject to Corporations Act obligations to provide services efficiently, honestly and fairly. Unfair contract terms would be extended to insurance, with Commissioner Hayne favouring a narrowly defined “main subject matter” for contracts. This approach is preferred by consumer groups, as more terms would be left open to challenge. “The purpose of extending the unfair contract terms regime to insurance contracts would be undermined if the broader definition endorsed by industry were adopted,” he says. The final report recommends that the Insurance Council of Australia (ICA) strengthen sanction provisions in the Code of Practice and proposes that industry codes in general should make some provisions enforceable by law – a significant step from the way self-regulatory codes were originally envisaged. The Government and Opposition have committed to implanting recommendations in the final report as soon as possible, including measures aimed at improving the performance of the regulators in cracking down on misconduct. Many of the proposals are broadly supported by the industry, with some reflecting work already in progress, but details of proposals are still being analysed and considered. “Repairing public confidence in general insurance is essential if we are to continue to provide effective and efficient risk-based products to households, businesses, governments and the broader community,” ICA Chief Executive Rob Whelan says in a response to the royal commission’s final report. But brokers do have time to justify the continuation of their commission arrangements and to prepare the case for retaining a hard-won exclusion to the conflicted remuneration ban. They have a solid case to put forward, but the opposition from consumer groups as well as ASIC and the ACCC mean it’s shaping up to be a very tough battle. 0


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Bright future: Tim Plant believes Zurich is heading in the right direction

Maintaining momentum Zurich is back on track, with a new Chief Executive who’s determined to build on recent gains By John Deex

I

t’s no secret that Zurich’s local business has had to work through some challenging times in recent years.

But now it’s out the other side of that tricky period, equipped with a renewed focus and clear strategy – and new leader in experienced executive Tim Plant. Mr Plant (formerly of QBE and icare) was selected to run the general insurance business following last year’s departure of Raj Nanra, and sees a bright future full of opportunity. Zurich’s international reputation, the hardening market and the ability to grow were all factors in attracting him to the role – as was the insurer’s almost singular focus on the commercial intermediated market. “I saw a great opportunity,” he tells Insurance News. “The business had gone through some challenges in the

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past few years, but I think the direction we are on, the positioning of the business has been very positive. “A lot of my focus has been on maintaining the strong momentum that our really great team has been able to develop. “It was a great time to come in, the timing of the market is terrific for our business.” Zurich remains a major player in the broker market across Australia and New Zealand, writing more than $1 billion in premium and employing more than 500 staff. “We are really proud of our customer proposition,” Mr Plant says. “We provide coverage for more than half of the ASX 300, we also cover about one-third of Australia’s top 500 private companies, and we have a really good SME footprint, with more than 100,000 customers.


“There is an enormous amount of goodwill for Zurich in the marketplace from our broker partners and there is quite a Zurich alumni across the market in various places.”

“It is so important that we have a deep understanding of what each of them are doing and how we can continue to build really strong relationships and work with them to build strong customer solutions.

Mr Plant, who took the reins halfway through last year, did not rush to put his stamp on the business.

“In terms of customer experience, we have been able to drive significant improvement in the feedback responses we are getting. The likelihood of a customer recommending us has increased more than 185% in our claims area.

Instead, he recognised good work already being done, and spent time holding in-depth discussions with staff and broker partners. After gathering crucial feedback, he developed five key strategic themes: keeping decisions as close to the customer as possible; a deep understanding of broker partners; investing heavily in customer experience; consistency and clarity; and instilling pride and confidence. “Our market is healthy, competitive and mature and there is no shortage of insurance options. We are making sure we are in a position where we can differentiate our offering from the broader market. “The key area of focus for us is to build on the momentum our team has delivered over the past couple of years. “Part of that success has been keeping our decisions as close to the customers and intermediaries as possible, and we have reinforced that with some announcements on our executive structure. “We are continuing to drive a deep understanding of our broker partners. The market is seeing a fair bit of disruption, a lot of new technology coming through, and each of our broker partners is making slightly different strategic choices.

“We are also investing in technology and processes, and in value-added services around risk engineering and areas that really support our relationships and make us more than purely a provider of capacity.” Mr Plant says feedback from broker partners indicates consistency and clarity are crucial. “A lot of the feedback was quite consistent around ensuring we deliver a consistent level of service and really have clarity around our risk appetite and delivering on expectations. “We don’t want to be going down the path of exploring opportunities that clearly aren’t within our appetite.” He also believes that instilling pride, confidence, focus and purpose in his staff can only lead to better outcomes. “I do think we have a lot to be proud of and it’s about making sure our people have the confidence to go out and represent us appropriately, and deliver high-quality solutions.” Mr Plant believes Zurich is strong across the corporate, mid-market and SME sectors, and sees growth opportunities in all three.

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“Being part of a global group, we have enormous capabilities to service multinational customers. In the mid-market, we have achieved really solid penetration across a number of products. “And we still see great opportunities in the SME space. We are continuing to invest in that area, in particular in customer experiences across claims, underwriting and risk solutions. We want to grow our position across those three key segments, but it is really important that we grow sustainably. “We want to take the opportunities for growth, but making sure we do it with appropriate levels of underwriting profitability.” While Zurich’s focus is on the commercial intermediated sector, it is also helping brokers gain market share in personal lines through its support of insurtech Blue Zebra, which it underwrites. Launched last year by former QBE executives Colin Fagen and Blair Nicholls, Blue Zebra uses a smart technology platform to help brokers compete with direct players. “They are doing really well and we are pleased with the penetration they have developed already,” Mr Plant says. “They have more than 250 brokers supporting them across Australia, and they are bringing some unique IP to the market. “It is a very valuable proposition for brokers as well. A lot of the brokers we talk to still see personal lines as an important way of managing the overall relationships

Backing brokers: Mr Plant believes intermediaries always add value

Seeds of a successful career Tim Plant has spent 25 years in insurance – but he started his professional life on a different track. “I came in from the agri-side,” he tells Insurance News. “My first job out of university was teaching in an agricultural college. Then an opportunity came up at a company called Australian Eagle in Melbourne as their national agronomist, so I got into insurance from there. The past 25 years has seen some great experiences.” Mr Plant has worked at home and abroad, in insurance and reinsurance. “I was lucky enough in the early days

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to start off with a number of technical roles on the underwriting and claims side in particular, which positioned me well for a number of the distribution roles. “The roles I have really enjoyed, looking back, have been in leadership and distribution.” He spent more than a decade with Elders and QBE, finally as QBE’s chief executive for Australia and New Zealand, before leaving in 2016. He then joined state insurer icare for about 18 months, an experience he looks back on fondly.

“There was a really good balance between driving great commercial outcomes for the people of New South Wales, but also with a very strong community and social focus. “I really enjoyed that balance and that perspective. The areas of the business I was looking after were really around the government-related entities. I thoroughly enjoyed it. “I hadn’t expected to be placing the state’s reinsurance program and covering iconic assets like the Harbour Bridge and the Opera House.”


they have with their customers. Zurich was very underweight in personal lines in the intermediated space, so Blue Zebra represented a really strong opportunity for us.” While the bulk of Zurich’s remediation is behind it, Mr Plant does not rule out further retreats from unprofitable business. He says some portfolios are still not delivering expected levels of profitability. “We are very focused on continuing to remediate portfolios where we are not getting the technical outcomes we expect. However, I think we are very well advanced in that process. “The team has done an excellent job in the past couple of years remediating underperforming portfolios, and we’ve got a very strong technical focus.” He believes that while the market is generally hardening and will continue to do so throughout the year, there is “no shortage of opportunities” in the marketplace. But he says “very high-risk property areas” will continue to be challenging. “We have been very clear on our appetite, we haven’t tended to support EPS (expanded polystyrene) risk or recycling plants. Those sorts of areas will continue to be quite difficult and challenging to place over the next 12 months. “But [that’s not the case] for high-quality business where we’ve had solid relationships over a long period of time. “It is not a one-size-fits-all response to the market, and there are different responses from underwriters depending on the type of business and its underlying profitability.” Zurich works exclusively with brokers, and has no plans to develop direct commercial insurance offerings. Mr Plant believes brokers will retain relevance and value, even in the face of rapidly developing technology and consumer expectations. “We retain a very strong view that brokers have got a lot of value to add with all commercial customers, from the smallest SMEs all the way through to the largest corporates,” he says. “Even in those areas where smaller SME customers can get a direct solution, it doesn’t take much growth to add a small amount of complexity to their business where they will need some kind of advice. “So we continue to think brokers will be best positioned to manage the life cycles of those customers as well. We have made a very conscious decision not to go down the path of direct SME.” As for broker remuneration, Mr Plant says the key is that brokers are paid fairly, and consumers get value for money. This could be through a commission or a fee, but he warns too much change too fast could cause problems. “I don’t think it makes a huge difference from an insurer’s perspective as to whether it is a commission or a fee. It is really about brokers getting remunerated appropriately for the value they are adding to the customer relationship. “It will be interesting to see how the debate unfolds following the [Hayne] royal commission final report. I think it is important that customers continue to get really solid value out of the remuneration they are paying brokers, in whatever form, but as long as it is transparent and disclosed, then commission is a good way to remunerate brokers. “We have got to be mindful of the potential unintended consequences of a dramatic shift in the way brokers can be remunerated.” For Zurich, it’s about staying the course, sticking to its strategy and building on the momentum developed in the past couple of years. “We have reaffirmed our focus and purpose in the marketplace, and it’s about making sure we continue to deliver on that,” Mr Plant says. 0

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HIGHER

FASTER

STRONGER

Commercial premium rates have rallied, although further increases may be more muted, the annual industry Barometer shows By Wendy Pugh

A

recovery in commercial premiums has gathered pace after rates rose more than anticipated last year, the annual JP Morgan Taylor Fry General Insurance Barometer shows. Rates increased 9% as the market continued to recover ground following a long period in depressed territory, building on a 3% gain in the previous 12 months. The improvement follows action taken to remediate underperforming classes, while insurers also benefitted from a fairly benign period for catastrophes and a tailwind from economic momentum. Combined operating ratios improved last year and further profitability gains are expected as the business environment remains reasonably supportive. Commercial rates are forecast to rise 8% this year, with the increases remaining much higher than claims inflation, even as economic growth moderates. “For Australian insurers a tempering, but still growing, economy still allows for the prospect of an upward tick in the insurance cycle,” the Barometer says. Cautious assessments a year ago that the pricing cycle had entered positive territory have proven correct, although the rebound remains more muted than past recoveries.

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The pace of rate gains is likely to slow after this year, but a still-healthy gain of 6% is anticipated in 2020. The expectation is that an overall profitability improvement that emerged over the last two years will likely hold into this year and next, the report says. The Barometer is based on a survey of major underwriters, reinsurers and brokers in the local market, and taps data from the Australian Prudential Regulation Authority. The report also has its own substantial body of trend data. This year’s Barometer is the seventh between the current partners, continuing on from 19 editions of the JP Morgan Deloitte General Insurance Survey. Three years ago the report highlighted sliding commercial premiums and a tough environment for insurers. Commercial rates then stemmed the decline with a 1% drop in 2016 before recovering ground in 2017. The 9% rise last year exceeded earlier expectations for gains of around 5-6%.

in the domestic motor and householder ratios indicating improved profitability in these classes, while the premium rates in domestic classes overall are forecast to remain broadly stable,” JP Morgan Insurance Analyst Siddharth Parameswaran says. Survey participants expect claims inflation over the forecast period to grow at moderate levels of around 3% across domestic and commercial classes. In claims frequency, commercial classes have shown more variation compared with domestic lines, but are expected to increase at relatively stable rates going forward. Despite the generally positive picture some classes remain problematic, with more remediation still required. • Fire and industrial special risk rates rose 9% last year after sliding 3% in 2016, but the combined operating ratio was still at 106%, despite dropping by nine percentage points over the same period. The ratio is forecast to be 101% this year.

Commercial combined operating ratios have also improved from 101% in 2016 to 96% last year. In domestic lines the ratio improved to 78% from 90% over the same period, with the greatest shift seen in compulsory third party.

• Commercial motor rates jumped 14% last year, helping the combined operating ratio to slip to 99% from 103% the previous year and 105% in 2016. The report notes that on a normalised basis it is still on the wrong side of the ledger.

“There has been a slight downward trend

• Professional indemnity profitability has


improved, with the combined operating ratio slipping back to positive territory at 90% after surging to 154% in the previous year. Rates rose 10% to counter an 8% inflation in claims size and a 5.5% rise in claims frequency. The inflation pace is expected to remain at similar levels this year. The class includes directors’ and officers’ (D&O) cover, partially masking problems in one of the most stressed areas for the industry. A number of insurers and Lloyd’s

underwriters have exited the market or have reduced their exposure. An Australian Law Reform Commission report has recommended a government review of the securities class action regime after noting that the insurance problems suggest “something is not quite right”. The Barometer warns Australia may be entering an even more litigious environment in some segments of the economy, particularly after the Hayne royal commission highlighted financial services misconduct.

Industry Summary INDUSTRY PREMIUM RATE MOVEMENTS Class

2016A

2017A

2018A

Domestic motor

3

5

4

Householders

3

3

4

CTP

7

-1

-5

Personal lines

3

2

2

Fire & ISR

-3

5

9

Commercial motor

3

4

14

Workers’ compensation

-1

1

10

Public & product liability

-2

1

4

Professional indemnity

1

3

10

Commercial lines

-1

3

9

The increased presence of litigation funders in Australia also suggests claims activity levels are unlikely to decline and the class is set to remain a tough area for underwriters.

Profitability and competition in commercial classes, particularly in D&O was named as a key issue by underwriters, while brokers nominated excess competition and capacity, particularly in the hardening ISR market.

3

Several trends in the wider environment are also presenting challenges for the insurance sector, according to survey respondents, with the royal commission hearings and fallout putting regulation concerns front and centre.

8

Combined ratios 2016A

2017A

2018A

2019F

2020F

Domestic classes Domestic motor*

98

101

95

n/a

n/a

Householders*

90

92

85

89

86

CTP

73

44

64

n/a

n/a

Weighted average

90

82

78

81

79

Fire & ISR (commercial property)*

115

113

106

101

102

Commercial motor*

105

103

99

96

97

Public & product lLiability*

77

81

80

79

78

Workers compensation

98

84

92

n/a

n/a

Professional indemnity^

95

154

90

92

92

Weighted average

101

103

96

94

95

Commercial classes

* Starting from 2012 we have used APRA data for these classes, whilst for other classes and prior years we used company data collected through the survey. ^ The 2017A and onwards, ratios are based on a different mix of participants to 2016A and 2015A.

“This could create serious implications for a functioning economy if a significant increase in premiums creates difficulty for companies to obtain cover at an acceptable level,” he says.

“Insurers have raised rates, but it is still performing quite poorly from a profitability perspective,” Mr Gomes says.

2019F

Source: 2018 J. P. Morgan Taylor Fry General Insurance Barometer

Source: 2018 J.P. Morgan Taylor Fry Barometer

Taylor Fry Principal and Senior Actuary Kevin Gomes says the cost of class actions, particularly related to listed company disclosure obligation breaches is approaching crisis levels.

Underwriters, reinsurers and brokers all named regulation as a key issue and the Barometer highlights potential impacts from both the Hayne inquiry and a Productivity Commission review of financial services competition. “There are a number of issues on the horizon confronting the industry, including increased oversight from regulatory bodies, increased losses from cyber threats, surplus reinsurance capacity and the disruption of the industry through technology and insurtech companies,” Mr Gomes says. Weather impacts also remain an unknown, with the survey completed before the effects of the December Sydney hailstorm and other recent summer catastrophes were known. Nevertheless, the various headwinds are not likely to knock insurers and brokers off-course. The recovery in commercial premiums and profitability that gained traction last year has left the industry well placed for the challenges ahead. 0

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Rise of the MIDDLEMEN They’re not universally liked, but consumer claims advocates have come under the spotlight following recent catastrophes By Wendy Pugh

C

yclone Debbie’s timing couldn’t have been worse for Sarah and David Simmonds*, as howling winds and rainfall damaged their recently purchased home before they had even moved in. The couple found water throughout the house and external damage too, leading to a claims-handling nightmare that took a heavy toll, with battles at every turn. Insurance claims are usually simple, but when they’re complex they can develop into a frustrating and bitter campaign that no one wins. That’s what happened to Sarah and David. First, questions were raised over the claim’s eligibility, then progress on repairs was complicated by problems including the presence of asbestos and delays in getting revised scopes of work. Sarah says it was tough to stay informed on their claim’s progress, requests for updates were not acted on, documents provided had redacted information and mould became an issue as weeks passed without any resolution. As stress levels grew, they finally engaged a claims advocate to argue on their behalf, and felt immediate

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relief. The claim was eventually settled for 150% more than the original offer. “He took the pressure off me and said, if you get any calls from anybody, you tell them I am acting on your behalf,” Sarah tells Insurance News. “He took all of those calls and once they realised they were dealing with someone who actually understood what they were saying, they were more careful and started putting everything in writing.” Major natural catastrophes such as cyclones Marcia and Debbie have seen more claims advocates emerge at the consumer end of the market, while the insurance industry has faced high-profile scrutiny over its performance. Insurers can dismiss some advocates as akin to personal injury ambulance-chasers, and some are without doubt self-interested publicists who fail to walk the talk. But people dealing with the claims process for the first time after a catastrophe can feel overwhelmed, particularly if matters are not straightforward, and for them claims advocates are a godsend.


“The third wave will be a year or two later when it has all turned horrible, and either the insured or a lawyer contacts us to try help the client,” he tells Insurance News. Helping hand: claims advocates believe they can get better deals for insureds

Suncorp Head of Claims Paige Vincent says her experience is that there are two types of advocates. “The ones who work in the best interest of the customer and those leveraging already vulnerable customers for their own commercial gain. “Given this, it is very important that customers are aware of the risks associated with engaging a third party that proactively approaches them, because there will be a cost and it is not covered by the policy.” The situation is different in the commercial arena. Industrial special risks policy wordings for property damage and earnings loss were introduced in 1987 and include cover for claims preparation costs. Claims services smooth the process, ease the paperwork burden, help set up a company for recovery and can benefit all parties, given the complexities and expertise needed to assess business and accounting impacts. “A claims preparer will help their clients through that policy and take the time to look at them as an individual business,” says Claim Solutions director Susan Kelly, who has helped companies after the 1991 Coode Island chemical explosion, the 1998 Victorian gas crisis and various fires, floods and accidents.

“If we can get in early, we can make sure the right builders are on it and we can make sure we can advise on loss mitigation strategies to minimise disruption.” Professor Manning says claims handling problems can trace back to false savings on price when insurers procure loss-adjusting services, and more focus is needed on building expertise among the next generation of adjusters. One homeowner who received help from LMI after a bushfire says his insurer became more responsive once an expert was involved, and he wished he had gained independent assistance earlier. “Otherwise, it was this excuse and that excuse,” he says. “I reckon everyone should, at the start, have someone just go over the process with them and show them their rights, or whatever.” Personal home and contents claims, in most cases, are relatively straightforward compared with commercial claims, but the Hayne royal commission has shown systems can fail customers, particularly after major catastrophes when resources are stretched. Problems include inadequate temporary repairs that lead to more damage, delays that allow mould to develop, lack of communication, issues with rebuild scopes of work and cash settlement disagreements.

Long-standing claims assistance company LMI Group says it is often contacted about personal lines matters, although its focus is on the commercial sector.

In the Hayne royal commission cases studies, some had sought help from the Financial Rights Legal Centre, a local MP, claims advocate David Keane and the Financial Ombudsman Service (FOS).

Managing Director Allan Manning, who is highly regarded as a loss adjuster, says requests come in three waves. The first is when an event happens and the second is after nothing has progressed.

Mr Keane, who advised Sarah and David, angered insurers after appearing on television program A Current Affair and suggesting the industry will do all it can to avoid paying claims. He also accused insurer

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panels of adjusters, builders and other providers as lacking impartiality. Points of contention can include whether damage is due to normal wear and tear or lack of maintenance, and whether it may date back to previous disasters or events. Diego Ascani, Chief Executive of Sedgwick Australia, which last year acquired loss adjuster Cunningham Lindsey, says claims advisers shouldn’t be necessary for homeowners, but in some cases they have a role. “There is a time and place for them, provided they are doing the right thing and are ethical and are behaving appropriately and not simply chasing ambit claims and deliberately putting the insurance industry in a bad light for the sake of feathering their own nest,” he says. The Insurance Council of Australia’s (ICA) Understand Insurance website warns that engagement of a claim adviser should be considered carefully and involves full transparency – the same as for any service or tradesperson. Allianz General Manager Corporate Affairs Nicholas Scofield says insurers have heard of people signing agreements with advocate fees of up to 20% of the claim value. “What we have seen, particularly after natural disasters such as Cyclone Debbie, is more people door-knocking, virtually cold-calling, or advertising and trying to rope people into using services, often in circumstances where it makes no difference to the way the claim is processed and the amount that will be paid,” he says. Homeowners can take claims problems to the Australian Financial Complaints Authority (AFCA), which last year replaced FOS. The service offers free dispute resolution for consumer and small business policies up to $1 million, although it comes into play well after problems emerge. Financial Rights Legal Centre Policy and Advocacy Officer Drew MacRae is cautious about the role of unregulated claims advocates, and says it is important that consumers can self-advocate in resolving claims issues at AFCA, rather than having to pay for highpriced assistance. “The nature of the external dispute resolution is such that it should be easy to navigate, it should be open to everybody and in the best interest of the consumer and fairness, rather than some sort of technical and legalistic fight,” he says. ICA points out that general insurers deny only about 3% of claims each year and fewer than 0.6% of Cyclone Debbie claims ended up with the ombudsman. Insurance companies highlight efforts they are making to support consumers during the highly fraught period after natural catastrophes. IAG, for example, says its specialist Major Events

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Team and Major Event Rapid Response Vehicle head to disaster recovery centres and other locations to provide on-the-spot services for policyholders, and the group aims to swiftly deploy experts and complete processes. Executive General Manager Short-Tail Claims Luke Gallagher says that in some cases a customer may seek further assistance from a claims advocate. “Our focus is always supporting our customers and we look to resolve any questions or issues with their claim as quickly as possible, directly or through their representatives,” he tells Insurance News. Suncorp has moved to a full case management approach, in which each policyholder is given a point of contact for the duration of their claim. It has set up a dedicated complaints team to better understand causes and to fix “pain points”, and has established a specialist team to help vulnerable and impacted customers with complex claims. The industry is acting to raise its performance and reputation against a background of regulatory reviews and proposals. The Hayne royal commission was held while ICA was preparing the next iteration of its Code of Practice, which aims to enhance consumer protections. The Australian Securities and Investments Commission (ASIC) says the code should include standards to make it easier for consumers during the scope-of-works process, which FOS has highlighted as an area in which problems arise after catastrophes. “Initial versions of the document may be inaccurate or missing items and consumers are required to review and identify these inaccuracies,” an ASIC spokesman told Insurance News. “It can be particularly challenging for post-disaster claims where scopes of works can be complicated and require multiple stages of review and revision.” ASIC says insurers should help consumers understand the purpose and importance of an accurate scope of works, explain what is required of the policyholder at each step and make sure they know how they can seek assistance. “Given the importance of this issue for good consumer outcomes, it seems appropriate and timely to set out minimum industry standards in the General Insurance Code of Practice, which is under review,” the spokesman said. Whatever changes are made, it’s in the interests of insurers and their customers to have claims resolved as quickly and smoothly as possible, and without increasing economic hardship. “Only a small minority of retail customers choose to use claims advocates,” Suncorp’s Ms Vincent says. “Whether a customer manages their own claim, or uses an advocate, our process remains the same.” 0 *Real names withheld at the interviewees’ request

Advice: Allan Manning says early intervention is crucial


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A rough ride Amusement park operators and other businesses deemed high-risk are struggling with soaring premiums and limited capacity By Bernice Han

D

ouglas Campbell was far from amused when he saw the public liability insurance policy renewal details for his amusement park, which offers trampolines, climbing towers, water slides and a host of other fun attractions. It would cost about $25,000 for a year, more than double the $12,000 he’d paid under previous terms. But that wasn’t the only increase he faced. The excess for the park’s trampolines had risen to $20,000 from $1000 – a whopping 1900% rise. In economics-speak, that easily qualifies as hyperinflation, which has precipitated economic collapses, most recently in oil-rich Venezuela. This is despite the fact his amusement park, Xscape at the Cape in Dunsborough, a coastal town south of Perth, has been incident and claims-free since opening more than six years ago. No wonder Mr Campbell was unhappy. But he renewed last November anyway – there were no other options. A Lloyd’s coverholder in London was the only underwriter his broker could find willing to provide the public liability policy Mr Campbell wanted. “I didn’t have any choice and I’m not impressed at all,” Mr Campbell told Insurance News. “It was the only rate I got and the trampolines are an integral attraction of our overall product. It’s very, very hard to gauge and make an allowance for this huge increase. It’s not just the premiums. It’s the excess that is diabolical. We’ve just got to bite the bullet and work out our cost accordingly.”

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Mr Campbell’s case is not an isolated one. In fact, hundreds of businesses around the country that fall into the “high-risk” or “hard-to-place” category are encountering barriers. Not only have premiums and excesses spiked, but obtaining cover, as many businesses have discovered, is proving difficult. They have been forced to turn to offshore markets such as London, where the cover is available but the terms and conditions are often more stringent. Business owners whose enterprises fall outside the risk norms have told Insurance News they have followed the advice of their brokers and overhauled risk management systems just to nail down a policy. A blowout in claims losses, caused mainly by a spate of serious incidents in similar industries in Australia and abroad, is to blame. The effect has been most pronounced on trampoline centres, amusement and theme parks, recycling centres and the food production industry. Mr Campbell says the industry is wrong to ignore his park’s clean safety record. He believes his business is being unfairly lumped in with other trampoline operators, especially new entrants running indoor play centres, where the incident rate is high. “But with insurance, it’s all to do with statistics, isn’t it? And we have been caught in this. We have


an exemplary record. We shouldn’t be penalised and weighed up against others.” Many others are in a similar predicament. Businesses that have historically performed poorly, such as large hospitality groups, nightclubs and supermarkets, are having an unusually hard time buying public liability insurance. “I have seen an example where an insured party has purchased a hotel with inferior construction and three weeks later still has no property insurance in place,” Precision Underwriting Senior Underwriter Paul Douglas tells Insurance News. “I have also seen an operator of an indoor play centre with some small trampolines who cannot secure public liability insurance and is probably going to have to close up shop. “The insurers have become more vigilant over the past 12 months and have become far more particular about what they will write. It’s not due to any specific large losses, it’s due to long-term poor performance.” And it won’t get any easier for businesses hoping the market cycle will turn and insurers will return to a less stringent risk appetite.

Not happy: amusement park owner Douglas Campbell

“It’s not a matter of waiting until this ‘underwriting attitude’ blows over,” Mr Douglas says. “Insurers need to provide better results for their shareholders, or the underwriters who aren’t performing will lose their jobs. “This means brokers and their clients need to riskmanage better or their clients will find themselves uninsurable. “The insurance market doesn’t owe it to the client to find insurance. The insured party needs to play their part in making their risk exposure more attractive to be offered insurance.” More than two years after a ride malfunction at the Dreamworld theme park on the Gold Coast saw four visitors died, the effects still reverberate. HIB Insurance Brokers Managing Director Michael Alexander says serious incidents in other countries and reduced insurer capacity have also pushed up rates.

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Ride operators and amusement parks have seen public liability premiums and excesses soar in the past three to five years, he tells Insurance News. “Some increases have been more than 300% for both premium and excesses. Insurers are now asking more questions when looking at these risks around the risk management and safety checks, educational programs for staff, how staff are being trained.” Huge fires at an abattoir in South Australia early last year and a Queensland pork processing plant in late 2016 marked a turning point for property covers. Broker Gallagher has noted that the $750 million in insured losses from these two fires destabilised a “typically benign” property market, pushing insurers to adopt a hard-line approach to properties at which expanded polystyrene (EPS) is present. About 80% of domestic food facilities have been constructed using EPS panels which offer superior insulation for perishables but are extremely combustible. Insurance rates for food-related premises with combustible EPS panels grew steeply after the two incidents, and all signs suggest the sector will endure at least another two years of tough market conditions. “It’s the catalyst for the industry to draw a line with EPS,” Gallagher’s National Head of Food Production Stephen Elms tells Insurance News. “The insurers’ mindset these days with EPS buildings is, if it catches fire, it more often than not is going to be a total loss. It’s totally driven by the amount of EPS in the building. “We thought last year was tough, but I think this year is going to be worse. The insurance market is a cyclical thing, so it will turn at some stage, but my own opinion is I’m not sure we will ever get down to the same levels that we have seen.” Even businesses that qualify as “well protected” from fire-related risks have seen property risk premiums increase 30-40%. “I would stress that those very well managed accounts focusing on improving their own internal risk management process with the goal of mitigating fire risk to the EPS are the minority, not the majority,” Mr Elms says.

providing over the past decade or so.’ ” A capacity squeeze is also pushing up rates. The local market is left with just two insurers – QBE and Allianz – with the capacity to lead a multi-insurer property program, he says. Before the market upheavals, up to eight insurance players had the resources to spearhead a medium to large program. Under present conditions, bigger food producers have turned to offshore markets. Gallagher has been procuring programs from Lloyd’s, placing clients in competition with other foreign producers for the same pool of capacity. Under such circumstances, buyers have little bargaining power. “If we talk about Lloyd’s in particular, it’s a global marketplace for them,” Mr Elms says. “The Lloyd’s market can pick and choose where they want to utilise their capacity and at what price. They call the shots at present. They will say, ‘This is my rate – if you don’t like it, fine,’ and they walk away.” Replacing EPS panels with newer non-combustible materials is probably the only sure way to guarantee reductions in premiums, but it can be an extremely costly exercise, even for large food businesses with deep pockets. Gallagher has advised clients on steps to secure better rates, including installing sprinklers, investing in other fire protection and suppression systems, ensuring business continuity processes are robust and examining other ways to continually improve risk management. “One of the best ways to combat these increases is to improve what clients already have internally with respect to their risk management processes,” Mr Elms says. “If there are any shortcomings or housekeeping issues that haven’t been rectified, rectify them quickly. If there is a business continuity plan that hasn’t been documented into a formal document, get it documented in a formal document. “And if you can clearly show the insurance market that all these processes and procedures are in place, it does have a flow-on effect. These are very simple and low-cost areas that can have a huge payback to an organisation’s insurance cost.”

Huge claims from food manufacturers in the Middle East and the US have not helped matters.

The role of an experienced broker is critical. “It comes down to the broker, again, to really make sure the client is doing everything possible to improve their risk profile, and the broker should be using every bit of positive information available to ensure their clients are receiving the best possible deal,” Mr Elms says.

“Globally, the sector has been, for lack of a better word, burning,” Mr Elms says. “Insurers have drawn a line in the sand and said, ‘We can’t continue to support these businesses at the premiums that we have been

“Property surveys, risk management reports, business continuity reports…all of those should be used as well as highlighting any improvements through capital injection and continued maintenance.” 0

“Clients, in conjunction with their brokers’ advice and assistance, need to focus on this area because it will pay off in minimising the level of premium increase.”

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Looking to the future: Diego Ascani

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Art and science Sedgwick Australia chief Diego Ascani says there’s more to loss adjusting than technical skill By Wendy Pugh

A

mine disaster in southern Africa gave Sedgwick Australia Chief Executive Diego Ascani an early introduction to the art and science of loss adjusting, and the difference it can make for communities. Heavy rain led to the failure of an embankment at the mine in the Free State province town of Virginia, with the resulting flood taking lives and destroying homes and possessions. Multiple insurers and reinsurers were involved and, as a loss adjuster for GAB Robins, Mr Ascani met the people affected, learned about their circumstances and signed documents that released funds for the community’s recovery. Mr Ascani was based in Johannesburg and travelled widely in Africa, handling claims that included flooding at a Mozambique aluminium smelter, cashew nut production losses and damage when a ship hit a gantry crane in Maputo harbour. “I loved being able to go into a place and see it being rebuilt, and then eventually shake the hands of the insureds and say, ‘You are up and running again,’ ” Mr Ascani tells Insurance News. “That, for me, was so tangible.” Mr Ascani joined GAB Robins after studying law and completing his articles with a firm active in South African motor vehicle accident claims. GAB Robins was later taken over by Cunningham Lindsey, a long-established loss-adjusting firm, which was last year acquired by Memphis-based global claims administrator Sedgwick. The combined group has about 21,000 people across 65 countries. Mr Ascani moved to Australia in 1999 after his insurance work highlighted rising violence in South Africa, and in some respects his career has since come full circle. In Sydney he worked as a loss adjuster while the city recovered from a hailstorm that remains Australia’s most costly natural disaster on record. He updated his

law qualifications to meet local requirements, held positions with the actuarial and insurance practices at Deloitte and PricewaterhouseCoopers, and was seconded to assist the HIH royal commission. Later he led Xchanging in Australia, overseeing operations including workers’ compensation contracts, before joining Cunningham Lindsey as chief operating officer in 2017. Sedgwick Australia launched last November, consigning the Cunningham Lindsey brand to history, with Mr Ascani leading a business with a network of more than 40 offices and about 600 people. The acquisition also gives Sedgwick an entrée for its wider suite of services. The group is a major player in US workers’ compensation and has a strong corporate customer base for its third-party administration offerings. As Chief Executive, Mr Ascani is elevating a customer-centric focus that reflects Sedgwick’s core role helping people recover from losses, while also building on Cunningham Lindsey’s solid foundations as he takes the traditional loss adjuster forward. “The company isn’t as change-ready as it could be in this fast-changing technology environment, so my priority is really future-proofing the business, making it sustainable and making it more agile to meet our clients’ existing and future needs,” he says. Sedgwick has also undergone an ownership shift in recent months, with private equity investor the Carlyle Group buying a majority stake from KKR. Mr Ascani says this adds to the momentum, with the venture capitalist likely seeking efficiencies, improved performance and growth from its investment. Early impacts from the Sedgwick acquisition include kick-starting a technology overhaul, with the Cunningham Lindsey business benefiting from the global expertise of a 700-person IT department. A new platform will link Australia with international operations, providing transparency and access benefits

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send information to remotely located building and construction experts, engineers and forensic accountants. “It is a combination of our national footprint combined with technology that is very powerful. These things are coming together,” he says. The insurance industry is under continual pressure to improve its performance after major catastrophes, and drew fire during the Hayne royal commission for responses to Cyclone Debbie, Victorian bushfires and other storms. Mr Ascani says technology can help better triage claims and reduce timeframes. Ensuring effective temporary repairs, building in ways that mitigate against future problems and containing costs are key requirements. “We have got to make sure as independent loss adjusters that building costs and the quantification and the adjustment is correct, so there is no gouging of costs, which ultimately has an adverse impact on premiums,” he says. Cunningham Lindsay and rival Crawford & Company have been the dominant loss adjusters in Australia in recent years, with McLarens in third position ahead of smaller, niche providers. This compares with a few decades ago, when many smaller operators were active.

New team: Mr Ascani heads up Sedgwick’s Australian operation following the acquisition of Cunningham Lindsey

and an improved interface for clients. Australia and New Zealand are a focus area for Sedgwick, due to opportunities within the countries and their proximity to Asian markets with accelerating growth rates. “We are represented in nine countries in Asia, but the teams in those counties are fairly small, so Australia is well placed to support the rest of Asia,” Mr Ascani says. The technology upgrade will allow the business to further benefit from changes already affecting loss adjusting. Drones are reaching areas otherwise impossible or dangerous to enter after disasters, while virtual reality tools can gather information for experts thousands of kilometres away. Data will increasingly support improved analytics and modelling, helping mitigate future losses and providing tools to respond more quickly and economically when events occur. Mr Ascani says after major catastrophes, Sedgwick can quickly set up control centres as close as possible to damaged areas, while technology can rapidly

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Mr Ascani says large players have scale and strong corporate governance and data protection, while also offering specialty expertise. The personal reputation of individual adjusters remains important and insurers, for the most part, still select from a panel to access the right people for various events. The focus is often on the technical aspects of assessing claims and preparing reports, but Mr Ascani says that should not overshadow the personal side, and delivering outcomes for people is at the heart of the role. Sedgwick has registered its catchphrase “caring counts” with the US Patent and Trademark Office and Mr Ascani says a cultural focus on looking after colleagues and customers is as relevant to loss adjusting in property as to claims in the health and safety arena. “There is an art and a science to loss adjusting. The science we could get 100% right – policy wording is correctly defined, and we have adjusted the loss correctly – but in the process the art might have been lost. “We need to show more care, compassion and customer satisfaction, while not losing our technical expertise.” He says the Hayne inquiry is likely to help hone the insurance industry’s customer focus and restore consumer faith in the sector, just as the royal commission on the HIH failure, nearly two decades ago, led to reforms to the Australian Prudential Regulation


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“We need to show more care, compassion and customer satisfaction, while not losing our technical expertise.”

Authority (APRA) and other changes. Mr Ascani was involved in the HIH inquiry for two years, looking into the group’s claims management and reserving methodologies and philosophies, and was an expert witness for the royal commission. “I saw first-hand how a poor culture, particularly around claims management, can really impact clients, and also ultimately led to HIH going into bankruptcy,” he says. “The positive was that the royal commission identified a number of deficiencies, not only with APRA but also with the insurance industry, and that has stood the industry in good stead to withstand a lot of the other risks and challenges it has had since HIH went under.” Other key issues facing the insurance industry include evolving cyber risks, building material issues highlighted by the Grenfell and Lacrosse fires, and impacts from dust diseases and fumes, he says. Globally, Sedgwick is focused on diversity, and Mr Ascani says addressing the gender imbalance in its

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Australian operations and bringing younger people into the industry is an important goal. “The legal profession and the accounting profession have been successful in evening out the gender inequalities. One of my priorities is attracting more talent, and certainly getting a better balance and creating the right environment to attract more women into the industry.” Mr Ascani says his early time as a loss adjuster marked some of the most enjoyable years of his career and helped draw him back into a sector that, he says, has a strong social purpose, leading ultimately to the role heading Sedgwick Australia. He says the Australian insurance industry is strong and performs well in supporting the economy, and the businesses and people who take out protection against the unexpected. “It is almost the oil of the economy – it keeps it going and when things break down, it gets them up and running again.” 0


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Taming the king of cats Citizen scientists are providing valuable insight into Australia’s most expensive natural peril – hail By Miranda Maxwell

Costly reminder: December’s hailstorm resulted in 100,000 claims. Credit: AAP

O

n the afternoon of April 14 1999 a catastrophic hailstorm tore across eastern Sydney, causing billions of dollars in insured losses. Nearly 20 years later, just before Christmas last year, residents received a sharp reminder of hail’s capacity to inflict damage. That 1999 storm became Australia’s most expensive natural disaster, at $5.6 billion in inflation-adjusted figures. The city’s CBD had managed to avoid intense hail damage since then, until last December’s costly burst. Hailstorms that battered Sydney and many other New South Wales communities on December 20 prompted almost 100,000 claims in a month, and claims at the start of February were closing in on $1 billion, according to the Insurance Council of Australia. One analyst has predicted that the total insured losses from this event could reach $2 billion. There were reports of hailstones almost eight centimetres wide, and in the month to January 21 there were 71,475 motor vehicle claims, 22,057 home building claims and 4563 contents claims. “Sydney, because it had not been impacted for a while, may have been more vulnerable than people thought,” Monash University researcher and hail expert Joshua Soderholm tells Insurance News. “When you have areas that have more frequent thunderstorms, people are often more aware and have better places to put

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their cars and so on. People in Sydney may not have realised hailstorms can impact their region.” Hail ranks among the biggest natural cost drivers for insurers. Dr Soderholm is harnessing new technology to enable actuaries to create better risk profiles for hail-producing storms. Improved radar systems, a new app called WeatheX placed in the hands of citizen scientists, and the social media tag #uqhail will soon allow insurers unprecedented access to data. This will better indicate the likelihood of hailstorms and the probable damage. Work at Monash University’s School of Earth, Atmosphere and Environment is designed to enable insurers to better forecast the frequency, size and potency of hailstorms based on accurate historical patterns. “In the future, insurers will access this dataset and use it on top of their existing datasets to better understand risk,” Dr Soderholm says. “We don’t have models that can predict the future. We really have to go back to our data. “So we take the reports people have provided us, and we can use radar data, to build up a picture – a map essentially – over decades from some of these datasets of where hail-producing thunderstorms have been through.” Brisbane is Australia’s most hail-prone capital, with Sydney close behind. For hail

up to about 6cm in diameter, vehicle losses are the primary source of cost to insurers. Newer cars are more vulnerable, with the steel thinner and the panels larger and more costly to replace. Above 6cm, hailstones will damage roofing and skylights, causing expensive flooding. While building code changes can mitigate against other natural disasters such as cyclones, the main defence against hail is giving people enough warning to move possessions such as vehicles and farm equipment out of harm’s way. “Hailstorms are a particularly thorny issue for insurance,” Dr Soderholm says. “They are especially hard to protect against and it takes only one big event to blow costs through the roof, so to speak. They can create a lot of trouble.” Dr Soderholm recently returned from a trip to Argentina, where frequent hailstorms in the west present ideal conditions to study the fine-scale processes that produce hail. After completing an undergraduate degree in mathematics that touched on meteorology, Dr Soderholm undertook an honours project examining the south-east Queensland region, seeking to understand why there were more thunderstorms in some regions than others. That was followed by a PhD investigating thunderstorms, which focused on the impact of sea breezes. “There are a lot of questions about thunderstorms in Australia that just haven’t


been answered,” Dr Soderholm, who grew up in Queensland, says. “From my PhD we have a much better understanding of why some thunderstorms intensify and why some might weaken, and it really does come down to how strong the sea-breeze wind is.” When insurers want to understand risk, particularly beyond their own records or claims, they refer to thunderstorm databases. The coverage that data offers is critical in assessing the true risk of thunderstorms, and for comparing the relative risk to a city such as Brisbane or Sydney, and on down to the suburb level. The WeatheX App harnesses vast layperson interest in weather across Australia, reflected in the hundreds of thousands of people following social media groups discussing weather processes. Dr Soderholm and his team are reaching out to these “citizen scientists”, encouraging them to use the app to report what they see during bouts of intense weather. A public dataset built from these reports will be made available, illustrating the occurrence of severe events but also capturing smaller hail falls that are a frequent and a costly headache for car insurers. “For every big event there are maybe 100 small events that are slowly eating up the money from insurance,” Dr Soderholm says. “Speaking to insurers, that is a big problem. These are little storms, but there are many of them and they eat up claims.”

The app has attracted 5000 downloads and almost 500 reports in just a few months, all of which will be collated and fed to a central database. “We are trying to build a more thorough database across Australia, rather than just capturing little pieces of events. If we can start to get hundreds of reports from individual events, our ability to map them will be so much better. There is a lot of potential out there and we are getting closer to being able to use it for forecasting down the track.” The Monash research team is also starting a project to improve the prediction of hail size and area using radar. The Bureau of Meteorology is investing tens of millions of dollars in upgrading its radar network, and this offers new ways to improve hail detection and forecasting. The improved radar allows scientists to see where hail is and to estimate how big it is, and to distinguish between heavy rain and hail. That improves confidence in warnings and gets more accurate information to people. Even the 30 to 60-minute warning weather radar offers is enough to allow people to move property and take shelter. “This new radar not only tells us how intense the precipitation is, it tells us the shape of it, if it is round or flat raindrops, so we get a much better idea of what is actually in the cloud,” Dr Soderholm says. “Our skill at estimating hail size and the area

where it’s going to fall is pretty good using radars, because we are not modelling. We are actually observing. We already know it is there, we are just saying, ‘It is going to fall in this place.’ ” In future, this information will be available to city councils and insurers, which can contact affected populations with accuracy. As more houses are built away from cities, the risk is the population encroaches on areas that might experience more hailstorms. This risk is little understood because people have not lived in these places before. The Monash team has identified this as a problem for our growing population. Timing is also everything. In 1999 the storm arrived in the afternoon and carried on through Sydney’s peak commuter rush. “It was really the time of day,” Dr Soderholm says. “We have had hailstorms on the weekend and the losses are a lot lower just because people weren’t travelling around. “If we can improve warnings by providing a much clearer picture of the hail size, for example, we will be able to encourage people to get vehicles undercover, protect their homes, and basically encourage actions that reduce the amount of damage to their property.” New technology is expected to improve the reporting of a wide range of severe weather, with a focus on hail, wind damage

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and tornadoes – though the conditions that can produce thunderstorms are more random and “stochastic”, and difficult to characterise than, say, tropical cyclones. The research team has also investigated crop damage. While in the US tornadoes garner much attention, a tornado track might be only a kilometre or so wide and they are quite short-lived. A hail track is generally wider and hailstorms are more frequent. While farmers can’t do a lot with warnings except cover up equipment and themselves, Dr Soderholm says there is value in having information on frequency of hailstorms, because this helps to better inform insurance companies about risk. The WeatheX app and new radar will go some way to redressing the disproportionate investment in understanding bushfires and flooding compared with hailstorms, despite the headache numerous small hailstorms and giant hail events inflict on the insurance industry. “People don’t consider it life-threatening and people don’t see hail as a problem for communities, more a problem for insurance and industry,” Dr Soderholm says. “But it costs the country a lot of money.” 0

Big problem: hailstones above 6cm diameter can cause serious damage

Top five insured loss events normalised in 2017 dollars 1999

Sydney hailstorm

$5.6bn

1974

Cyclone Tracy

$5bn

1966

Cyclone Dinah

$4.7bn

1989

Newcastle earthquake

$4.2bn

1973

Brisbane flooding

$3.2bn

Top 10 hailstorms, normalised in 2017 dollars (excluding December 2018 event) 1999

Eastern Sydney hailstorm

NSW

$5,574,498,958

1985

Brisbane hail

QLD

$2,274,272,916

1990

Northern Sydney hailstorm

NSW

$1,681,692,745

2010

Melbourne storm

VIC

$1,625,980,165

1967

SEQ hailstorm

QLD

$1,595,957,781

2014

Brisbane hailstorm

QLD

$1,535,440,024

2010

Perth storm

WA

$1,344,798,983

2011

Melbourne Christmas Day hailstorm

VIC

$987,926,516

1986

Western Sydney hail event

NSW

$795,963,895

1976

Western Sydney hailstorm

NSW

$749,612,517

2016

November hailstorm

VIC, SA & NSW

$621,470,779

2007

Blacktown hailstorm

NSW

$586,787,347

Information supplied by the Insurance Council of Australia

Gathering data: hail expert Joshua Soderholm 44

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Built to last: windows feature toughened glass, with metal mesh screens for protection. Credit Andrew Halsall

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arly this year, as bushfires spread across Tasmania, those of us lucky enough to live outside the danger zones were left asking the usual key questions: has anyone died, and how many people have lost their homes? The answers at time of writing were mercifully low, although swathes of wilderness were affected. But Australians know from bitter experience how horrific the human toll can be. Wye River, Yarloop and Winmalee are among communities to suffer devastating losses in recent years. Black Saturday still haunts the nation a decade on. And the risk is growing. Climate change threatens to make bushfires more frequent and intense, while urban sprawl is putting more people in harm’s way. The issue of climate change is global, and requires global solutions. Urban sprawl can be at least partly addressed through smart planning and building design. And, as bushfire architecture expert Ian Weir tells Insurance News, it doesn’t have to involve destruction of the bushland that makes the Australian bush such an

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attractive place to live. His home designs aim to “fly the flag for lifestyle and swing the pendulum back towards landscape conservation, and away from landscape clearing. But, unfortunately, the pendulum is being held very much on the side of landscape clearing all around Australia.” Insurance News asked Dr Weir – an architect, Queensland University of Technology academic and adviser to the Bushfire Building Council of Australia – for a virtual tour of the ideal bushfire-resistant home. Karri Fire House in Denmark, Western Australia, fits the bill in more ways than one. Built to withstand Bushfire Attack Level (BAL) 40, as dictated by standard AS3959 under the National Construction Code (see breakout), the home belongs to a retired firefighter whose fire plan dictates he will stay to defend the property. Dr Weir and his co-designer (and wife) Kylie Feher sought to create a home that would give the owner enough confidence to do that. “The house is all non-combustible, which is your first principle,” Dr Weir says. “There’s nothing on the


Ideal homes and gardens Smart design can help country property owners mitigate fire risk without taking a chainsaw to the bush around them By Andy Swales

exterior of this building that will combust in a fire.”

in sarking of no more than 2mm.

The flooring is concrete and raised from the ground. “A lot of fire-prone sites are very undulating, so it’s not as if you can build a house on the ground. In most cases it’s more cost-effective to make it more elevated.”

Sarking on the Karri Fire House – completed in late 2014 – is called Phoenix EA, made by TBA Firefly. “These guys make suits for firefighters and fabrics for furnaces and so on. They’re the leaders in fabrics. That’s what we wrap the whole house in before the roof sheeting and the wall sheeting [are] put on.”

The walls are concrete block with metal cladding. “Of course, [all this is] not only non-combustible but basically fireproof. We call all that the first line of defence.” The second line of defence is sarking – material that lines the walls and steel roof. “There [was] a weak link in AS3959, which has been identified, and that is that conventional sarking… is a flaw,” Dr Weir says. “It will fail when exposed to too much heat and therefore let embers into… those invisible parts of the house, the wall spaces and the roof cavity. “Ninety per cent of houses are lost through ember attack, not through flame contact, and that’s generally [through] gaps greater than 2mm.” Dr Weir says the latest standard – issued in November, and to which he contributed – calls for gaps

Insulation is made from non-combustible rockwool, providing a third line of defence. Dr Weir says the biggest contribution to cost when building a fire-resistant home comes from decking and verandas. “You’re usually making them out of timber, of course, [but] you can’t do that at BAL 40 – you’ve got to use steel. I’ve found about 3% of the cost of construction was the verandas. “We’ve used a BAL 40-rated decking product – there’s a couple available commercially – called ModWood. The added bonus is, it’s incredibly lowmaintenance.”Without the need for regular upkeep such as weatherproofing, he reckons steel structures “probably pay for themselves over 10-15 years”.

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Windows feature toughened glass and are protected by metal mesh screens. “This is one of the key design features of the house – we made all the glass slide… and then coupled that with a [radiant heat] sliding screen, and that is used on a daily basis, because we’ve got a site that has a lot of insects, so you’ve got to activate all those screens,” Dr Weir says. By working fire protection into everyday utility such as flyscreens, mitigation is ever present. In contrast, the alternative to smart design – major vegetation clearance – is often poorly maintained. “It’s something you’re going to do once a year, and then it’s going to slide. Even though a lot of local governments and state policy says [fuel clearance] has to be done in perpetuity, it’s still something that’s only done for bushfire reasons. “Whereas if you have, say, a shutter system on a house you have to operate every day to control the sun and wind and insects, it’s going to be actually working, and will work in an emergency – and you’re going to know how to make it work because you use it every day.” And while the best design and building products can be costly upfront, “it costs thousands to [clear bush]… cutting down a tree can be anything between $2000 and $5000”. Dr Weir says a lot of what’s required is separation of [tree] crowns, “so clearing a lot of trees to get the necessary crown separation involves huge costs, and to what end? What you end up with is a site you don’t want to live in. “We’ve seen this first-hand in the Blue Mountains since the Winmalee fires there in 2013, where the amenity has just been annihilated.” He says poor upkeep of landscape maintenance means many homes are built to lower standards than the actual risk they end up facing, creating threats to lives and property, and causing underinsurance. In fact, he considers the insurance industry a “weak link” in the nation’s bushfire preparedness. He notes Suncorp’s work with partners such as James Cook University on cyclone protection, and says similar projects to promote innovation in fire mitigation are needed “to help people reduce their exposure that way”. “For example, in the Flame Zone [highest] level of exposure, there are only two commercially available shutter systems.” These items can cost about $1000 per square metre of window, he says. “We don’t see much encouragement in development of alternatives... we need more research, we need better testing.” 0

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Fireproof: floors are suspended concrete, and walls are steel-clad concrete block. Credit Ian Weir

Standard procedure The national standard AS3959 covers construction in bushfire-prone areas, outlining safety requirements for buildings facing six Bushfire Attack Levels (BAL), mostly expressed in terms of exposure to radiant heat (kW per square metre). A property’s BAL should be determined by an independent assessor, with fire services often taking the lead rating higher-risk properties, according to Dr Weir. The BAL ratings run from BAL Low and BAL 12.5 through to BAL 40 (the Karri Fire House) and Flame Zone. On top of this, Dr Weir says states can add special statements to the National Construction Code, and local planning policies also affect requirements.


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Fires reveal shape of things to come Under a changing climate, previously rare catastrophes will occur more frequently, writes David Sinai, Head of Property Treaty Underwriting at Swiss Re Australia and New Zealand

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s a catastrophe reinsurance underwriter, I keep a keen eye on what is happening in the world of natural disasters, and the factors that drive them. A key driver of risk for weather-related natural hazards and bushfires is an increase in ambient temperature – our world has been getting warmer since 1850, and especially since the 1960s. In an effort to tackle climate change, the Paris Agreement was created at the United Nations Climate Change Conference 21 in 2015. The agreement aims to cap global warming to less than two degrees, preferably 1.5 degrees. To many, a two-degree average global temperature increase may not sound too alarming; and some may be left wondering why aiming for 1.5 degrees is so important.

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In simple terms, at 1.5 to two degrees warming there will already be serious implications for our planet and society. However, it is at the extremes where this seemingly moderate rise will be felt more acutely – as average global temperatures increase, we can expect to see a non-linear response in the tail of the severe weather distribution. Under a changing climate, previously rare events will occur more frequently, and extreme catastrophes will likely redefine our historical benchmarks of such events. When it comes to bushfires, it would appear this trend is already playing out here in Australia and around the world. Last November Queensland experienced record temperatures and heatwaves. In that month, about 200 bushfires were

burning across the state. Other Australian states are well known for heatwaves and bushfire outbreaks, but the recent events in Queensland are unprecedented. There are several drivers at play, and a warming environment is at the core1. This summer has continued to serve up severe heatwaves across the continent. The Australian Bureau of Meteorology released a special climate statement2 regarding the “unusual extended period of heatwaves” in December and January. The executive summary lists just some of the many records recently broken, including: hottest national average December day; five consecutive days of nationally averaged mean maxima above 40 degrees; numerous locations reporting highest daily maximum temperatures; a new record for the highest minimum temperature; and Australia’s


Tinderbox: fires burned across Tasmania this summer. Credit: AAP/ Tasmania Parks and Wildlife Service

seeing the impacts of a changing climate on wildfire risk. Early last year Swiss Re’s annual natural catastrophe Sigma report4 reviewed the 2017 wildfires in California. The combination of long-term drought then the wettest winter and hottest summer on record created perfect conditions for wildfires. The report also showed that fire seasons are lengthening – the average burning time for large fires (more than 400 hectares) has increased significantly from six to 50 days. Large fires are also occurring more frequently – 20 additional large fires happened each decade over the period 1973-2012. Climate change will continue to increase fire frequency and severity as the earlier onset of spring leads to extended, warmer and drier summers. Last year’s California wildfire season adds yet another convincing data point: it was the most destructive season yet seen, following a record year in 2017.

warmest December. January followed suit, taking the title for hottest month on record3. It was not much of a surprise to then see widespread bushfires in Victoria and Tasmania during January and February. At the time of writing, the fires have devastated large swathes and are still burning. However, the 10th anniversary of the Black Saturday fires in Victoria reminds us how the outcomes of this fire season (thus far) could have been much worse. Elsewhere around the world, we are

Insured loss estimates quoted by industry media are in the range of $US15$US20 billion, and will affect catastrophe covers and catastrophe bonds for a second consecutive year. California is not the only place in North America experiencing significantly increased wildfire risk. The 2017 fire season in British Columbia brought a new record for burned area. The average temperature there is already 1.7 degrees higher, pushing the Paris Agreement targets. Increased temperatures lead to drier fuels, more lightning strikes and more fires. In northern Alberta the extreme fire risk has already increased by a range of 1.5 to six times due to climatic changes5.

Under a changing climate, it is expected that more regions will become susceptible to wildfires, while events in known risk areas are predicted to get worse. Devastating fires in Greece last July marked the second-deadliest wildfire event of the 21st century after the Black Saturday fires. Rare wildfires in Sweden last year – occurring above the Arctic Circle – might not be so well known. These increases in fire hazard – spatially and in terms of frequency and severity – combined with a rise in the number of risks at the urban-woodland interface will materially increase wildfire risk on a global scale. With Queensland having suffered its largest bushfire event in history, and with temperature records being broken across the continent in consecutive months, we will be monitoring the remainder of the Australian bushfire season very closely. Whatever transpires, we know that, globally, wildfire risk is increasing because of a warming planet. Meanwhile, after the UN Climate Change Conference 21 (in Katowice, Poland, last December), experts agree that we can, and must, do more to meet the Paris targets, the benefits of which would reach far beyond keeping a lid on increasing wildfire risk. 0 [1] https://www.bnhcrc.com.au/hazardnotes/55 [2] http://www.bom.gov.au/climate/current/ statements/scs68.pdf [3] https://www.abc.net.au/news/2019-02-01/ australian-weather-hottest-month-on-record-injanuary/10769392?pfmredir=sm [4] https://www.swissre.com/institute/research/ sigma-research/sigma-2018-01.html [5] http://theconversation.com/how-will-canadamanage-its-wildfires-in-the-future-86383

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People power

Finding good people: Don McLardy

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elbourne-based brokerage and authorised representative network McLardy McShane is growing fast – both geographically and in breadth of offerings. But crucial to its success is the way it is approaching that expansion, with people and culture at the core of its strategy.

McLardy McShane brand, and we have just settled on a joint venture in Perth,” he says. “We don’t go to places and try to find the person; we try and find the people first and build our business around good people. “With the AR network, again we are attracting good ARs, building around good quality people.

McLardy McShane now has 18 branches and joint ventures across Australia, with 41 corporate authorised representatives (ARs) and eight specialist divisions and associated companies.

“It is all about having people that add to our brand and culture and not just growing for growing’s sake. As it is turning out we are continuing to grow very strongly.”

In 2011/12 group premium income was less than $20 million, and by 2015/16 it was up to $70 million. Now it’s more than $120 million, with the AR network generating more income than the brokerage network for the first time.

The company has raised well over $1 million for organisations including the Reach Foundation, which aims to improve the resilience and wellbeing of young people.

Chief Executive Don McLardy tells Insurance News that a focus on “good people” dictates growth strategy, and he highlights the company’s well-documented charity endeavours as its “biggest asset”.

Founded by Mr McLardy’s close friend, Melbourne AFL champion the late Jim Stynes, Reach and its Irish equivalent, Soar, are close to the company’s heart. But a range of other good causes, including Beyondblue and Boys to the Bush, have also been backed.

“We have our regional network throughout Victoria, but also in the past couple of years we’ve expanded in Sydney, we have a joint venture in Brisbane under the

At the end of last year, nearly 700 people attended the company’s 10th Reach luncheon in Melbourne, raising about $80,000. Speakers AFL legend Kevin

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How a growth strategy built around culture and reputation is paying off for broker McLardy McShane By John Deex

Backing good causes: from left, Don McLardy, Kevin Sheedy and Mike McShane

Sheedy and former Essendon player and coach James Hird were “extraordinary”. As an indication of the esteem in which the company’s fundraising efforts are held, Mr Hird attended despite suffering severe injuries in a cycling accident just days before. “He rang me on the Sunday when the lunch was on the Wednesday and I thought he was going to say he’d have to pull out. “But he rang to say he absolutely wanted to come, even though he had more than 20 fractures in his wrist and had basically busted his knee in half. “He said he was still on morphine but if we could organise the transport to pick him up and help him to get in and out he would still love to do it. “It was a pretty courageous performance to come and speak. His speech was the best we’ve had, and we’ve had some pretty great guests over the years. “You could have heard a pin drop. It was incredible. It was nothing about the drugs scandal [that overtook the Essendon club when Mr Hird was its coach]. It was about him, his life, his children, overcoming adversity.

“It was a great link with Reach. It was about saying no matter what you have got to overcome, whatever adversity you face, there is support there, and for young people that is a great example of how to approach things.” Mr McLardy and company co-founder Mike McShane are clear that there are very personal reasons for the company’s charitable focus. “Mike and I have a total of seven kids, and we are happy and healthy,” Mr McLardy says. “We’ve been in the insurance industry all our lives and we feel quite privileged. We feel like we should be giving something back because of how fortunate we’ve been.” But it’s more than a personal crusade. The charitable endeavours have become a crucial part of the company’s identity. Mr McLardy believes the development of this culture lends trust and credibility to the McLardy McShane brand. It’s not tokenism, but a very deliberate part of what the company does. “It is a very genuine cultural thing and it is our biggest asset, frankly.”

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Mr McLardy believes clients’ resulting faith in the brand is opening up opportunities in other areas. Aligned businesses include McLardy McShane Financial Services, mortgages and equipment finance, and premium funding operation Victory Funding. “We are trying to build ancillary businesses to complement the businesses we have, to give us additional potential income streams from our client base,” Mr McLardy says. “We think that clients like dealing with us and our brand. “Our culture and giving back to community is all very genuine, and our clients like that. “So we think the trust that we are building in our brand means that we can look to these other income streams. People know we are a credible company with a credible offering.” Mr McLardy sees a trend in SMEs looking for direct insurance offerings, and the company is aiming to tap into that. However, he is clear that this needs to be approached with a degree of caution. “We are exploring our online options but we are very conscious of getting that right. We have got to be careful not to cross over with our existing distribution channels. We don’t want to compete with ourselves. “But as we know, a lot of that bottom end of the SME market is moving to online, and if we are not competitive and have an offering, then we are going to lose those clients. We are working on that.” Mr McLardy believes that despite a shift to direct, people still like to know who they are dealing with. “For smaller businesses like ours that is our biggest advantage. The customers know who they are dealing with and there is trust and credibility in that relationship. “I think that is the most valuable thing. Even as technology advances, that will still be something that we can use to our advantage. “But we are going to need to be good at online and communicating what our values and culture are.” Following the Hayne royal commission’s final report, change may be coming for brokers and the way they are remunerated. Mr McLardy is open to different ways of doing things, but warns against designing a system around a relatively small number of discrepancies. “My big issue with a lot of the reporting around the royal commission is the sensationalist aspect of it. “The fundamentals of our industry are that the vast majority of all transactions are handled with credibility and authenticity, giving good value to customer and supplier.

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“And there is a lot of goodwill in our business. There’s a lot of claims that insurers pay that technically they don’t need to pay but they do for the goodwill of long-term clients. These things don’t get reported. “For every poor instance that gets reported, there are probably 100 instances where insurance companies or brokers have gone out of their way to support a client. “We have got to be careful not to build a system to eliminate what is a minor part of the business. That is not underplaying how important it is that we actually eliminate all those [problematic] transactions, but we can’t build a whole system to that because it will undermine all the other great things that are being done.” If changes are made to broker commissions, then it must be done over a reasonable period of time, he says. “Businesses need to be given time to adjust their systems. To come in with a sledgehammer to kill an ant is the wrong way to approach it. But we all understand there are issues that need to be dealt with.” Mr McLardy sees the market hardening at present, but says it is only the extremes that cause issues. It is in those cases that broker expertise and relationships really come to the fore, he says. “It is very difficult to explain to a client why his premium one year is $20,000 and the next year it is $80,000, and they haven’t changed their business at all. “Clients can get very suspicious, and if I was in their shoes I would be as well. We have to try and explain market forces to them, and it is a real test of a broker’s ability.” Mr McLardy says talking to the client early is vital. “A lot of the skill in broking is to forewarn your client. Don’t arrive on renewal date saying look it’s up 150% – part of the art of broking is to educate your client along the way to that so when that time arrives it’s not a surprise. “It is about managing the client’s expectations on the way through those markets. “In certain areas there are some pretty extreme cases coming out and things are getting worse. “We have had a couple of clients we’ve had some difficulty even placing in the market.” Even in these changing times, Mr McLardy tries not to look to far ahead for his business. While the growth, and the focus on “good people”, continues, he’s happy. “We are not too futuristic. We are adding new things and we are growing strongly still,” he says. “At the moment we are comfortable we are gathering good people, under a good brand, with a good culture. For the next couple of years it will be more of the same.” 0


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Loyal to a fault If shopping around saves them money, why do so many insurance consumers stay put? By Benjamin Levy

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Choice is scathing of the industry’s efforts to help consumers shop around, calling it anti-consumerist. Policy and Campaigns Adviser Patrick Veyret says it is “bizarre” that insurers don’t want to disclose how much premiums have changed. Consumer groups want the Australian industry to follow the example of the United Kingdom, where the Financial Conduct Authority has made it mandatory for insurers to display last year’s premium on renewal notices. Switching increased by 1020% as a result.

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t has become a familiar complaint among consumer advocates: sucked in by an attractive 12-month discount, customers sign up for an insurance policy only to be slugged with a significant price increase at renewal time. The insurance industry has copped a fair amount of criticism for this from the public, Senate inquiries and – more controversially – the New South Wales Emergency Services Levy Insurance Monitor Allan Fels [see accompanying article]. Yet despite the criticism, people are not voting with their feet and shopping around. A report by researcher Roy Morgan last year shows more than 77% of general insurance policies are renewed with the same insurer without the consumer approaching other companies. That is down only a couple of points from 79.3% five years ago. There are two overarching perspectives on why this is the case, and the people voicing them line up in predictably opposing camps. On one side is the industry, led by the Insurance Council of Australia (ICA), which believes customers are satisfied with the service they receive and don’t want to switch insurers. Besides that, the evidence that renewals are always higher because of an “acquisition discount” is inconsistent. On the other side are consumer groups, which believe customers are held hostage by an industry that is trying to make it impossible to compare this year’s premium with last year’s. Consumer advocates Choice and the Consumer Action Law Centre are pushing for insurers to display – or be forced to display – premium changes on renewal notices.

But ICA warns it would be misguided to apply the experiences of the British market or the expectations of the British regulator in an Australian context. Spokesman Campbell Fuller says the proliferation of price comparison websites in the UK has led to the creation of “vanilla products” in many segments, with product differentiation much narrower. The major Australian insurers have long resisted getting involved with comparison sites, pointing to the UK experience where price is the major factor in a buying decision. In Australia there is greater variety in the features of personal lines policies, and insurers maintain that comparison sites force the focus on to price rather than suitability. But while ICA celebrates Australia’s product and value differentiation, Choice and the Consumer Action Law Centre believe it also drives consumers’ reluctance to switch insurers. Consumer Action Law Centre Chief Executive Gerard Brody says there is no standardised cover for motor or house insurance, and the differences between policies are too complex for people to understand. Mr Veyret says the differences between policies are often contained in complicated product disclosure statements (PDS). “There should be standardised definitions across policies so consumers can be sure what is covered,” he tells Insurance News. Consumer groups believe displaying the previous year’s premium on renewal notices would help consumers compare different policies and encourage switching. Roy Morgan Industry Communications Director Norman Morris agrees it is difficult for people to understand different conditions across policies when shopping around. It is

hard to judge which is a better policy based on more than premiums alone, especially because consumers receive a whole book of conditions and disclosure documentation. But consumers can demand a better deal with their current insurer, leaving them no worse off, Mr Morris says. Mr Fuller says the industry has tried for many years to address the issue of hard-tounderstand PDS documents. ICA’s Effective Disclosure Taskforce has commissioned research on how to better inform consumers at the point of sale. But it is a complex and long-running piece of work. The Consumer Action Law Centre is on a crusade to stop the practice of discounting for new customers and increasing charges for renewing ones. On this issue, the insurance industry is one of many in its sights. “It’s a complex product you’re buying, and the pricing is a challenge to understand,” Mr Brody says. “The incentive on suppliers is to price strategically, and one way to do that is to discount upfront, knowing people are less likely to switch down the track, and slowly increase the price.” ICA says offering price discounts to new consumers is a legitimate business strategy in many industries, and it helps people afford insurance. “That’s hardly detrimental,” Mr Fuller says. It believes customers stick with insurers because they are happy and have positive experiences at claims time. The Roy Morgan research seems to back this up: only 4.6% of customers opted to change insurers over the past five years, compared with 5.8% in 2013. Satisfaction with general insurers is closely associated with higher levels of loyalty. The top performers for loyalty also have above-average satisfaction levels, Mr Morris says. Given high levels of satisfaction, Mr Fuller is surprised the Roy Morgan figure for policies automatically renewed (77%) isn’t higher. Yet a customer survey conducted by Choice at the start of the Hayne royal commission showed the most common problem identified in general insurance is a lack of loyalty to customers. Choice says respondents complained of annual premium rises. “It’s a perverse retention strategy that they’re not rewarding people for staying longer,” Mr Veyret says. “Loyalty should

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be rewarded with cheaper premiums and discounts.” Mr Veyret and Mr Brody also believe people don’t shop around for policies because they are time-poor. Mr Brody says there is a “behavioural bias” against action, so people stay with their provider. But it is a generalisation to say all insurers are unappreciative of their customers. An IAG spokesman told Insurance News the group already provides annual premium comparisons on policy documents. It also provides loyalty discounts based on the number of years a customer has been with it and the number of policies they hold. For example, a customer with IAG subsidiary NRMA Insurance for 3-4 consecutive years, holding two policies, can receive a 7.5% loyalty discount. It is also committed to helping customers understand what they’re covered for, the spokesman says. IAG created a single Australian division last year with a focus on customer-centricity.

Suncorp’s Marketplace strategy also puts customers front and centre, while QBE recently undertook a staffing restructure aiming to make it easier for customers to do business. A QBE spokesman says it is working to enhance its customer experience and loyalty proposition. KPMG Insurance Partner Scott Guse told Insurance News all insurers are under cost pressure, and customer focus has never been more important. The royal commission, he says, has forced insurers to look more closely at how they treat customers. But this is not enough for the consumer groups. Choice and the Consumer Action Law Centre want a price comparison website – an idea repeatedly knocked back by key industry players who say price should not be the sole focus when it comes to buying personal lines insurance. Mr Fuller says guidance from the industry and the Australian Securities and Investments Commission’s MoneySmart program is that shopping around on price

alone is unlikely to deliver the right policy for individual circumstances, and many people are hearing that message. But Mr Veyret says there is “no merit to ICA’s arguments against a comparison website”. The Government continues to consider many of these issues. It recently asked for submissions on a discussion paper concerning disclosure in general insurance. In the highly competitive personal lines field, the drive to attract more customers is a complex issue, and while retention of established customers has always been important, insurers are increasingly devising new marketing strategies to retain customers by understanding and even anticipating their changing individual needs. Despite the differences of opinion on the so-called loyalty tax, and even whether it truly exists anymore, there is agreement on one thing: everybody wants more informed – and adequately protected – consumers. 0

Batting on: Allan Fels’ wayward campaign In his role as the monitor overseeing insurers’ adherence to the aborted NSW Emergency Services Levy reforms – and then their performance in returning to the previous arrangement – Professor Allan Fels has adopted the colourful phrase “loyalty tax”. A former chairman of the Australian Competition and Consumer Commission and a long-time critic of the insurance industry, Professor Fels featured as the cover story in the December edition of Insurance News. Now he has picked a fight with insurers which is beginning to resemble a test cricket match in its intensity. Professor Fels opened the bowling late in November with a claim in his quarterly monitor’s report that personal lines insurers in NSW were imposing a “loyalty tax” on longterm policyholders. Using data compulsorily obtained from the insurers, he said the average base premium for renewals in NSW is 27% higher than for new policies. But industry sources told Insurance News the data they provide does not distinguish between renewals and new business, and that this had been compared with the severely limited number of quotes available from online comparators. The Insurance Council of Australia (ICA) initially let the criticism go through to the

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keeper, saying the monitor’s office hadn’t shared the research, and anyway, discounts to new customers to attract new business is “competition in action”. Professor Fels then demanded additional comparative pricing data for motor and commercial policies, as well as disclosure of fees paid to intermediaries, and this time ICA came out swinging for the boundary. Accusing Professor Fels of “acting outside his powers” and failing to listen to industry concerns, it called on NSW Treasurer Dominic Perrottet to force him to withdraw the demand. “The information which the monitor can require insurance companies to provide is limited to information about emergency services levy reform,” says a letter sent to the minister and seen by Insurance News. ICA then filed a forthright submission along similar lines to Professor Fels’ “loyalty tax” discussion document. In January Deputy Monitor David Cousins stepped in to bat for Professor Fels, saying ICA’s submission “makes a number of factually inaccurate points” and uses “seriously deficient” methodology. In brief, the response accepts the insurers’ line that the monitor’s role is so widely defined that it can be pretty much whatever the monitor deems it to be by having regard “to the effectiveness of competition in the

War of words: Allan Fels has criticised insurers’ pricing practices

property insurance industry as it is relevant in determining the most appropriate way to implement its monitoring program”. Professor Cousins says the monitor is not obligated to consult on how data provided by insurers is analysed and has offered a consultation avenue on the “loyalty tax” issue by releasing the discussion paper. The monitor’s role – which was designed to support an initiative that never happened – was originally scheduled to end at the end of December. It will now continue until June 30 next year. Plenty of time to fit in another innings.


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Levy failures The NSW election presents another barrier to emergency service funding reform By Wendy Pugh

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ew South Wales Treasurer Dominic Perrottet channelled former prime minister Tony Abbott when he declared a proposal to fund fire and emergency services through a property-based levy was “dead, buried and cremated”. Mr Perrottet was speaking about the ditched model that had been scheduled to start in 2017, but he left the way open for change by insisting the Government remained “completely committed to the principle of moving away from a levy on insurance”. Almost two years later and the political will to act on that commitment has faded before a March 23 election, potentially closing the reform window for years and leaving NSW as the last state to fund emergency services with a levy on home insurance. “The NSW Government has no plans to introduce a revised fire and emergency services levy in the next term of government,” it said last month in response to a Legislative Council committee report that examined what went wrong last time and how to prevent pitfalls if another reform attempt is made. The response rejects committee suggestions that the Coalition Government, led by Gladys Berejiklian, “is likely to introduce a new property-based levy should it be re-elected” for a third term. University of Sydney professor Rodney Smith says the Coalition is most likely to be returned with a reduced majority or as part of a minority government formed with independents, leaving it less political capital to revisit a policy that caused grief the first time around. “You don’t get the sense this is something they are pining to put back on the table,” Professor Smith tells Insurance News. “I think it is something they tried to do, mucked it up, and I suspect that might be it for a while. They have a lot on their agenda already that they need to move on, in terms of infrastructure projects in particular, and I suspect the scope for being too adventurous in other policy areas is fairly limited.”

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Professor Smith says Labor faces a difficult task to win power, and would anyway be unlikely to pursue levy reform. The Berejiklian Government halted the 2017 plan in a panic after some businesses and landowners used a levy calculator and found the switch to the proposed new model would make their payments soar. The Insurance Council of Australia (ICA) estimates the backflip, announced just weeks before the change was due, cost the industry about $40 million. In addition, the Government reimbursed local councils about $11.5 million for work undertaken. The Legislative Council inquiry describes the failed implementation as a poor public policy decision undertaken without adequate understanding of the issue’s complexities or the proposed reform’s unequal impacts across the community. “I don’t really care how it is levied as long as there is an even playing field,” committee chairman Robert Borsak, from the Shooters, Fishers and Farmers Party, tells Insurance News. “What I don’t want to see is people paying extra money because of artificial inflation on their property values.” The failed switch contrasts with the relatively smooth introduction of a property levy in Victoria in 2013. The Victorian move was recommended by the royal commission on the Black Saturday bushfires of 2009, and the state based its new levy system on improved property values, which have a closer alignment with sums insured. NSW council rates are based on unimproved land values. Using that method for a fire and emergency services levy (FESL) would mean the charge soared for some people and failed to take account of variations in the size and nature of buildings, the parliamentary committee inquiry heard.


Hard-hit groups would have included seaboardbased, cash-poor owner-occupiers, some rural landholders, and industrial and commercial property owners in high-land-value areas, such as those zoned for high-density residential development. In a submission to the committee the Government says the NSW Valuer-General does not estimate improved land values and creating such a database is estimated to have a one-off $140 million cost and annual charges of $30 million. Waiting for that change would have delayed the FESL by up to five years. The valuation issue also came up several years ago as part of a NSW Independent Pricing and Regulatory Tribunal (IPART) review of the local government rating system.

The Legislative Council committee says no future NSW government should implement an FESL unless it considers a range of options to improve fairness. These include: use of capital-improved value of land; differential levy rates, fixed charges, discounts and caps; better-aligned land classifications between councils and the FESL; and the inclusion of motor vehicles. NSW Treasury should work to minimise the number of “known unknowns” and conduct a full and transparent re-modelling of any new FESL, it says. The committee recommendations have been well received by insurers, which have not abandoned their push for change, although neither side of politics is expressing a commitment to reform.

A draft report recommends councils be allowed to use capital-improved value, that a valuation base date for an emergency service property levy and council rates should be aligned, and information collection could be phased in “over a period time, such as five years”. “The NSW Government should levy the emergency services property levy on a capital-improved-value basis when capital-improved value data becomes available state-wide,” it says. This has also languished in the too-hard basket, with the IPART draft document published in August 2016 and the yet-to-be-released final report delivered to the Government later that year. “It is a large and complex report and the government is not rushing into a response,” a spokesman for Local Government Minister Gabrielle Upton says. “We are committed to ensuring local councils are sustainable and can deliver improved services, and that is why the report was commissioned.”

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highest proportion of taxes on household insurance policies in Australia; the emergency services levy typically adds 21% to household premiums and 45% to small business premiums, ICA estimates.

U-turn: how we covered the issue in 2017

“While we were disappointed with the deferral of the reforms and the associated impacts, we continue to support any steps that can be taken by the Government to move to a fairer system for customers, such as through a broad-based property levy,” Matthew Bennett, Executive Manager at IAG-owned NRMA Insurance, says. “We hope the NSW Government may consider options for reform in the future.” An ICA submission to the parliamentary committee says if a property-based levy cannot be made to operate equitably, alternatives could include providing funds from state consolidated revenue.

Tasmania is reviewing its emergency services hybrid funding model, which uses a property-based levy for households and a tax imposed on commercial and motor vehicle insurance.

A spokesman for Mr Perrottet tells Insurance News the Government is committed to maintaining an equitable and efficient funding model for fire and emergency services workers, and the withdrawn FESL model was based on the best information available at the time. “The [committee’s] report makes a number of recommendations, which the Government will consider as part of its longer-term plan to improve the fairness and efficiency of the NSW tax system,” he says. The reform’s delay means NSW customers pay the

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“When you start to add up all this expenditure and increases in fire brigade budgets, you can’t see any future for the levy except one where it continues to rise,” Mr Scofield says. The case for abolishing insurance statutory contributions to the fire services in favour of a broadbased tax has been made in numerous reviews and inquiries, including Productivity Commission reports and the Henry tax review.

A fixed-rate levy on policies liable for the emergency services levy would also be preferable to current arrangements, it says.

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Allianz Corporate Affairs General Manager Nicholas Scofield says funding requirements are increasing, putting further pressure on policyholders. The latest NSW budget update includes new workers’ compensation measures to be funded through the levy, plus costs from aircraft purchases, while other potential expenses loom.

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“ICA and its members are disappointed the Berejiklian Government will not reform the unfair and inequitable emergency services levy for the foreseeable future,” spokesman Campbell Fuller says. “Changing the emergency services levy from an impost on insurance customers to a more efficient, broader-based charge would significantly benefit the NSW economy and insured households and businesses. It would reduce non-insurance and underinsurance and lower community reliance on government support after natural disasters.” But despite the arguments, a reform described as long overdue faces further delay. 0


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t $US16.5 billion, the Camp fire that torched the Californian town of Paradise in November was the world’s costliest natural disaster last year, capping another horrific season of calamities for the United States. New figures from Munich Re show the world’s three most financially damaging catastrophes in 2018 were in the US, which was hit by wildfires and hurricanes. The total cost: $US46.5 billion. Hurricane Michael, the fourth-strongest storm on record in the US, ranks second – costing $US16 billion – in the German reinsurer’s top five. In third place is another Atlantic hurricane, Florence, at $US14 billion. Typhoon Jebi, which mainly hit Japan in September, is fourth with losses of $US12.5 billion, followed by floods and subsequent landslides in Japan two months earlier, leaving a damage bill of $US9.5 billion. In terms of insured losses, the Camp fire tops the chart at $US12.5 billion, followed by Michael on $US10 billion and Jebi on $US9 billion. The deadliest event was the quake and tsunami in September that killed more than 2100 people around the Indonesian city of Palu, costing at least $US1.5 billion. Asia was the worst-affected continent last year, accounting for 43% of 850 natural disasters and 74% of fatalities. The region suffered an overall loss of $US59 billion, of which $US18 billion was insured – accounting for 24% of global insurance payouts.

Record-breaking losses: a statue stands in front of destroyed properties in Paradise, California. Credit: Reuters

Paradise lost Californian wildfires dominated another tough year for the US insurance industry, even as natural disaster losses fell worldwide By Bernice Han 64

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December’s Sydney hailstorm was one of about 40 natural disasters to strike the Oceania region. The event has so far cost more than $926 million, with the Insurance Council of Australia saying more claims are expected. Munich Re says global losses last year declined by more than half to $US160 billion from $US350 billion in 2017, when a troika of large hurricanes hit the US and some of its neighbours, leaving affected regions with historic damages. The insurance industry shouldered about half of last year’s damage bill, arising mainly from a series of billion-dollar events in Japan and other Asia-Pacific countries in the second half. While significantly lower than 2017, last year’s catastrophe bill still ranks among the worst on record, Munich Re says. Overall losses of $US160 billion were above the inflation-adjusted average of $US140 billion for the past 30 years. And insurer payouts were higher than the 30year average of $US41 billion. “When compared with the record losses of the previous year… the indications at the start of 2018 were that it would be a more moderate year,” Munich Re Head of NatCatService Climate and Public Sector Business Petra Low says. “However, the second half of the year saw an


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Deadly: more than 2100 people were killed by a tsunami in Palu, Indonesia. Credit: Reuters

accumulation of billion-dollar losses from floods, tropical cyclones in the US and Japan, wildfires and earthquakes. “[Last year] therefore ranks among the 10 costliest disaster years in terms of overall losses, and was the fourth-costliest year since 1980 for the insurance industry.” Munich Re says 29 natural disasters resulted in individual losses of $US1 billion or more. US and AsiaPacific storms and the California wildfires left losses of $US57 billion and $US24 billion respectively. About $US29 billion of storm-linked damages were insured, while the figure for wildfires was roughly $US18 billion. The Camp fire and other major blazes in California amounted to that state’s worst wildfire season for the second year running, Munich Re says. And fire risk is expected to escalate, fuelled in part by a warming climate, meaning insurers must reassess their risk models. “Our data shows the losses from wildfires in California have risen dramatically in recent years,” Munich Re Head of Climate and Geosciences Ernst Rauch says. “At the same time, we have experienced a significant increase in hot, dry summers, which has been a major factor in the formation of wildfires. Many scientists see a link between these developments and advancing climate change. “This is compounded by man-made factors such as burgeoning settlements in areas close to forests at risk

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from wildfire. The casualties and losses are immense, and measures to prevent fires and damage are vital. Insurers also need to take account of the rising losses in their risk management and pricing.” According to Aon, natural disasters led to $US225 billion in economic losses last year, with about $US90 billion insured. The Camp fire was the costliest insured event at $US12 billion. Willis Towers Watson estimates the California wildfires cost insurers $US15-$US17 billion. The fires and other major natural catastrophes combined to cost $US71.5 billion in insured losses last year, less than half 2017’s figure, but marginally above the average for the previous eight years. Preliminary estimates from Swiss Re show natural catastrophes cost the global economy $US146 billion, down 57% on 2017, while insured losses fell 50% to $US71 billion. Nevertheless, last year was the fourth most expensive for the insurance industry, according to Swiss Re’s records. Extreme weather was the chief villain. “Like [2017], losses from the 2018 series of events highlight the increasing vulnerability of the evergrowing concentration of humans and property values on coastlines and in the urban-wildlife interface,” the reinsurer says. “The very presence of human and property assets in areas such as these means extreme weather conditions can quickly turn into catastrophe events in terms of losses inflicted.” 0


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New reality bites The virtual world is expanding, creating risks and opportunities for insurers By Andy Swales

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n the Japanese city of Nishio last year, an 85-year-old woman was fatally hit by a car while crossing the street – an awfully common occurrence, unremarkable even. However, she may also have been the victim of a peculiar recent trend: local media reported how the driver was arrested after admitting she was playing Pokemon Go when the crash happened. The game, played via a phone app, is an example of augmented reality: players hunt for virtual creatures in real-world locations. It’s addictive stuff; distracting, too. After its release in 2016 there followed a wave of incidents in which players suffered or caused injuries as – eyes locked on

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screens – they stumbled around pursuing virtual critters, often paying little regard to the very real dangers around them. In fact, augmented reality is one of the less-immersive “new realities” that have applications from gaming to business, education and healthcare. And, as a recent report from Lloyd’s notes, the technology should be of great interest to insurers. “Increasing uptake by businesses, and the new risks the technologies pose to them and society in general, represent a potentially substantial new market for insurers, [and] a means by which they can improve their own products and services,” the paper notes.


New realities is a term coined by futurist and Lloyd’s report co-author Amelia Kallman. It includes augmented reality (AR), virtual reality (VR) and mixed reality (MR) (see Fake Views panel).

include depression, isolation, reclusive behaviour and even suicide and violence.

“As these technologies become more widely adopted, new risks to human health and data security are emerging,” the report says.

There may also be issues around digital consent.

“KPMG estimates these risks could cost business £20 billion annually… insurers could develop innovative products and services to help businesses manage these risks.” The report outlines a host of human and data risks in the ever-growing “metaverse”. The former may include physical dangers as users become “disoriented in their real-world environments and injure themselves. Users may also become so used to making consequence-free actions in the metaverse – walking into traffic, for example – they could become desensitised to potentially fatal real-world risks.” As we have noted, these dangers are already manifest. In 2017 a boy in Perth reportedly lost sight in one eye after falling while playing Pokemon Go, and in 2016 a teenager allegedly drove into a Melbourne school building while playing the same game. Lloyd’s also notes that the instruction manual for the Oculus Rift VR headset warns an estimated one in 4000 users may experience severe dizziness, seizures, eye or muscle twitching, or blackouts triggered by light flashes or patterns. The report also flags mental risks. “Because these are relatively new technologies, there are currently no available long-term studies on their physical and mental impacts. “Side effects vary dramatically from person to person, but some of those associated with immersive gaming may

“Employers are going to have to consider the impacts of physical and mental risks from an employer’s liability perspective.”

“Laws and legal jurisdiction in the metaverse, which has no physical boundaries or borders, have not yet been developed. Liability is unclear and has yet to be broadly tested in law.” Data risks may arise if financial and personal information or even “biometric and emotional data” become more susceptible to hacking. “The metaverse is increasing the number of vulnerable places that can be attacked. However, underlying legacy systems remain the most vulnerable to data and cyber breaches. This may change as metaverse platforms become more popularised.” To seize on new policy opportunities and possible process improvements, insurers are urged to “immerse themselves in this new sector, to stay on top of new developments, anticipate and react to new risks and invest in innovation and new product development”. “Insurers should work with software and hardware manufacturers to support the responsible development of new realities technology and solutions,” the report says. “Establish partnerships with companies that are developing new realities products. This will help insurers understand future distribution channels and mean they can work closely with their customers to develop relevant products and services.” An early example of new product development is Seguro Go, a Mexican policy covering accidents, injuries and death for Pokemon Go gamers. The industry must keep pace with developments as the technology creates

“entirely new worlds… that will be vulnerable to cyber risks. The rapid development of digital technology is already having an impact on risk exposure, so insurers must ensure they fully understand the risks, and their potential aggregation, and price policies accordingly.” The report says new realities technology can also bring process improvements across the insurance industry. On the marketing side, new realities can add “emotional engagement” for customers. For example, Allianz has created an AR app to show the potential for accidents in the home. “When users enter a specially designed home, they can use a tablet to uncover hidden dangers. For instance, when one views a toaster through the app, an AR overlay shows sparks and smoke.” VR training exercises could help commercial clients’ staff reduce workplace accident risks, and insurance workers can also benefit: Farmers Insurance in the US developed a VR app for claims staff that can generate up to 500 possible property damage scenarios and customer interactions. In claims handling, AR and MR headsets may aid property damage assessments, “making it easy to take measurements and overlay information or previous images to identify damaged portions of a building”. Underwriters could examine assets without needing to be on site and, likewise, brokers may “move around” clients’ properties remotely. Investment officers could “walk the virtual streets” of their investment portfolios, making decisions supported by a new perspective on their allocation. Lloyd’s says the technology is “opening up a new world of commercial and sensory possibility for developers, suppliers, users and insurers”. 0

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Metamorphosis

Fake views Augmented reality overlays digital 2D content onto physical objects, people and environments. In Pokemon Go, creatures appear on a user’s phone or tablet screen, interacting with the real-world image behind them. Other examples include Snapchat and Instagram filters. Virtual reality requires a headset that “completely immerses users’ senses of sight and hearing into an artificial, 3D, digital environment. The stereoscopic images trick the brain into believing the simulation exists tangibly in the spatial landscape of a user, and images instantly adjust based on head position and movement, as they would in real life.” More senses are being added to the mix. Recent start-up Sensiks is developing Sensory Reality Pods – personal cabins that provide a VR experience encapsulating temperature, smell, taste, airflow and light

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frequency “simulated in sync with content”. Mixed reality involves interactive 360-degree, 3D imagery such as holograms overlaid onto real environments. For example, Microsoft’s HoloLens sensors and headsets can “holoport” a fullsize and interactive hologram of a person to another location in real time. Mixed reality is “more inclusive than VR because you can still see your natural environment and the people around you, only with additional layers of holographic digital content that is sharable and interactive”, the Lloyd’s report says. These “differentiating features… are key to why it is likely to become the most important of the new realities”. The report says underwriters may one day “holoport around scenarios, watching as their portfolio is subjected to simulated events. This would highlight potential risks and opportunities where clients might share risks or be impacted by one-another’s losses. This could be useful to identify supply chain risks.”

Lloyd’s report says it is estimated this year at least 20% of large businesses will have adopted new realities. It notes AR and VR start-ups raised more than $US3.6 billion in 12 months to the end of quarter one last year, with half concentrated in just five companies. “Future market size estimates range from $108 billion by 2020 to $US1.3 trillion by 2035. Currently, most new realities technology is being developed for consumer markets – video games, for example – but there are an increasing number of applications aimed at the commercial sector.” A host of potential applications exist in the “metaverse” – the “virtual white space that acts as a blank canvas where people can interact with computer-generated environments, objects and scenarios, as well as other users”. These may include conducting medical operations remotely, simulating disaster scenarios for engineering companies and creating “virtual hospitality boxes” for entertainment events. “The new realities and the metaverse will create new markets, transforming entire sectors and the way they do business,” the report says. In sales and marketing the technology may be used to create virtual office branches and new kinds of advertising campaigns and services. It could decentralise the workforce, allowing staff to “work anywhere by switching their connecting device to ‘in the office’ ”. The metaverse could also make for a more inclusive society, making “life easier for millions of people who experience mobility challenges. Employers could harness the technology to ensure all employees have the same access, regardless of their physical condition.”


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Insurance broking commissions – Lessons from the Royal Commission By Andrew Sharpe In the lead-up to the Final Report of the Financial Services Royal Commission, one simple question was occupying the minds of many in the general insurance sector: would Commissioner Hayne recommend that general insurance broker commissions be banned? When the Final Report was handed down, the Commissioner did not recommend the abolition, or phasing out, of commissions for general insurance brokers. He recommended that the general insurance exception to the prohibition on conflicted remuneration be reviewed in three years’ time with a report to be concluded by the end of 2022. But this was not a reprieve. It was an opportunity for general insurance brokers to demonstrate that the existing exemption can operate in a manner which enhances (rather than detracts from) consumer outcomes. The Final Report In the Final Report, Commissioner Hayne has provided the industry with a series of indications as to the objections which it will need to meet if it is to successfully advocate for a continuation of the exemption on conflicted remuneration. a) Underlying Principles Commissioner Hayne has set out a strong argument that, at the level of principal and policy, exceptions to the ban on conflicted remuneration should be eliminated from the financial services sector. That argument begins with the identification of six norms of conduct: obey the law; do not mislead or deceive; act fairly; provide services that are fit for purpose; deliver services with reasonable care and skill; and – critically – when acting for another, act in the best interests of that other. It continues with the identification of a series of six “general rules” which those norms are said to support or, in some cases, entail. Two of those general rules are directly on point: • intermediaries should act only on behalf of, and in the interests of, the party who pays the intermediary; • exceptions to the ban on conflicted remuneration should be eliminated. According to Commissioner Hayne, the very hinge about which the conflicted remuneration provisions turn is that the payment “could reasonably be expected to influence the choice of financial product recommended to retail clients”. The starting presumption will be that commissions have the propensity to detract from consumer outcomes.

b) Simplification The financial laws should be simplified to draw explicit connections between the particular rules that are made and the fundamental norms to which those rules give effect. This objective itself calls for the removal of exceptions and carve-outs wherever possible. Commissioner Hayne expressly identifies grandfathered commissions in this context. c) Unintended Consequences Advocacy by reference to high level claims of “unintended consequences” are unlikely to be successful. If the exception to the rules prohibiting conflicted remuneration is to be preserved, the exception must be “closely and cogently justified” by identifying, and empirically supporting, the precise nature and the extent of the consequences that are said to follow from the removal of the exemption. d) Practical operation in other contexts While no evidence was led in the Royal Commission as to any actual issues with commissions paid to general insurance brokers, the Commission observed actual conflicted behaviours by others including mortgage brokers, life brokers and motor dealers. In those contexts, “all too often advisers have preferred their own interests against the interests over clients, despite having an obligation to pursue the best interests of their clients”. These findings heighten the need for general insurance brokers to be able to point to reasons to differentiate themselves from other financial service advisers.

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e) Proving Value In the context of mortgage brokers, the Commissioner considered the submissions put on behalf of mortgage brokers as to the positive effect of brokers on competition. In the absence of any detailed studies to prove the pro-competitive effects of mortgage brokers (and reviews by ASIC and the ACCC which raised questions as to the actual extent of such effects) the Commission placed little weight on those submissions. Readying for the review My own observation has been that, on the whole, commission-based remuneration practices have facilitated the distribution of insurance products through advice-based broker channels which have a real capacity to improve consumer outcomes through: • increasing competition for insurance products including both price-based and non-price based competition; • encouraging the development of more appropriate insurance products; • improving the access of consumers to quality product advice and claims advocacy services;

• enabling the development of technology, education and technical resources which reduce the cost of production and distribution of insurance products and contribute to heightened professionalism within the broking industry. Any broad-based removal of the current exemption has the capacity to significantly affect the take-up of broker services and erode these benefits. It would run the risk of adversely affecting net consumer welfare. The insurance broking industry has a good story to tell. The fact that the exemption has continued to date is testament to the fact that the industry has told that story well and the comparatively lower extent of complaints and disputes in the sector. However, in a new ‘post-Royal Commission’ world, the shift to simplified financial services regulation will present a greater challenge. If the general insurance sector is to maintain the existing exception to the ban on conflicted remuneration, it will need to heed the above warnings and: 1. carry out an inventory of existing conflicted remuneration arrangements, consider the potential for each such arrangement to encourage behaviours inconsistent with the six norms of conduct and self-regulate to remove or modify any arrangements which do not pass the tests laid down by the Commissioner; 2. collect data and undertake studies to prove and measure the benefits created by those conflicted remuneration structures which are assessed as contributing to positive consumer outcomes; 3. increase the transparency of all conflicted remuneration arrangements through more stringent disclosure obligations in the Insurance Brokers Code of Practice; 4. enhance the powers of the Code Compliance Committee to impose sanctions to police conduct which breaches any of the six norms of conduct, especially where particular conflicted remuneration arrangements might be seen to be a factor in such conduct. This review must take place both at the level of the relevant industry bodies and in the boardrooms of industry participants. It requires individual brokers and insurers to heed the clear messages from the Commission, focus on consumer outcomes and ensure that their own broker remuneration structures are consistent with six norms of conduct and operate consistently to promote the best interests of consumers.

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Growing fast: New Hollard brand targets SMEs Hollard has invested in a new brand aimed at Australia’s huge SME market. Hollard Commercial Insurance, or HCi for short, will carry insurance products that address the everyday risks small and medium firms face. The brand will combine Hollard Select Brokers and Calibre, which was acquired in 2017, to form a single business. The Calibre brand will be retired. HCi products will be delivered via lowreferral electronic platforms to maximise efficiencies in insurance placements for intermediaries. Richard Heilig, previously chief executive of Hollard’s commercial business, has been named Chief Executive of the new brand. The timing is right for the launch, Hollard Chief Executive Richard Enthoven says, as the insurer looks to build on its success since setting foot in Australia 20 years ago. The insurer now writes more than $1 billion in gross written premium, achieving the target a year ahead of schedule. The hardening market is another incentive behind the brand’s launch.

Connecting clients: Sparke Helmore’s Chris Wood

Global connections: Sparke Helmore joins powerhouse alliance Sparke Helmore Lawyers has become the first Australian law firm to join Global Insurance Law Connect (GILC). Based in London, GILC has 14 members from around the world including the US, the UK, China, Brazil, France, Spain, India, Switzerland and Norway. The network was set up to service growing demand from insurers and reinsurers for specialist insurance legal advice on a range of issues. “We are delighted to be joining GILC,” Chris Wood, National Practice Group Leader for Commercial Insurance, tells Insurance News. “It makes a powerful statement about the firm’s deep commitment to the insurance sector as well as reinforcing our position as one of the market leading insurance law practices in Australia. “This move gives Sparke Helmore the ability to connect clients across the globe, delivering smart solutions through the lens

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of leading thinking and a dedication to innovation.” Areas where GILC specialises include cyber, energy, environment, financial lines, fraud, construction, complex bodily injury claims, marine, property and product liability and recall. Sparke Helmore’s Partner Gillian Davidson will become a GILC board member and represent Asia-Pacific. “It’s an honour to be appointed to the board of GILC and fast-track the firm’s connection with the other member firms,” Ms Davidson says. “We have a great deal of knowledge and expertise to contribute. I will be championing a number of issues as a member of the board including strategic and gender diversity.” Sparke Helmore’s commercial insurance group has 35 partners, 172 lawyers and 147 allied professionals in nine offices across the country. More than half of the firm’s lawyers work on insurance-related matters. 0

“HCi brings together into one dedicated, focused team all of our commercial offerings,” Mr Enthoven tells Insurance News. “We probably have a bigger market share in the SME market than in personal lines. It is a smaller market, but we will have a very meaningful presence. We will be positioned well to grow market share as that market hardens.” Hollard’s commercial operations write $120 million in gross written premium and the figure is on track to hit $200 million in the next three years. The insurer will continue to sell its SME products through intermediaries. And the market can expect to hear more from Hollard, says Mr Enthoven, who believes the insurer, now the seventh largest, is on the right expansion path. “Up until now we’ve been growing out of the spotlight, and I think many people are a bit surprised when they discover the extent of our operations,” Mr Enthoven says. “Over the past four years, our compound annual growth rate has been about 35%, well ahead of our nearest challengers and the larger incumbents. “We don’t envisage standing still – we will continue to take market share.” 0


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Out from the shadows An executive development program aims to empower a new wave of broking leaders By Wendy Pugh

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n accelerated leadership development program for brokers will accept its first intake early this year, in a training collaboration between former Suncorp Insurance chief executive Anthony Day and motivational speaker and business consultant Rowdy McLean. The Eclipse Program aims to build the capabilities of emerging talent in the broking community and provide a platform for organisations to meet growth goals, filling a gap in the market identified by the business executives. Mr Day says the program evolved from observing the benefits of training and development opportunities in large corporate environments. In contrast, broking principals wanting to develop and retain their best people have generally had limited options for programs that address

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their specific needs.

while empowering individual participants.

“In talking to a number of brokers, there isn’t much around for that next level of leaders coming through, where they can build their own leadership skills, get some focused attention and deliver something special,” he tells Insurance News.

“If you provide people with the right support base and the ability to take time out from what they are doing day to day, to innovate and drive better results, then the results are amazing,” Mr Day says.

Mr Day has a high profile in the insurance industry after a career spanning more than 30 years with local and international insurers. Last year he established the Elevate CEOs consultancy to mentor senior executives. At Suncorp he developed a program for commercial insurance front-line staff with Mr McLean, whose Play A Bigger Game business has assisted many companies. That program created an environment for teams to devise innovative ideas and projects,

The broker scheme, launching as the Eclipse Program “Time to Outshine”, offers a similar concept and centres around objectives of personal growth and the delivery of projects that have a significant benefit for businesses. The four-month schedule aims to quickly deliver results, and is structured around rapid growth masterclasses in which participants develop ideas and strategies. Participants are supported by the facilitators, and each is held accountable for completing two rapid growth projects.


Mr Day and Mr McLean will oversee the program and bring in guests to lend expertise according to the projects participants pursue. They say the $20,000-per-person cost will pay for itself, driving ideas and outcomes to shake up business-as-usual approaches and preventing the complacency that can cause teams and organisations “to rust from the inside out” without realising their full potential. Places will be allocated through an application process, with 12 participants expected for the first program, set to start next quarter. Mr Day says investment in the new wave of leadership helps to retain staff, who may otherwise see a ceiling on their opportunities, and provides a pathway for succession as principals look to the future of their businesses. “I have spoken to a number of brokers as we went through… designing the concept,” he says. “They are looking for the next level of leaders, they are looking for succession and they are looking to maximise their profits.” The Eclipse Program also taps into the motivational and entrepreneurial energy of Mr McLean, who has helped clients build success-driven cultures. He has consulted across a wide range of industries and regularly addresses conferences and events. Mr McLean established a communications business aged 24 and retired at 34 after his early success. He returned to the corporate arena and has since worked with companies including Tabcorp, Macquarie Bank, International Game Technology, Gloria Jean’s Coffee, Volvo, LJ Hooker real estate and Suncorp. He says businesses, whatever sector they are in, experience many of the same constraints affecting their ability to capitalise on opportunities and achieve exceptional results. Enterprises often start a new year with intentions to make changes and pursue innovations, before finding that time has passed and few of their plans are achieved. “The next thing, it is December, and everything is still the same, opportunities still not exploited,” he tells Insurance News. “The idea of this program is to change that dynamic for those brokers that really want to make this the breakout year.” 0

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UIG holds birthday bash More than 100 guests and staff joined in birthday celebrations to mark United Insurance Group’s 10th year in business. The cocktail party was held at the stylish Stolen Gem, one of Melbourne’s famous rooftop terraces. Senior representatives from the broking firm’s key industry partners mingled and networked with authorised representatives, many of whom had flown interstate for the occasion. Director Anthony Zambelli and General Manager Trevor Howard led the celebrations and thanked insurers and authorised representatives for their support over the last 10 years. Part of the Steadfast network, United Insurance Group has approximately 30 associated businesses involving more than 80 individual authorised representatives in Victoria, Queensland and New South Wales.

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All Blacks a hit with AIG guests AIG hosted New Zealand rugby teams over two sessions in Sydney where invited guests and employees got the chance to hear what makes the all-conquering players tick. Three members from the Black Ferns Sevens shared how they strike a balance between personal and professional responsibilities, and prepare mentally for matches. Guests at the event – organised by AIG’s Sydney Women & Allies Employee Resource Group – also heard how the team handles conflict and copes

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with being away from families for long periods. In the other event, the All Blacks Sevens joined employees and brokers in several rounds of archery at Sydney Olympic Park after a gourmet BBQ breakfast. Three players later took part in a “shoot off” with outside back Kurt Baker emerging victorious. Guests were later presented with various All Blacks prizes and photos with the players. AIG is the official insurance sponsor of New Zealand Rugby.


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Sedgwick celebrates new start Claims administrator Sedgwick celebrated its local launch in Sydney in November, after merging the Cunningham Lindsey operations into its business. Sedgwick Group President Mike Arbour from the US and International Chief Executive Ian Muress from the UK were in town for the event. Both gave speeches to the 400 attendees, and new Australia Chief Executive Diego Ascani also spoke to the crowd. The combined group operates across 65 countries and has more than 20,000 employees, including 1200 in Asia-Pacific. The event was held at the O Bar and Dining.

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McLardy McShane charity lunch marks decade McLardy McShane’s 10th annual Reach Christmas lunch was packed out, with 670 people attending. The event has raised more than $1 million over its existence, and proceeds for this event went to youth organisations Reach Foundation, Irishbased Soar, and Boys to the Bush. Beyondblue was also supported.

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Former Essendon player and coach James Hird and AFL Hall of Fame Legend Kevin Sheedy were special guests. Mr Hird was still recovering from a serious cycling accident but was determined to attend and delivered an “inspiring” speech. The lunch was held at Peninsula in Melbourne’s Docklands.


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Aussie icons invade Insurance House conference Brokerage Insurance House celebrated its 35-year anniversary in style at its annual conference in December. The conference looked back at the history of the company, with a Q&A with former managing director Wayne Hildebrand about the history of Insurance House and its development from a small office in Echuca. Staff and management were inspired by eminent corporate businesswoman Margaret Jackson, and Dave Burt, the founding director of health promotion organisation Sport and Life Training. Almost 130 attendees later let their hair down with an “iconic Aussie� dress up Christmas party. Steve Irwin, Dame Edna Everidge and Ozzie Ostrich costumes were spotted, and guests were treated to a live performance by ARIA Hall of Famer Daryl Braithwaite. The event was held in the rural Victorian town of Yuroke, at the Aitken Hill conference centre.

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NTI thanks broker partners National Transport Insurance (NTI) held its annual business partners function at the end of last year. The event took place at the prestigious Vue De Monde restaurant of prominent chef Shannon Bennett in Collins Street, Melbourne. The function recognises and thanks NTI’s broker partners, suppliers and staff for their support of the business. About 130 guests attended.

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Insurers bat for school fundraiser The inaugural Battle of the Insurance Ashes was a smashing success as the industry raised $40,000 for the Spring Farm Public School in Sydney. Teams from Allianz, Procare Group, QBE Insurance, Sura/AUB and others including special guests from the Primary Club of Australia, a cricketers’ charity, competed in the round robin tournament. QBE finished top of the ladder, followed by the PCA Barbarians and the Sura/AUB team. “I would like to thank the major sponsors who entered teams, our trophy sponsor CGU, as well as Suncorp, Insurance Advisernet and 360 Underwriting Solutions,” club board member Craig Patterson said. “I’m always really impressed by the enthusiasm of people in the insurance industry to get behind events like the Insurance Ashes.” There are plans to stage another Ashes next year. The school will use the funds to install soft surfaces and safe playground equipment for its autistic pupils.

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maglog > T

Terry McMullan Publisher

he death of Frank Hoffmann in February at the age of 84 removed from the industry’s ranks its most knowledgeable expert, a raconteur of rare wit and a fearless advocate for technical and service excellence. He was a walking encyclopedia of broking, the wider industry and its laws and practices.

corporations, most buy on price.

Although he would state otherwise if he could, it’s entirely coincidental that Frank died just a few hours after the Hayne royal commission’s report was publicly released. He would have found much in the report to agree with, because he believed passionately in the power of professional relationships and behaviour.

One of the biggest challenges for business insurance is getting the government to stop the ridiculous taxes they keep imposing. I mean it’s all very well if a bill is $20,000 for insurance, but why should $10,000 of that go to a state government and the Federal Government as well? It is quite ludicrous. There is no other industry in Australia that is so loaded down with so many taxes – perhaps with the exception of the tobacco industry.

This writer interviewed Frank way back in 2007. I remember it chiefly as a ramble through some thorny issues that 12 years later still command attention, with Frank, swathed in cigarette smoke, charging ahead through the industry’s undergrowth doing exactly what he always did: identifying professional failings, legislative lunacies and some practices that had been lost along the way. He was charming, entertaining and erudite all at once. Since his death there have been many fine words spoken about Frank’s life and long career, all richly deserved. We’ve selected some of his comments from that 12-year-old interview and will let him do the talking one last time. Rest in peace, Frank. [Discussing what broking was like in 1952, when he took over his late father’s brokerage at the age of 18:] Loyalty was important, both to clients – and they were very loyal in return – and to insurers. You had to be very technically competent. That is probably the major aspect which today, regrettably, is not necessarily the case. There are some extraordinarily good technicians in the market today, of course, but generally speaking we are more interested in performance. Most broker education [in 2007] lasts two or three years. It has become more centred on compliance, and the real concise, intelligent technical aspects have been nearly forgotten by many. The biggest issue for brokers now is one of their own making, regrettably. Today, whether one likes it or not, whether it’s SMEs, middle-sized companies or very large

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There is an enormous push for underwriters – and many brokers are falling into the same trap – of saying one size fits all. So for your SME you’ve got these quite wide, very nice wordings. But they’re not necessarily what fits the need of a particular client.

Professionalism is [achieved by] continuing education, and this is one of the things that I think a lot of brokers and the directors of broking companies fail in. They really believe that because they’ve worked

in broking for 20 years they know it all. I don’t often see senior brokers, let alone directors of broking houses at insurance law association-type sessions on things of considerable importance to our industry. I’ve been in this business since 1952 and I don’t think a day has gone by that I don’t learn something about insurance that I didn’t know before, or something that I thought I knew [which] has changed. For anyone that likes lunching and likes speaking and likes people, broking is an ideal occupation. To be a good broker takes brains – it really does – and people skills. Insurance has been rather steeped in my family through my mother’s side. I’m the fifth generation in insurance and my two sons are the sixth generation, which is probably unique in the world. My great-great-great grandfather was one of the 10 founders of the Generali of Trieste. Unfortunately, some idiot in the family must have got rid of his shares. 0


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FEB/MAR 2019 - Insurance News (the magazine)  

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