Global problems, insurtech solutions

Beyond the floods

The industry did well last year, after the 2019/20 Black Summer. But will the worst floods on record derail its momentum?

By Bernice Han

General insurers in Australia performed significantly better last year, more than tripling their combined insurance profit to about $3.48 billion, KPMG says in its annual state-of-the-industry review.

In 2020 the industry could only manage $915 million, the first time in the five-year period going back to 2017 when insurance profit did not crack the $1 billion mark. Earnings that year took a huge drubbing from several natural hazard events including the 2019/20 Black Summer bushfires and also initial recognition of Covid-19 business interruption provisions.

KPMG says the increase in gross written premium (GWP), by 11% to $53.85 billion, with no similar corresponding rise in claims costs was a deciding factor last year for the industry. Insurers were continuing to reprice for claims cost inflation across all lines of business, with the exception of compulsory third party, travel and employers’ liability lines.

The rate changes were most “profound” in motor and home classes for personal products as well as commercial property and professional indemnity products, according to the review.

“These rate rises are a result of insurers continuing to price products to reflect the underlying risks and costs of a policy which will drive a more sustainable product,” KPMG says.

KPMG estimates GWP last year clocked an average quarterly increase of 2.6%, representing the “highest percentage movement” it has seen in recent years.

“It demonstrates the continued hardening of the market,” KPMG says.

As the industry approaches the half-way point of 2022, predicting whether it can match or even surpass last year’s results is a difficult exercise, not least because of the floods in New South Wales and Queensland.

KPMG released the report in April, as the extent of flood damage began to emerge. While the waters have subsided, repairs are being held up by acute shortages of tradies and building materials.

The still evolving fallout from the February/March catastrophe – the country’s most costly flood event with insured losses in excess of $4.3 billion – is just one of a number of headwinds pressuring the industry. Supply chain disruption is another challenge facing the industry.

Delays to flood recovery works, on top of yet-to-becompleted construction repairs from prior catastrophes, are potentially adding to cost pressures.

“It’s not a rosy position for insurers as they head into the year,” KPMG Insurance Partner Scott Guse tells Insurance News. “It’s impossible to tell at this stage (if they can do better than last year). It will come down to the reinsurance agreements they strike and how many catastrophes that we have.”

Reinsurance renewal talks are set to finalise by June 30 and even before the February/March floods struck, reinsurers had already indicated further rate increases were on the cards for Australian clients.

Mr Guse says reinsurance rates went up in the December renewal season and also most recently in March, which was due partially to recent perils in Japan.

“What is clear from the reinsurers is that they have upped the prices and they’re obviously going through a process now of discussing those increases with the insurers,” Mr Guse says. “The [NSW/Queensland] event means that you’re likely to see further increases… we’ll get a much clearer picture come June 30.”

As reinsurance rates go up for the industry, so will

premiums as insurers look to defray cost pressures.

“We have been through a hard cycle for probably about five or six years now and that is a fairly long period of time in the insurance market,” Mr Guse says. “I would say all the signs are pointing for that hard market to continue. The floods are certainly one aspect that extends it.”

In the KPMG review the consultancy details an array of long-running industry issues, listing climate change as among the top 10 challenges that will shape the sector in the coming years.

Others included in the list are pricing and affordability; changing customer expectations; simplification and cost optimisation; regulatory and compliance transformation; competition for talent; and digital, data, innovation and cyber security.

On climate change, KPMG says insurers continue to face a higher exposure to natural perils, such as floods, bushfires and cyclones. The effects of climate change are already being felt, with the industry increasingly concerned that the frequency and severity of natural hazard events will “significantly” push premiums up even more and render some parts of Australia “uninsurable,” the consultancy says.

Mr Guse says insurers, through peak body the Insurance Council of Australia, have been stepping up their calls on governments to do more to improve the country’s natural disaster resilience.

He sees a “positive” change in this area under the newly elected Labor Federal Government, which unveiled its Disaster Ready Fund in the run-up to the May 21 poll. Labor says its fund aims to improve disaster readiness by investing up to $200 million a year on mitigation projects such as flood levees and fire breaks, matched by states, territories and local governments.

“I think whenever you get a change in government, it’s a fresh perspective so I can see it as a positive,” Mr Guse says. “The fact that the Insurance Council was pushing the [previous] government before the election and nothing significant changed, you’re hopeful that with a new government that changes will be on the horizon.”

The KPMG review says the industry may not be able to sustain insurance in flood-prone areas and is looking to the government to implement flood mitigation measures to reduce the impact to communities when natural hazard events occur.

It warns of a “looming market failure” and potential significant risk of underinsurance for some locations and classes of assets as natural perils become “uninsurable”.

On customer expectations, KPMG says the insurance industry continues to lag behind its peers in other sectors when it comes to offering “best in class” experience. This is particularly the case for personal lines insurance providers.

Some personal lines insurers have made significant investment in digitising and improving the front-end sales process but improvements have been lacking in other areas, notably in claims management and policy changes.

KPMG says the process for managing claims or amending policy details is often “slow and difficult” for consumers.

“Personal lines insurers will likely need to make significant changes to their operating models if they hope to retain their customers and avoid becoming commoditised,” KPMG says. 0

Hurting earnings: insurers have more than 200,000 claims to pay in places like Rosalie, Brisbane. Credit: Ali Rasoul

Global problems, insurtech solutions

Insurtech can help society face up to some of its biggest challenges

By Simon O’Dell, Insurtech Gateway Australia Chief Executive

Insurtech leader: Simon O’Dell

Insurance is the ultimate social-good industry. Through the provision of capital and services, it provides critical protections for society; underwriting our prosperity and way of life.

Never before has the insurance industry been more important. Society is facing unprecedented challenges from climate change, increased frequency and severity of natural catastrophes, an unstable geo-political environment, war and cyber crime.

Three global social challenges

1. Protection gap – the insurance industry will typically cover less than 50% of economic loss following a natural catastrophe. 2. Vulnerable food supply chains – more than 50% of the global food supply chain is unprotected and increasingly vulnerable to a changing climate. 3. Climate change – The world is racing towards a 2 degree increase in global average temperature which would be catastrophic for societies around the globe.

Insurtech represents a reliable partner to reinforce the insurance industry’s critical role in society. In the world’s time of need, we’re seeing tech working with insurance to solve society’s biggest problems. Founders from all start-up verticals are attracted to insurtech by the magnitude of the problems and the altruistic nature of the cause.

“I come from an agricultural family and have faced unpredictable weather events firsthand. After 15 years of working in the satellite industry and with the current state of technologies like remote sensing and blockchain, I saw the opportunity to transform agriculture insurance for the better” – Maria Mateo, Co-Founder & CEO, IBISA.

“The proxy that is the insurer’s understanding of reality is increasingly unreliable given the dynamic nature of risk. Our diverse market of Australia’s geospatial data allows insurers to ingest reality directly into their workflows. We hope this will help more of the uninsurables become insurable” – Stephen Donaldson, Founder & CEO, Geolocarta.

Three ways insurtech is working with insurance to help solve big social problems

1. Parametric

IBISA brings resilience and security to global food supply chains and adds social value to farmers and their families. An estimated 2.5 billion people who manage 500 million smallholder farm households provide over 80% of the food consumed in the developing world, more than 80% of which is uninsured.

Distribution and claims assessments costs in these nations have meant that insurance is cost prohibitive.

IBISA has fixed the economics by utilising digital distribution tech for local mutuals and remote sensing data (satellites) for parametric style claims settlements.

This results in about $15 premiums for $1000 coverage to local farmers in the Philippines, India and Africa that previously couldn’t access or afford insurance. In addition to the social good and underwriting food supply chains, it’s helping to augment the insurance premium pool and close the protection gap. 2. Underwriting climate action

KITA is the world’s first carbon insurer. The carbon credit market relies on the sellers of carbon credits to come good on the delivery of carbon reduction schemes. This sometimes does not happen.

A scheme to plant trees may fall short due to unforeseen events, or the volume of carbon captured by a forest could get compromised by a bushfire. KITA removes the “carbon delivery risk” from buyers and sellers in the market and in turn underwrites the delivery of climate change mitigation. 3. Reality-as-a-Service (RaaS)

Geolocarta provides data consumers, including (re)insurers with access to a high fidelity reality reference layer. No longer does the insurer need to rely on subjective data to profile risks or quantify potential losses.

Competitive gains in risk modelling and data analytics have been iterative for some time. This marked shift in data quality and delivery now offers (re)insurers room to compete on a differentiated basis in an otherwise homogenous market.

Reliability in risk profiling and quantifying potential losses allows insurers to insure (and reinsure) with greater clarity, with minimal margin required for the unknown. This should see – in the case of Australia’s increasing domestic property “red zones” – homes treated in direct consequence to the reality of their risk profile. Where a property is uninsurable, focus should shift to risk reduction or mitigation measures.

RaaS should also help close the protection gap. In Australia alone, billions in premium are foregone due to risk profiles being too ambiguous. • Insurtech Gateway Australia is an insurtech incubator launched in 2019 as a joint venture between the Insurtech

Gateway UK parent and a consortium of local investors including Envest, an investment firm focused on the insurance industry. 0