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BILL BERKLEY: FEAR DRIVES THE INSURANCE CYCLE
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NO MARKET FAILURE: INSURERS FIRE BACK OVER FLOOD
SOCIAL MEDIA: YOU CAN’T AFFORD TO IGNORE IT
REVEALED:
AUSTRALIA’S BIGGEST FLOOD RISK
August/September 2011
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Contents 6 Newsmakers » 10 Governments told: you failed, not us » Insurers muscle up and fire back over flood insurance.
14 Insurance in the flood equation »
The rationale behind the Federal Government’s drive to make universal flood cover possible.
16 The greatest flood risk of all »
Sydney’s northwestern suburbs sit on the most lethal floodplain in Australia.
22 Better than flood mapping »
3D movie-style imagery could be the missing link in the debate, say its CSIRO developers.
26 A man for all seasons »
Industry guru Bill Berkley offers some new angles on profitability, investors, catastrophes and how fear drives the insurance cycle.
30 Christchurch: setting new precedents »
New Zealanders and the global insurance industry have long lived with earthquake risk, but the Christchurch events have destroyed many of the assumptions they had about it.
34 Future-proofing or navel-gazing? »
Insurers have learned to rely on catastrophe modelling. But critics say it’s predicting the unknowable.
40 Calm before the storm »
styleNEWS
38 A star is born » Joe Vella’s award-winning Cairns office revival gives ‘an old girl a new dress’.
companyNEWS
59 Zurich claims an online first »
peopleNEWS
60 It’s all a matter of balance » Actuary Melinda Howes is expanding her profession’s influence and reach.
62 Bill Berkley drops in for breakfast » 64 Gaining Insight in the warmth of the Sunshine Coast » 68 Allianz hits the road to explain travel products » 70 Ace moves down for room to move » 71 Sharing experiences and building friendships » 72 CQIB turns on the sunshine » 74 maglog »
Rates definitely will rise, say the insurers – but they’re not dictating when or how much.
44 A whole new way of doing business »
Noel Condon is an AIG veteran who has embraced the less stuffy culture of Chartis.
48 Social media: Love it or loathe it. Just don’t ignore it »
Will insurers’ brands be damaged if they give way to the social media phenomenon? Not taking part might be riskier.
54 A sly and grubby thing to do »
Insurers are investing big dollars in the war against insurance fraud.
August/September 2011
Cover image: Nearmap
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insuranceNEWS.com.au newsmakers at
Travel by air has become a little less routine recently, with last year’s volcanic ash cloud from an Icelandic eruption closing down airlines and airports across Europe. In June it was the turn of southern hemisphere travellers to be stranded as ash from Chile’s Puyehue Cordon Caulle volcano (pictured) drifted across Australia and New Zealand. Just about the only good news was that people with travel insurance policies who found themselves stuck were covered. The ash cloud wandered up into the stratosphere, at the sort of altitudes that commercial jets fly, catching westerly winds to wander across southern Africa, Australia and New Zealand. It caused havoc with domestic flights to and from Melbourne, Adelaide, Hobart and Perth cancelled, as well as
No-fly zone
trans-Tasman flights and flights within New Zealand. Some international flights to Argentina were also affected. QBE underwrites travel insurance policies sold by Qantas and Air New Zealand, Chartis underwrites policies sold by Jetstar and Tiger, and Allianzowned Mondial Assistance underwrites Virgin Australia’s travel policies. The insurers confirmed they would cover cancellation costs if policyholders weren’t able to complete prepaid travel plans, as well as additional costs from changes to travel plans including accommodation and transport expenses. Qantas said the ash cloud disruptions had cost it $21 million up to June 20. That’s a shame, because aviation brokers say the airlines wouldn’t have been carrying relevant business interruption cover.
Reuters
Just about the only good news was that people with travel insurance policies who found themselves stuck were covered.
Going up and staying there
Flood is a global problem
The message for policyholders, brokers and insurers in New Zealand is stark: the country’s insurance market is going through a “fundamental and significant shift” to permanently higher premiums. Lumley NZ Chief Executive John Lyon told the Insurance Brokers Association of New Zealand conference in Auckland last month that the way earthquake risk is managed “has changed forever”. “The models used to assess risk in New Zealand were funda-
If you thought Australia’s flood insurance problems were complex, take a look at the British and US markets. Both countries’ flood insurance markets – once considered good examples for Australia in the debate over flood pools and compulsory cover – are a mess. UK insurers are struggling to continue offering flood cover, and the US scheme is grappling with a $US18 billion deficit. The Association of British Insurers is investigating how to save the UK’s struggling flood insurance scheme, which includes a pool arrangement. The market is maintained under a deal between the Government and insurers, which is due to run out in 2013. The UK Government agreed to fund flood defence works while insurers agreed to keep offering flood cover as widely as possible. But the agreement is currently in a very precarious state, with the Government slashing funding by more than 17% and insurers threatening to pull out of the market.
mentally flawed, and confidence in those models was severely undermined.” He also believes reinsurers are now taking note of the country’s unmodelled risks, like the potential for tsunamis and even volcanoes. New Zealand insurers are now competing for reinsurers’ support by demonstrating they’re managing risks properly and “getting our prices right and selecting risks appropriately. Our world has changed.”
Figure this
39
11.63
36.2
Dollar amount of general insurance premiums paid in Australia last year, according to Swiss Re
Amount in dollars of the Japanese insurance industry’s earthquake and tsunami payouts so far
Dollar amount of life insurance premiums paid in Australia last year, according to Swiss Re
BILLION
6
BILLION
insuranceNEWS
August/September 2011
BILLION
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NZ brokers ‘taking too much’
Big changes at QBE QBE’s Australian operations are going through some big changes. Early in July it cut around 200 jobs in its Sydney IT department as it implemented a new operating model aimed at providing “more effective and robust” IT services. A few weeks later the Australia Asia Pacific division was re-engineered back into two divisions. That left divisional chief executive Vince McLenaghan – who just a few years ago was being tipped as the successor to the legendary Frank O’Halloran – with nowhere to go, and he left the company. Popular broker channel chief Colin Fagen (above) became Chief Executive Australian Operations, and Michael Goodwin was confirmed as Chief Executive of QBE’s Asia Pacific Operations.
Insurance premiums in New Zealand are rising, and they’re not likely to head back down for a long time, if ever. But brokers in the shaky isles needn’t think they’re in for a commissions bonanza, with insurers warning them it’s time to “share the pain”. Four of the country’s most senior insurance executives told the Insurance Brokers Association of New Zealand (IBANZ) conference last month that the level of commissions can no longer be justified. “At the end of the day the insurers are the ones carrying the risk and buying the reinsurance – and that is not getting cheaper,” QBE NZ Chief Executive Ross Chapman said. NZI Executive General Manager Karl Armstrong
With two directors from the failed property group Centro sent to jail last month, directors’ and officers’ (D&O) insurers are advising clients to read the judgement. The Centro directors were sent to jail for breaching the Corporations Act by approving a set of accounts which did not disclose debts of about $2.6 billion, as well as about $1.75 billion of guarantees. Centro’s internal accounting team, auditors and management approved the accounts but none admitted spotting the omission.
to the ombudsman scheme and the insurance code of practice as his biggest achievements. “I was the first consumer advocate to be involved in insurance,” he told Insurance News. “I’ve always been interested in making sure that things work properly so the right solutions occur.”
30
60
6
Amount in dollars of the cost to merge AMP and Axa Asia-Pacific
Amount in dollars of total insured losses in first half of this year, according to Munich Re
Number of transactions carried out on the Sunrise Exchange platform in the year to June 30
MILLION
Willis Australasia Chief Executive Bill Donovan (above) resigned last month to join QBE New Zealand. His replacement, Pieter Lindhout, the current Managing Director of GE Capital – Insurance, will start at Willis in October. Mr Donovan has commuted regularly between Australia and his home in Auckland since becoming chief executive in January 2009.
Centro’s lesson for directors
Denis gets a gong Insurance consumer advocate Denis Nelthorpe has never been one to shy away from a challenge, and now he’s been given the seal of approval for his dedication. The Melbourne lawyer became a Member of the Order of Australia (AM) as part of the 2011 Queen’s Birthday honours list. He is being rewarded for his “services to social justice and advocacy for consumers’ rights, the development of national credit legislation, and for the provision of legal services to the disadvantaged through a range of community organisations”. Nelthorpe is well known in general insurance for his key role in the development of the industry’s dispute resolution services since the late 1980s. He still finds the time to remain a consumer member of the Financial Ombudsman Service, campaigning for insurance services to benefit low-income earners and for the disadvantaged. While he admits to being chuffed with his award, Nelthorpe still regards his role in the establishment of the terms of reference that led
says if brokers disagree with the view that they’re “taking too much out of the pot”, they could charge a transparent fee instead of commission. “The reality is we have to get to a situation where we have to make insurance affordable,” he said. “And can we afford 25-27% [commission] on domestic insurance?” Brokers in the audience weren’t impressed, and neither was IBANZ Chief Executive Gary Young, who told Insurance News brokers are already “sharing the pain” of industry losses. He says when the insurers pushed rates down, “they resisted calls for higher commissions then. Why would we want to cut commissions now rates are rising?”
Departures at Willis, Zurich
BILLION
insuranceNEWS
BILLION
August/September 2011
Meanwhile, Zurich has brought its Associated Marine subsidiary under its organisational wing. The restructure means Managing Director Stephen Ford (above) will leave the underwriting agency next month under a restructure that will see the business integrated more closely with the primary business. Zurich will also drop the Associated Marine brand in New Zealand. The decision to move the agency closer to the Zurich operation follows a review of Zurich’s underwriting and development strategy. Zurich General Insurance Chief Executive Shane Doyle will take over management of the company.
7
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newsmakers at
insuranceNEWS.com.au A NOTE FROM THE PUBLISHER: The man pictured at left is a victim of the summer floods, caught by the camera as he starts to sort out the damage. We don’t know whether he’s insured against flood or not, and at the time this picture was taken he probably didn’t know, either. Images similar to this filled our newspapers and television news for weeks after the floods swept through enormous areas of the eastern states. The floodwaters have gone now. They’ll be back one day, unless governments get the message and start spending the money they should to build decent defences. After all, it was they who approved the building of whole communities in areas where flood was at best possible, at worst inevitable. We’ve been providing extensive coverage of the industry’s submissions to the Federal Government’s Natural Disaster Insurance Review each week in insuranceNEWS.com.au, because it’s important for insurance professionals to have an understanding of just how complex this issue is. Take some time to read the submissions in more detail at www.ndir.gov.au and you’ll see what we mean by complex. In this edition we present the industry’s case, and it’s gratifying to see the insurers are building pressure on governments at all levels to play their part in making flood cover possible. And at the same time they’re devising their own practical solutions where solutions are feasible. Our cover story is about a vast area of land close to our largest city that is a flood hazard of the worst kind. It’s a magnet for young people seeking cheap land. The original point of the story, researched and written by our Sydney Editor Michelle Hannen, was to illustrate how bad planning makes universal flood insurance a difficult proposition. It turned into something rather more chilling than we intended. Which brings us back to the man in the picture. The review chairman, John Trowbridge, says this is a once-in-ageneration opportunity to fix the flood insurance problem before other crises arise to distract the politicians and the whole thing gets shelved, just as it did in the 1970s. He’s right. It’s possible a solution will be found and nothing will happen.
News Ltd
When you deconstruct the various viewpoints, you’ll find the flood insurance debate isn’t really about the dollars or political imperatives – it’s about people like the man in our picture, and their right to financial security. That’s why we shouldn’t let this opportunity escape us.
PUBLISHER/EDITOR: TERRY McMULLAN McMullan Conway Communications Pty Ltd Tel: + 61 3 9499 5538 Fax: +61 3 9499 5535 Email: publisher@insurancenews.com.au ADVERTISING: NAOMI CONWAY McMullan Conway Communications Pty Ltd Tel: +61 3 9499 5538 Fax: +61 3 9499 5535 Email: naomi@mccmedia.com.au ARTWORK DELIVERY TO: McMullan Conway Communications Pty Ltd PO Box 116, Ivanhoe VIC 3079 Australia or 763 Heidelberg Road, Alphington VIC 3078 (COURIERS ONLY) Email: naomi@mccmedia.com.au
Terry McMullan
SUBSCRIPTION ENQUIRIES: www.insurancenews.com.au/subscribe Email: admin@insurancenews.com.au CONTRIBUTIONS: We welcome all material that is relevant to the Australasian and regional risk insurance industry, including all aspects of risk management. Please contact the Editor, +61 3 9499 5538. PRINTING: Printgraphics, 14 Hardner Road, Mt Waverley VIC 3149, Australia www.insurancenews.com.au/magazine
A McMullan Conway production
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I hope you enjoy this edition of Insurance News.
insuranceNEWS
August/September 2010
Material in insuranceNEWS (the magazine) is protected under the Commonwealth Copyright Act 1968. No material may be reproduced in part or in whole without the consent of the copyright holders. The content of articles appearing in this magazine do not necessarily reflect the views of the Publisher. All statements made are based on information that is believed to be reliable and accurate, but no liability is accepted for any fault or omission. We also accept no responsibility or liability for any matter published in this magazine that reflects personal opinion. Printed on FSC paper stock using vegetable based inks by a printer with ISO14001 Environmental Management System Certification.
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Governments told:
You failed, not us Insurers muscle up and fire back over flood insurance By Terry McMullan
THE INSURANCE INDUSTRY HAS SET OUT THE WAY IT believes flood insurance for all Australian households can be achieved, expanding on the Natural Disaster Insurance Review (NDIR) panel’s theme that governments at all levels must do their bit to make it work. The Insurance Council of Australia’s (ICA) submission to the review is probably the most significant of the more than 73 submissions published. It details exactly how far the industry is prepared to bend on the matter, while demanding that state governments spend some of the billions they make each year on insurance taxes to protect the most at-risk communities and properties. Submissions by the major insurers – only QBE chose not to make its views public – show general agreement with the Insurance Council’s reasoning, while offering some alternatives of their own. The industry seems unanimous in rejecting the first of the panel’s three options, which calls for flood cover provided automatically as part of home insurance in the same way as it provides cover for fire and storm. This option calls for automatic cover where every insurer would offer flood cover under the same model – an option ICA says “would only increase the cost of living for all Australians, or force them to not insure at all”. The second option calls for automatic flood cover with an optout provision for people who don’t want it. ICA says removing choice from the equation isn’t the solution, either. “Australians decide to purchase, or not purchase, flood insurance for a variety of reasons.” The third option offers the status quo – in effect no change in the arrangement at all – and it may yet be that this is the one most likely to make it as the final recommendation. The NDIR panel has been charged by Assistant Treasurer Bill Shorten with independently reviewing the issues relating to insurance in light of the recent flood disasters in the eastern states “in the context of the long-term funding of disaster relief”. It will report back to him by September 30. 10
insuranceNEWS
The review is part of a concerted push by the Federal Government to solve the long-standing flood insurance issue, which has become a major public and media issue following widespread criticism following the Brisbane floods in January. Panel Chairman John Trowbridge sees it as a “once in a generation” opportunity to put in place a dependable and workable flood insurance strategy. Mr Trowbridge is a former leading actuary and general insurance executive who retired as Executive Member of the Australian Prudential Regulation Authority last year. The other members of his panel are Jim Minto, the Managing Director of Tower Australia, and John Berrill, a principal of leading plaintiff law firm Maurice Blackburn. The submissions show insurers have moved out of their postflood defensive positions to put the pressure back where it mainly belongs – on state and local governments which have failed to control residential development in flood-prone areas or to undertake meaningful levels of flood protection. ICA Chief Executive Rob Whelan told a seminar in Sydney that what’s needed to enable the market to put flood cover in the same place as bushfire and cyclone risks isn’t better performance from the industry. It’s flood maps and data, targeted flood mitigation and better land-use planning – all government responsibilities. “This leads to overall lower risk levels and increases the number of insurers coming into the marketplace, driving up competition, lowering risk levels, and therefore lowering the premiums in the marketplace, increasing the overall level of affordable flood cover as a consequence,” he says. Media and political critics’ claims of a market failure by insurers is also taking a bashing in the industry’s submissions, with ICA saying government spending on the mitigation of flood risks “is a small fraction of the ultimate cost of events and must be improved”. “There is a community expectation of government action on the mitigation of flood risks, including a modernisation of the way August/September 2011
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in which the flood risk is mapped and communicated to the public. “This is expected to exceed 84% in the next 18 months. There “A repeat of the 2011 flooding, damaging the same homes, will is no issue with availability. be a failure of mitigation, not a failure of private market insurance. “The private insurance market is working, but there is room for This is the core issue that needs to be addressed urgently.” improvement through market reforms and government action on That sort of rhetoric sits neatly with the industry’s new mantra: risk mitigation and community support,” it says. flood mapping and mitigation makes the risk measurable and Backing up the industry’s assertions was the announcement last draws insurers into the month by three leading market. It’s not a market personal lines insurers that failure, it’s a failure of state they will expand their and local governments to flood cover offerings. make an insurance market IAG Chief Executive possible. Mike Wilkins says his comIn the heat of the pany will cover riverine media spotlight politiflood from next year as cians postured with standard in all home and demands for what looked contents policies across its then like easy solutions. NRMA, SGIC, SGIO and Six months later, with the CGU brands – “subject to backlog of claims being the availability of approsorted, some of what they priate data” like flood have set in train looks mapping. like an over-reaction. Suncorp Chief ExecICA’s submission utive Personal Insurance points out that 92% of the Mark Milliner says riverine claims lodged as a result flood cover will be added – Insurance Council of Australia submission of the Queensland and to its AAMI home and Victorian floods have now contents policies from been accepted. early next year, bringing it And it says only 7% of residential property in Australia is exinto line with the 11 other Suncorp brands which already offer posed to predictable and repetitive flooding, although that flood cover. small percentage costs the industry an average of $400- $450 IAG’s NRMA Insur-ance subsidiary already provides flood cover million in damage every year. automatically to 98% of customers – giving the remaining 2% in “Flood insurance has been widely available for every property in high-risk areas the ability to opt out. Australia since 2006. Market provision of cover is accelerating with Allianz has also committed to provide flood cover for 54% of policies selected by consumers currently providing cover. personal lines customers in New South Wales only by the end of
“A repeat of the 2011 flooding, damaging the same homes, will be a failure of mitigation, not a failure of private market insurance. This is the core issue that needs to be addressed urgently.”
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Resilience = reduced impact = reduced natural disaster costs. Without a robust and properly funded mitigation strategy, the cost of flooding will continue to increase… Suncorp recommends the establishment of a national inquiry into disaster mitigation and the adequacy of today’s infrastructure to withstand and respond to future events. Such an inquiry and its subsequent response should address disaster warning, mitigation, risk assessment and education.
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IAG does not believe all insurers should be forced to offer flood cover, as such a move would be potentially damaging if flood products were beyond an insurer’s risk appetite. This may actually work to reduce competition in the insurance market… In addition, a pool for natural disasters or flood risks would ultimately increase the cost of living for those at low risk, as they would subsidise the costs of those with high risks.
the year. The company’s submission to the NDIR says it does not regard the flood-mapping information available in other states “to be of sufficient quality and comprehensiveness”. The NDIR issues paper also suggests the establishment of a flood insurance pool to help fund the premiums of the 50,000 homes it estimates are subject to high flood risk – “less than 1% of Australia’s estimated 6.2 million homes. There are probably a further 3-6% of properties subject to modest flood risk.” The Institute of Actuaries of Australia supports the establishment of a pool, pointing out that flood mitigation efforts will take many years to implement. “In the interim, we recommend government intervention in the market via some form of insurance pool for high-risk properties, which will facilitate government subsidy of premiums for those in high-risk areas. “That pool can also serve as a mechanism to provide financial incentives for flood mapping and mitigation actions, with the aim of eventual wind-up of the pool over 10 or 15 years. A pool also provides a structure to address the chronic problems of non and underinsurance.” ICA believes a flood insurance pool isn’t necessary, because it would lead to “further government bureaucracy and complexity and will increase the cost of living for ordinary Australians”. “The majority of insurers do not support the creation of a system that will pool flood premiums in government hands, preferring instead a model targeting those in need of premium support, with direct subsidies.” The insurers believe property-owners who face large flood risks as a result of a lack of government flood mitigation and land-use planning decisions should receive direct premium subsidies from governments rather than from a pool to which all parties would contribute. ICA wants to see subsidies modelled on the first homeowner grant scheme, which along with mitigation works would be funded out of the $4.6 billion the state governments collect annually in stamp duty on insurance premiums. “While the use of stamp duty revenue for this type of activity is 12
insuranceNEWS
A number of insurers have exited the rural and regional market in recent years given underwriting challenges associated with extreme weather, lack of data and under-writing losses. It is imperative that any solution does not have any unintended consequences of reducing capacity or changing the risk appetite of insurers and reinsurers in this market. To do so may increase the under-insurance or non-insurance problems that are already inherent in the Australian market.
If the Government was to implement a flood pool, it is Allianz’s view that the most efficient approach would be the establishment of a flood claims pool. The underlying principle of such a pool is the sharing of risk between the pool and insurers in such a way as to make full flood cover available to high floodrisk properties, while also making flood insurance premiums more affordable for the owners of those properties.
a form of cross-subsidisation by government, the relinquishment of revenue would serve as a powerful motivation to carry out mitigation, to reduce the risks and to gradually reduce the extent of subsidisation required,” ICA’s submission says. While the focus of the NDIR is primarily on residential properties, its terms of reference also address small business. But the industry is clearly anxious to keep the flood cover debate confined to personal lines, saying extending the arrangements to commercial insurance would increase the price of cover for all businesses, with the risk of higher levels of underinsurance and non-insurance. Suncorp says cover for small businesses needs to be “individualised” and it would increase insurance costs for all small business operators when only a small percentage face a flood risk. IAG agrees, saying that because of the involvement of brokers, businesses have access to specialised advice and are more likely to buy a policy aligned to their needs. The only exception might be very small businesses. The panel members are now travelling around Australia, listening to the views of a bewildering array of interested business and community groups. Come September 30 the industry probably won’t get everything that it asks for when the panel finally reports to Mr Shorten. Whether state governments would fork out reasonable amounts of aid from the billions of dollars they collect in taxes from the insurance industry is the big question. If they don’t an insurance pool – either permanent or temporary – is seen by pundits as the most attractive alternative. What isn’t in question is the fact that governments at all levels have been put on notice from the insurance industry – and from Mr Trowbridge – that the solution relies as much on them as it does on insurers. And going by the speed with which the industry is sorting out its own market-based solutions, the next big flood that comes our way may well have politicians rather than insurance professionals ducking for cover.
W a a t s c r
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Insurance in the flood equation The rationale behind the Federal Government’s drive to make universal flood cover possible By John Trowbridge, Chairman, Natural Disaster Insurance Review* ON FEBRUARY 13 THE COUNCIL OF Australian Governments (COAG) adopted the National Strategy for Disaster Resilience. The strategy focuses on prevention, mitigation and resilience. Importantly, COAG also agreed on the importance of insurance in disaster recovery. Insurance plays a key role in the recovery from natural disaster. It helps people deal with significant financial loss and provides help to rebuild, repair or replace damaged property. Insurance is also about individuals taking responsibility for themselves, their families and businesses and so sharing the costs of recovery fairly with the community and governments. One of the principles that the Federal Government set for this review is therefore to encourage individuals and businesses to insure themselves where practicable. Insurance takes on added importance following a natural disaster when whole communities have suffered loss and damage. It plays a key part in the ability of the community to recover – not only to allow people to return to their homes, but to support businesses that provide employment and goods and services and to facilities that give life to the community. The extreme weather events of the past summer were not in themselves what stimulated the review, because the insurance industry has demonstrated in these events and others such as the Victorian bushfires in February 2009 and the hailstorms in Melbourne and Perth in March 2010 that it has the financial capacity and other resources needed to respond effectively to such events. It was the absence of flood insurance for many policyholders, particularly in Brisbane and Ipswich, which was the primary stimulus to the review. The fact that all home insurance policies cover storm damage but many do not cover flood, allied with the insurance industry’s distinction between the two – which is seen as arcane and confusing by many – has led to a community backlash against insurers and considerable distress, financial 14
loss and disillusionment for many insured homeowners. The theme of the review is the availability and affordability of insurance offered by the private insurance market, with particular reference to flood and other natural disasters. This acknowledges that the insurance industry cannot be expected to solve the flood insurance problem on its own. The evidence available to the review panel is that a very high proportion of houses – probably more than 95% – have household insurance. We understand that home insurance is readily available for almost all homes and that the vast majority of owners are prepared to pay for that insurance at current market prices. But we know from the Brisbane and Ipswich floods that there were many homeowners with insurance that excluded flood. The outcome was anger and confusion among homeowners about whether they had insurance cover for flood and whether that was made clear to them at the time they purchased their insurance policies. Some insurance claims took many months to be resolved in order to determine whether the damage was caused by a form of flood that was not covered by the policy. It delayed repair and rebuilding of homes, access to assistance from the Premier’s Fund and the ability of people to start to resume a normal life. The private insurance industry has responded very effectively and in line with community expectations in most recent natural disasters. However, the reaction to the 2011 floods that affected Brisbane and Ipswich, and the floods in northern Victoria, was different, because community expectations and needs were not met. The difference of course is that, in the bushfires, cyclones and storms, homeowners who purchased home insurance were automatically covered for these events. There was no need for the homeowner to know how a bushfire or cyclone was defined. There was no need to make specific enquiries about whether the event was covered when purchasing the product over the phone or the internet. Let me make it clear that these outcomes following the floods are not regarded by me or the panel as criticism of the insurance industry’s willingness and ability to mobilise resources and deal effectively with disasters. Insurers cannot be expected to offer insurance cover at prices which do not include the full costs of the risks they uninsuranceNEWS
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derwrite. Nor can they apply identifiable cross-subsidies in a competitive market, because competitors who do not crosssubsidise will have lower premiums for lower-risk properties, all other things being equal. The existence of flood or natural disaster insurance schemes in many other countries is testimony to the limited ability of private sector insurance markets to cover these risks satisfactorily. More insurers are now preparing to extend the availability of flood cover, partly as a result of the stimulus of the recent events in Queensland and Victoria. For homes exposed to a high level of flood risk, however, flood cover availability will always be problematic in a private insurance market, because insurers are likely to attempt to underwrite or price themselves out of this higher-risk business. Hence a competitive market is unlikely to exist. The problem is exacerbated by the uncertainties associated with assessing flood risk in the high-risk areas. As a specific example, it might be difficult for insurers to determine realistic assumptions about the future flood mitigation outcomes of the Wivenhoe Dam, and hence a reasonable price for the cost of flood risk in the areas surrounding the Brisbane River. An insurer pricing such homes is almost certainly going to engage in defensive pricing. The business will be marginal at best and probably unattractive from an underwriting viewpoint, so the insurer will tend to take – justifiably – a pessimistic view of the risk. Nevertheless, some insurers already provide cover for all types of storm and flood-related water damage. I understand that some that do so in some states and not in others plan to extend this cover nationwide. I also understand that some insurers that do not cover riverine flooding at all plan to introduce cover in some locations soon. Risk mitigation – both through reducing the flood risk faced for homes and improving the ability of homeowners to make informed decisions about where to live – is a crucial part of any strategy to improve the resilience of the community and its recovery after a natural disaster. Mitigation efforts have limitations and can require substantial investment. While it may be achievable to ensure that no further development takes place in areas of moderate and high flood risk, it will be considerably harder to mitigate the risks for existing homes in these areas.
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“Insurers cannot be expected to offer insurance cover at prices which do not include the full costs of the risks they underwrite.”
In considering all options to improve availability and affordability, the review panel will put particular focus on avoiding moral hazard and providing a positive incentive to reduce flood risk over time through mitigation. Access to suitable flood mapping and other data to assess flood risk was on the review’s radar from the beginning. It is usually councils who arrange this information because they require it to avoid developments in areas with high flood risk and otherwise to manage water flows and flood risk. Data on flood risks is important not only for insurance but for mitigation more generally, and to build resilient communities. To deliver the benefits to individuals and to the community that insurance cover for flood can provide after an event, insurers need to make it available, and households need to take up the offer. How far should the question of affordability be taken? Some would argue that building or owning a property in a floodprone area is at the risk of the property-owner, who has the obligation to understand and deal with the full cost of that risk, possibly with the assistance of insurance. Others point to historical situations, such as councils opening up flood-prone land for development without owners being made aware of the risk; lower-income property
owners who have lived for years or even decades in flood-prone areas without the means to pay higher premiums for flood cover; the risk changing due to increasing urbanisation; or insurers putting a very high price on some flood risks without a competitive need or interest in limiting the price. In the issues paper we put forward the idea that the affordability problem needs some form of price discount system for a solution. That leads to the idea of a flood insurance pool for properties with high flood risk. Can a distinction be made between those living in flood-prone areas but for whom information was not available to inform their decision-making, and those who move there with full information? Can price signals be relied on to provide adequate incentives to households to reduce their risk of flood? Or should access to a discount require some defined actions on the part of the household? If there is to be a system of premium discounts for high-risk properties, there are significant policy issues concerning who should meet the cost of the discounts. For example, is it reasonable to ask those who live in an area free of flood risk to assist those who live in flood-prone areas? Can the incentives be aligned so that those with responsibility for funding any discounts also have an incentive to reduce the funding requirement over time
through taking mitigation action? There are costs in managing and mitigating flood risk, and there are additional costs when flooding occurs. The optimal insurance solution for flood cover could be regarded as one where the interests of all parties – property-owners, local councils and insurers – are aligned. Aligning these interests might mean, for example, insurers bearing some cost if a flood occurs; property-owners bearing some cost to carry out risk mitigation steps, in addition to paying insurance premiums; councils taking relevant risk mitigation steps; and data on flood risk being collected and analysed to assist all parties. Under current arrangements and current insurance market conditions, those insurers offering the cover do bear costs if a flood occurs. There is not, however, any related obligation on property-owners or councils to undertake flood risk mitigation. There are of course flood risk mitigation efforts being made by some property-owners and some councils, but they are not generally linked with insurers’ efforts to price and underwrite flood risk. And there is certainly no established cycle of the parties working together and responding to the efforts of each other. * This is an edited and abridged version of a speech given by Mr Trowbridge at a joint Institute of Actuaries of Australia/Insurance Council of Australia seminar in July
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The greatest flood risk of all Sydney’s northwestern suburbs sit on the most lethal floodplain in Australia By Michelle Hannen
TO SEE THE CENTRE OF BRISBANE AWASH IN JANUARY should have served as a wake-up call for city folk that floods are not confined to rural towns – they can and do happen in urban areas. But while the flood debate at present centres on how to provide flood insurance for the small percentage of householders living in high-risk areas, there has been little talk about a region that epitomises the enormous scale of the flood-risk problem in Australia. This region contains tens of thousands of homes in leafy suburbs where families live and play and go to school and shop, most of them totally unaware they’re living on a floodplain. And not just any floodplain. It’s the HawkesburyNepean basin, around an hour’s drive northwest of the Sydney CBD. What were once fertile farmlands are now heavily populated outer city suburbs such as Windsor, Richmond, Penrith, and Pitt Town, where you’ll find young families priced out of locations closer to the city, building project homes on concrete slabs, oblivious to the fact that their dream home could one day be many metres underwater. It is estimated that more than a million people live in the area. Like many communities across Australia where flood risk is a lurking menace, ignorance is all too often bliss. Emergency plans show in graphic detail how buildings in many parts of the region could be submerged up to 25 metres deep. Mark Babister, the Managing Director of hydrology firm WMAwater and the immediate past chairman of the National Committee on Water Engineering, describes the flood risk in the Hawkesbury-Nepean region as “enormous”. “It’s probably the worst in New South Wales,” he says. It 16
is a flood zone that insurers are well aware of. Karl Sullivan, the Insurance Council of Australia’s (ICA) General Manager Risk and Disaster Planning, says in the areas around Windsor and Richmond “there are acute flood risks in the proper sense of the word”. In this case, “acute” refers to greater than a one-in-20 year event probability. Mr Sullivan adds that ICA data shows a “large percentage” of the 25 worst flood risks in NSW come from the Hawkesbury-Nepean. The magnitude of the risk is not to be underestimated. Professor John McAneney, Director of the Risk Frontiers Natural Hazards Research Centre in Sydney, says it is not just the potential frequency of flooding but the possible depth that is the issue here. The State Emergency Service (SES) website describes the area as a “16,000 square kilometre catchment [which] drains in to a floodplain at Windsor where the river bed is less than a metre above sea level”. Mr Babister says that for most rivers and creeks the difference in height between a one-in-100 year flood and a one-in-200 year flood is half a metre, while in Windsor that difference is two metres. “In a bad flood they’ll be flooded three or four storeys deep,” he says. In financial terms, the difference is significant. Mr Sullivan says claims figures from this year’s Brisbane floods suggest a one-metre deep flood causes around $40,000 of A lake in the suburbs of Sydney: an SES map shows the extent of the 1867 flood, which was farmland then but is now a rapidly growing population centre. Experts say some areas would be three storeys deep, but many residents aren’t aware of the danger
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Other areas of major flood risk across Australia According to ICA figures, 422,000 residential properties in Australia are at some level of flood risk. The biggest risks are in New South Wales, Queensland and Victoria, which have extensive river catchment systems and high populations.
Queensland, Brisbane and Ipswich: As witnessed earlier this year, cities built on a river system in close proximity to a dam can be a recipe for disaster. Despite being built in response to the 1974 floods, Wivenhoe Dam has operated in recent years with water storage as a priority, so high water levels were maintained.
Queensland, Gold Coast: A flat, low-lying, densely populated region with many houses built on and around canal estates. But the local council is well aware of the risks, looks to mitigate them and is often held up as a model for other councils to follow.
NSW, Northern Rivers: Stretching from Tweed Heads to south of Grafton on the NSW north coast, a large number of rivers flow together. While not as severe as some other regions in terms of depth of flooding, the potential breadth of a flood could cause claims in excess of the recent Brisbane event.
NSW, Hunter Valley and Maitland: Floods hit this area in 1955, peaking at 12.3 metres in Maitland and leading to the creation of the State Emergency Service. The existing levees could withstand a one-in-20 year flood, but they could not withstand a more extreme flood event.
Victoria, North West: A number of rural, sparsely populated towns, such as Carisbrook and Charlton, are located on the banks of rivers or waterway junctions downstream from local reservoirs. Towns in this region were extensively flooded – some several times – in January.
damage to an average house, while a two-metre flood does around $80,000 of damage “and above two metres is a total loss”. “The Hawkesbury Nepean is the extreme one in terms of population numbers and depth of flooding,” he says. Little of this information is new, but much of it is forgotten. The worst flood in the region’s history occurred in 1867, where floodwaters peaked in Windsor at 19.7 metres. Since then the landscape has changed dramatically, with development and the construction of Warragamba Dam, which was completed in 1960, but Mr Babister says an 1867-type event would see Windsor and Pitt Town completely flooded, as well as large parts of Penrith including the Penrith Lakes and parts of Richmond. He says that even with the dam, which was built for water supply rather than flood mitigation purposes, an 1867-level flood could still peak at 19.3 or 19.4 metres. Professor McAneney says that a “huge amount” of de18
velopment has occurred in the Hawkesbury-Nepean region above the one-in-100 flood line – the default standard for residential planning in Australia. But he says the one-in-100 flood line and the worst-case flood scenario in the Hawkesbury-Nepean region are “very different” in terms of depth of flood. Mr Sullivan agrees that the scale of development, infill and subdivision in the region has been “huge”. This, in itself, is not the problem, he says. “Building on a floodplain is perfectly okay to do as long as you build in a suitable way.” But in the case of communities in the HawkesburyNepean basin, the wrong type of construction – concrete slabs on the ground – has been predominant. Not all blame can be laid at the feet of local councils, Mr Sullivan says. Developers in NSW have in the past been able to take planning decisions for major developments out of local councils’ hands to the state government. Mr Sullivan says while the SES has some input into the
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THE HAWKESBURY-NEPEAN BASIN IS ONE OF THE major river systems of New South Wales with a catchment of 22,000 square kilometres stretching from Goulburn and Lithgow to Broken Bay. Although 130 kilometres from the sea, the river is tidal to Windsor Bridge where the normal water level is only 0.8 metres above sea level. This part of the eastern seaboard experiences irregular and unpredictable weather events. Exceptionally heavy rainfall over several days can lead to severe flooding in the Hawkesbury-Nepean River Valley, basically because water flows into the valley at a far higher rate than it can flow out. The narrowing of the valley downstream at Castlereagh controls the flow of water between the wide floodplain at Penrith and the even larger floodplain at North Richmond and Wilberforce. The flow of water is restricted by the narrow gorges downstream of Wilberforce which act like a bottleneck and result in backing up of floodwater producing flooding much deeper than on a typical coastal river in NSW. This backwater flooding can be extremely deep and
it is the depth rather than the velocity that is the key component of the flood hazard in most areas. For example, in the largest flood of record in June 1867, floodwaters reached 19.2 metres in Windsor – three metres higher than the majority of development there today and two metres higher than the current flood planning level of 17.3 metres. The probable maximum flood will reach to 28.9 metres, or 11 metres above the planning level in Windsor. Detailed estimates provided by Sydney Water shows that the probable maximum flood could cover an area of 300 square kilometres, completely inundating Richmond, Windsor, McGraths Hill and partially flooding Penrith, Emu Plains and Riverstone. Such a flood or smaller ones would cause untold devastation and potentially significant loss of life. From a 2002 report in the Australian Journal of Emergency Management, by Catherine Gillespie (NSW Department of Land and Water Conservation), Paul Grech (Don Fox Planning) and Sydney and Drew Bewsher, Bewsher Consulting)
“That road network has now reached capacity. It’s not dissimilar to putting more people on boats and not adding more lifejackets.” approval of proposed developments, its concerns are often rejected. Additional infrastructure is required to accommodate expanding communities, but Mr Babister says the region’s flood problem has been exacerbated by infrastructure development that has not kept pace with increased housing. The region’s roads are of particular concern. He says a large number of residents would need to be evacuated in a flood event because of the depth of the water. “If we had to do that it would be the biggest evacuation in Australia’s history.” Professor McAneney says that even recent road upgrades completed in 2007 – which includes a high-level, 1.5-kilometre bridge over South Creek to give additional time for the evacuation of Windsor residents during times of flood – are not sufficient for the potential depth of flooding. Mr Babister agrees, although he says the terrain prevented the bridge span being any higher. “That road network has now reached capacity,” he says. “It’s not dissimilar to putting more people on boats and not adding more lifejackets.” One key piece of infrastructure that has been added to the local landscape is Warragamba Dam, Sydney’s primary water supply facility. But the dam was built for water storage – it supplies Sydney with 80% of its drinking water – not for flood mitigation. Therefore its influence on minimising the impact of a flood is minimal, a fact that the NSW Government’s Sydney Catchment Authority confirms. “Some believe that Warragamba Dam… protects the Hawkesbury-Nepean Valley from flooding,” the authority’s website says. “In fact, Warragamba was never designed as a flood mitigation dam. It can only mitigate floods to a limited extent.” Mr Babister says the dam, which is only a short distance upstream from Penrith, would have water overtopping even in a small flood, and discharge at a “pretty high rate”. The dam was upgraded in the 1990s, with its height raised and a side spillway constructed to improve its safety, 20
after authorities realised the dam could experience floods much larger than originally estimated. Mr Babister says these measures and associated road works cost more than the construction of a new flood mitigation dam in the area would have cost. Plans for such a dam were shelved due to environmental concerns. A flood recovery expert, who declined to be named, says Warragamba Dam could pose a similar complication in a Hawkesbury-Nepean flood as Brisbane’s Wivenhoe Dam did in that city’s floods earlier this year. The expert says that in the event of a flood, the side spillway should allow excess water to pass around the dam, preventing a catastrophic dambreak, but the water would still flow rapidly to the floodplains below. He says “parallels can be drawn with Wivenhoe”, as Warragamba’s side spillway “could be more effectively managed”. “The way the dam is operated hasn’t changed since the spillway was added,” he says. After years of drought and talk of water shortages, Mr Babister says there is a community perception that Australia doesn’t flood any more. With the Hawkesbury-Nepean’s worst flood occurring almost 150 years ago, he says many residents in the area are not aware of its flood history. Coupled with the fact that “there hasn’t even been a ‘wake-up flood’ there since 1990”, he believes that anyone who has moved to the area in the past 20 years may be completely unaware it is a floodplain. Professor McAneney says the low public profile of the risks faced in the region only serves to exacerbate the problems; community preparedness is not what it could be. Such gaps in knowledge, Mr Sullivan says, further underline the need for statutory reform such as improved building codes and planning laws to protect communities. “Unless knowledge of such events is passed down through generations, baseline laws need to be changed to prevent future disasters,” he says. “The first thing somebody knows about their flood risk should not be a knock on the door from the SES telling them to move to higher ground.”
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Better than flood mapping 3D movie-style imagery could be the missing link in the debate, say its CSIRO developers By Tania Martin
Fast flood scenarios: the CSIRO program simulates the impact of water flows on buildings and infrastructure in great detail
IMAGINE BEING ABLE TO KEY IN THE exact co-ordinates of your home or business premises and pinpointing not only where a flood might hit your property but also how much time you will have to evacuate and how much damage will be caused. It may sound implausible, but it’s already reality. The Commonwealth Scientific and Industrial Research Organisation – better known to Australians by the acronym CSIRO – says its new three-dimension extreme events simulation flood-modelling program can do far more than aerial flood mapping when planning new infrastructure. And while there are a few programming challenges to overcome at present – it can take a week or more to set up simulations – the level of detail on water flow and its impact on buildings and infrastructure is a huge step forward. The developers say it will be possible for insurers to use the results to accurately price the risk of any future water inundation. The CSIRO is pushing for the research to be used widely in Australia as a tool that could help prevent or at least plan for ways to counter the impact of events similar to last 22
summer’s Queensland and Victorian floods. The new 3D technology is currently being trialled in China. The CSIRO was approached more than 18 months ago by China’s Satellite Surveying and Mapping Application Centre to use its 3D research to determine the level of damage if the Geheyan Dam wall – one of the world’s largest dams, holding five times the volume of Sydney Harbour – broke. Principal Research Scientist Mahesh Prakash says this has enabled the organisation to finally put all its research into action and kick-started the pilot program. There are already plans to use the system to research coastal areas of Queensland, where sea level and storm surge events can cause havoc. In some areas sea level rises of up to 1.1 metres are predicted by 2100, with the cost of damage to coastal communities estimated at $226 billion. Dr Prakash says various types of scenario modelling can be used to look at the impacts of rising sea levels and storm surges, but the CSIRO has to use a “degree of sensitivity” to avoid raising residents’ fears over the future of their homes. insuranceNEWS
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“We will say what would happen if this region is affected by sea level rises and will be careful not to alarm people,” he told Insurance News. While the CSIRO has been given the opportunity to use this new technology in coastal Queensland, researchers are still in talks with the insurance industry and all levels of government for the wider application of the modelling to help aid future flood mitigation efforts. It’s believed this type of research could be the “missing link” in the flood insurance debate, giving insurers the chance to be able to price the risk of future events by providing not only predictive but consequence analysis. Lead Scientist Alan Dormer says the CSIRO could provide insurance companies with a complete picture of the risks. “The trend in the insurance industry is to individualise, and if insurance companies can get more clued up on where someone’s house is located and the associated flood risk for that area, then they are able to better calculate the premium,” he told Insurance News. “Our modelling can help insurance
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companies rate individual properties on flood risk, which is something that’s not generally done. “You can almost go down to impact at a specific street address based on our simulations. This obviously gives insurance companies much more detailed and precise data about risk for individual properties.” Dr Prakash says Australia’s vulnerability to various catastrophic fluid flow events proved there needed to be more research done. “If we can better understand these events and work out the likely consequences, we can have more detailed risk mitigation strategies and make informed decisions about infrastructure and planning,” he told Insurance News. Dr Prakash says this research also has the capability of equating how long it would take for water to recede following a major event such as the Brisbane floods so that reconstruction efforts can begin. “Having this information helps authori-
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ties make informed decisions about the risks involved in living in these area,” he says. Dr Prakash says the CSIRO’s work in this area reveals huge potential, especially considering the increased need for risk mitigation surrounding flood. Could it have helped prevent the Brisbane floods? Could it have shown the high-risk areas more clearly and provided authorities with more time to prepare defences and evacuations? He says it’s impossible to say if this data could have affected the outcome of the flood crisis, but strongly believes it has a place in future planing. “Obviously our modelling won’t stop events from occurring. Rather it’s about understanding consequences of those events and preparing for them.” The CSIRO says although a number of groups are currently using fluid flow technology its scientists are the first to use these 3D type simulations. Dr Prakash says this technology has the
potential to be able to pinpoint to planners and local council what areas are liveable and suitable for future development. “What it can do is identify how a structure or building will be affected after floodwater impact, whether it will be stable and liveable and can be refurbished; or if it will have to be torn down and rebuilt.” Simulations can show specific areas in a flood-prone region that will be most affected, right down to the detail of how high water will rise at certain points. Modelling the water flow can indicate how long it will take for flood waters to rise to dangerous levels, providing powerful evaluation tools in determining how much time is available to evacuate affected areas. Dr Prakash says this kind of simulation has been designed to help disaster management authorities in their planning rather than for use by individual communities. “Simulations are of most benefit when planning infrastructure around a floodprone area to enable detailed analysis of
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“We have done a project for a client where we examined their claims history and worked out their maximum foreseeable loss looking at one-in-100 year and one-in-1000 year events.” the risks involved in building in that area. “We hope this modelling will be used to inform disaster planning strategies but it certainly doesn’t provide all the answers, rather it’s a tool to get a better understanding of event outcomes.” The CSIRO says these techniques are “remarkably accurate and detailed” and outweigh data collected through other means such as flood mapping. Dr Prakash says flood mapping only shows where water will go, but not the effect it will have. He says this may be sufficient in many cases, but dynamic water flow from dam breaks, flash flooding or abnormal releases of water from dams have to be understood. “Our modelling adds much more detail – it combines static and fluid flow data that changes over time, it is able to model three-dimensional flow and it also shows how fluid flow interacts with structures such as buildings.” Dr Dormer says this new system can also be used to optimise insurers’ reinsurance strategies by being able to predict the level of damage certain events may cause and what the company’s exposure will be. “We have done a project for a client where we examined their claims history and worked out their maximum foreseeable loss looking at one-in-100 year and one-in-1000 year events. They use that to drive their reinsurance strategy. “The exciting thing is that insurance companies can be extremely specific, not only about rating individual properties, but also optimising their reinsurance strategies because they can know both the likelihood of catastrophic events and their impact.” Loss expert Allan Manning, the Managing Director of LMI Group, says the ability to accurately calculate the effects of flood would help insurers to price the risk more easily. He says the dams above Brisbane during the flood crisis were so full there was no data available to indicate the rate at which the water should be released. There has been no modelling done in the Brisbane Valley since 1985, and he believes this lack of knowledge delayed the earlier release of water. “If there was dam modelling they could have known how much to release without 24
The science behind 3D modelling THE CSIRO SAYS ITS FLOOD RESEARCH tool now offers far more than traditional flood mapping can offer. Its researchers have been developing these techniques for more than 20 years, validating their accuracy by modelling the effects of the 1928 St Francis dam collapse in California and comparing the actual impact with their model’s calculations. The result, they say, is “remarkably accurate”. Principal Research Scientist Mahesh Prakash (pictured) says the first step in using this technology is to develop a 3D digital model of the area that is being used in the simulation. This is achieved by gathering as much information on a specific area as possible – terrain, buildings and critical infrastructure such as roads and rail embankments. Using computational fluid dynamics that involve such complex methods as “smoothed particle hydrodynamics” and “granular flow”, the scientists are able to accurately model events like flood events, dam breaks and even tsunamis. The CSIRO has been working with the Chinese Academy of Surveying and Mapping to model the hypothetical collapse of China's Geheyan Dam, one of the world’s largest dams. It is also working on the effects of a storm surge on the Bellinger River in New South Wales, and predicting areas affected by a hypothetical tsunami inundating the Californian coastline. The program is able to simulate where the water will go and what damage will occur, pinpointing the areas of highest risk. Dr Prakash says the organisation hopes to simplify the process. At present it’s “quite labour-intensive” because of the time it takes to key in all the information. “We have used visual effects bringing movie-style animation into science so the user can see exactly what happens when a dam breaks,” he says. Colours are used to show the force of various flows. The CSIRO has also produced a YouTube clip of how the modelling works to illustrate why it’s so important for future flood mitigation efforts.
causing the flooding,” Dr Manning told Insurance News. He says the CSIRO modelling research could provide insurers with a significant advantage in being able to price risk. Insurance Council of Australia General Manager for Risk and Disaster Planning Karl Sullivan is equally enthusiastic, saying this type of modelling would give greater clarity to property-owners and allow them to better manage their risks. Dr Prakash says the CSIRO would ideally like the research to be used by town planners, local councils and governments to be able to determine the appropriate areas to build future infrastructure. insuranceNEWS
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But he says there is a long way to go before it reaches that stage. The program still needs to be streamlined before it can be used in a mainstream role like wide-scale planning. At present it takes at least a week to input the data before a simulation can be run. The CSIRO is currently exploring a range of funding sources and partnerships to further develop the system, including talking to insurers and government departments interested in better ways of managing and mitigating flood. “We have also been approached by other countries and international aid agencies who want to better manage natural disasters.”
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Bill Berkley in Sydney: cat events make the worry turn to fear
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A man for all seasons Industry guru Bill Berkley offers some new angles on profitability, investors, catastrophes and how fear drives the insurance cycle By Michelle Hannen
TIMES HAVE BEEN TOUGH IN THE INSURANCE MARKET in recent years but the founder, Chairman and Chief Executive of US specialty insurer WR Berkley, William (Bill) Berkley, is not one for throwing in the towel or lowering the standard. In a recent speech to Australian insurance executives in Sydney, Mr Berkley concluded with a quote from Thomas Edison, which he cites as one of his favourites: “Our greatest weakness lies in giving up. The most certain way to succeed is to try just one more time.” And so, despite the prolonged soft market, Mr Berkley does not believe market conditions give businesses the right to demand and deliver less. Questioned about the comment earlier this year by the chief executive of Bermudan (re)insurer Endurance Specialty that the 15% return on equity target which businesses set out to deliver to investors may require a rethink in light of the continuing low-interest rate environment, Mr Berkley made it clear he is unwilling to concede. “So when all else fails, lower the standard? We’ve had the same standards for 40 years. We would rather give our money back to the shareholders than lower the standard. “They shouldn’t give us their money if we can’t deliver those kind of returns. If we deliver the average returns people could get on their own, why pay us?” In order to maintain its returns to investors, WR Berkley has changed its investment strategy, investing in more dividendproducing shares and including capital gains in its return on equity calculations. But should returns drop, Mr Berkley says his company will compensate its investors through increased dividends. In May he announced a 14% lift in this year’s dividend. “This is a riskier business than most people think, and you need to have a return of 15% or more,” he told Insurance News.
“We’ve been able to do that for a very long time and we think we’ll continue to, but that’s not to say that there won’t be moments where we don’t achieve it.” While others talk of the death of the insurance cycle and cycles smoothing out due to more sophisticated, individually risk-rated underwriting techniques, Mr Berkley has been around long enough to contend that it is human behaviour and emotions, rather than underwriting technology and common sense, which drives cycles. He says pricing is a state of mind, and while the current soft market isn’t profitable for many companies, things won’t change substantially until fear overcomes the greed for market share. “The fact is underwriting results in general are negative right now, certainly in the US and certainly so counting catastrophes here [in Australia and New Zealand]. “When capital gets no return that is when there’s a fiduciary responsibility to shareholders to raise prices – they have no choice. “When results are inadequate, people’s state of mind has to change. They’re going to say ‘results are bad, we’re beginning to get worried’. “Cat events make the worry turn to fear and then people start to raise prices.” Mr Berkley says that in the US, rates in most classes of business (with the exception of directors’ and officers’) have improved this year, with prices up on average by 1% in the first quarter and larger improvements expected as the year continues. In the local market, he notes there have been “modest increases in price”, but says there still seems to be plenty of capacity around for catastrophe business – “which is astonishing to me”. But while there has been some improvement in rates, Mr Berkley is quick to point out that the small incremental
WR Berkley: in numbers Founded in 1967
18th largest property and casualty insurer in the US
Total revenues $US4.4 billion*
Net income $US450 million*
Offices in 12 countries
* As at 31/12/10
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increases are not cycle-changing, so the fear has not yet set in. “Prices probably need to go up 8-10%, to be back to okay margins, maybe even 15%, so we’re not there yet, we’re not going to be there by the end of the year.” In addition, he says that with modern accounting methods, price increases take five quarters to filter through to financial results. “So it’s really inadequate. You need some acceleration of that, and the only thing that’s going to accelerate that is fear, where people start to raise prices more or somebody starts to get more disciplined more quickly because they’re afraid of some particular thing or someone getting particularly bad results.” Mr Berkley is equally assertive regarding new capital entering the market after disasters, particularly when it involves a short-term play by an investment fund, as is the case with much of the so-called sidecar capital which has made itself available after the first quarter’s catastrophes. “We don’t believe in it,” he says. “We think much of this specialty capital devised by investment bankers and brokers represents uninformed capital that is more like gambling than it is investing in the insurance business. “This is a long-run business. The statistics are great if you’re playing it for the long run, but if you’re playing it for the short run you’re gambling.” Some insurers put stock in the power of this new capital to accelerate the market in order for its managers to achieve the high short-term returns they are chasing, but Mr Berkley says sidecars “generally don’t serve a purpose” in the market. “What I’m hoping for is that we have a really horrendous balance of the [US] catastrophe season and that they all lose all their money,” he quips.
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“How do you deal with a person who has a house that was worth $400,000 and they have a $300,000 mortgage and it’s gone?” ONE OF THE GREATEST CHALLENGES facing the insurance industry has been epitomised by the situation in Christchurch due to the ongoing seismic activity. Bill Berkley says that in such instances – where the magnitude of the insured losses is more than the exposure a small population can afford to pay for, and more than the country can afford to fund – the question of how to provide cover going forward must be raised. “What is the role of the global insurance/reinsurance market in providing economic protection versus the role of government in providing that economic safety net?” he says. “You have a million, a million and a half taxpayers in New Zealand, and you have a $NZ10 billion loss. Does every citizen in the country have to pay $3000 to subsidise that? How do you tell people that? What do you do?” He says at present the situation has thrown up many more questions than answers, including whether the entire city of Christchurch should be moved and what sort of building standards should be enforced in future, with the additional conundrum of who should pay for any changes deemed necessary. “Forget about making money in the
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insurance business, these are the problems that we’re a part of and we have to come up with a better solution. “It’s a problem that you don’t want to leave to the bureaucrats because they’ll come up with a dumb solution.” He says that aside from issues of insurability, such disasters have huge social repercussions. “How do you deal with a person who has a house that was worth $400,000 and they have a $300,000 mortgage and it’s gone? “They collect on insurance and it was $275,000 because most of the value was in the land, so they can’t even pay the mortgage off and they can’t rebuild the house there because of liquefaction. What happens to those people? What happens to the society? Does the government cover the cost? “What happens to the person who has that house there, and the bank says you have to pay the other $25,000 and you’ve got no money, and then they force you into bankruptcy?” Mr Berkley says the curse of a small population which does not provide a big enough pool for acute risks is also evident in the debate around flood insurance in Australia. “It’s easy to see in Christchurch, but
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there’ll be some towns in Australia that are affected by the flood issue in exactly the same way.” He is against the idea of subsidised mandatory flood insurance. “I certainly don’t think the public should pay for someone who has a flood loss who has a $5 million house on a river; they can deal with their own house. “On the other hand somebody who’s got a family house worth $300,000 that’s been there forever we probably ought to try to help. That’s the big issue facing the industry in this part of the world.” To date, Mr Berkley says the conversations and debates around these issues have – wrongly – centred on economics, rather than the social implications. “We’re supposed to have some balance and some understanding about these kind of things and we’re sort of saying, ‘oh well it’s not our problem’, so it’s a serious issue. “It’s people’s lives and I think most people [in the insurance industry] actually do care about people, but it’s a whole lot easier not to, so we’re going to have to take our shields off and try to think of a better solution.”
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NEW ZEALANDERS AND THE GLOBAL INSURANCE industry have long lived with earthquake risk, but the Christchurch events have destroyed many of the assumptions they had about it. The series of earthquakes and aftershocks in and around Christchurch has shown how the insurance market can fail, with some key risks in the city becoming uninsurable. But as the anniversary of the first major quake on September 4 approaches, the industry believes the shaking will have to stop for several months before insurers and reinsurers fully return to the Canterbury region. Even then, the insurance repercussions will long continue. With an unprecedented sequence of events, the insurance industry has had to cope with challenges that were not considered when policies were written and sold. These include business interruption insurance when firms suffer no physical damage but lose all their customers for months. Some of the accepted principles of insurance are also being questioned, such as payments to repair and restore when the insured believes they should be paid for a full loss. The rapid succession of quakes and aftershocks has added to the complexity of the catastrophe, causing difficulties in apportioning damage to a particular event and raising the insurance risk when buildings are outwardly stable but may have been structurally weakened. It is likely a number of disputes will end up in the courts. Graeme Riach, a litigation partner of Harmans Lawyers, who specialises in insurance, says he can see new law emerging from the Christchurch experience. Mr Riach says disputes are in two main areas: property damage and the Earthquake Commission (EQC), and business interruption insurance. He says the inter-relationship between the EQC and insurers has been called into question when a claim rises above the commission’s $NZ120,000 home and contents limit. insuranceNEWS
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When two groups of assessors are involved, some policyholders believe aspects of claims have “fallen through the cracks”. Some homeowners have accepted a sum from the EQC and then found it does not cover the cost of repair, although Mr Riach says it is hard to know if this is due to rising costs because of the demand for contractors or simply an incorrect assessment. The New Zealand Government’s buyout package for some homeowners is intended to remove uncertainty and help residents rebuild. It has two facets: property owners can accept an offer for their house and land; or a government payment for land and their insurer’s payout for a house or building. “This has thrown up an insurance issue, because many insurers are taking the view that they are only liable for the repair costs on those properties, whereas properties that would ordinarily be repaired won’t be because the land cannot be remediated,” Mr Riach told Insurance News. He sees the insurers’ response being tested in court in cases where property owners cannot get building permits to reinstate. There are business interruption issues where premises have suffered no physical damage. The various cordoned-off zones in the central business district are shrinking, but
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Wrecked and doomed: the Hotel Grand Chancellor, Christchurch’s tallest building, has shifted and is on the CBD demolition list. But many office workers don’t want to go back to multi-storey buildings. See story page 32
Christchurch: setting new precedents NZ Herald
By Jan McCallum
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Tall building phobia Traumatised office workers want to stay closer to the ground CONTINUING AFTERSHOCKS HAVE raised fears of depopulation in Christchurch, as residents’ nerves are worn down by fear every time the ground starts shaking. The behaviour of those who have rebuilt their lives there is also changing, and that has implications for insurers and their clients. Many employers will find it hard to get staff back into multi-storey buildings, raising an insurance issue when an office can be repaired but staff refuse to work there. There are currently few tall buildings to go back to, with about 200 in the central business district slated for total demolition and the CBD expected to be closed to the public until late October. Clinical psychologist Richard Wheeler is treating people traumatised by the earthquakes. He says many tall buildings failed to stand up to the February quake, with people trapped when stairwells collapsed. Some were hit by falling masonry when they got outside. “I am hearing people that were working in that area saying there is no way their firm will ever get them back into a multi-storey building,” he says. The Pyne Gould Corporation has bought a single-storey building following the collapse of its five-storey CBD office in February, which killed 14 people. Mr Wheeler sees people suffering an extreme stress reaction to the experience, but says it is too early to diagnose post-traumatic stress disorder, which would only be diagnosed months after the event. He says there are techniques to “switch off” the stress, but it is too early to tell how many people will suffer longer-term effects to the point where months later they cannot face going to work in a tall building. The city’s tallest building, the 26storey Grand Chancellor Hotel, is to be demolished from the top down, making it possible for businesses in the hotel’s “drop zone” – the surrounding area it is at risk of collapsing on – to return to their buildings. The hotel has been on an ominous lean since the February 22 quake that killed 181 people.
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many business owners still can’t get into their shops and offices. And even if the shops in the area were to reopen, there are no customers around. “That really is likely to be a source of some litigation,” Mr Riach says. He believes challenges will rely on policy wordings. “Most, if not all, of these policies respond only to physical damage.” He says calculating lost profits is also problematic. Christchurch’s accommodation industry was looking forward to hosting the Rugby World Cup during September-October, and while it has lost the tourists, the influx of contractors who have come for rebuilding work may compensate for lost rugby tourism. The insurance market’s withdrawal from covering Christchurch has led to criticism of the industry as only wanting to be around for the good times. However, Insurance Brokers Association of New Zealand Chief Executive Gary Young says the industry has performed very well in such a difficult time. He acknowledges that insurers’ withdrawal from the market has caused difficulties for Cantabrians trying to rebuild their lives. Insurers have renewed policies but been unwilling to write new business and Mr Young says it takes companies longer after each substantial tremor to return to the market. Canterbury has had more than 7500 tremors since the first major quake on September 4, with the larger ones undoing earlier damage that had been repaired and making insurers and reinsurers more nervous about New Zealand risk. Most of Christchurch City Council’s $NZ4.2 billion property portfolio became uninsured from July 1, after its insurer, New Zealand-based Civic Assurance, could not get enough reinsurance to provide property cover. The council found it was in the market for new cover when the treaty renewals were being negotiated, and the council was at the back of the line. General Manager Corporate Services Paul Anderson says new insurers want full information about the condition and damage to assets, which is a huge task and means that property needs to be re-inspected following the June 13 earthquake. The council has obtained fire cover for more than 2200 housing units and an indoor sports and entertainment venue, and he says it is beginning to see some offshore insurers showing interest in providing earthquake cover. He says that when the insurers are ready to talk, the council aims to have the
best case it can present. “We are doing a lot of work on damage assessment, making sure we have very accurate and up-to-date loss adjustment for our assets.” The Port of Lyttelton, the major trading port in the South Island with about $NZ200 million of property, plant and equipment, has been able to get some cover – but has no insurance against natural disasters relating to business interruption and material damage. The insurance failure comes when the port is at its busiest, with the export-oriented dairy industry largely unaffected by earthquakes and more goods being shipped inwards for the rebuilding of Christchurch. The port’s Chief Executive, Peter Davie, says Lyttelton has substantial reserves, and the lack of insurance is not deterring shipping companies and other users. But it’s frustrating when insurance companies will not even respond when the port’s business is offered. Mr Davie says he can understand insurers’ reluctance to offer earthquake cover, but the risk on a straddle crane, used to pick up and transport containers, has not changed at all, and the port can’t get cover for that either. “In five years time they will be looking for our business,” he says. Christchurch businesses are reporting increases of 50-100% in business interruption insurance and Standard and Poor’s (S&P) says reinsurance rates have more than tripled in some cases for New Zealand-only placements and risen by 50% for joint Australia-New Zealand programs. The ratings agency says New Zealand has historically had favourable reinsurance pricing compared with other regions, partly because of relatively few natural disasters. “New Zealand rate increases have and will be substantial, especially at lower reinsurance layers, and for insurers biased to South Island, Christchurch and Wellington risks,” it says. The New Zealand market is resigned to paying more for insurance, with S&P saying major insurers have raised prices by around 20% for property-related cover with no material loss of customers. Most people in the industry believe they have to wait for the aftershocks to abate as the earth settles. They say New Zealanders are getting used to higher premiums and tighter policy conditions, just as they have learned to live with earth tremors. The low rates have gone and won’t be returning.
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Part of the culture: this year’s force 9 earthquake and tsunami in Japan was matched by one in 869AD. But modellers set their expectations for a smaller quake
Future-proofing or navel-gazing? Insurers have learned to rely on catastrophe modelling. But critics say it’s predicting the unknowable By Jan McCallum A SURGE IN NATURAL DISASTERS since the beginning of last year and the resulting losses have focused attention on catastrophe modelling and its effectiveness in risk management. Insurers and reinsurers are relying more on catastrophe models to determine their exposure to events, enabling them to manage and price risk, but critics argue too much emphasis is being placed on the models and not enough on the expertise built up by experienced underwriters. Natural catastrophe modelling in this region came under the spotlight during the Christchurch earthquakes. California-based Eqecat had to clarify how it estimated losses from the June 13 earthquake after the New Zealand Government and the insurance industry disputed the size of the loss. Eqecat said insured losses would be $US3-5 billion – an estimate Prime Minister John Key and 34
Insurance Council of New Zealand Chief Executive Chris Ryan said was far too high. Such criticism isn’t all that unusual. Risk Management Services recently had to defend its updated model for the US hurricane season after a critical report by cat modelling pioneer Karen Clark. Ms Clark, who founded the company that became AIR Worldwide and who now runs Boston-based consultancy Karen Clark & Co, found cat models designed to project insured losses from Atlantic hurricanes for the 2006-2010 seasons significantly overestimated the losses. She believes too much reliance is put on cat modelling and that the industry needs to swing back towards recognising that underwriters also have considerable information to gauge risk. Ms Clark says it’s time to start recognising the limitations of cat models, as assumptions are made on science when data is often unavailable or cannot be measured. The science of catastrophe modelling has only been developed in its present form in the last 20 years, having grown following Hurricane Andrew, which hit Florida in 1992 causing losses of around $US20 billion. That event bankrupted seven insurers and directed attention to how devastating events – and the damage – can be predicted. Critics of cat modelling say it is about insuranceNEWS
trying to predict the unknowable. The range of information, such as records of weather and geographic data that is fed into models, might be incomplete or simply not accurate. Engineering and building data may be out of date if building uses have changed or there is lax regulation. Modellers also have to stay up to date with changing population sizes and insurance penetration if they are to estimate financial losses. Recent disasters have shown cat models have not given enough weight to secondary perils, such as flooding from storms or soil damage in earthquakes. Modellers acknowledge this but they – and those who use the science – say cat models have performed well in recent disasters. Risk Management Solutions Chief Research Officer Robert Muir-Wood says models anticipated the Japan tsunami and the Haiti earthquake and reconfirmed how there could be extreme loss of life from “unsupervised informal concrete buildings”. “In Japan evidence had been accumulating from research since 2000 that in 869AD there had been a massive earthquake and accompanying mega-tsunami, speculated [to be] as large as magnitude 9, on the northeast Pacific coast. “Based on previous similar earthquakes, there was also evidence that this had an average return period of 1000 years – that
August/September 2011
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Black swans: a peril for modellers Factoring in unexpected and unlikely threats is a major challenge ONCE EVERYONE ASSUMED THAT all swans were white. Then European explorers made it to Wester n Australia. Today, the term “black swan” in risk modelling refers to an unexpected event that has extreme consequences – something that nobody believed could happen, that is so rare it is not modelled and which can therefore lead to a severe loss. The global financial crisis was labelled a black swan, which was when the theory became popular. The challenge for catastrophe modellers and the insurance industry is to factor the likelihood of a black swan event into their calculations. That’s not as easy as it sounds. The industry’s risk managers have also had to contend over the past 18 months with unmodelled perils such as volcanoes, landslides and tsunamis. Volcanic activity in Iceland and Chile has shown how disruptive and costly ash clouds can be in countries thousands of kilometres away. And the link between earthquakes and tsunamis is more apparent after Japan. The Aon Benfield UCL Hazard Centre based at University College London is working on how the insurance industry can improve risk estimates from unmodelled perils and how these can be linked to cat models. The centre’s volcano specialist, Bill McGuire, says volcanic ash is an under-rated hazard as it can transport the impact of an eruption right around the planet via the stratosphere. Although the ash clouds make news when they disrupt air travel, he says the ash causes considerable local damage from collapsed roofs, contaminated water, destroyed crops and health problems. Professor McGuire notes there are 1500 active volcanoes, and around 50 erupt every year. Research Fellow Simon Day says around 80% of damaging tsunamis are caused by earthquakes. Although insured building and infrastructure losses will dominate in larger tsunamis, he says the more frequent smaller events also trigger significant contents and business interruption claims. Dr Day says because tsunamis are rare, historical records may be a poor guide to future events but computer modelling can predict the effect when the water hits land. However, he says that there will need to be a major effort to collect data to provide accurate maps globally.
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is, a repeat was now due.” He says because there had been no high magnitude quakes in recent times, coastal nuclear power plants and tsunami protection walls had been built to withstand a much lower magnitude event. Swiss Re’s earthquake specialist Balz Grollimund says earthquake models cover everything modellers can anticipate. “In these aspects cat models have fared well,” he told Insurance News. “They have properly anticipated the amount of shaking that was observed given the magnitude and location of the event.” He says the impact of shaking on buildings is predicted accurately by most models, confirming that older, unreinforced masonry buildings would perform far worse than modern structures. “The size of the event does not fall outside the scope of predictive modelling. Predictive modelling is rather used to model exactly these types of events.” Dr Grollimund says the lessons from Christchurch – such as whether liquefaction or the probability of a second event should be reviewed in models – will have global relevance. “However, this does not warrant a rewriting of models but rather an improvement over what is already available.” Responding to criticism that the insurance industry is relying too heavily on cat modelling and not enough on the experience of underwriters, he says there has to be a mix of both. “Any model is a simplified reflection of reality. As such it cannot stand on its own but requires the careful analysis and interpretation of experienced underwriters. On the flipside, models are an invaluable help for experienced underwriters to evaluate cat risks.” He says cat models can help underwriters to understand and track loss cumulation potentials, to compare different portfolios of insured properties, and serve as a starting point to estimate the impact of extreme events. The lessons from recent disasters will be incorporated into newer versions of models. Earthquake cover has already risen in price, and given the cost of recent disasters the higher cost from such events will certainly be factored into updated cat models. Dr Muir-Wood says the need to review and raise maximum magnitudes is being insuranceNEWS
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considered for other earthquake models. Both last year’s Chile quake and this year’s Japan quake showed that cat models covering earthquake subduction zones – where the earth’s plates meet – will need to incorporate tsunami models. He says the Christchurch experience has highlighted how one earthquake can trigger a series of others in sequences that extend beyond the usual pattern of aftershocks. Although this had been seen before, “in New Zealand, the second major but smaller earthquake in the sequence occurred five months after the original earthquake at shallow depths right under a major city and caused very significant damage and casualties. In future the way that earthquakes can communicate one to another will need to be something that becomes standard in cat models – and in post-event catastrophe response.” Work by Swiss Re has found that the loss from secondary effects of earthquakes – for instance from tsunamis, soil liquefaction and business interruption – is underestimated Dr Grollimund says a large proportion of damage from the Darfield and Christchurch events was from liquefaction rather than ground shaking. He notes the Chilean earthquake caused significant business interruption losses because of damage to heavy industries such as refineries, ports and pulp and paper mills. “The industrial losses can shoot up quite quickly, especially when business interruption claims are involved.” He says another lesson from Christchurch is the cost of deconstruction, when large buildings have to be taken apart piece by piece to avoid damaging nearby buildings which remain intact. “This can add considerably to the total property replacement cost.” Among the lessons for modellers are that as the influence of cat modelling grows, so does scrutiny of how the models are performing. Insurers and reinsurers are becoming more selective in the risk they want to write after 18 months of severe losses from extreme events, and they will be looking to the models as they seek more information to drive their decisions. The industry can therefore expect continuing debate about the effectiveness of cat modelling as a risk management tool.
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A star is reborn Joe Vella’s award-winning Cairns office revival gives ‘an old girl a new dress’
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JOE VELLA IS IN TH E BUSI NESS OF helping people put their lives back together following a loss, so when it came to refurbishing an old movie theatre as the new head office for his Cairns brokerage, he decided to apply the same thinking to the job. The veteran insurance broker bought the 1940s-era Plaza Movie Theatre, which was in a serious state of disrepair, and embarked on a two-and-a-half year journey to bring the local icon back to life. The restoration has been referred to as giving “an old girl a new dress”, and has also received the Cairns Regional Council’s award for Excellence in Design for the adaptive re-use of a character building. For Mr Vella, it’s been a labour of love and a wonderful challenge. It all started with a dream in 2007, when he saw great potential in the old art deco theatre. However, the $2 million project got off to a rocky start with just one black and white photograph of the original facade to refer to. But in the absence of local historical knowledge, Mr Vella turned to books on art deco and interior design for inspiration. He says at one stage during the project it looked like the theatre could not be saved due to years of poor maintenance. “But we never wanted to remove the building, we insuranceNEWS
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wanted to bring her style back.” Joe Vella Insurance Brokers now takes up the top floor of the old theatre and one of the four tenancies on the ground floor, with the other three office spaces rented out. In December 2008, staff went from working in a 225 square metre “run of the mill office building” to a luxurious open-plan easy-flow working environment at Vella Plaza. The building offers a vision of two worlds colliding, as the exterior steps back in time to an almost forgotten era of 1940s art deco and the interior celebrates the pinnacle of modern style. “On the inside it’s very much a modern look and on the outside art deco,” Mr Vella told Insurance News. “We wanted to mix a bit of the new and the old. “We now have a noticeable presence and the townspeople have been really appreciative of what we have done.” Vella Plaza even has its own friendly ghost, which haunts the halls. “Quite a few staff have experienced doors shutting and unusual noises when no one else is in the building, so we now greet the ghost when we come into work,” Mr Vella says. And although the project ran a year over budget due to planning delays, he says it was a labour of love and an experience he wouldn’t change for anything. If you’ve got an old art deco building looking for some love and imagination, talk to Joe Vella. He says he would “love to set myself up for another project”. 39
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Austra
Calm before the storm Rates definitely will rise, say the insurers – but they’re not dictating when or by how much By John Wilkinson
Iron ore for China: if mining failed insurers would find it harder to impose premium rises
THIS HAS BEEN A VERY TOUGH YEAR for insurers so far. The catastrophes of summer were supposed to have led to a dramatic rise in rates. But by the end of the June 30 renewals period that hadn’t happened. So is this a calm before the premiums storm? Possibly, because a number of factors hadn’t kicked in at the time of the June renewals. For example, many reinsurance contracts had been renewed in January – just before the spate of natural disasters occurred. Certainly some insurers had sought extra reinsurance at a higher price to cover the cost of unprecedented flooding and Cyclone Yasi, but again it was early days for the June renewals. Suncorp Executive General Manager Underwriting Management Darren O’Connell 40
agrees that increases in June were “varied”. “While most businesses have seen rates increase, the level varies across commercial lines,” he told Insurance News. “Businesses which suffered natural disaster losses have generally seen rates and limits change, including a trend toward holding higher deductibles.” But it now seems past events will catch up with the pricing cycle and rates will rise during the next six months. Aon Corporation Australia Chairman Pacific Region Steve Nevett expects recent events to continue to place pressure on insurance premiums. “During the past two years there have been a number of significant natural disasters in our region which will place continuing upward pressure on a market already on the brink of hardening,” he said. Most insurers and reinsurers are preinsuranceNEWS
August/September 2011
dicting rate raises before the year end, although IAG told Insurance News its reinsurance renewals were in January so that won’t be a factor in any rate increases from them. Finding out about possible rate rises has been difficult, as insurers are remaining very non-committal. However, Lumley Insurance Chief Executive John Nagle is willing to predict rates will rise further during the next 12 months. “Given insurers are experiencing significant increases in reinsurance costs it would be surprising if the market didn’t experience price hardening, particularly in loss-affected areas,” he told Insurance News. “For those regions that continue to display ongoing risk volatility (including Far North Queensland and regional areas) we are repricing some risks to ensure premiums accurately reflect the inherent risk exposure.” Other insurers are being a little more cautious in predicting rate rises across the board. “I think it would be fair to say that we do not anticipate across-the-board increases during the next six months,” Chartis Regional Financial Lines Manager Mike Pryce told Insurance News. “Property lines of business can expect modest levels of increase, with loss-affected accounts achieving higher levels of increase than cleanskin or non-catastrophe exposed placements.” While Mr Pryce rules out standard price increases on financial lines business, he has one qualification: “Within certain sectors such as financial institutions professional
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indemnity we are expecting prices to continue to rise due to the claims environment.” Caution about rate rises from insurers is understandable, as the global industry has experienced a record number of natural catastrophe claims in the first six months of this year. And global insurers aren’t feeling too confident about the second half of the year, either. Bermuda-based Platinum Underwriting has pulled out of Australasia because of scientific predictions there will be another major earthquake in New Zealand during the next 12 months. There is also growing concern over a predicted rough hurricane season in the United States. Marsh sees the hurricane season as having the potential “for a changing market dynamic through the balance of 2011”, according to its July market update. “Although there has not been an overall change in market pricing in the wake of further natural catastrophes in the second quarter – including storms and tornadoes across the United States – the global insurance market remains under pressure,” US-based credit insurance broking specialist Nick Bacon says. “Many insurers and reinsurers have already seen their 2011 budgets for catastrophe losses substantially eroded, if not exceeded – and this was before the start of the Atlantic hurricane season,” says Mr Bacon. On a brighter note, Marsh finds the global insurance industry in good shape despite having endured 18 months of catastrophic events across the globe. “In Australia there remains a robust supply of capital for most risks and product lines although, predictably, property underwriters have turned their attention to managing aggregate exposures and seeking rate increases from buyers that have suffered large losses.” Across the Tasman, competition in the New Zealand market has slowed dramatically following the earthquake events, with hardening conditions on earthquake pricing and deductibles. While natural catastrophes on the other side of the world might be the trigger to a hardening of markets in Australia and New Zealand, other events might have a reverse effect. The growing financial crisis in Europe and potentially the US might lead to a slowing of global trade. In Europe, Greece is struggling with its debt and the European Union has come up with an elegant solution – give them more debt. 42
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Spain, Portugal, Ireland and potentially Italy are all wallowing in debt with no simple solutions to fix their problems. Economies in these countries are struggling, as is the UK, where the Governor of the Bank of England, Sir Mervyn King, has predicted seven years of recession for the country. As Insurance News went to press, the US was poised to default on its debt, which would send a chill around the global economy and could trigger a recession. And the impact on Australia? The Australian economy is already operating on a two-speed basis, with mining booming and manufacturing and retail struggling. Anything that could impact on the mining business will send Australia’s economy into recession. For insurers that will mean pushing through stronger rate rises will be more difficult. Some lines, such as car insurance, are firmly locked into the retail marketplace with products even sold over the counter in shopping centres, and this is part of Australia’s economy that is struggling. Lumley’s John Nagle hints that insurers would be wise to keep a close eye on the economic outlook before pushing strong rate rises into the marketplace. “[Potential rate rises] are being balanced out by strong capacity in the market,” he says. “This is working to keep prices competitive in regions and portfolios that have not been impacted by recent catastrophe events and have lower inherent risk exposure.” Suncorp’s Darren O’Connell says the economic outlook is a factor when looking at rate rises, especially in the SME market. “We recently looked closely at how the macroeconomic conditions may be affecting the SME market by looking for shifts in the total numbers of small companies we insure,” he said. “This is pretty stable, so we conclude that even with the recent events we’re not at this stage seeing a drop in the sector that’s caused by SME businesses going out of business.” So the next six months will be a wait-andsee period for rate rises, although some increases seem inevitable. “Overall we see rates steadily increasing during the coming 24 months,” Mr Nagle says. But by how much? All eyes will be on the US to see how that hurricane season shapes up and how the world’s biggest economy will deal with a massive debt problem. Only then will anyone be able to safely predict what’s going to happen to insurance premium rates Down Under.
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A whole new way of doing business Noel Condon is an AIG veteran who has embraced the less stuffy culture of Chartis By Michelle Hannen MANY YEARS BEFORE HE ARRIVED IN Sydney, Noel Condon was told by then AIG global Chief Executive Martin Sullivan that the Australian insurance market was “the most competitive commercial/industrial market in the world”. One year into the job as Chief Executive of Chartis Australia, Mr Condon reflects: “Boy, was he right! This is what I had expected and it hasn’t let me down, that’s for sure.” He says the market is attractive for global insurers because it is well regulated with good rule of law, but “any carrier who is in the market, they’re bumping up against a hundred other carriers” due to the relatively small pool of business. The multi-speed economy has amplified the issue. “Those parts of the economy that are charging, those are the parts that insurers and brokers will focus on,” meaning that in some sectors the competition is even more pronounced. But with stereotypical enthusiasm and good humour, the Irishman is relishing the challenge. As well as dealing with the multi-speed economy, Mr Condon describes the current insurance market as “multi-speed”. He says commercial property rates have dominated conversations before and since July 1, and the market in that sector has definitely hardened, with “some people pulling back and tightening up their positions, 44
trying to push some price, and then others who are looking at this as an opportunity to gain market share”. For its part, Chartis “lost some positions, we’ve trimmed down in other areas, we did look to push some price in April, May and June and found that we were being a bit too pushy, so we’ve taken our foot off the pedal a little bit”. But in liability, Mr Condon says, it is an altogether different story. “Liability is still competitive. There’s a lot of capacity out there, and why? Australia is Litigation Central. “Given the long-tail nature of liability I guess the claims are not hitting, but when they do, they’re painful.” Chartis Australia’s biggest area of business is financial lines, and in that space Mr Condon says there has been “sporadic competition” in the top end of the directors’ and officers’ (D&O) market over the past year. But he cites a hardening of rates in “top end of town D&O” following the Centro decision. (In June the Federal Court ruled against the directors of Centro Properties Group on the grounds that they had approved incorrect financial accounts which classified more than $2 billion in short-term loans as long-term loans.) Competition for SME D&O risks is “really sharp”, but he warns that if the multi-speed economy continues, retailers and small businesses doing it tough could insuranceNEWS
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lead to a surge in bankruptcies and liquidations that could generate a strong flow of D&O claims. In that case the price competitiveness of the bottom end of the market “could all change very quickly”. Mr Condon doubts an across-the-board hard market is in the offing. “Overall right now there just seems to be plenty of capacity. Some people have taken some pain but others not. “With the events we’ve had, if it was going to harden it would have hardened by now.” Like most in the industry, he is looking to the North Atlantic hurricane season and still-to-come reinsurance treaty renewals as indicators of the market’s future direction. “It remains to be seen how the rest of the year will pan out with reinsurance treaty renewals, because clearly reinsurers are pushing up their prices. But how does that translate back into increases for individual policies?” He says there might be further increases of around 10% in property, but whether that will be enough depends on what happens in the next one to two years. “For us a 10% move in property prices wouldn’t be enough. We still think we need higher prices in property.” AIG was historically known as a top-end player, and while Mr Condon says there is still a focus on big business, locally Chartis is in year two of a five-year SME strategy, which
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Noel Condon milestones 1984
Joins AIG as an engineering underwriter in Ireland
1992
Moves to AIG’s newly opened Shanghai office, establishes the direct sales team in China
2001
Sets up the direct marketing business for AIG in Korea
2004
Appointed Country Manager for AIG/Chartis Belgium and Luxembourg
2010
Appointed Chief Executive of Chartis Australia In addition, Mr Condon has worked for AIG in Hong Kong, Japan, New Zealand, the UK, Ireland and Hungary
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“We’ve got some brokers who see the value in our product and in our differentiation, but it’s not enough of a broad spread.”
involves business package, property, liability, D&O, and corporate travel products. The company has built a technology platform – Transact – and is using Sunrise Exchange to broaden distribution, with new products scheduled to come online. “It’s a slow build,” Mr Condon says. “We’re not looking to rock the boat in terms of revenue because we really want to show a bottom-line profit. “We want good return on equity. It’s definitely a five-year play rather than just go in, grab market share and get out.” He says Chartis has made some mistakes with the strategy, causing “ourselves and some business partners some pain, so we’re sorting ourselves out”. And he wants to get more brokers on board with Chartis. “We’ve got some brokers who see the value in our product and in our differentiation, but it’s not enough of a broad spread. I think I counted 88 brokers who really, truly are doing business with us, when we’ve actually signed up 500.” When Chartis has pitched to the middle market in other parts of the world, brokers have questioned whether they were in it for the long term, he says. “They would think, ‘Do they have the patience for this?’ because our natural space has been in major accounts and multina46
tionals. But we’re there to stay, and we’ve got to get better at telling our story.” That story inevitably involves the fall from grace of AIG in 2008, and Mr Condon speaks about the “incident” with the experience – and humility – of someone who has been to the brink. He says as a result of the company’s nearcollapse, it has undergone a major cultural change. “The company, that big amorphous thing, started to express its love for its employees more than it had ever done before,” he says, and credits staff who stayed the course as the “bedrock” for its revival. He says the process of “hustling” – getting out and visiting brokers and clients more – which followed in the year after the problems were revealed, is something the business should repeat every few years “just to reconnect”. He says the company’s attitude towards its business partners has also evolved. “We realise that we’re earning their trust every day.” Nowhere is this more apparent than in its approach to claims, where there has been a “definite change in philosophy”. In the past, Mr Condon says, claims were considered back office within the organisation rather than shopfront. But since 2005 a new approach has been insuranceNEWS
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encouraged. “We’re never going to be loose on paying claims, but without a doubt we are looking for coverage, whereas the old AIG was renowned for searching for that exclusion.” With progress being made on all fronts, Chartis experienced a setback earlier this year when its global credit rating was downgraded from A+ to A by Standard and Poor’s after a lower than expected fourth-quarter result. Mr Condon, who describes the downgrade as “half a click down”, says he immediately called some local brokers to assess the impact. “The reaction from the brokers I spoke to was, ‘You’re A, that’s fine’, so it didn’t have an impact at all,” he says. “I got very, very positive comments straight away from the people I spoke to.” But the times certainly have changed. “In the old AIG, we were AAA rated and we used to beat our chest at that. Now we’re A, so we don’t talk about ratings so much any more! “We might have been arrogant in the past and we’re definitely doing business with a tinge of humility now. “We’re never going to be humble – that would be inappropriate – but if it happened to AIG it could happen to anybody.”
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FACEBOOK. TWITTER. BLOGGING. LINKEDIN. YOUTUBE.
[ SOCIAL MEDIA ]
Love it or loathe it. Just don’t ignore it Will insurers’ brands be damaged if they give way to the social media phenomenon? Not taking part might be riskier By Tania Martin THE TWISTS AND TURNS OF technological development are now intertwined with social change. The phenomenon that transformed the way business processes happen is now part of our everyday environment. There are smartphones in every pocket and handbag and ipads are proliferating in offices and homes. Now we’ve entered the era of social media – the age of Facebook and Twitter and blogs, where ideas and information are instantly shared with groups ranging from a few to millions. Social media made the “Arab Spring” of 2011 possible, and now it’s banging on the door of business. It’s a world inhabited without fear by generations Y and Z. It enables them to maintain close relationships in a fast-moving world, and to share thoughts and ideas instantly with 48
their friends and peers. And just as religious leaders and aristocrats in the 15th century feared the introduction of the printing press for its ability to destroy their domination of knowledge and ideas, in the 21st century many managers are looking at social media with the same sort of uncertainty. The questions are much the same as they were nearly 600 years ago: Can we use this to suit our purposes? How can we control it? Social media is already past the point of being ignored, and is probably not controllable. It’s time to look at social media as a new and powerful opportunity. Facebook, Twitter, YouTube and LinkedIn are just a few of the “must-have” applications for any business, because the experts are saying this phenomenon will be a gamechanger for insurance. insuranceNEWS
This is the way of the future – an opportunity to revolutionise customer relations by building awareness and support, and eliminating unnecessary calls or telephone waiting times. But the key concern for insurers is the lack of regulation and the risk to both brand and reputation from engaging in social networking. Insurers could be facing an even bigger risk by not joining. Last year’s JP Morgan Deloitte General Insurance Industry Survey, for example, labelled social media the “new game plan” for insurers. Currently more than 10 million people in Australia use the Facebook platform. They also routinely use other forms of technology such as YouTube and professional profiling site LinkedIn. Deloitte Partner Elaine Collins says the insurance inAugust/September 2011
dustry needs to start using or building social media into its structure to be able to access the growing number of opportunities it offers. She says the move to social media is similar to the shift from paper claims to the internet. Many smaller brokerages clung to their fax machines for far too long before moving to online systems, and the rate of take-up with social media has also been relatively slow. The Deloitte survey showed sales of general insurance products through the internet has grown from 2% in 2003 to 11% in 2010. That percentage is expected to hit 20% by 2015. “Given the increase in use of the internet as a mainstream distribution channel we believe that this forecast may be conservative,” Ms Collins says. She also predicts that there will be 22 billion devices con-
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nected to the internet by 2020, and the impact of social media can’t be dismissed or ignored by the industry. Most of the big players in the market have already signed up for Facebook, but some only have business contact information on their pages. Others such as IAG direct online subsidiary The Buzz and Zurich Australia have set up interactive pages where customers can ask questions or leave posts about their experiences. Insurers say although there is a risk of adverse comments being made about their companies, social media also allows for them to respond instantly to any arising issues. Zurich first embraced social media in 2008, and despite the risk to its brand the company says insurers need to be able to take the good with the bad. “Our worst concerns proved
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No place in the office for Facebook EBIX AUSTRALIA MANAGING Leon d’Apice is a master of new technologies and hardware, but even he has hesitations about the use of social media in the workplace. An ipad has replaced his pen and notebook at meetings – “you can do so much more with it” – and he admits the emerging generations may never use a pen or pencil. But when it comes to social media, he’s as cautious as any traditional boss. “A significant proportion of our staff are regular users of things like Facebook and LinkedIn,” he says. “But that’s in their own time, and I don’t believe there’s a place for social media in the workplace.
insuranceNEWS
It’s a distraction. “You need to be able to divorce your work activities from your social media interactions.” Ebix does allow limited use of social media at work within carefully defined limits. “There’s no room for abuse of those limits.” Mr d’Apice says the entry into the social media market of Google+ “will give a lot more credibility to social media. It might help change the way we think about it and use it.” And much to his surprise, his younger staff “actually like going to meetings”. He says this is supported by recent research which found young people who rely too much on social media are often
August/September 2011
lonely when they’re placed in a work environment. “I’ve found the younger ones at Ebix really seem to look forward to meetings where there’s face-to-face interaction,” he says.
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“Customers expect their brokers and insurers to respond through whatever avenues of communication are open to them.” – Zurich Head of Marketing General Insurance, Lucy Barrett unfounded, Zurich Head of Marketing General Insurance Lucy Barrett told Insurance News. “The feedback we have received has been invaluable in helping us improve our service to brokers and their customers. “It demonstrates our acceptance of constructive feedback and the ability to empathise with users. “And at least via social media you have the ability to respond instantly. “How you respond reflects the brand and demonstrates the company’s ability to accept criticism, and it also gives you the opportunity to turn it into a positive experience for the customer.” Social media expert Peter Fraser, a partner at media consultancy SR7, warns that the internet and social networking sites like Facebook are not some “grand utopia full of sweet and pleasant people”. He says insurance companies need a risk strategy before even thinking about taking that first step. “[Social media] is a chaotic set of communities where people do express negative commentary and can come together to target companies and individuals,” he told Insurance News. He believes this is a factor that deters insurance and other financial services companies from dipping their toes into the social media pool. “But insurance companies and other businesses can put in place risk mitigation strategies, for instance, undertaking extensive social media risk audits to identify any risks involved with using social media as a means of effective communication.” He says early-warning techniques can help companies take immediate action to address any threat to brand, image and reputation. 50
Mr Fraser says the biggest risk for insurers might well be doing nothing. Ms Collins agrees, saying adapting the heavily regulated insurance industry to deal with the free and easy exchange of information that is social media could be a challenge – but it’s one that must be faced. “Just as they did back in the days when the internet and email was emerging, insurers are weighing the risks and benefits and finding ways to meet talent and customer demand,” she says. “Insurers should look to harness the power of these new capabilities to support their business initiatives.” Lucy Barrett says Zurich has already decided that as new generations of professionals join the industry, her company needs to be prepared to respond to their needs through social media. It’s now second nature to include it in the Zurich communication mix. “However, there is still a need for education on what advantages social media can bring to business,” she told Insurance News. “Not only are we seeing brokers of all ages seizing social media opportunities, customers expect their brokers and insurers to respond through whatever avenues of communication are open to them.” Ms Barrett says it is also a great way to improve lines of communication with intermediaries while demonstrating Zurich’s ability to adapt to change and new technologies. The company also discovered the benefits of using social media during this year’s natural catastrophes. “We turned to social media to rapidly get urgent messages to brokers and insuranceNEWS
Social media is penetrating all areas of business, including the recruitment market THESE DAYS LOOKING FOR A JOB – OR PRETTY MUCH anything else – involves more than sitting down with the morning paper and a pen to circle the ads that seem to match your needs. Both employers and job-seekers are increasingly using online jobs boards (www.insurancenews.com.au/jobs, for example) and social media platforms such as Facebook, Twitter and LinkedIn. Just as the insurance industry is taking its wary first steps into social media, it’s also finding the social media space is a good place to increase its emerging talent pool. The 2010 JP Morgan Deloitte General Insurance Industry Survey says recruitment through social media is another key opportunity for the industry. Deloitte Partner and survey author for the social media section, Elaine Collins, says younger generations who build social media into their personal lives expect to find similar communication networks in the workplace. “Companies that fail to deliver may be losing out on emerging top talent,” she says. “And beyond the issue of new talent, insurance companies are likely to see a growing demand by veteran producers and agents as social media use continues to grow in popularity among the mature set.” The vexed question of social media use in the workplace still hasn’t been solved, although many managers will agree there’s a need to set guidelines and find an acceptable middle ground with a young workforce. A social media commentary produced by JP Morgan Deloitte says organisations that provide access, guidelines, and compliance clearance for social media tools “will rapidly attract the top talent and make their recruitment channels more efficient”. However, recruitment experts are now warning companies against jumping into a social media strategy too quickly. “There are many cases where organisasations have rushed to incorporate social media into their recruitment process, even if they were not sure how to put their new tools to an effective use,” Hays Insurance Senior Regional Director Jane McNeil told Insurance News. “But without thinking ahead, the increasing use of these mediums means employers no longer totally own their brand… “We have to accept that allowing employees to blog and discuss matters on social forums isn’t without risk, and employees must always remember they are representing the company.” While Ms McNeil says these risks shouldn’t deter insurers from using social media as a recruitment enticement, it should be done using a strategic approach and strict policy rules on social media etiquette. “It’s also advisable to remember that social media will not replace the traditional recruitment process,” she says.
August/September 2011
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Source: Greg Savage
customers,” Ms Barrett says. “It certainly helped.” Even the Queensland Floods Commission of Inquiry has heard how Facebook and other forms of social media were integrated into police media policy to assist the dissemination of information during the crisis. “Social media as a method of communication is here to stay and how a company embraces it will impact its relationship with brokers of the future – for younger generations that’s their normal mode of communication,” Ms Barrett told Insurance News. However, on the flip side of this debate customers don’t necessarily expect their insurance provider to be taking part in the social media space. An IBM/Institute of Business Value global customer survey has found that while researching insurance options online is becoming more popular, most people don’t expect their insurer to be using social interfaces such as 52
Facebook and Twitter or new technologies such as ipad and iphone applications. The survey of 21,740 customers from 20 countries also showed that people now crave “cross-transactional options” – accessing several forms of communication – before deciding whether to buy their insurance on the internet, through face-toface contact or via aggregators. The study, Meeting the Demands of the Smarter Consumers, revealed that although 49.4% of people research prices through insurers’ websites, 47.9% also want some kind of personal interaction. Even more surprising, just 14.4% of the respondents use Facebook or LinkedIn, and just 1% considered buying insurance using other applications such as smartphones. IBM’s German-based insurance expert and study author Christian Bieck says insurers shouldn’t scrap their social insuranceNEWS
media strategies on the basis of his survey. He says social media, along with talking to peer groups and family members, is “one of the key factors” in customers’ insurance decision-making. “It’s a unique opportunity for insurers to participate in that discussion,” Mr Bieck told Insurance News. “Customers can’t imagine anything happening in this area, or find it hard to see themselves buying their insurance this way; and we found this quite surprising.” But Mr Bieck believes this can be turned around in the future and says that social media would be one of the best ways to educate customers about their insurance. He says a large portion of customers don’t trust their insurer to deliver when they need it most, and educating these people would be a huge step towards closing the credibility gap. “For interacting with insurers there is no better or August/September 2011
cheaper way to educate customers than social media,” Mr Bieck says. For example? “You could use it as a pre-emptive strike – to warn people if there is going to be a flood next week and talk about what people can do to prepare… “A large part of raising trust is being able to make insurance tangible to people, not just an institution that deals with damage, which is the way the industry sees itself.” IBM’s Financial Services Sector Director for Growth Markets Paul Robinson says Australia’s low level of expectation to use social media for insurance was a shock to the industry when the survey results were published last month. But he says this research now presents insurers with an interesting opportunity to do a much better job in this area. “They need to use social media to get the industry’s mes sage out there.”
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INSURANCE FRAUD
A sly and grubby thing to do Insurers are investing big dollars in the war against insurance fraud By Tania Martin
AS DESPERATE QUEENSLANDERS struggled to hold back the floodwaters that swept across the state in January, others were driving to the scene to dump their cars in the path of the rising floodwaters. It might sound illogical, but it did happen in Brisbane, with witnesses reporting people leaving their cars and running from the scene. Why? Because the cars were insured. Insurers say this kind of behaviour isn’t uncommon during tough times such as the global financial crisis and natural catastrophes. Allianz Australia’s National Investigation Unit Manager, Wayne Stapleton, believes the global economic crisis, increasing interest rates and unemployment have led to an increase in fraudulent claims. “Generally we have seen a direct relationship between the state of the economy and the level of downturn with people at risk of losing their jobs,” he says. “It prompts workers’ compensation fraud and in tough economic times people often think insurance is a quick way to make money.” 54
In particular, insurers are finding more people taking advantage of the situation in times of natural disaster. Mr Stapleton says it’s amazing how many people find it impossible to resist the chance to rort the system at such a time. “We are aware that people do take advantage of the opportunity, and it was surprising to see how some people were moving furniture to higher ground for protection while others were purposely damaging things.” Suncorp Executive General Manager Commercial Insurance Claims Matt Pearson says although the vast majority of claims from the floods were legitimate, he agrees the number of fraudulent cases increases during difficult economic times. “People who find it difficult to continue loan repayments may look at different ways to access funds or stop payments, and they believe that lodging fraudulent claims is just one way to do this.” But despite this growing trend and the fact it’s costing the industry an estimated $2.1 billion a year in fraudulent claims, insurers are still reluctant to talk about the issue. insuranceNEWS
August/September 2011
Allianz’s Mr Stapleton says this is because “no one really knows how big a problem it is”. “Last year $66 million was reported in exaggerated and fraud-related claims in general insurance alone,” he told Insurance News. But Mr Pearson says even though the figures are staggering, it has to be remembered the vast majority of claims are genuine. “Fraudulent claims amount for only a very small proportion of total insurance claims lodged – less than 1%.” The Insurance Council of Australia (ICA) has created the Insurance Fraud Bureau of Australia (IFBA), similar to one being established in the UK. It will be a single point of contact for fraud investigators who will work closely with state and federal police, all levels of government and stakeholders. It already offers a fraud hotline which operates during businesses hours for the general public to report any suspected frauds. The IFBA co-ordinates reports from the hotline and from law enforcement agencies. An ICA spokesman says the hotline “defi-
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Liar liar! A US expert has some hints on detecting deception the old-fashioned way
nitely contributes” to a reduction in fraud. While fearing innocent customers could get caught in the crossfire in the war against insurance fraud, companies like Suncorp are pouring resources into the battle. Like most of its major competitors, the group is employing experienced investigators, intelligence analysts and forensic accountants to identify trends and detect fraudulent behaviour patterns. “We are constantly reviewing our processes and strategies to ensure everything is being done to combat insurance fraud,” Mr Pearson says. “Fraud is a serious crime, carrying significant penalties and should never be viewed as easy money.” Mr Stapleton says it’s good to see insurers starting to intensify their efforts against fraud. “But the problem with insurance fraud is that there is such a variety of so many different lines of business and people from so different social networks it’s hard to detect. “It’s one of those never-ending battles. When you identify a particular methodology organised criminals are just as quick – we are always learning.”
PUTTING ASIDE VOICE STRESS analysis and biometric software that helps to separate lies from the truth, Californian psychology professor R Edward Geiselman has developed a number of ways to flag untruths in interviews. He has taught investigative interviewing techniques to a wide range of US police forces and intelligence agencies, and his research and an analysis of 60 different interviewing technique programs will soon be published in the American Journal of Forensic Psychiatry. His paper identifies ways in which a person who is being deceptive behaves. The most reliable indicators include: • When questioned, deceptive people generally want to say as little as possible. Dr Geiselman initially thought they would tell an elaborate story, but the vast majority give only the bare bones. Studies with college students, as well as prisoners, show this. • Although deceptive people do not say much, they tend to spontaneously give a justification for what little they are saying, without being prompted. • They tend to repeat questions before answering them, possibly to give themselves time to concoct an answer. • They often monitor the listener’s reaction to what they are saying. “They try to read you to see if you are
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buying their story.” • They often initially slow down their speech because they have to create their story and monitor your reaction, and when they have it straight “will spew it out faster”. Truthful people are not bothered if they speak slowly, but deceptive people often think slowing their speech down may look suspicious. Dr Geiselman says people telling the truth “will not dramatically alter their speech rate within a single sentence”. • They tend to use sentence fragments more frequently than truthful people. Often they will start an answer, back up and not complete the sentence. • They are more likely to purse their lips when asked a sensitive question, and are more likely to play with their hair or engage in other “grooming” behaviours. Gesturing toward themselves with their hands tends to be a sign of deception, while gesturing outwardly is not. • Challenged about details, truthful people will often deny they are lying and explain even more. Deceptive people generally will not provide more specifics. • When asked a difficult question, truthful people will often look away because the question requires concentration, while dishonest people will look away only briefly, if at all – unless it is a question that should require intense concentration.
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Anyone’s game Insurance fraud has no typical ‘face’ and no totally typical behaviour patterns
“The organised crime offender will see insurance fraud as a lucrative source of regular and substantial income.” 56
IT’S NOT AS IF LUISELLA looks like a criminal. She’s a hardworking Australian mother with three kids to chauffeur around after school, a nice house in a nice suburb and a husband who dotes on the lot of them. But nevertheless she’s a criminal. Rob might be a bit easier to spot. He’s in his 40s, a bit of a lad, fond of a drink, and he’s been in trouble in the past over petty thefts. Nothing big. A few low-risk home burglaries, a bit of fencing of stolen goods. Rob skates around the law, always looking for an easy way to make a bit of money. And then there’s John. He’s a bit of a loner in his own neighbourhood, but his kids attend expensive schools and his wife is nice, if a bit evasive about family details. They have a big house and flashy cars. If he’s asked what he does for a living, John says he owns a wholesaling business. In fact, he’s involved in organised crime, investing money in scams that bring in big money. Each of them has their own reason for committing insurance fraud, whether it’s from inflating a legitimate claim, a spot of arson on a business that’s been going downhill, or a full-bore organised fake road accident. For so many people, insurance fraud seems to be a temptation that’s just too good to resist. An Australian Institute of Criminology (AIC) study has divided insurance fraudsters into three distinct groups, represented above by Luisella, Joe and John. The accidents can easily be mistaken for the real thing with many motorists being caught in this organised crime web. For example an unsuspecting motorist on his way to work could easily become a victim of fraud when a car full of passengers pulls out in front of him and suddenly stops, causing a collision. That leads to personal injury claims. Claims arrive in insurance offices in all shapes, sizes and amounts. To the trained eye each is different, with its own peculiarities. And mixed in among them are total fakes, some that are possibly inflated and others that are blatantly implausible but just might be honest. After all, the vast majority of claims are honest, and the people who submit them are entitled to be treated as honest and valued cus-
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tomers. Remember “utmost good faith”? So the question is, how do insurers pick the frauds from the honest? It’s a daily dilemma. Most agree it’s impossible to profile a fraudster as there are so many varied types of customers, policies and claims. Instead they’re choosing to use technology and investigative tools to pick up anomalies that may lead to a full fraud investigation, a denial of the claim and a criminal prosecution. But the risks for organised crime are often outweighed by the possible rewards. The proceeds from crime syndicate stings are usually funnelled back into some kind of illegal activity such as the importation of prohibited drugs. “Insurance fraud is generally used by the average and criminal offenders as an easy source of quick money,” the AIC report says. “The organised crime offender will see insurance fraud as a lucrative source of regular and substantial income.” Allianz Australia’s National Investigations Unit Manager Wayne Stapleton told Insurance News it’s “too difficult” to pinpoint just one group or type of person as the most likely to commit fraud. “It could be people from totally different social networks, it could be a mum and dad hit by financial difficulties, or at the other end of the scale it could be a criminal who takes out a policy for the sole purpose of committing fraud.” He says most companies are all too aware of how big this problem is, and they’re acting accordingly. Many of the larger insurers now employ dedicated teams to investigate suspect claims. Each case has it own individual traits, Mr Stapleton says. This makes it difficult to profile any one type of offender. But investigative tools are now helping. Suncorp Executive General Manager Commercial Insurance Claims Matt Pearson says that due to the range of policy and claim types there is no specific profile that fits all fraud offenders. However, he says Vero has a flexible detection approach utilising fraud triggers and other indicators “to identify claims that are most likely to have a fraudulent compo nent”.
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companyNEWS
Zurich claims an online first: New residential strata product expands its features and goes on portal ZURICH IS MOVING WITH THE times, expanding its stable of products offered through the Z.streamXpress portal and last month claiming bragging rights for being the first Australian insurer to deliver residential strata insurance via the Internet. General Manager SME and Packages Shaun Feely says this demonstrates Zurich’s ability to adapt to a growing demand from brokers for online access to products. It comes on the heels of last year’s national launch of Zurich business insurance on the same platform and adds to the stable of products already online. Mr Feely says this is another exciting step for Zurich to be the first Australian insurer to offer residential strata online. “We’re committed to having a competitive and sustainable presence in this market,” he told Insurance News. “Z.streamXpress demonstrates our investment in solutions for brokers and supports our approach for delivering fast, seamless and convenient service.” As well as expanding its online delivery portal, Zurich is also providing a new “market leading” policy wording, which includes amendments to definitions of “terrorism”, “body corporate” and “unit owner”. The product disclosure statement’s “acts of terrorism” section has been
amended to better align with Zurich’s treaty requirements. The body corporate and unit owner sections have also been reworded to provide a clear intent around all applicable state acts. Brokers will now be able to access an increased asset limit from $20 million to $50 million. The new product will also provide competitive pricing on modern unit blocks valued from $4 million to $50 million. Zurich is also removing its holiday letting limitations for those strata complexes that have onsite managers. “Brokers will no longer have to rely on a manual process to transact strata business,” Mr Feely says. “And with an electronic underwriting process, we put brokers in a strong position to take advantage of this business opportunity.” This new online function also comes with a dedicated specialist strata underwriting team led by National Strata Manager Andre Sliwka, who will assist brokers with product advice while further developing the offering to ensure a proactive response to ongoing regulatory requirements and market demands. “We aim to make it easier for brokers to do business with us,” Mr Feely says. “It’s all part of an ongoing program of continuous improvement to provide brokers with even better services and support, enabling Zurich to be more competitive.”
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peopleNEWS
It’s all a matter of balance Actuary Melinda Howes is expanding her profession’s influence and reach
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By Tania Martin
IAA’s Melinda Howes: ad led to dream job
MELINDA HOWES KNOWS THE VALUE of good balance. The Chief Executive of the Institute of Actuaries Australia (IAA) is a registered actuary and a long-distance commuter who shares the task of bringing up two children with her husband. She’s a smart, savvy strategist who is giving the IAA greater influence than it has enjoyed in the past, seizing the opportunity to make it not just a representative body promoting professionalism but an influential centre for discussion. Outgoing and friendly, Mr Howes is the opposite of the popular image of the shy, bookish actuary. But look around and you’ll find actuaries have moved on from being back-office number crunchers – they’ve assumed a position of considerable power and influence in the insurance industry over the past 10 years. Their institute has been heading in the same direction since Ms Howes took up the chief executive job 18 months ago. Despite living on the far north coast of New South Wales and commuting to Sydney, Ms Howes says the sacrifice of being away from her children three nights a week is worth the sacrifice, because this is her dream job. She stays in Sydney from Monday to Thursday before flying home to be with her kids for the rest of the week. Her husband spends the first half of the week with the children before flying to Sydney for the pair to enjoy their weekly “date night” prior to Ms Howes returning home to be with their children on Thursday night. Ms Howes says juggling parenthood and work is all about getting the balance right – and an understanding and supportive partner is essential. “In the end the proof of how well this is working is in the kids, and they’re happy – so it must mean it’s working all right.” Being an actuary is a far cry from Ms Howes’ childhood dream of being a veterinarian. But her grasp of science was slim and her ability in maths was strong. 60
After finishing a degree in economics majoring in actuarial studies, she wasn’t prepared for the struggle she would have to endure passing the four examinations necessary to gain her accreditation as an actuary. It took her more than 10 years to get there. “It was a long road. I thought I would do it a lot faster than that, but I’m really glad I persevered.”
“We’re passionate about getting the message out there that we have a lot more to offer than you might think.” She spent her first four years after university undertaking a cadetship in life insurance, with “heaps” of study leave, but she passed just two actuarial exams in that time. And after being retrenched in the early ’90s, Ms Howes had to decide if she wanted to continue along the road to becoming an accredited actuary. “It really wasn’t necessary, because I was working mainly in wealth management,” she says. “But I decided to knuckle down, and I had better success when I was working 60-70 hours a week with no study leave.” Although finding no problems with the insuranceNEWS
August/September 2011
mathematical and statistical side of the actuarial exams, Ms Howes says the theoretical knowledge is very challenging. The institute she now heads administers the three-level exams, which are recognised as being among the most difficult in the industry. Things happened quite quickly after that. Children, for starters. And Ms Howes’ first big break came when she least expected it, while she was on maternity leave with her first child. Her original plan was to be a stayat-home mum until her children reached school age, but BT Financial Group offered her a job as director of superannuation and retirement products. Ideas of staying at home for a while were quickly shelved, but four years later she again gave it all up to run the family. But she found that her profession enabled her, with some adjustments, to balance work and family. Actuaries can work from home just as easily as they can from a city office, so that’s what Mr Howes did, working as a consultant from her home office until she rejoined the workforce in mid-2008 as the director of policy and industry practice at the Association of Superannuation Funds of Australia (ASFA). Although actuaries tend not to believe in things like fate, Ms Howes admits it was “rather freaky” that the day before seeing an advertisement seeking a new chief executive for the IAA, she had told her husband if she couldn’t one day have the top job at ASFA she would like to work at IAA. “It was bizarre,” she says. “It really was my dream job.” Today she’s developing her dream job and extending the institute’s reach out to the industry. Ms Howes says she’s thrilled to be working at IAA, and being able to promote a profession she loves and worked very hard to join. “We’re passionate about getting the message out there that we have a lot more to offer than you might think,” she says.
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peopleNEWS
Bill Berkley drops in for breakfast WILLIAM “BILL� BERKLEY, one of the most influential people in the global insurance industry, flew into Sydney in June for meetings with his Australian insurance and reinsurance executives. And while he was here he hosted a breakfast for 300 insurance professionals. The breakfast at the Four Seasons Hotel was just the second time Mr Berkley has visited these shores since opening an Australian arm of WR Berkley Corporation. He spoke about the trials of the United States market, the key issues facing the global insurance market and discussed how social media is just the latest in a long list of technological developments that challenge the industry to keep up with the pace.
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peopleNEWS
Gaining Insight in the warmth of the Sunshine Coast INSIGHT INSURANCE BROKERS ASSOCIATION MEMBERS PACKED up their midwinter blues in May to enjoy a warm and exciting annual conference on Queensland’s Sunshine Coast. About 300 delegates attended the big event, which attracted a record 42 exhibitors celebrating the “sun, surf and success” theme. The Hyatt Regency Coolum resort set the grand stage for the three-day conference, featuring presentations by industry leaders and business experts with all sorts of suggestions on how Insight members can improve their effectiveness. A highlight was the presentation by Vero Executive Manager Distribution Technology Troy Filipcevic, who demonstrated how technology is changing not only the way the industry does business, but the way people communicate and interact. Not that the conference was all about work and increasing earnings. Meals and breaks were spent in the exhibition area encouraging networking between brokers and suppliers, and delegates also took a half-day break to fan out and sample the wonders of the Sunshine Coast. Some went whale-watching or touring
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the hinterland behind the coast, others caught a bus to Noosa and others stayed closer to home and enjoyed the resort’s spectacular golf courses or got pampered in the spa. Evening activities included a barbecue at the resort’s Beach Club and the final night dinner, which ended in the small hours of the following morning with delegates partying on in the resort’s nightclub. Awards presented at the gala dinner highlighted the achievements of brokers. Gold Coast Broker Sally-Anne Townley, 21, was awarded the Norm Dyer Award of Excellence, while experienced New South Wales Central Coast broker Marianna Alhovirta of Affinity Insurance Services won the inaugural Les McInerney Award of Excellence. Recently retired CGU General Manager Retail John Evans was named the inaugural winner of the Peter Michell Friends of Insight Award for his advice and encouragement over a long period. All in all, a terrific conference with a record turnout – but Insight Executive Officer Bill Friend is already promising that next year’s conference in Adelaide’s seaside suburb of Glenelg from May 17 to 20 will be even bigger and brighter. August/September 2011
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Allianz hits the road to explain travel products Allianz has taken its suite of new travel products on the road, giving brokers from across the country one-on-one tutorials about what makes them special. More than 400 brokers and Allianz staff attended events in Melbourne, Perth, Sydney, Adelaide and Brisbane to learn about the company’s new corporate travel, personal accident and expatriate medical protection products. The events showcased the products while giving brokers hands-on tutorials and demonstrations on how to use them through the Allianz online Workbench platform, which has been purpose-built to provide service delivery for these products.
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$XVWUDOLD
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Trusted to deliver tailored products and solutions for marine businesses For more information contact our Marine Business Insurance Underwriters on 1300 402 040. www.clubmarine.com.au
Insurance is underwritten by Allianz Australia Insurance Limited (Allianz) AFSL No. 234708 ABN 15 000 122 850. Club Marine Limited (Club Marine) AFSL No. 236916 ABN 12 007 588 347 is a related body corporate and an agent of Allianz. Please read the Product Disclosure Statement (PDS) available by phoning 1300 402 040 before deciding if this product is right for you.
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peopleNEWS Ace moves down for room to move Ace Insurance staff in Brisbane have packed up and moved to a new office. But they haven’t had to travel far. More than 60 industry professionals helped them celebrate last month at the completion of their shift from floor 28 to 27 of the Gold Tower building at 10 Eagle Street. Ace Australia and New Zealand President Giles Ward (pictured below, at left) was on hand to officially open the new – and slightly lower – premises. The move was more than six months in the making and allows for the future growth of the company’s Brisbane operations in a significantly larger office. The celebration was also an opportunity for local brokers to raise cash for the Cancer Council of Queensland with a raffle and plenty of prizes on offer.
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Sharing experiences and building friendships Great company, good food, fine wine and sparkling conversation are the usual prerequisites for a great night out, and the recent Women in Insurance Sydney cocktail party certainly measured up. More than 180 female professionals (and a few suits who must have slipped in the back door) from a wide cross-section of the industry – including lawyers, account managers and service-providers – attended the evening sponsored by Curwoods Lawyers. It was one of six functions Women in Insurance hosts each year to bring women together for networking opportunities. The night was a great chance for women from all areas of insurance to find common ground and share experiences. Local artist Kathrin Longhurst and her art – which she calls “ultrafeminine – added some additional inspiration to a special evening. Pictures: Ishot Images
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CQIB turns on the sunshine The Council of Queensland Insurance Brokers knows how to take advantage of winter sunshine and warmth to tempt delegates to its annual convention. This year’s event – the 19th – was held in May at the Novotel Twin Waters Resort on the Sunshine Coast, which meant learning and networking could be balanced with a healthy amount of golf. More than 350 delegates attended, and popular TV sports presenter and journalist Jim Wilson returned for his third stint as MC. Former Australian test cricketer Michael Kasprowicz was also among the notable guests, kick-starting the first day of presentations, followed by QBE Executive General Manager Intermediary Distribution (and now Chief Executive Australia) Colin Fagen. And on the final day Jim Wilson swapped his MC’s hat to make a presentation titled “Greed is good… how bucks control the sporting world”. Delegates got up to fun and games at the Vero-sponsored Vegas night, which ended a couple of days of professional and recreational stimulation.
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SUMMIT 2807
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still
It’s what we cover and they don’t that sets us apart. At Summit, we promised at the outset we would provide excellent coverage, sensible premiums and first class service. We delivered. And will continue to do so, moving forward with flexibility and innovation as others strive to catch up. As a broker you know that flexibility is crucial when it comes to insurance for prestige homes. Their owners didn’t get where they are by wasting money, so how can they be expected to pay for cover they don’t need?
With Summit, they won’t. This will go a long way towards keeping your happy relationship with your clients. When you place your client’s cover with Summit you can be confident that our guidelines will not change. You’ll also enjoy peace of mind from one of the broadest covers available and the security of cover 100% through Lloyd’s. Summit Prestige Home Insurance is a specialist division of SRS Underwriting Agency Pty Ltd. ABN 89 113 929 516. AFSL 290518.
Enquiries welcome from brokers who want security, service, flexibility and a fast response. Contact Sue Hutchinson or Karen Kearins Free Call — 1800 815 678 Or visit our website for more information www.summitinsurance.com.au
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Sam Pentecost Contributor
The Chairman, Natural Disaster Insurance Review c/o The Treasury Langton Crescent Parkes ACT 2600
Dear sir, The following is my submission in response to the Issues Paper on flood insurance. You invited people to share their views and that’s what I’m doing. I’m a farmer, not a lawyer, but I am very well qualified to speak on the subject of flood insurance, having spent the last two years living on my homestead roof while a four-metre saltie took up residence in the kitchen and huge barramundi could be hooked from under the china cabinet in the drawing room. I thought I would write to you because I believe all my problems have been caused by my insurance broker, whom I have known since college days in Brisbane. My farm is a large area of land out west called Duck Flats, where the snakes not only outnumber the cattle, they’re in much better shape. The land is in a basin, which at present is perhaps best described as a very large stagnant lake. Or ocean. The homestead is at the centre of the property, on slightly elevated land that saved it from being flooded through the Big Floods of 1910, the Great Flood of 1919, the Massive Flood of 1932, the Very Wet Flood of 1940, the Sneaky Cyclone Flood of 1960 and the Big Flood Mk II of 1983. But they were as nothing compared with what we’ve put up with for the past two years, capped off with a rainy season this year that saw us completely cut off. Throughout a long and very trying ordeal I was comforted only by the presence beside me of my loving wife, the mother of my two children. All I had left was her and an insurance policy that covered flood. Even as the months passed and we were stuck on the homestead’s iron roof with a piano, two camp beds and a camping stove, my wife continued to keep me in good cheer. She is a woman of remarkable musical attributes, and her Zulu war dance has to be seen to be believed. However, as this involves nudity and very sharp knives it is probably best that her cultural virtuosity is not widely shared. It was at about this time that my insurance broker took to visiting in an inflatable boat with an outboard, enquiring constantly of our welfare and whether there was anything he could do. Well, there was of course. He could get off his bum and get our flood claim paid. He told me many times that if you bought cheap household insurance via a call centre you got what you paid for, which in my case wasn’t much. I certainly didn’t get what the brochure promised. I expected the beautiful smiley woman in the tight shirt with the insurance company badge who is pictured prominently on the first page, standing beside a person described as a loss adjuster, who looked like Jude Law. Though I waited by the gate in the rowing boat for several days after mailing in my claim using the broker’s kind offer of middleman, they never arrived. My insurance broker told me I didn’t really need a loss adjuster, because he wouldn’t have anything to inspect unless he wore scuba gear, and there was the little problem of the saltie in the kitchen if that ever eventuated. He said a loss adjuster would possibly arrive when the floodwaters receded and there were buildings to see, like maybe the end of winter, before the next rainy season. And don’t blame him. I realised over the next few months that although he had little to offer in the way of practical advice, the broker spent considerable time sharing our cramped roof space. During this time he taught my wife a thing called the Flood Definition, a ditty that neither rhymed nor made much sense. She was never the same after that. A few weeks later my wife rowed to town to visit said broker, ostensibly to discuss our next year’s insurances, and did not return. I can only fear the worst. The floodwaters have now receded somewhat although Duck Flats, being in a depression, relies more on evaporation than drainage. I cannot criticise the broker for any lack of professional attention or insurance knowledge, but I am curious to know if this sort of personal behaviour is countenanced by the industry’s professional bodies. If you feel this is a matter you should investigate further, I would be happy to supply names and dates. This leaves the issue of my household insurance and my insurance company’s service, which falls far short of what was promised via the brochure. Today an American gentleman pitched up in a large 4x4, announced himself as the insurance company’s loss adjuster and, presumably mistaking my gesture for him to climb on to the roof as an invitation to go for it, let himself in through the front door, clipboard to the fore, saying “now what have we got here?” I don’t think he made it far past the parlour before he found out. There was much sloshing of water followed by an ominous silence. I therefore wish to know if I have grounds for demanding my premium back for lack of service, or alternatively if the insurance company could please send out someone else to do the job the American has failed to accomplish. If that is possible, could it please be the lady from the brochure? She can leave Jude Law at home. I am, sir, Yours sincerely, Thomas Duck
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at 391 metres, ACE insures progress
Property & Casualty Accident & Health
To address the risks of the construction industry, it takes technical knowledge, experienced underwriting and a strong balance sheet. These are the strengths of ACE that allow us to create custom and flexible solutions for your specific construction needs. We take on the responsibility of building for the future. We call this insuring progress. Visit us at aceinsurance.com.au
Š 2011 ACE Group. To decide if the product is right for you, please review the Policy Wording and Product Disclosure Statement (PDS) available from ACE Insurance Limited ABN 23 001 642 020 AFSL No. 239687