The Top 10 Influences

The Top 10 Influences

By Terry McMullan

In 2008 Insurance News presented the first annual list of the Top 10 influencers in the insurance industry. This year we’re taking a slightly different approach, in deference to the overwhelming variety of challenges and changes forced on the insurance industry by the emergence of a virus named coronavirus-2019 (COVID-19 for short).

By the end of November the virus had caused the deaths of 907 Australians and some 1.38 million people worldwide. Its impact on economies, businesses, societies and families globally has been wide-ranging and incredibly destructive.

Severe lockdowns have decimated many businesses and forced people to adopt new ways of living and working. Every major factor that influenced the insurance industry’s direction in 2020 has some form of linkage to the pandemic crisis.

It would be remiss of us not to look more closely at these factors. So this year we’re examining not just the influencers who we believe have the power and push to move the industry forward into an uncertain and complex future, but also the influences that are already dictating the direction.

1. COVID-19

For the insurance industry in Australia – and globally – the COVID-19 pandemic changed everything. A few local examples:

It brought the industry’s gradual return to underwriting stability via a hard market to a halt. It decimated investment returns, which underpin insurers’ profitability, even as they worked on natural disaster claims of more than $6 billion from the storms of fire, flood and hail that battered the country in the summer.

It caused controversies over travel insurers’ varied reactions to cancellations and – most remarkably – over a wording slip in many business interruption policies that exposes insurers to claims for risks they did not intend to cover. And it forced the industry to devise new ways of working that kept employees at home but connected.

The offices of insurers, brokers and the army of service organisations that work alongside them – lawyers and loss adjusters, for example – have been empty in most cities as employees spent most of the year working from home. “Zooming” has entered the popular lexicon. Some of the temporary solutions adopted may well become standard practice.

If there is an upside to the past nine months of challenge, it is this: the insurance industry is changing more quickly in ways that once may have seemed a long way from becoming reality. While opinions vary, there’s a strong feeling among analysts and industry leaders that 2021 will mark the beginning of what will hopefully be a rapid recovery. Time will tell.

2. THE HARD MARKET

The hard market was about 18 months old when the pandemic struck in the first quarter of 2020.

Steep premium rises in many commercial classes (and personal lines) were well advanced in countering falling investment returns and returning insurers to more acceptable levels of profitability. And they need to. APRA’s latest prudential update shows the industry recorded an annual 73.3% fall in net profit after-tax to $900 million for the year to September.

Following record losses (and consequent rises in reinsurance rates) incurred through the summer bushfires, floods and hailstorms, insurers’ risk appetites have become even more muted. Renewals are usually possible, but with restricted conditions and higher premiums. If they are high-risk, the premium is often on a “take it or try elsewhere” basis. Brokers, who have earned their commissions this year negotiating alternative approaches for their clients, have been vocal in making the point that for some risks there is no “elsewhere”.

Underwriting agencies – the logical fallback when insurers decline new business – are suffering their own capacity problems, and focused on established relationships. Even unauthorised foreign insurers – or at least the UFIs brokers should be dealing with – are more cautious. This is a global problem.

That’s not particularly good news for brokers and their clients, who over the past couple of years have seen local premium growth run well ahead of other developed insurance markets. The issue the industry will have to consider this year as it imposes further premium rises is the issue of affordability, particularly in some of the higher-risk classes.

Consider the impact on bottom lines of business interruption arguments and the risk of class actions, the cost of natural catastrophe claims and the growing list of liability losses insurers are facing.

Nevertheless, industries large and small are suffering from revenue shortfalls every bit as severe as that faced by underwriters.

But insurance is a business, shareholders are restless and premium rates have to be calculated against losses and risks. That’s why further premium rises next year seem inevitable.

Swiss Re expects the local industry will experience gross written premium (GWP) growth of 3% next year, following nominal growth of about 5% this year.

3. CLIMATE CHANGE

Unlike the coronavirus, climate change can’t be controlled by rolling out a vaccine. Governments around the world are falling well short in their efforts to lower atmospheric emissions that are warming the planet. While commitments to zero emissions in 30 years abound, climate change isn’t hitting the world with the sharp and sudden impact of a pandemic.

Instead it is proving to be a slow and gradual progress that is raising temperatures around the world, giving us record-breaking storms of all kinds, melting ice and raising sea levels – to name just a few of the effects. This is already pushing insurers’ losses to unprecedented levels.

Over the past 10 years the insurance industry has moved from its normal configuration of raising premiums as risks grow to actively lobbying for government policies that address climate change-related issues like mitigation to protect properties and people and keep insurance affordable. The record levels of claims for the past year’s spate of frightening bushfires, as well as floods and hailstorms, have demonstrated again the need for the industry to push harder for meaningful action to address climate change issues.

While federal politicians continue to downplay the likely impacts of climate change, the previous summer of crippling natural catastrophes, coupled with temperatures that regularly break records, have brought home to Australians the inescapable conclusion that change is already happening. Insurers have spent much of the past 10 years pointing out the need to build stronger in cyclone-affected areas, while flood-prone areas need greater levels of protection as rainstorms become more volatile.

Last summer’s devastating bushfires, floods and hailstorms left a claims burden of more than $6 billion. With reinsurers becoming more skittish about Australian weather risks and investment markets depressed, the industry’s ability to continue offering affordable cover to at-risk customers is being stretched.

The Government’s announcement of a new National Resilience, Relief and Recovery Agency to align and co-ordinate efforts to build resilience and better prepare for disasters came in response to the 80 recommendations of the bushfires royal commission, and its in-principle support of insurers helping individual customers adopt mitigation actions could will help to slow the pace of rising premiums. There’s a lot left to do, and the direction of the newly installed Insurance Council management will be crucial in driving the industry’s agenda.

4. REGULATION: SO MANY CHANGES…

Insurers are already having to deal with a long list of significant regulatory changes, and it’s only going to get worse next year.

Putting aside the introduction in July of a challenging new code of practice which imposes new practices and socially aware attitudes, the wash-up from the Hayne royal commission continues and the industry faces new compliance and governance measures.

Major changes to product design and distribution of retail products will come into effect on April 5, tackling issues of improper selling by requiring “product issuers” like insurers, coverholders and underwriting agencies to provide a “target market determination” which sets the target market and restrictions on selling each product.

Unfair contract terms legislation is also expected to be enforced from April 5, with the regulators focusing on a number of common terms related to insurers allowing cash settlements based on the cost of a repair to them, others that are an unnecessary barrier to a claim being lodged and terms that reduce the cover offered where compliance with preconditions is unfeasible.

One of the most notable changes is related to the decision to put claims-handling under the Australian Financial Services Licence regime.

An alternative for the legion of people involved in claims handling activities – loss adjusters and even company-appointed assessors among them – is to become an authorised representative.

Then there’s the Financial Accountability Regime for insurers, which will be based off the Banking Executive Accountability Regime.

So many changes and new regulations, in fact, that we don’t have the room to cover

5. THE CFO RISES

Time was when the chief executive of an insurance company would have worked his way up from the mailroom, studying with the institute and working through the various specialties until he (it was always a male) arrived in the boardroom after 25-30 years as a knowledgeable insurance professional.

But the boards of the nation’s two largest insurers have moved away from the dominance of the insurance technician by installing their chief financial officers as chief executives. It’s not an unusual phenomenon in Australian business, if somewhat disillusioning for career insurance people. Put simply, the CFO works closely with capital markets, maintains contact with institutional shareholders and speaks the same language as the company’s directors.

Thus in the past year we have seen Suncorp Managing Director Steve Johnston – formerly the CFO – farewell Chief Executive Insurance Gary Dransfield, who was replaced by Lisa Harrison as Insurance Product and Portfolio Chief Executive and New Zealand CEO Paul Smeaton as Chief Operating Officer Insurance.

Much the same thing happened at IAG in November, with the board appointing longtime CFO Nick Hawkins to succeed Peter Harmer as MD.

That was swiftly followed by the splitting-up of the dominant Australian division into direct and intermediated divisions, to be run by acting managers.

Mark Milliner, a highly regarded manager who ran the Australia division and most key areas of the company’s operations – and who was Mr Hawkins’ rival for the top job – was out the door.

The third-largest local insurer, QBE, has yet to appoint a new group CEO to replace Pat Regan, who left the company in September shortly after the board investigated allegations of “poor performance” in relation to a female employee.

Mr Regan was appointed to the top job in 2017 from Australian and New Zealand CEO. Prior to that he was the Group CFO, having been lured to QBE in 2014 from British insurer Aviva, where he was also CFO.

6. TECHNOLOGY: PICKING UP SPEED

The pandemic crisis of 2020 will be remembered a long time from now for the Australian workforce’s rapid transition to a mode of work that, at the start of the year, was rarely considered as a serious possibility.

Working from home became the norm during the year, with responsive technologies making office tasks and communications easy and convenient. Insurance staff learned a new way of working that was, for very many, a cultural shift. No longer bound to the office thanks to lockdowns, employees discovered they could operate effectively and enjoy time not spent commuting.

Similarly, the pandemic accelerated the insurance industry’s focus on customer-centric strategies driven by technology. With massive amounts of data available, insurers are working with developers to devise products that meet the rising generations’ demands for flexibility and control over how their assets are covered.

There are already such products in the market – some driven by disruptors but most by established insurers – and we can expect to see a range of new products with catchy names, easy access and simpler processes emerge on the consumer market over the next year.

The Australian insurance industry already boasts a comparatively high level of technology-based internal services such as transaction platforms and broker systems, and the commercial insurance market will use technology over the next few years to focus on client support services.

As technology advances, so do the opportunities. Investing in products and services that capitalise on the growing demand for flexible and friendly products is an industry-wide priority.

7. LAWYERS, CLASS ACTIONS AND MONEY

Insurance is basically a contract between two parties, so the influence on the industry of legal issues and law firms has always been strong, if not always friendly.

The impact of class actions in particular, involving multi-million dollar settlements on professional and management liability premiums over the past seven years has been profound.

While such lawsuits are not frivolous and class actions do meet a need for less advantaged Australians to obtain financial redress, shareholder actions have had a massive impact on management liability products. There should be some discomfort in the fact that Australia has become the most likely jurisdiction outside of the United States in which a corporation will face significant class action litigation, according to leading law firm Allens.

But the courtroom action worrying insurers at present is one for which they are solely responsible. At the end of November lawyers were considering the New South Wales Court of Appeal’s unanimous finding against insurers in a test case to determine whether policy wordings referencing the repealed 1908 Quarantine Act – which was replaced in 2015 by the Biosecurity Act – were valid in excluding COVID-related business interruption claims.

The five appeal court judges decided COVID-19 is not a disease “declared to be a quarantinable disease under the Quarantine Act 1908 and subsequent amendments”, and “accordingly was not excluded from the disease benefit clauses”.

While the insurers were considering their next move as this edition of Insurance News went to press, lawyers are already planning a class action on behalf of affected businesses. This is a high-stakes game with a substantial amount of insurers’ money on the table, and we can expect this one to run well into 2021.

8. UNCERTAINTY FOR THE SPECIALISTS

Underwriting agencies which sell a limited number of specialised products are a mainstay for brokers and their clients.

Many agencies are small companies run by professionals with specialised knowledge in niche products. Others are part of larger organisations like Steadfast and AUB. But for many independent operators, or agencies working under the umbrella of smaller broking companies, the biggest challenge right now is capacity.

In previous hard markets brokers could fall back on the specialists to obtain cover for their clients. But that was before Lloyd’s clamped down on its member syndicates to control a series of big losses, limiting local underwriting agencies’ ability to meet demand. Some agencies that rely on local insurers for capacity are dealing with similar restrictions.

However, the sector’s leaders say they will survive this hard market; they also expect it to weed out average performers. Adding value is what the agencies are focusing on, along with their ability to develop innovative and efficient niche products faster than the insurers can manage.

As the hard market progresses we can expect larger broking groups acquiring high-performing agencies. An example is AUB’s acquisition in late November of Sydney-based 360 Underwriting.

Greater diversification in capacity providers is also possible, with the caveat that brokers and agencies remain wary of unauthorised foreign insurers.

The Australian market has been burned in past hard markets by dodgy foreign operators. But it should be remembered that many of the so-called UFIs being accessed by local agencies and brokers are substantial players in their own markets.

9. CHANGING CUSTOMER HABITS

The coronavirus lockdowns across Australia have demonstrated the advantages of buying products online, and insurance is no exception. While technology is being introduced by the largest (and smallest) insurers to capitalise on what some call the “rising generations”, it’s underpinned by a strong intent to capture and – if it’s possible – retain customers across the spectrum. But the primary focus is the Generation X and Millennial customers who use technology as instinctively as Baby Boomers uses a wristwatch. Accelerating investment in innovative products will see many things in the industry change. Meanwhile, small disruptors are aiming for the niches.

But understanding the needs and demands of Gen X and Millennial customers isn’t easy. If an insurer’s website is more like a marketing brochure than a clear and convenient way to access, compare and buy responsive products, tech-savvy Gen X (196580) and Millennial (1981-1996) consumers will pass it by. The transition is already under way from Baby Boomers who generally stick with insurers for long periods to new customers who use their smartphones to compare products, prices and even insurers’ reputations.

The Millennials are aged from 23 to 39, and by 2025 they will represent 46% of the country’s salaries and wages. They want more responsiveness and interaction through a website that uses artificial intelligence. They also want products that can be tailored to their specific needs – a demand that insurers can go a long way to meeting through Big Data. Things are changing fast, and the 2020s will see personal lines, at least, transformed.

10. AFFORDABILITY: THE HARD MARKET IS HARD ON EVERYONE

The traditional insurance cycle, under which insurers go “soft” on premiums and compete for new business when their investments earnings are high, before the market gets “hard” and premiums rise when investment earnings and profits begin to fall, still applies in 2020, but the rationale has been shelved for the moment. The coronavirus trashed global investment markets, and in Australia a payout of nearly $6 billion in claims from last summer’s catastrophic bushfires, floods and hailstorms added to the pain.

Figures from global broker Marsh suggest Australian commercial insurance rates rose 33% in the September quarter compared with the corresponding period last year – compared with the 20% rise overall achieved globally.

Swiss Re says premium growth in Australia in 2021 will be 3%, unless the benefits of a coronavirus vaccine kick in earlier.

The hard market is getting literally harder, with premium affordability beginning to be an issue for business groups and consumer advocates.

In late November the Actuaries Institute called for government intervention to help manage the affordability issue, with households in up to 12% of Australian postcode areas facing pressure in meeting premiums.

Some underwriters and brokers have predicted that the high premium levels of 2020-21 will be a feature of the market for the next few years at least, as insurers recoup their losses and set aside reserves for the next series of natural disasters. COVID-19 may disappear next year, but climate change-induced mega-catastrophes remain an issue of cost to a beleaguered industry.

11-20: THE INFLUENCERS

11. Insurance industry employees

Stand by for big changes in the workplace, with insurers’ and brokers’ staff facing a future where working some days at the office and others from home is a permanent arrangement. That will (eventually) result in less office space being needed. Better educated than many of their forebears and far more tuned into technology, staff should enjoy more independence in future and help to drive sweeping changes to what they do and how they do it.

12. Robert Kelly, Chief Executive and Managing Director, Steadfast Group

The co-founder and mastermind behind the listing and rapid growth of the Steadfast broking and underwriting agency empire remains at the top of his energetic game, reaping the rewards of scale and a hard market.

13. Andrew Hall, Executive Director and Chief Executive, Insurance Council of Australia

An experienced political and public affairs operator, Hall hasn’t wasted time in dispensing with several key managers since taking over from Rob Whelan in September. The appointment of the high-profile corporate strategist and communicator indicates the council’s member companies want ICA to be more active and visible in pushing the industry’s many agendas with governments.

14. Mike Emmett, Managing Director, AUB Group

AUB’s member companies are some of the best brokerages in the country, and Emmett, who joined AUB in May 2019 is focused on them and their core business as he turns away from the diversification program instituted by his predecessor. Now this change management expert is looking at ways to improve the effectiveness of AUB’s Sura-branded underwriting agencies.

15. Dallas Booth, Chief Executive, National Insurance Brokers Association

Running an association whose member companies face many challenges, from regulatory reforms to commission levels, Booth has proved to be a solid and passionate defender of broking. Projecting the value of brokers and protecting their interests before numerous inquiries, he’s a reassuring presence in an insurance sector that is increasingly able to demonstrate its effectiveness.

16. The legal profession

The insurance industry relies on lawyers to help them avoid legal traps and regulatory minefields, while lawyers on the “other side” represent aggrieved customers and push reform agendas. As the industry battles to avoid paying pandemic-linked business interruption claims and looming class actions, the only thing standing between them and substantial losses are the lawyers.

17. Nick Hawkins, Managing Director, IAG

Hawkins has worked at IAG for more than 19 years. His only other employer was KPMG, where he worked in senior roles over 11 years. Appointed to the top job at IAG in November, he has already announced a restructure separating the dominant Australian Division into direct and commercial insurance operations. With change of all sorts and myriad challenges – including growth – dominating attention, Hawkins is a reliable and safe leader.

18. Steve Johnston, Chief Executive and Managing Director, Suncorp

Suncorp has been through some internal problems in recent years, and Steve Johnston moved quickly to calm things down when he took over in September 2019. Since then he has announced a restructure that has seen two proven high performers take up management of the group’s insurance functions, which presumably will free him up to push internal change and move more quickly with the group’s technology-driven transformation.

19. Chris Mackinnon, Regional Head of Australia & New Zealand, Lloyd’s

Despite its problems, London-based Lloyd’s remains an important part of the Australian insurance community. Mackinnon sits on the boards of both the Insurance Council and the Underwriting Agencies Council, which demonstrates how the market straddles both underwriting camps. An experienced manager and broker who has worked here and overseas, the personable Mackinnon has spent the six years since being appointed to the Lloyd’s role building new relationships and explaining the market’s sometimes bewildering problems and solutions to its Australian and New Zealand partners.

20. Mike Wilkins, Chairman, QBE Group

Admired and respected for his intelligence and disciplined approach to the business, Wilkins had a brief return to fame in September when as Chairman of QBE he terminated highly regarded Group CEO Pat Regan for inappropriate behaviour. As CEO of IAG from 2008 to 2013, Wilkins transformed the group. In 2018, as a director of AMP, he was appointed acting CEO after the incumbent resigned in the wake of the Hayne royal commission findings. His sacking of Mr Regan after an investigation confirmed he’s still a leader with admirable values.