The year ahead

The year ahead

So many challenges, so many opportunities. We’ve tackled the key issues for 2022 with industry leaders in insurance, reinsurance and broking

By John Deex

2021 was a big year for insurance. The industry was under serious scrutiny thanks to the covid pandemic, while participants also had to adjust to a storm of once-in-a-generation regulatory change.

Affordability was front and centre, not only in northern Australia but across a range of locations and sectors as the market went from hard to harder. And climate change – a perennial issue that isn’t going to go away – emerged from covid’s shadow thanks in part to Glasgow’s COP26 conference.

Border closures and lockdowns brought their own challenges as supply chains slowed, and talent streams from overseas dried up.

That was 2021, so what happens in 2022?

We asked industry leaders across Australia how they see the next 12 months panning out.

The participants were National Insurance Brokers Association (NIBA) Chief Executive Phil Kewin; Insurance Council of Australia (ICA) Chief Executive Andrew Hall; Lloyd’s General Representative in Australia Chris Mackinnon; Steadfast Chief Executive Robert Kelly; Suncorp Chief Executive Steve Johnston; Aon Head of Commercial Risk Australia Ben Rolfe; WTW Head of Australasia Simon Weaver; Hollard Chief Executive Paul Fahey; Munich Re Managing Director Australasia Scott Hawkins; IAG Group Executive Intermediated Insurance Australia Jarrod Hill; PSC Chief Executive Australia, New Zealand and Hong Kong David Hosking, MGA Managing Director Paul George; Insurance Advisernet Managing Director Shaun Standfield; CBN Chief Executive Richard Crawford and Executive Manager Distribution Leigh Frost; and Resilium Managing Director Ben Hastie.

How do you see the hard insurance market developing over the year?

The most forthright on this subject is Steadfast’s Mr Kelly, who declares there is no hard market – just the current market, where insurers are pricing to make a profit. And that’s the way it’ll be for the foreseeable future.

He believes the “traditional” insurance market is dead and buried. There’ll be no return to a soft market where underwriters drop prices to compete for market share, because regulators and capital providers won’t allow it any more.

Other respondents agree that while the rate of rises is slowing, we are not about to see price drops any time soon.

“The question is, will it ever go back to the stupidity of the pricing that created the current environment?” Mr Kelly said. “In my view it never will.

“I don’t think that the capital markets will allow publicly listed insurers to not produce profits, and on the other side there is the APRA control.”

Mr Kelly says that moving away from the traditional market cycle will provide more stability and certainty for consumers. Suncorp says “multiple influences” such as covid, supply chain issues and variability in natural hazards are playing their part “over and above working losses across each class of business”.

“All speak to an ongoing focus on underwriting discipline, risk selection and intelligent pricing and the overall market conditions being maintained,” Mr Johnston says.

Aon’s Mr Rolfe says conditions for customers are finally starting to improve, “albeit in pockets”.

“This has been the longest consecutive period of positive property rate increases we have experienced in decades, so it’s a very welcome sign for buyers.”

Mr Rolfe says there is an increasing distinction between good and bad risks, and this will continue over time. Well-managed risks with a low natural catastrophe footprint are well placed, but cyber, some elements of casualty, professional indemnity and complex property “remain significantly challenged”.

Insurers are united in their efforts to reduce volatility, he says. “This makes some industries and product lines hugely attractive to all, while others are borderline uninsurable.”

IAG’s Mr Hill says claims cost challenges, including increasingly severe natural disasters and elevated claims inflation from pandemic-related supply chain disruption, will continue, along with ongoing modest pressure on long-tail classes.

“As a result of these claims cost pressures, we’re expecting these market conditions to continue into FY23.” Hollard expects above-inflation increases for home insurance to persist. “The ongoing shift to work from home is a key question for the motor book, with a possible permanent shift in motor portfolio claim frequency which would dampen premium inflation for a period,” Mr Fahey says.

“The impact of supply chain challenges, particularly for the motor sector and especially imported cars and parts, could work against this potentially permanent shift in frequency.”

WTW’s Mr Weaver says insurers this year will continue their scrutiny of terms and conditions, sub-limits and exclusions.

“That means it’s not so much a matter of rates coming down, but a stabilisation of premiums in 2022, after consecutive years of high-end increases.”

Do you see the insurance affordability issue worsening in some locations or insurance lines?

All respondents agree that insurance affordability issues facing certain sectors and locations will continue this year.

While price rises might stabilise to a degree, they aren’t likely to drop, and climate change is expected to lead to increased severity and frequency of natural catastrophe events.

Munich Re’s Mr Hawkins says the reinsurer’s analysis shows Australia faces “a material increase” in the average annual loss from perils like tropical cyclones and floods.

“In Queensland we expect that the cost of damage to residential properties caused by cyclones will increase by over 30% by 2050 without significant mitigation,” he says.

“As a result of climate change, insurance affordability issues will almost certainly get worse unless there are targeted resilience and mitigation efforts.”

Lloyd’s agrees that affordability issues “will continue to challenge our industry”, but Mr Mackinnon also sees opportunity for product innovation.

“In the past 12 months Lloyd’s has backed two new coverholders that offer innovative, affordable parametric style covers to customers that help protect them from the immediate financial consequences of natural catastrophe risk.”

Aon’s Mr Rolfe says “the affordability of some policy lines will continue to challenge buyers” with cyber, construction professional indemnity, some areas of casualty and complex property continuing as “the main areas of pinch point”.

Paul Fahey, Hollard

Coverage is still being heavily scrutinised, and restrictions are being imposed across the board, he says. “Over the past 12 months Aon has seen a large uptake in clients exploring captive or cell solutions to manage increased retentions, create a bridge to parametric solutions or simply accessing additional capacity via the reinsurance market.”

CBN believes intervention and collaboration is needed to solve the “significant” social problems, with Mr Frost noting that greater consultation between the insurance industry and government is required “to look at ways in which we might tackle these issues”.

ICA’s Mr Hall says the council is working with the business community on solutions for affected sectors.

Do you welcome increasing government involvement via reinsurance pools or mutuals? Do you have any concerns?

While the industry spent a long time resisting the concept of government-run reinsurance pools, most now welcome the upcoming facility for northern Australia. But some suspicion of solutions outside the private market remains.

NIBA’s Mr Kewin says pools and mutuals “are not necessarily the answer, as there are too many risks with this approach. And in any event a mutual must take out insurance against major loss events anyway”.

IAG, while welcoming the pool as “an important step”, believes the private insurance market “remains the most effective and economically sustainable solution to ensuring the maximum number of Australians choose to cover themselves for their risks”.

“We don’t think mutual insurers are the answer because they create an insurance market where companies are operating in a regulatory vacuum for the sake of ensuring cover is available to those who seek it, no matter what the quality,” Mr Hill says.

“That is not a good outcome for customers or a good public policy result.”

Hollard’s Mr Fahey says it’s a “delicate balance”, while casting some doubt over the eventual success of the pool. “It will be interesting to see how the cyclone and related damage reinsurance pool plays out over the next couple of years,” he says. “We believe there is a risk that the intended affordability outcomes will not be achieved.”

Munich Re also welcomes the pool, but says the “balance between premium subsidies and resilience measures needs to be right”.

The message on resilience and mitigation spending is repeated by many respondents who believe it is the only long-term solution to the problem.

“Australia must build for the weather we will be getting in the next 50 years, not the weather we had 30 years ago,” Mr Kewin says.

Suncorp says it has stood by communities in North Queensland for more than 100 years and welcomes the Government’s cyclone pool, but says it “needs to be accompanied by investments in public and private resilience infrastructure, enhanced building codes, better land use planning and removal of unfair insurance taxes”.

“To ensure a lasting impact on insurance premiums we need to address the underlying cause of high insurance costs in the area, which is the frequency and scale of natural disasters,” Mr Johnston says.

MGA’s Mr George believes government support is sometimes needed but ideally “should be as little as possible and, like trainer wheels, designed to come off”.

But PSC’s Mr Hosking says clients must remain the focus.

“Businesses and individuals need a solution to obtain affordable insurance,” he says. “If the insurance industry can’t provide this, there will need to be some form of intervention and the cyclone reinsurance pool is a start.”

What are the positive and negative influences of the Covid-19 pandemic on the insurance industry, and how do you see these playing out in 2022?

All survey respondents recognise the terrible impact of the pandemic on some clients’ businesses and lives, but say better use of technology has emerged as one of the key positives.

“As in most industries, the pandemic has led to fast-tracking technologies and processes that make it easier to deal with businesses digitally,” IAG’s Mr Hill says. “We’re improving and expanding our digital experiences and propositions, and across IAG’s brands we’re aiming to drive 80% of our customers’ activity through digital channels.”

“Feedback from brokers is that one of the negatives of working from home is the lack of experience-sharing ... resulting in a sense that it seems easier to just say no.” NIBA’s Phil Kewin

Technology also enabled a rapid switch to remote working as lockdowns took effect. But many observe that this has negatives as well as positives.

Phil Kewin, NIBA

“Feedback from brokers is that one of the negatives of working from home is the lack of experience-sharing, where decisions are being made independently rather than being discussed with senior colleagues, resulting in a sense that it seems easier to just say no,” NIBA’s Mr Kewin says. Insurance Advisernet’s Shaun Standfield agrees. “I feel service standards from insurers have started to wane a little the longer the pandemic has gone on. This is due to fatigue and in some part lack of training or declining organisational culture in terms of service and responsiveness.”

Lloyd’s notes that remote working can lead to a loss of team culture and reduced learning opportunities, while WTW’s Mr Weaver wonders “whether this will start to erode the ability to train our new generations of talent”. The leaders of both ICA and NIBA flag issues with closed borders in Australia, while Hollard raises concerns about supply chains.

“From a business performance perspective there continue to be complications with supply chains, with significant global pressures affecting availability of new cars and parts, a shortage of housing materials and inflation in labour costs,” Mr Fahey says.

Resilium’s Mr Hastie says the lack of industry gatherings has been a “huge negative”.

“Historically speaking these get-togethers are a great way to share new ideas with like-minded people, as well as cultivate new business relationships and connections.”

Should governments do more to support a transition towards a net zero carbon emissions economy?

As governments and businesses continue working towards emissions reductions, our survey respondents are keen to support their clients on that journey.

ICA’s Mr Hall says it will support an industry-wide transition to net zero, “via the development of a climate change roadmap”.

“Gradually decarbonising Australia’s economy will help to limit the worsening extreme weather events that can affect the availability and affordability of insurance, while also unlocking substantial new capital across all asset classes.”

Respondents did not criticise Australia’s political leaders directly, but NIBA’s Mr Kewin calls on governments to “provide leadership and set out clear roadmaps for the changes that need to be made, so business and insurers can plan and act appropriately”.

Hollard’s Mr Fahey says governments should do more, and could learn from other countries. “Government policy decisions such as those in Europe are required,” he says.

“The insurance industry can support these through innovative approaches to encourage zero emissions where relevant to the products we deliver and the way in which we operate.”

IAG’s Mr Hill says action on climate change “must be a government priority”, from supporting emissions reductions to investing in mitigation against natural disasters.

“Across a range of industries, both in Australia and globally, we’re seeing the private sector increasingly taking action to tackle climate change and support the transition to net zero. We expect this to accelerate as new technologies and opportunities emerge.”

Munich Re’s Mr Hawkins believes collaboration is key. “To achieve a net zero goal will require a co-ordinated effort of business, the insurance industry and government to be achievable.

“Insurance will play a role in providing risk transfer products to assist in the transition to green technologies.”

Mr Kewin says the industry has a critical and positive role to play – as investors as well as insurers.

“I think we are already seeing this happen in areas such as mining, where insurers are making decisions based on socially responsible grounds, and it is flowing through to smaller businesses that support the mining industry directly or indirectly.” But Insurance Advisernet’s Mr Standfield warns against pulling away too quickly as a result of “activist” pressure.

“I don’t believe you can have the situation where you say to companies that have supported the past prosperity of this country that your suppliers, whether they be banks or insurers, now can’t support you through this transition due to ‘activists’ that put pressure on banks and insurers to withdraw their support,” he said.

“The insurance industry is in the risk business and part of managing risk is to provide solutions to companies, whether they be transitioning from high carbon emitters to those that have greener credentials.”

Scott Hawkins, Munich Re

How has the industry adjusted to the significant regulatory changes introduced in 2021?

NIBA and ICA want regulatory change to slow down this year, after a rapid-fire onslaught of reform in 2021.

ICA’s Mr Hall says insurers support the reform process, but warns that “insurers, their customers and regulators need time to assess the impact of these far-reaching changes before any further regulatory changes are considered”.

Mr Kewin goes further, saying: “There is a sense that the Government has over-reached on regulation and governance in insurance and financial services.”

And CBN’s Mr Crawford says the work created by the reforms “is not commensurate” with the protections delivered for consumers.

“In many cases the legislation, while well-intended, was impractical in its delivery and has not delivered the intended behaviours or protections. The wide variety of industry approaches is not helping the situation.”

Insurance Advisernet believes continuing education of both clients and staff will be key.

“There is no doubt the costs of running brokerages have increased significantly in not only enacting the changes but in monitoring compliance with these changes moving forward,” Mr Standfield says.

Lloyd’s Mr Mackinnon says the industry has responded positively to “all the change that has been thrust upon us”, but believes that there is still work to do.

“There is a danger that the end objectives of better consumer outcomes could be eroded by the very significant financial burden placed on industry to implement change,” he says. “There is also now significant complexity and overlap in the raft of regulations and legislation that is in play, and we need to work with government to now look to improve efficiency and reduce complexity, while maintaining the same outcome objectives.”

MGA’s Mr George says “the big one” for the industry has been the decision to make claims a financial service, creating “instant challenges around a lack of qualified staff”. “Along with the difficulty with lockdowns and insurer work coming back onshore – this was an enormous challenge,” Mr George says. “To put some quite significant weather and fire catastrophes among this has created somewhat of a perfect storm.

“As brokers, we’ve never held our clients’ hands tighter than we have in the past couple of years. As an industry, I think we managed this very well, considering the circumstances.”

Is the industry suffering from a skills shortage as we head into 2022?

WTW says the impacts of a “war for talent” within the industry are already being felt, and the situation is expected to worsen thanks to this year’s predicted “great resignation”. “With strong capital inflows into insurance and new market entrants, there is significant competition for the existing relatively stretched talent pool – exacerbated by border closures that prevent overseas talent entering our market,” Mr Weaver says.

“The gaps are in specialist underwriting and a lack of experienced replacements for retiring veterans. There will likely be an increased demand for digital and analytical skills, which the market can source from other industries and professions.”

ICA’s Mr Hall says the industry will continue to diversify “at a cracking pace” this year with the focus on emerging sectors such as cyber insurance, climate change and net zero targets, harnessing artificial intelligence and understanding industry disruptors.

“With these new sectors comes the opportunity to employ specialist team members skill-ready to drive these new parts of the industry forward,” he says.

“ICA will be working with external stakeholders to ensure we have a workforce ready to meet Australian policyholder expectations.” IAG’s Mr Hill admits the group is “finding it hard” to recruit in some parts of its business, including customer-facing teams, and technology and risk teams.

“We believe we’ll continue to see a tight employment market in 2022 and want to see the Government prioritise restoring migration to get more skilled and critical workers back to the country to help accelerate Australia’s economic recovery.”

PSC’s Mr Hosking says “without doubt” there is a shortage of quality people “across all areas of the business. Borders opening and immigration may assist but in the interim it is about developing people and ensuring the DNA of PSC retains and attracts the right people for our business.”

Steadfast’s Mr Kelly says while insurance is a “great industry”, young people could be put off by negative media coverage.

Chris Mackinnon, Lloyd's

“Insurance is never boring, never dull, it’s always vibrant. It does a great public service. It actually does what it’s supposed to do.

“But if you’re a young person looking at insurance and everything you read is that the insurance companies didn’t do the right thing [during covid], didn’t pay their claims, they’ll think, ‘what sort of industry is this to get into? They’re crooks.’ That’s not the truth, of course.”

But it’s not an emerging problem, Mr Mackinnon says, noting the local insurance industry has struggled to position itself as a desirable career for younger generations “for many years”.

“More work needs to be done promoting the insurance industry in schools and universities to the next generation,” he says. “Employers need to make themselves attractive to the next generation of employees by providing meaningful work environments that make a difference to individuals, and particularly younger generations that seek employers that have strong positions and policies on diversity and inclusion, sustainability, etc.”

Resilium’s Mr Hastie applauds the work of NIBA in this area but says “I think we need to take this issue on as a collective group”.

“Looking beyond the square and hiring graduates who might be ‘green’ but are willing to learn, and giving internships to young school-leavers keen to learn the trade firsthand are both possible steps in the right direction.”

Do you foresee any other significant opportunities or challenges for the industry in 2022?

The industry leaders are looking to this year with optimism, and renewed hope that most of the disruption from the pandemic is behind us and the market will stabilise.

Lloyd’s, for example, sees “great opportunity for sustainable, profitable growth”.

“With the majority of the ‘unknowns’ surrounding the royal commission outcomes now known and following five to six years of hardening conditions we are really excited about 2022,” Mr Mackinnon says.

“After four years of tough performance management strategies we are now seeing the benefit in terms of underlying attritional loss ratios, and so we are once again targeting sustainable growth within our network.” Resilium’s Mr Hastie predicts significant M&A activity this year, “which presents excellent opportunities for all parties involved and indeed the industry itself”, while Hollard’s Mr Fahey believes innovative approaches to product design are on the horizon.

“This could include one or a combination of things, such as a policy to cover your car, home, etc. all in one with choices on peril, or using data to understand the greater insurance need of that customer rather than a vanilla, one-size-fits-all policy.

“Or it could be a bespoke product for lower socio-economic areas where insurance affordability is a key issue and the policy considers the basics required to get them back on their feet at a lower cost.”

MGA’s Mr George would like to see more emphasis on retail, “and it would be good to see some new competition come in with a broker alignment”.

“These markets have been under some incredible strain in recent years so, there is a hope that the increases could lead to portfolio profitability. The direct arena appears to be the big game here, and I do think brokers have a place in this segment of the market. I just hope we don’t get pushed out of it.”

Steadfast’s Mr Kelly ends with a warning about the impact of inflation on claims.

“The biggest worry that I see is the reserving on claims and the impact of inflation on how the final payment will be made on the claim.

“If you think about policies that were rated at an inflation rate of ‘x’, and will be paid at an inflation rate of ‘y’, there’ll be a gap between the actuarial triangulation of what the claim should be worth and what actually will be paid out.

“I think that’s something that could compound the current market and keep prices going up because the actuarial calculations could be wrong, and beyond the control of the insurer – because of the inflation that is occurring at the moment on a whole range of things.”

And ICA’s Mr Hall reminds us that a federal election is due in the next few months. “We will be spearheading a number of significant projects during the course of 2022. An election year always brings about both challenges and opportunities for highly regulated sectors like insurance.”

Watch this space.