Defining times

Industry leaders give their thoughts on (among other things) a pandemic, rising catastrophe costs and increasing market tensions

Insurance News asked senior executives about the path ahead after a tumultuous year, with an edited selection of responses published below.

Participants are Aon CEO Australia James Baum, AUB Chief Broking Officer Ben Bessell, Insurance Council of Australia (ICA) President Sue Houghton, Marsh Head of Risk Management Asia & Pacific Scott Leney, National Insurance Brokers Association President Dianne Phelan, Steadfast CEO Robert Kelly, Underwriting Agencies Council Chairman Kurt Nilsen and Willis Towers Watson Head of Australasia Simon Weaver.

What do you see as the main opportunities for the insurance industry in 2021?

James Baum: The events of 2020 highlighted how businesses and the public sector are operating in a volatile world of unforeseen risks. The COVID-19 crisis is one example of a highly specific challenge which lacks an equally specific solution.

In an environment where we are seeing industries, economies, communities and individuals underserved or not served at all because of current market dynamics, our industry has an opportunity to create more affordable and scalable products which will narrow the underserved gap which currently exists.

Sue Houghton: As the risk and intensity of natural disasters increases in Australia, the insurance industry is strengthening its focus on critical economic support to communities, households, and businesses. ICA is advocating for lasting improvements to hazard exposure and adopting a systematic approach to disaster risk reduction.

Working collaboratively across a range of stakeholder industries such as building, property and real estate, banking, financial counsellors and government disaster agencies, the insurance industry is striving to identify and progress practical solutions that will improve the resilience of Australian homes.

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Robert Kelly: The biggest opportunity the insurance industry has got right now is to actually take advantage of the debacle about the pandemic coverage or lack of coverage, or inability for people to know whether they did or didn’t have cover. This may stir the consumer into thinking, “you know what, insurance is not a commodity. It’s not like buying a Big Mac or buying a paper. Maybe I need to spend more time on the nuances of what insurance does and familiarise myself with what I am insuring”.

Kurt Nilsen: The underwriting agency sector will continue to show great growth, provided they have the capacity to meet the increasing demand. Agencies have the ability to adjust to market needs at fairly short notice, which gives them an advantage over the larger company markets. There will be M&A opportunities which could provide great growth opportunities and add value for brokers.

Scott Leney: The main opportunities are improved clarity of coverage in insurance contracts, greater stability in premiums to relieve pressure on businesses, and improved risk quality as businesses better understand resilience and prepare for future disruptions. Alternative risk solutions are also a big opportunity for the industry as we explore ways to help clients transfer risk in an affordable and sustainable way beyond what’s available in the current market via traditional insurance.

There is also an opportunity to attract more talent to the industry by keeping the benefits of flexible working as we return to a hybrid model of office occupation and by accelerating the good progress made in the areas of inclusion and diversity as the world has learned from some polarising social events in 2020.

What do you see as the main challenges for the insurance industry in 2021?

Ben Bessell: Maintaining a strong reputation in an environment where prices are likely to rise and uncertainty around economic recovery exists. Resolving the business interruption legal proceedings will be important as it will be impactful for different stakeholders involved in the issue.

The insurance market has been impacted by the pandemic in many forms, in addition to severe weather events in recent times. These experiences will manifest themselves in different ways, such as pricing, risk selection and appetite. Insurers may be required to rebalance portfolios which may create challenges for customers and brokers.

Dianne Phelan: The outcomes of the [business interruption] test cases will cause some challenges and the hard market will continue to impact not just the affordability but the availability of cover. This is not confined to northern Australia, with insurers reducing limits, introducing sub-limits or in some cases declining renewals in areas affected by bushfire and hail, for example. This will continue to have a negative impact on clients.

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Sue Houghton: There are emerging trends and risks on newly identified issues such as business interruption policies, resulting in the industry seeking clarity on claims related to COVID-19. The insurance industry is committed to an efficient, transparent and consistent claims process that is fair to policyholders, while ensuring the sustainability of the insurance industry.

Simon Weaver: As clients become comfortable self-insuring and managing their risks, instead of transferring most of them, insurers will need to look at recovering lost premium and their capital cost will continue to increase. Clients have become more aware of the options available beyond the traditional insurance market because of the continual premium increases across all product classes.

Robert Kelly: The biggest challenge is the perception the consumer will have that insurance companies do not pay their claims. “In the case of [COVID-related business interruption claims] they said it’s definitely not covered, and when it was tested in court…”

The fallback position to [the Australian Financial Complaints Authority] is now slightly under challenge because people over the past year who have been denied claims that could have been put to AFCA have found that AFCA hasn’t wanted to rule on them because of the pending court case.

That puts a big credibility gap over the existing system – do you trust the insurers when they say no? Secondly, the potential to take it to somewhere to get an advocate to adjudicate didn’t work.

How will COVID-19 change the Australian insurance industry and working environment this year and beyond?

Dianne Phelan: COVID-19 certainly showed that policy drafting and clear policy interpretation is something to be improved upon. Hopefully this results in improved drafting. However, it may result in some reductions in cover as part of making the intention clear.

It also showed that a mobile workforce can work, and in some cases worked better than the normal office environment. We continue to live on a knife-edge with new COVID-19 cases causing swift lockdowns and border closures. We will need to build resilience to constant change, whilst ensuring the wellbeing of our people.

Simon Weaver: Presenting risk to the insurance market virtually will continue. With so many risks now being re-marketed locally and submission flows to the global marketplace set to increase significantly again, the need to differentiate is key. The fundamentals, however, will never change. Relationships are still vital. Brokers need to ensure connections with key decision-makers within insurance companies are strong.

We must always remember we are a people business. We’ve transitioned to working outside the office but we need to make sure our culture, teamwork and training remains optimal to deliver for our clients.

The quality of advice and client solutions/ benefits are directly correlated to the quality of people and talent in an organisation. Ensuring that quality people are retained and trained to deliver this level of advice will continue to be an opportunity and threat for the industry in 2021 and beyond.

Kurt Nilsen: The way we transact or go about business from a day-to-day perspective has changed forever, and will continue to change. The impact to mental health cannot be downplayed, and employers have an added responsibility to their employees that needs to be considered more than ever before. Capacity providers will be reviewing policy coverage (most have already) and monitoring the progress of the BI cases.

The general economic impact needs to be monitored, as we know some industries have suffered massive financial downturn, while others have seen unprecedented growth.

Ben Bessell: Risk mitigation and business interruption plans will be improved, in part to mitigate the impact of coverage changes but also in response to being more aware of rapid change and the impact it can have both commercially and socially. Stronger client engagement and advice will be of paramount importance.

Robert Kelly: The insurance industry has realised that a lot of our people don’t actually need to be physically in their offices to do the job with great expertise and diligence. If you say there will be a lot of people who will work off-site, how do you get the socialisation correct? That is the challenge.

Allowing the movement to work more from home, but secondly to blend that movement with time at home and time at work, and thirdly handling of the socialisation for people that become more isolated.

What factors are driving the current hard market, how long will it last, and what are the key impacts?

Kurt Nilsen: The cost of global catastrophe events coupled with low investment returns has pushed underwriters to focus on returning an underwriting profit rather than writing for market share. We have seen large portfolios become non-renewed as markets try to “correct” their results, with very little or no room for negotiation.

There is a general consensus the market will continue to harden and that the current trading conditions are likely to prevail throughout 2021/22. The impacts of a hard market such as rate increases, reductions or a squeeze to coverage will be with us for a while.

James Baum: Despite four years of remediation by insurers in the Australian market, the majority of them have struggled to meet return on equity targets. This has been driven by a number of factors, from the increased prevalence and scale of natural disasters in the region, increased litigation and a low interest rate environment. None of these elements are new, but the compound effect of multiple years and the universal push by capital providers for correction is driving the need for change.

Ben Bessell: The hardening market is likely to be evident for the medium term. Key impacts will be enhanced cost-efficient use of technology, a highly engaged workforce, and high customer engagement achieved through valued advice and engagement. Access and engagement with a range of contemporary products and services, plus maintaining and earning trust with clients and partners is vital.

Scott Leney: The continuing uncertainty of COVID-19 claims is extending the hard market. The test case(s) around prevention of access and intervention of government authorities will not likely be run until midyear at the earliest. There are a small number of major Australian companies that have lodged claims and if any of these are successful, there could be an avalanche of claims submitted to insurers.

On a positive note, the catastrophe summer season, while incomplete, is looking like it will be modest on the claims front, which should help improve insurers’ profitability.

We expect the current market conditions to prevail during 2021. However, we expect to see some levelling of premium increases for certain classes of insurance. We are already seeing it in some regions of the world.

Can the industry keep up with the scale of planned regulatory change? Do you have any concerns about any specific reforms?

James Baum: The industry can keep pace with regulatory changes, and while these aren’t without challenge, we embrace changes that result in greater transparency and value for clients.

One of the bigger challenges will be the viability of smaller product portfolios where insurers and brokers will be significantly challenged by the increased cost to serve. We have already seen insurers walking away from some portfolios not generating significant enough gross written premium. This is likely to be an unintended consequence and may hit buyers in some areas hard.

Dianne Phelan: Reform for the betterment of client outcomes should never be a concern. However, reforms that do not provide benefit but can hinder those outcomes are of concern. The inquiry into conflicted remuneration in 2022 is a major focus for brokers.

Scott Leney: One specific reform giving rise to some angst is the design and distribution obligations which come into effect in October. There remains some confusion as to what a target market determination should look like. The most pressing reform is the extension of unfair contract terms to insurance contacts, which applies from April. The inherently subjective test as to what is “unfair” is also generating a lot of discussion.

Robert Kelly: I think some of the reaction to the Hayne royal commission about protecting the consumer is an over-reaction in terms of a small section of the market that was affected by very poor decisions by some insurers as to how they distributed product and priced remuneration. My main concern is that we don’t use a sledgehammer to put a tack in.

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Simon Weaver: Regulation is our ticket to play and we have to comply with the regulatory environment. The alternative is that you stop doing business and hand back your Australian Financial Services Licence.

Do you expect government intervention in the Australian insurance market to address affordability issues in northern Australia, or more broadly? Would you welcome government intervention, and if so, in what form?

Scott Leney: We have a very successful government-backed insurance pool, ARPC (Australian Reinsurance Pool Corporation), to provide protection for declared terrorism events. We believe that something similar could be created for northern Australia catastrophe perils. Similar models could work to provide protection for pandemic events.

In the absence of federal or state government backing, public and private sector leaders, officials, and residents will need innovative new models of catastrophe insurance delivery to secure widespread coverage and help sustain communities following a natural disaster event. One such model is community-based catastrophe insurance.

Kurt Nilsen: I cannot foresee a solution being provided by the Government for northern Australia.

Taking into account the extremely soft market conditions over the past 10 to 12 years, a pricing correction was inevitable. Is the Government focussed on a lack of capacity or the increasing cost? If there is a government solution, then it would be fair to say they would have to provide a solution to the inability to secure professional indemnity insurance in some sectors, or cover for the impact of bushfire, or flood, etc. There is no quick fix for this.

Ben Bessell: Government intervention in such areas as risk mitigation is important, particularly so far as flood, fire, cyclone and building codes are concerned. These factors are more extreme in certain parts of Australia, and if addressed could certainly have an impact on minimising damage and therefore impacting cost.

Scrutiny of building standards and planning approval processes can be managed at a local government level, in addition to more targeted mitigation that could be facilitated federally.

Sue Houghton: ICA has commissioned a review to be released mid-year that will recommend ways forward for the industry and policymakers.

The review will provide a summary of practical solutions to problems that have been challenging sectors of the economy for a decade or more.

As advocated by numerous parliamentary and other inquiries, ICA also supports the abolition of stamp duties on insurance. This would have an immediate impact on insurance affordability in that region.

Robert Kelly: It’s a very brave government that starts to support certain sectors. So, if you support Far North Queensland because it’s expensive to get insurance up there, what do you do with the farmers in western NSW and north-western Victoria when they can’t get drought insurance? What do you do for the people that are suffering subsidence on the east coast when the big storms come, and what do you do for corporate Australia when they can’t get directors’ and officers’ cover?

If you are going to throw a support blanket over the industry, how big a blanket do you throw?