KEY IMPACTS, RISKS AND OPPORTUNITIES
2008 saw a range of global issues that have impacted businesses world wide, including a challenging economic environment and a climate that is changing more rapidly than expected. Here we present four key challenges that our business has responded to in 2008 and identify the risks and opportunities that are emerging.
| Company direction |
| Climate change |
| Innovative customer care |
| Sustainable investment |
Company direction
The hallmark of a good company is to be able to adapt to the changing operating environment to ensure its sustainability.
IAG has faced significant challenges across our operations during the year. Increased claims costs relating to more severe and frequent natural perils, coupled with continuing difficult trading conditions in key insurance markets and widening credit spreads have severely impacted our profitability and as a result, we have experienced one of the most challenging years as an organisation.
It is in these challenging times that the need to protect the long term sustainability of our business is most heightened. We believe our response will be enhanced by the ability to adapt to the changing operating environment, thus ensuring the long term sustainability of our business.
Accordingly, we have undergone some significant changes to ensure our business sustainability. In particular, we have refined our strategic intent, with a renewed focus on creating a portfolio of high performing, customer focused, diverse operations that provide general insurance in a manner that delivers superior experiences for stakeholders and creates value for shareholders.
The refined corporate strategy has meant that we have rationalised the number of roles across the Group. This has been a necessary measure to ensure the business can improve its performance. In doing so, we remain committed to ensuring that our employees are treated fairly and we have at all times been transparent about the rationale and execution of this strategy.
Our commitment to improving performance against non financial measures remains as important as our financial performance improvements. Despite these times of major change, many of our employee indicators remained stable. In our annual employment engagement survey, 72% of our people indicated they value IAG's focus on balancing its social, environmental and financial responsibilities.
During the year, we continued to improve our sustainability performance. In particular, we made progress on reducing our carbon emissions and continue to support initiatives that improve the energy efficiency of the buildings we occupy—this benefits not only the environment but also reduces our operating costs.
We are proud to have been included in the Dow Jones Sustainability Index, and we know that we must continue to rise to the challenge of exploring new ways to maintain our leadership position by delivering superior outcomes for our customers, employees and shareholders.
Going forward, we need to focus on how best to integrate sustainable thinking into our refined corporate model. The new devolved operating model provides our businesses the control they need to execute strategies and manage performance within the Group's overall framework. As a result, accountability and responsibility for delivering sustainable performance will be driven further into our business operations.
The challenge now lies in effectively adapting sustainability to our new operating model. We will work across our businesses to integrate sustainability in a way that best fits their operations and business methods. While maintaining the Group commitment, we need to work with each of our businesses to deliver sustainability outcomes that are relevant and achievable.
IAG's Group wide sustainability commitment is already well embedded in our operations. The integration of sustainability thinking into products and services is one of the most important ways a general insurance company can deliver its commitment to sustainable performance.
This year, we are proud to have launched several new products and services across all our operations, including the new "green" insurance products in our New Zealand business and insurepink policies in the United Kingdom. Our Australian operations continue to explore integration of sustainability thinking into our claims operations, with a particular focus on "green for old" item replacement in the claims process.
We look forward to another year of continued commitment to the sustainability of our business.
Climate change
Private insurance plays a crucial social role in enabling communities to recover from the severe weather events that are likely to become more serious as climate change develops.
To better understand the physical challenges of climate change, IAG continued its program of hailstorm and cyclone research during the year, sponsoring published climate modeling for the period 2000 to 2050. This research has focused on the Sydney Basin and south east Queensland, locations where major natural hazards affect large populations with corresponding high asset concentrations. The research suggests disturbing increases in the frequency and/or severity of these major known drivers of property damage.1
As part of our work to help the community adapt to climate change, IAG has also continued our support for the Cyclone Testing Station at James Cook University, Townsville. This centre researches, tests and advises on building practices that minimise loss and suffering as a result of severe winds.
We've also found innovative ways to engage our customers in reducing their own environmental impact, from the development of insurance products that provide incentives for purchasing energy efficient vehicles and appliances to provision of a means to offset CO2e emissions from insured vehicles.
Meanwhile, research on the physical risks of climate change continues to be of concern. As the Garnaut Climate Change Review pointed out, not only is there evidence that global greenhouse emissions are growing faster than anticipated by the Intergovernmental Panel on Climate Change, the climate system may also be responding more quickly than earlier climate models indicated.
During 2008, the Australian Climate Group (ACG), co founded by IAG and WWF—Australia in 2004, reconvened to call for urgent action on emissions to minimise the risk of dangerous shifts in climate. The ACG released its Climate Change Solutions for Australia 2008 report in March. If global emissions continue to rise at the current rate, there is an increased risk of triggering irreversible large scale global climate effects.
IAG continued to advocate on climate change mitigation and adaptation policy, making a submission to the Garnaut Climate Change Review and presenting to the Review's public forum on Financial Services for Managing Risk; contributing to stakeholder liaison prior to the release of the Australian Government's Green Paper on the proposed Carbon Pollution Reduction Scheme; and making a submission to the Inquiry into Climate Change and Environmental Impacts on Coastal Communities.
In these submissions, IAG has noted an emerging insurance gap that faces the community. Many low lying coastal homes will become vulnerable to future coastal erosion and rising sea levels, and while property owners may be able to insure their homes, there is no insurance cover currently available for the value of their land. IAG has suggested for discussion an innovative way that government and the private sector could potentially develop an insurance product to help protect coastal land owners.
Climate change also involves investment risks and opportunities to companies, markets and economies. In the 2008 financial year, IAG became a member of the Investor Group on Climate Change, which represents investors with funds under management totaling nearly $500 billion. IAG also became a signatory to the United Nations Principles for Responsible Investment, and initiated its own Sustainable Investment Fund.
The issues of climate change are complex and so our approach is multi faceted. IAG will continue to advocate a proactive approach to the uncertain risks posed by climate change and investigate and implement solutions that will support the sustainability of our business and our communities for the long term.
Innovative customer care
A report released in August 2007 by research company, Mobium Group revealed that an emerging market of Australians spend $12 billion annually on sustainable and healthy products and services. Furthermore, this market is estimated to double within five years, led by a surge in spending by values driven consumers.
The research is the first of its kind in Australia and follows similar studies that have been conducted in the United States and Japan that identified hundreds of millions of LOHAS (Lifestyles of Health and Sustainability) consumers globally, spending over $500 billion per annum.
In understanding the uncertain future risks of climate change, as an insurer we need to be aware of these emerging markets and be innovative and adaptive in our response.
Our business is evolving and so too is our relationship with our customers. This year we have moved to a new operating model, creating end to end businesses aligned around customers, brands and markets. In this devolved model, accountability and responsibility is closer to the end consumer. This provides our operating businesses the control they need to better execute strategies and manage performance.
Over the last year our New Zealand business was pleased to launch a range of innovative and sustainable insurance products in line with our commitment to sustainability. These included NZI's suite of home, contents and motor vehicle products that provide incentives for customers to make environmentally sound choices.
Socially responsible product innovation in our United Kingdom operations saw the launch of insurepink, insurance policies specifically developed to allow people diagnosed with breast cancer access to affordable cover, while also supporting a United Kingdom breast cancer charity, the Pink Ribbon Foundation.
In Australia, research by CGU Insurance found that four out of five Australian businesses are underinsured, on average by as much as 38%. In response, they developed Right Cover, an innovative, simple and cost effective service designed to ensure small businesses get the right level of insurance.
Our relationship with our customers at the time when they need us most—when they make a claim—is also evolving. With climate change set to bring more severe and frequent weather events, the need for us to respond to our customers quickly and effectively is even greater. When a destructive storm swept through western Sydney in December 2007, NRMA Insurance swiftly found an innovative way to fulfil their insurance promises and help our customers, despite the ongoing wet weather conditions which made it difficult to repair homes during the December holiday period.
Our Home Contents Collection program launched this year takes initiative to extend our responsibility beyond our immediate commitments to customers. The program reduces the amount of our customers' damaged goods entering the land fill waste stream by collecting the items that have been replaced through a claim. These goods are then sorted and sent off to either be sold at auction or recycled. The program is being delivered by NRMA Insurance in New South Wales and Queensland. State insurance in New Zealand has also started a similar initiative.
Looking to the future we recognise the need to explore new business models that account for changing demographics and customer preferences. With more consumers transacting online, particularly in financial services, we are establishing an internet based startup business.
It is an important step for the future strategic direction of the Group, ensuring we leverage our knowledge of motor, home and travel products as well as our international experience to deliver an innovative solution for customers who want to deal with us differently.
Separating this work out from the operating divisions ensures it will get the focus and attention it requires to be a real force in the market.
Sustainable investment
Managing $10 billion in funds on behalf of our policyholders and shareholders is a responsibility we take very seriously.
IAG is committed to generating optimal returns when making decisions about how to invest its funds.
We also align our investment philosophy with our broader sustainability framework, and for some of our investments, this means targeting opportunities to support environmental, social and governance (ESG) issues.
IAG has taken this approach for some years. We were a foundation investor in Generation Investment Management (GenerationIM), established in 2004 by six founding partners including former US Vice President Al Gore.
GenerationIM's International Equity Fund was one of the first to integrate sustainability research within a rigorous fundamental equity analysis framework. We are pleased that our investment in this fund has performed well against benchmarks.
During the past year, through our newly established Sustainable Investment Fund, we invested in a new offering from GenerationIM—the Climate Solutions Fund—which invests in companies that are part of the solution to climate change.
We also invested in the Arkx Carbon Fund, which aims to deliver long term returns for investors while contributing to a low carbon economy, and in a microgeneration wind turbine developer.
We became a signatory to the UN Principles for Responsible Investment, a set of voluntary and aspirational principles to help incorporate ESG issues into investment decision making. As part of our responsibility as a signatory, we will encourage our external fund managers to sign.
