Understanding, accessibility and affordability of insurance: addressing the industry's emerging issues
19 Mar 2012
Address by Mike Wilkins, Managing Director and CEO, IAG
Monday, 19 March 2012
Thanks to Steadfast for inviting me today. The broker community is incredibly important to IAG and I’m pleased that I am able to be able to be part of your event here on the Gold Coast.
The choice of Queensland as the host state for the conference this year is incredibly appropriate.
The Queensland floods of just over a year ago have significantly shaped the insurance landscape that we now operate in. The tragic event was largely responsible for the intense national scrutiny that the industry has found itself under over the past 12 months, which has ultimately resulted in no fewer than ten government reviews and inquiries.
The likely outcome of all this is that the industry will be asked to undertake a number of reforms. These will include some welcomed changes - such as the impending common flood definition, which was called for by the industry many years ago but rejected by the ACCC, and consumer fact sheets soon to be a standard product feature. Some of the other issues brought to light may prove more challenging and will need to be continued to be worked through in the spirit of co-operation we have seen to date.
Most importantly though, the devastating floods have provided the impetus to have a national conversation around mitigation and how to make our communities safer. It would be yet another tragedy to arise from this disaster if, as a community, we failed to harness this opportunity... starkly evidenced by the fact that again, right now, we have seen widespread flooding across eastern Australia. But more on that later.
Today, I am going to talk to you about IAG’s own performance, with a focus on our CGU business, the important role you, the broker community plays in our success, and the changes we are making in recognition of that. Finally, I want to challenge us all as to how we can address the industry’s perfect storm of limited consumer understanding of our product, affordability pressures and emerging accessibility issues for those people who may need insurance the most.
OUR BUSINESS AND RESULTS
As I’m sure you all know, IAG is a multi-national general insurance group, known here in Australia under the CGU, NRMA Insurance, SGIC, SGIO and more recently buzz insurance brands.
IAG will always predominantly be an Australian and New Zealand based insurer and our focus is on targeting profitable growth in our home markets, and looking at opportunities to add to our growing presence in Asia.
Recently we reported an insurance profit of $271 million for the half year which represents an insurance margin of 7.1% - a good result in a challenging environment.
Our CGU business is also performing well and the turnaround in its underlying performance has continued. Gross written premium grew by 13%, through a combination of rate increases and bolt-on acquisitions, and it reported an insurance margin of almost 7%. While lower than the corresponding half, CGU has absorbed an adverse margin movement of more than 1000 basis points from the combination of higher natural perils, lower reserve releases and credit spreads.
On an underlying basis, the improvement in CGU’s performance has been very encouraging, having now delivered an annualised gain of nearly $160 million in underlying insurance profit since the end of the 2008 financial year.
We expect CGU to deliver further revenue growth in the second half and are confident we will deliver a double digit margin in financial year thirteen.
As I mentioned, I want to spend some time talking to the CGU business, as that’s the part of our Group that you will all have an interest in.
In recent times we have taken a good look at CGU. It is a business we believe has massive potential. It has a rich and proud history in Australia having confirmed its position as the country’s largest regional and rural insurer over 160 years.
It insures more than one million motor vehicles, more than half a million homes, more than 150,000 small to medium business, and is one of the largest provider of workers’ compensation services in the country.
CGU is an important part of IAG’s overall portfolio of businesses, and plays a significant role in supporting the Group’s priority of accelerating profitable growth in our home markets, by contributing around 30% of Group GWP, or around $2.3 billion in premium annually. Steadfast contributes more than $360 million of that premium.
We’ve spent the last few years focused on rebuilding the fundamentals in CGU, and we’ve achieved a lot. We have significantly remediated key portfolios instilling greater discipline around risk selection and pricing, and we have delivered significant cost savings both in indemnity and claims handling costs, and we’ve introduced improved processes and systems to drive better customer and financial outcomes.
We have also continued to invest in raising the profile of the CGU brand amongst both intermediaries and end customers.
With CGU on track to achieve a double digit margin in the 2013 financial year, the time is right to accelerate the next phase of CGU’s development with the introduction of a new operating model.
The broker segment is incredibly important to the insurance industry. All up its worth about $11 billion, in 2010 was one of the top five growth industries in the country, and employs more than 24 000 people. According to the Australian Bureau of Statistics 99% of all businesses are SMEs and we know the majority of SMEs use a broker to source their insurance needs further underscoring your significant role.
But yet, when we talk to you, we hear that whilst you value your alliance with CGU, you find the business difficult to navigate.
CGU’s new operating model acts on this feedback.
We’ve called it ‘oneCGU’ because that’s in essence what we’re trying to do – provide our intermediaries and customers with a single view of what CGU has to offer, and take a holistic approach to the portfolio you place with us.
First and foremost, we want to make it easier for our partners and clients to do business with us so we’re creating a principal point of contact across all of our products. The business development manager will act as your advocate across CGU, ensuring you get the best from the business each time you contact. Direct relationships with our underwriting, claims and product specialists will continue to be encouraged to ensure intermediaries have the best of both worlds.
This will enable us to focus on developing strategic relationships and gain customer insights that inform future product and service offerings. It also keeps us better informed of your changing needs and requirements.
It means business development teams that are focused on our distribution channels, instead of products or customer segments which we believes makes sense for an intermediated insurer looking to build a competitive advantage around sales-led, relationship-based account management.
Not only will our interactions with you be more streamlined, the ultimate end service to our mutual customers will also be improved. We are creating centres of excellence by bringing claims teams that are currently embedded in business units into claims service centres to drive consistency, best practice, operational efficiencies and service excellence.
We’re also bringing together our capabilities in underwriting and support services. Our new Underwriting Division will enable us to continue delivering competitive products and as well as provide responsive pricing and risk acceptance. A new CGU Service Centre will deliver a range of policy and administration services to our brokers and agents to ensure support functions are performed by experienced staff that specialise in the particular discipline.
The key take out here is that we know the greatest opportunity for improvement is in our largest channel – brokers and agents. We will be easier to do business with and are focused on building mutually beneficial relationships with valued partners for our joint benefit.
2011 – THE YEAR THAT WAS
Now that I’ve spent some time talking broadly about our business and the changes we are making, I would like to focus on the industry more generally as I believe we are entering a defining period for us all, and you will play a big part in shaping its future.
2011 was certainly my toughest year in the business. We’ve had numerous floods, cyclones, storms and a bushfire contributing to insured losses from major disasters for the year of around $4.3 billion, making 2011 the worst year on record.
As I mentioned, the disasters have also been largely been responsible for sparking no fewer than ten concurrent government reviews and inquiries into the industry, unprecedented in my time. While it is appropriate the industry’s response be examined, IAG defended the industry’s role in the recovery, calling out unhelpful political expediency at the expense of rationale debate.
There is no doubt that this combined landscape is bringing to the fore issues around what I believe are the industry’s three biggest challenges going forward; understanding, affordability and accessibility of insurance.
Consumer understanding of insurance was highlighted when the industry was unable to meet the expectations of some customers around coverage from the Queensland floods. Despite efforts over a number of years it is fair to say we need to do more to assist with understanding and generally promoting consumer interest in the insurance product prior to claims time.
Insurance affordability is being challenged with sheer claims numbers from perils, spiralling reinsurance costs and the broader policy coverage now offered following the introduction of flood cover. We understand these pressures and strive for fairness all round. We have to price for appropriately for risk and make returns for shareholders as well as reward the skill and effort of our intermediary partners. We look to you to play an important role in supporting pricing increases. These are necessary to give consumers the right coverage at a fair price that appropriately reflects that risk. This requires a suitably long term view to prevail over shorter term thinking.
The third issue, accessibility will become more of an issue over time as insurers withdraw from certain markets if they feel the level of risk is too great to insure. We have already seen this in Far North Queensland where CGU is one of the only two insurers still willing to underwrite strata in the region. In many areas nationally, risk from floods and cyclones are an inevitability not a chance.
Understanding, affordability and accessibility of insurance are issues that are coming together to change the environment in which we operate. But what does that mean for insurance customers and the broader community? To help us grapple with that question IAG has recently completed research with more than a thousand households nationally to understand their attitudes to insurance and their likely decisions around how they insure in response to affordability pressures.
UNDERSTANDING THE PROBLEM
The results are sobering.
The extent of insurance penetration has hardly changed from when we conducted a similar exercise in 2001. This is despite a wealth of activity and effort by the industry to educate consumers, and lobby governments to make the insurance product more affordable through the removal of taxation. It is clear that we need to do something differently.
Around one in ten home owners surveyed have no home buildings insurance and two in five have no contents insurance, with cost given as the primary reason for not taking cover out. Around 700,000 households underinsured, their contents, while a further 2.2 million households were unsure if they had the right amount of cover.
The affordability issue has seen 30% of people try to reduce their premium by either dropping cover completely or increasing their excesses.
This is an important social issue. As you know private insurance isn’t just a protection for businesses and individuals; it is a safety net for the taxpayer. So when someone drops out of the safety net or is underinsured, there is a potential economic impact on everyone.
IAG is not prepared to ignore these issues.
We have well known views on how the affordability issue can be assisted through proper investment in mitigation and adaption. This includes protective works such as barrages for unusual tides, levee banks, sea walls, properly maintained fire breaks and access trails, improved drainage and dams.
Recently, we commissioned experts to examine the flood levee in Swan Hill Victoria to understand the true flood risk of that community and provide data of a higher quality than has previously existed. As a result we were able to reduce the premiums of around 300 customers as it changed their flood risk from unacceptably high to, in some cases, no flood risk at all. In the current flooding 9000 residents from Wagga Wagga were able to return to their homes after being evacuated to find no damage after the city’s levee held through the flood’s peak. These are the types of things that can be achieved if we focus on prevention, the community’s down-payment for future resilience.
Planning authorities also need to be stricter and more transparent about their planning and zoning decisions. Development simply shouldn’t be allowed in areas of unacceptable risk. Strengthened building standards will also ensure we are adequately prepared for changing risks.
As I mentioned before, we have long called for the removal of inequitable state government taxes from insurance. Insurance taxes can add an extra $40 on top of every $100 of premium in NSW, a burden magnified by the tax-on-tax-on-tax effect of levying the insurance stamp duty and GST on top of the premium and fire services levy.
Our research confirms an additional 180,000 households would take out insurance if stamp duty was removed and 15% of those knowingly underinsured households would increase their cover. Replacing these imposts on insurance customers with a broader, more equitable source of revenue would have an immediate positive effect on the affordability of insurance policies.
In terms of accessibility of insurance for people in extreme risk, areas IAG recognises that the government may have a role to play and may wish to assist these people to access insurance potentially in the form of a subsidy. However, properties built or approved after an agreed date should not be eligible for the subsidy, to restrict further development in areas of high risk. It is important that all stakeholders are discouraged, through a risk price signal, from establishing new property in high risk locations. Any assistance must be accompanied by the mitigation strategies I’ve talked about above.
IAG RISK SUMMIT
However, we don’t, pretend that we have all the answers or that these can be managed in isolation. What we do have though is a good track record of getting sound policy and consumer outcomes working constructively with communities and government; and we are going to do more of it.
We supported the government’s response to the Natural Disaster Insurance Review and are participating in its implementation this year. We also have supported the government’s initiatives to improve consumer understanding, through a standard definition of flood and key facts statement. We’ve also favourably looked at other reviews such as the Productivity Commission’s Inquiry into Regulatory and Policy Barriers to Effective Climate Change Adaptation and the Treasury consultation on reforming flood insurance.
IAG wants to harness the goodwill and momentum achieved with government to date and I am pleased today to announce that we will be laying a stake in the ground on understanding, affordability and accessibility issues and holding the first IAG Risk Summit in May.
The Summit will bring government, community, industry and business representation, such as yourselves, together to look at what are the issues we currently face, which ones do we focus on going forward, how we best inform communities of their risks, how we influence decision makers to reduce risk and ultimately promoting the role of insurance in disaster management and recovery.
IAG doesn’t want to be the ambulance at the bottom of the hill, picking up the pieces after the disaster. We will be the community partner that helps with the understanding and mitigating of risks that are presented to us in our daily lives, and potentially stops incidents from occurring in the first place.
You will be hearing more about this in the weeks and months to come. The outcomes of this Summit will guide IAG’s efforts to create stronger more resilient communities over time as we recognise safer communities means a stronger Group.
In conclusion, while the past year has been full of challenges, it has also acutely demonstrated the important economic and social role of insurance.
The scrutiny we face can at times feel confronting. However, I believe the industry continues to do a commendable job in rebuilding communities and helping its customers during times of hardship. The fundamental role of insurance to help individuals manage risk and recover from unexpected loss is admirable, not to mention the important economic stimulus the industry creates with around $90 million in claims payments each and every day.
Everyone in this room has a part to play in ensuring the long term success of our industry. Society is a beneficiary of a strong insurance sector.
The industry is playing its part, government and other authorities must play their parts and our intermediary partners, you can not underestimate your crucial role in this process.
You help people to identify, understand and mitigate their risks. You interpret customer needs and design solutions to help people transfer and manage these risks.
I strongly encourage you to do this in a way that advocates the importance of insurance and its role in protecting the community by providing an economic shock absorber and enhancing the well being of our nation and our customers.
Together, we can all help to address the issues of understanding, affordability and accessibility of insurance to ensure the ongoing relevance of our industry is not only preserved but enhanced.