Aon advises industry to look beyond the status quo to lock in value, capture opportunity
Lambros Lambrou
Drivers of change in certain sectors of the insurance market in Australia are shaping a new set of business conditions – and those companies who wish to be winners should be prepared to act on them sooner rather than later, according to Lambros Lambrou, CEO of Aon Risk Solutions Australia, a risk management business of Aon plc.
This view was expressed by Mr. Lambrou upon the release of Aon’s third quarter Insurance Market Update for 2014.
Mr. Lambrou sounded a general warning against taking recent market data at face value, urging the insurance industry in Australia to look deeper rather than remaining content with the status quo.
“At first glance the data shows little variation from the past few quarters. Casual observers might conclude that we are in a ‘steady as she goes’ part of the cycle,” said Mr. Lambrou.
“However just because themes such as industry capacity and increasing competition are recurring, that does not mean the interplay of these factors will deliver recurring outcomes. On the contrary, some outcomes may come as a surprise to the industry – especially those who’ve become complacent and failed to look ahead.”
James Baum, Managing Director of Broking & Chief Broking Officer, Aon Risk Solutions Australia, cited some potential drivers of change for which the industry should be prepared. He also pointed out some of the underlying differences between today’s environment and more traditional scenarios – and their potential implications for the broader industry.
“Diversity of funding is one feature of our macro environment that should not be underestimated,” Baum explained. “The increasingly broad funding base of the insurance industry in Australia raises questions as to whether there would be the same level of withdrawal of capital from the market in the face of a catastrophic event as in the past. With insurance forming a smaller part of their portfolios there is less likelihood of new investors, such as pension funds, withdrawing their support. And that may well mean that we are moving away from the traditional cyclical market, with current market conditions likely to become the new norm.”
Another macro factor is the U.S. interest rate environment – more specifically, the likely global impact of an unexpected adjustment.
“Interest rates are priced in across all markets and any change would have profound implications on the shape of investment and markets in general – including the insurance market,” said Mr. Baum.
“Recent experience and the continuing economic uncertainty prevailing in the Eurozone and the UK are factors that we should remain aware of even in the face of more positive news from elsewhere. Failing to remain alive to the possibility of sudden unexpected downturns would be to deny the lessons of the past and the reality of today.”
In addition to the United States, Mr. Baum pointed to the role of China and its economy as a potential shaper of industry change – in particular in relation to property.
“Until recently the focus of the larger Chinese insurers and reinsurers has been on Chinese-owned assets,” said Mr. Baum. “However as they gain a better understanding of the geographies in which they operate – and that certainly includes Australia – they are developing an appetite for non-Chinese-owned assets. The upshot is that these insurers offer a very cost-competitive avenue, particularly where large amounts of capacity are required. It is likely that over time, as differences in business culture become better understood and managed, there will be a major move toward these providers.”
Mr Baum also named a number of micro or more industry- or sector-specific factors that should be factored into the insurance market outlook
- Heavier regulation in many sectors is leading to a greater compliance and risk burden – with corresponding effect on policies including for financial institutions and Director’s and Officer’s Insurance.
- Increased competition has reduced premiums in many instances, however insureds should be wary that this does not come with a corresponding reduction in the scope of the policies concerned. It’s a case of buyer beware.
- Competitive pressure is also leading to innovation in terms of both policy types and policy wording, as insurers work ever harder to attract and retain clients – a positive outcome for the industry and a direction in which it should continue if it is to thrive.
- Loyalty is becoming a watchword as falling premiums cause unprecedented numbers of insureds to “shop around”. Insurers who crack the “loyalty code” are likely to reap the benefits.
- Big infrastructure projects coming on-stream in response to moves at federal and state government level may also change the insurance outlook, especially in the project-specific Professional Indemnity space.
In conclusion, Mr. Lambrou highlighted the need for the industry at large to address its longer term, strategic challenges – and said that using hard data and information as reference points is the key to success.