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.

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Capital inflows affecting insurance markets: Aon

“An influx of capital from non-traditional sources is contributing to increased market capacity, lower premiums, and effectively enhancing competition in the global insurance industry.”

Commenting on insurance markets in 2013, Jason Disborough, Managing Director, Global, for Aon Risk Solutions, global provider of risk management, insurance and reinsurance brokerage, said that the market conditions that increased competition between insurers and lowered premiums across the board this year was likely to continue into 2014.

Mr Disborough said that increased capital flows into the industry from non-traditional sources has resulted in a convergence of traditional and non-traditional capital, translating into excess capacity which insurers have been unable to absorb through organic growth.

“Funds are flowing into the insurance sector from major pension and hedge funds as well as family trusts in a way we haven’t seen in the past,” he explained. “In the current low interest rate environment, these investors are seeking alternative sources of return. In addition, they have been willing to accept lower rates of return than have been usual in the industry. Because their investment has the potential to dwarf traditional sources of capital, it has the ability to fundamentally change market dynamics.”

Softening market conditions and increasing capacity have seen premiums fall almost across the board, with downward pressure on rates being experienced even in some of the poorer performing product classes.

Mr Disborough said that while this was great news for insured’s, it continues to present real challenges for insurers.

“Many are no longer able to rely on growth from their existing book of business, and need to look at new ways of maintaining profitability,” he explained.

James Baum, Managing Director of Broking & Chief Broking Officer, Pacific for Aon, also had some comments on the industry response to these changing financial dynamics, pointing out that when market conditions are challenging, it behoves insurers to innovate in order to maintain growth. And, he said, there are some key areas calling out for innovation in Australia.

“Australia is lagging behind the rest of the world in a number of areas. Network security and cyber risk, for example, have been seen as ‘emerging’ risks for far too long. The fact of the matter is that these risks are here now, and require a better and more coherent response from Australian insurers.”

Mr Baum went on to comment on the link between the themes emerging from Aon’s 2012/13 Australasian Risk Survey and the identifiable trends in insurance markets in 2013.

“Insurance exists to mitigate risk but at the same time, it is clearly not possible to insure against all risks,” he said. “We saw this very much reflected in the Aon risk survey. The number one risks identified by Australasian corporates, namely ‘brand and image’, and the ‘market environment’, are not risks that insurers can comprehensively address in the short to medium term.”

On the other hand, business interruption and human resources, which were ranked three and five respectively, are areas where insurance can offer real protection, and where insured’s and insurers alike need to concentrate their risk mitigation efforts.

“Workers Compensation, for example, is the single biggest insurance expense faced by businesses, so it’s no surprise that it ranked as the fifth highest risk concern. It really needs to be monitored and managed well on an ongoing basis.”

Mr Disborough concluded by looking forward to 2014, saying that he did not expect general economic conditions to pick up significantly, at least in the short term, and that alternative capital flowing into insurance markets would continue to keep competition alive and well.

“All in all, insurers and reinsurers alike are facing challenging times ahead, not just because of the ongoing impacts of natural catastrophes, but also due to less favourable operating conditions. On the other hand, their customer’s Total Cost of Insurable Risk will continue to benefit,” he said.

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Changes required to ensure long term profitability.

Change is needed in both the retail and group insurance markets in Australia if insurers are to return to sustainable long-term profitability.

Alain Néemeh, Executive Vice President, Australia and Canada, Reinsurance Group of America, Incorporated (NYSE: RGA) spoke earlier this week on the topic of sustainability at the 2013 Financial Services Council (FSC) Beyond 2013 Conference at the Brisbane Convention and Exhibition Centre in Australia.

Speaking to leaders in the life insurance industry, Mr Néemeh provided an international perspective to the challenges faced by the local industry as profitability appears to be deteriorating significantly in the first half of 2013. Highlighting some of the key risk areas observed in both the retail and group insurance markets, Mr Néemeh drew parallels to a similar situation faced in North America three decades ago. He underscored the importance of risk selection and emphasised how an alignment of interests between insurers, policyholders and third parties, particularly on product design and end-to-end claims management, are crucial to ensure the market returns to stability.

Following his presentation, Mr Néemeh said, “It’s not always easy to comment on a challenging question such as what makes a sustainable life insurance market. Fortunately we can draw on extensive experiences across the globe and over periods of time to look for trends and, where possible, appropriate solutions. Ultimately, what we do know is that change is required in Australia and there is no better agent for change than industry losses.” Mr Néemeh’s presentation comes days after RGA reported financial results for the second quarter of 2013. The company reported second-quarter net losses of $49.6 million. Losses this quarter were primarily attributable to an after-tax charge of approximately $184 million to increase claims liabilities in Australia, predominantly tied to the group total and permanent disability (TPD) line of business and, to a lesser extent, group disability income.

“The Australia market is the only one in which RGA has significant exposure to group TPD business. Not only have claim incidences for group disability benefits been increasing, but the claim lags throughout the TPD claim reporting process have also risen at a significant rate”, Mr Néemeh said.

According to Mark Stewart, Managing Director of RGA’s Australian subsidiary company, RGA Reinsurance Company of Australia Limited, the Australian life insurance market has experienced decade high lapse rates in the retail market over the last two years. “For some time now we have been working closely with our clients to better understand some of the drivers of worsening claims experience in the retail space. We believe that a similar effort is required to understand how our group experience can provide a platform for developing more sustainable solutions for all Australians”, Mr Stewart said.

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