Sustainable Market Still Not Achieved - Insurance Market Commentary (Q1 2019)
15 February 2019

Premium increases and restricted capacity for property risks in seismic regions are prevailing features of the current New Zealand insurance market.
Introduction
Premium increases and restricted capacity for commercial and domestic property risks in seismic regions are prevailing features of the current New Zealand insurance market.
 
In New Zealand, there is no doubt that the cost of insured losses caused by natural catastrophes is a major influence. The largest of these catastrophes was the 2011 Canterbury earthquakes but since then New Zealand insurers have responded to other substantial earthquake events in Kaikoura and Wellington (costs exceed $2.1b), more than twenty major weather events (an estimated total cost of $285m) and a major fire event in Christchurch (insured cost $18.3m).
 
Awareness of our exposure to earthquakes, cyclones and (smaller) storms has been heightened to overseas insurers and reinsurers. The Global Facility for Disaster Reduction and Recovery (funded by the World Bank and others) has analysed natural disaster risks across the world and the latest data, available through an online tool called ThinkHazard, recognises New Zealand as high-risk for almost every possible catastrophe, except extreme heat and water scarcity.
 
Overseas, a series of hurricanes in North America, wild fires in California and a substantial earthquake in Mexico have contributed to record insured losses for 2017. Some of these events have been repeated in 2018 but we won’t see the insurance related impact of these until next year.
 
In the Ernst & Young report, Global Insurance Trends 2018, poor global results in 2017 are largely attributable to a higher proportion of losses within the United States of America where there are regions of high insured value accumulation. Worldwide, 710 natural catastrophe events were recorded; the fifth time this number has exceeded 600, all in the last six years.
 
The United Kingdom regulator, Bank of England Prudential Regulation Authority, has become so concerned that they issued a letter in May 2018 to the CEOs of specialist general insurance firms expressing concern about the state of the insurance market, suggesting “many firms may now benefit from reassessing whether their business models remain sustainable”. The regulator identified their key findings, some described as “weaknesses in underwriting oversight”, and suggested “increasing supervisory scrutiny” may be a consequence if strategies do not change.
 
There can be no doubt that weather patterns are changing, and the frequency of natural catastrophe events is increasing. Insurers, regulators and commentators all recognise that some insurance markets are unsustainable, in their current form, and remedial action is necessary.
 
New Zealand insurers are increasing the extent of analysis for the risks they accept, partly because of a determination to achieve sustainable pricing and partly to meet the expectations of reinsurers. The outcome is more restricted capacity in some regions and for some risk profiles, along with higher premiums. For less hazardous regions and occupations, the trend is marginally higher or stable premiums. 
 
Other influences from outside the insurance profession are relatively low investment returns and a reducing foreign exchange rate which increases costs for insurers, particularly for cost of imported goods.
 
New Zealand Insurance Market Performance
The performance of New Zealand based insurers is recorded each year by the Insurance Council of New Zealand (ICNZ).  For the year ended 2017 the accumulated underwriting result (the amount that claims exceeded premiums) for all non-Life insurance products was a $163m loss. This is after insurers have recovered funds available from reinsurers and paid their business costs. 
 
Increasing premiums is just one mechanism that insurers have used over the last two years to manage or control industry-wide losses. However, the level of these increases was beginning to stabilise in the latter half of 2018.
 
A second method insurers apply is more scrutiny or analysis on hazardous occupations and risk profiles. A third method is to control their reinsurance programme by restricting the cover available in seismic or flood prone regions.
 
Both these strategies will have the effect of reducing competitiveness and therefore increasing premiums.
 
New Zealand Market – New Regulations for Brokers
At the time of writing this commentary legislation affecting insurance brokers, the Financial Advisers Legislative Amendment Bill, is going through its final stages in Parliament. Once enacted, the Bill will be amalgamated into the Financial Markets Conduct Act and establish stronger laws governing the performance of brokers. The result will be felt by insurance buyers in the form of better standards relating to and . By mid-2022 brokers will also need to be qualified to a specific standard of and
 
These new regulations will improve the professionalism of brokers, but a consequence is likely to be a higher cost of doing business. Brokers will need to decide whether to absorb these extra costs or pass them on to insurance buyers.
 
Market Conditions for Commercial Property
According to an international insurance market index, worldwide pricing has been steadily increasing during 2018. The Australasian market has been increasing for a longer period and at a steeper rate than the worldwide index. This is attributable to the frequency of catastrophe or major events in our region, disproportionate to the premiums generated in the region.
 
In New Zealand premiums began to increase during 2017, particularly Natural Disaster premiums in seismic or flood prone regions. Outside these regions premium increases are at a lower level and have begun to stabilise in the latter half of 2018.
 
A recent development has been the pressure on capacity for earthquake cover in the Wellington region and certain risk profiles, such as properties with a significant component of Expanded Polystyrene (EPS, commonly known as sandwich panel) material in the building construction.
 
However, when financially secure insurers can be encouraged to compete for accounts with a positive risk profile and supported by quality underwriting information, it is possible to achieve small reductions.
 
Overall, the current market is weighted in favour of insurers. Brokers with size, through membership of a network like NZbrokers, and determination will fend off some of these changes or be able to negotiate a compromise solution but there will undoubtedly be ongoing pressure.
 
Market Conditions for Other Commercial Products
Liability Products – Influences on Liability premiums are a little different from other types of insurance. Liability insurance is often referred to as ‘long tail’ because claims are usually not immediately apparent and once they are notified to the insurer, the settlement of a legal issue can be protracted by its nature and because of Court processes.
 
In New Zealand, new insurers have entered the Liability sector during the last three years, some of these offering new Liability products to help generate fresh streams of income for insurers. These are good influences for insurance buyers because it adds competition and better products to the market.
 
However, litigation is becoming more frequent in New Zealand therefore insurers are paying more legal expenses and settlements.
 
Profitability of Statutory Liability insurance is being undermined because fines are substantially higher than they were a few years ago. Apart from the obvious flow-on effect that claim payments will be more, the larger fine motivates defendants to adopt a more determined defensive position which increases the legal expenses and potentially the amount paid by insurers.
 
In the London market a number of Lloyds underwriting syndicates have ceased offering Professional Indemnity insurance. This action is motivated by unsustainable premium levels and an unhealthy forecast that suggests normal remedial action will not improve the position. This will undoubtedly put upward pressure on the premium quoted by those insurers that continue to provide Professional Indemnity insurance.
 
To minimise these influences and retain as much stability as possible in the Liability market it is important that businesses present good information to insurers. That information should demonstrate sound operational and governance procedures along with service and product quality controls.
 
Motor – Motor premiums continue to be determined by claim performance and there is evidence across the market that the position deteriorated during the last two years. In response insurers adopted remedial actions by withdrawing from high risk industries and increasing premiums elsewhere.
 
Some rationalisation has occurred amongst Motor insurers. For example, NZI has absorbed NTI, Allianz has merged GT Insurance into their underwriting operations and Zurich is withdrawing from some high-risk industries. This diminishes the number of insurers that might compete for an account therefore satisfactory renewals are only achieved for accounts with good underwriting information, fleets with sound management systems and clean claim records.
 
A large and well managed fleet with a clean claim record will attract positive attention from insurers but this is likely to do no more that hold the expiring premium.
 
Market Conditions for Domestic Products
Record claim pay-outs over the last two years, $243m in 2016 and $226m in 2017, is putting extreme pressure on Domestic premiums, particularly for houses. The Insurance Council of New Zealand (ICNZ) said this spike “is in large part due to the impacts of climate change”. ICNZ CEO, Tim Grafton, added “to have two years in a row in the most expensive years on record is an indicator of the increasing frequency and intensity of storms in New Zealand”.
 
These results are being experienced by all insurers that provide Domestic products and will result in premium increases. Those increases are being felt most in flood prone and seismic regions as insurers adopt the practice of risk-based pricing.
 
The half year results (to March 2018) of Tower Insurance demonstrates the problem faced by many insurers. Despite increasing the premium portfolio by 15.6% in this period, the company still report a post-tax loss of $11.6m.
 
In their half year report, Tower acknowledged 2017 is one of the worst years for weather events in the past 25 years and the impact of storms in 2018 already exceeding those for all the prior year.
 
Increases for Domestic products are evident across New Zealand and are likely to continue throughout 2019 as insurers recover their portfolios to a more sustainable position.
 
Purchasing Domestic insurance and setting an adequate sum insured is more complex than most people anticipate. We believe the changes influencing Domestic products and the addition of technology in the home (for example, e-bikes, drones, entertainment and other electronic products, and AirBnB) increases the importance for house owners to receive sound advice from professional brokers. Direct insurance providers, using call centres and bank intermediaries, may not be suitably experienced or have access to the range of products and advice that will genuinely help insurance buyers.
 
Insurance Product Developments
New or developing insurance products are becoming available from innovative insurers. Many of these products respond to the new risks faced by businesses. In this market commentary we will discuss two developing products, Cyber Insurance and Employment Practices Liability.
 
Cyber Insurance 
Cyber insurance provides first and third-party coverage. This means it not only covers the Insured’s own expenses to remediate after a breach but also the liability costs associated with privacy/confidentiality breaches.
 
Some of the typical sections of a Cyber insurance policy are:
Third Party Liability                                    Theft by hacker                            Lost profits and extra costs (of the Insured)
Public relations expenses                          Network extortion costs                   Restoration of research and other costs
 
Other benefits are available, and a sound analysis of any proposed cover is necessary to ensure it meets expectations.
 
Many insurance buyers are not persuaded that they need Cyber Insurance. Once the business has purchased anti-virus software and implemented basic IT security measures, many business managers are not convinced that they need Cyber Insurance, however the number of reported breaches in New Zealand continues to increase, as you’ll see from the table below, compiled by Computer Emergency Response Team (CERT NZ).

cyber-incidents.png

CERT NZ was established in 2015 with a government investment of $22 million. CERT NZ forms part of an international network of similar organisations and within New Zealand CERT NZ partners with the Department of Internal Affairs, Netsafe, the National Cyber Security Centre and NZ Police.
CERT NZ is responsible for supporting businesses and individuals who are affected (or may be affected) by some kind of breach. It is an organisation that receives cyber incident reports, tracks cyber security attacks, and provides advice and alerts to its customers on how to respond and prevent further attacks.
The statistical and analytical information provided on CERT NZs website can be useful to support a recommendation to purchase Cyber Insurance.
 
Employment Practices Liability
The second developing area of exposure and product is Employment Practices Liability. The growth in this product can be attributed to an increasing number of claims by employees arising out of employment disputes with their employer.
 
Employers can be held liable for the nature of the decisions they make regarding employees, as well as the procedures they follow, and the quality of the working environment provided. Employees are often well aware of their rights and more frequently choose to take action against the employer if they think their rights have been breached. Compensation awards often exceed $1 million overseas and while claims of this size do not exist in New Zealand and are rare in Australia the trend is heading in this direction. In New Zealand settlement amounts are often less than the financial and reputational cost of a defence. Therefore, as an employer, it is the overall costs to the business that need to be considered when putting in place risk management measures and insurance coverage.
 
Many Director’s & Officers Liability policies will include some cover for personal grievance type claims by employees. However, a specific Employment Practices Liability policy will provide a more comprehensive cover for the business itself, its subsidiaries, directors, officers and managers.  The cover will provide protection for allegations of discrimination, harassment, wrongful termination or other employment related claims such as constructive dismissal, slander, libel, emotional distress, humiliation and others.
 
When establishing an Employment Practices Liability policy, it is important to ensure the coverage is adequate for the territories where the business is trading and to ensure that the policy exclusions do not conflict with any regulatory requirements in those countries.
 
This exposure is under-estimated by many businesses however it is very real and can severely interfere with the workplace environment as well as expose the business to a considerable financial burden.  Business owners and their managers are strongly encouraged to investigate the costs associated with purchasing an Employment Practices Liability policy; it may be less cost than expected. 
 
Importance of Underwriting Information
The value of full and accurate information has increased considerably over the last two years and it is now imperative that the following information be collected and presented to insurers well before the renewal date:
 
  • Schedule of buildings, showing insurable value for each;
  • Schedule of contents, ideally showing insurable value in each building;
  • Building construction, security, fire prevention methods;
  • Details about any seismic strengthening;
  • Details about any heritage buildings or other unique assets;
  • Geotechnical site reports for assets in seismic regions;
  • Revenue sources, including significant dependencies;
  • Business continuity plans and other mitigation measures, such as operational and governance procedures, and service and product quality controls to protect assets, liabilities and minimise interruptions to the business.
 
Insurers require this more detailed information so they can recognise the positive risk profile of the business, manage their catastrophe exposures, and satisfy their audit requirements and the requirements of their reinsurers. By providing the best information it is likely that the number of competing insurers will increase and thereby apply positive pressure during the premium negotiations.
 
Your ICIB broker will work alongside you to collate this information, then compile it into a professional submission for the insurers. Your ICIB broker will also review a variety of options with you, for example, agreeing a basis to assess your revenue exposures and presenting viable insurance solutions as part of the submission to insurers.



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