Australia Insurance Industry: State of Play AILA Annual Conference 16 October 2009
Australia Insurance Industry: State of Play AILA Annual Conference 16 October 2009 Duncan West, CEO, CGU Insurance Historical Industry Performance 2 Growth in the Australian general insurance industry • Last 30 years – 8% average annual growth rate (1.2x nominal GDP) • Since 2004, annual growth fallen to ~3% Source: Deutsche/Finity 2009 Pendulum GI Review 3 Changes in premium rates Australian Commercial Lines Industry 1994-2008 Yearly Premium Rate Change (%) ’99 – ’02: Increased sophistication of pricing models 60% 50% 40% 30% Premium 20% Rate Change 10% (%) ’03 – ’08: Technical correction to overheated prices in 2002 Abnormal levels of large losses ’94 – ’98: Irrational pricing by Insurers New market entrants, particularly US insurers Collapse of HIH Insurer consolidation Tort law reforms HIH a rogue player 0% -10% Fire & ISR Commercial Motor Workers' Compensation Public & Product Liability Professional Indemnity Source: JP Morgan / Deloitte General Insurance Industry Surveys 4 '08 '07 '06 '05 '04 '03 '02 '01 '00 '99 '98 '97 '96 '95 '94 -20% Historical Return on Equity for Australian general insurance Average ‘03-’07 ~ 20% 25% 20% 30 year average ~ 11% 15% 10% 5% -10% Source: APRA (and predecessors regulators), Finity Consulting, Deutsche Bank. 5 2009 data anticipated to reflect further deterioration FY07 FY05 FY03 FY01 FY99 FY97 FY95 FY93 FY91 FY89 FY87 FY85 FY83 FY81 FY79 -5% FY77 0% Improvements in COR (up until 2008) 5-year Average CORs 1977-1981 1982-1986 1987-1991 1992-1996 1997-2001 2002-2006 108% 113% 113% 108% 108% 89% 125% 120% 115% 30-year average ~ 106% 110% 105% 100% 95% 90% Source: APRA (and predecessors regulators), Finity Consulting, Deutsche Bank 6 FY08 FY07 FY06 FY05 FY04 FY03 FY02 FY01 FY00 FY99 FY98 FY97 FY96 FY95 FY94 FY93 FY92 FY91 FY90 FY89 FY88 FY87 FY86 FY85 FY84 FY83 FY82 FY81 FY80 FY79 FY78 80% FY77 85% Key drivers of improved industry profitability - 1999 to 2006 • • • • • • Strengthening of regulatory regime Tort law reforms Market consolidation More “rational” pricing Reduced claims frequency due to benign weather conditions, minimal CATs and economic prosperity Higher investment income, due to bull investment markets and stronger claims reserving Profitability deteriorated from 2007 to 2009 • • • • 7 Sustained period of declining rates during soft cycle Increased CAT activity Pervasive impact of GFC: – Slowing Australian economy – Reduced investment income Diminishing reserve stemming from Tort law reforms State of Play - Market Trends and Issues 8 Insurance Cycle: Changing pricing expectations Class 2009 JP Morgan Survey (undertaken Oct-Dec 2008) Revised expectations (as at Feb 2009) Domestic Motor +4% Too low (10-12% expected) Home +6% Too low (10-12% expected) Fire & ISR +4% Higher in some areas Commercial Motor +8% Will be higher Liability -1% Rates have bottomed Workers (WA) -6% No reductions Professional Indemnity 0% Rate increases required Personal Lines: Commercial Lines: Source: JP Morgan Jan/Feb 2009 9 Cat and Weather Events: Impact of severe weather events * Premiums exclude workers’ compensation, motor liability, medical malpractice, accident-health, surety and other Source: Citigroup, SMH, US Department of Energy and University of California, CSIRO, ABS, KPMG, Insurance Technology 10 Economic Climate: Reduced impact of GFC on Australia relative to other economies, with signs of recovery emerging Observed impact Outlook Falling investment returns Medium-high Improving A slowdown in policy growth Low-medium Mild improvement Increased claims costs Generally low Stable 1 Potential consequences of the GFC 2 3 While the increase in claims costs attributable to the GFC in most classes was limited, pronounced increases have been observed in D&O, Professional Indemnity, Trade Credit and Builders Warranty 11 Insurer consolidation is a key structural change Australian General Insurance Market Shares Over Time 100% 90% 80% 47% 60% 50% 8% 40% 10% CU/NZI 30% 10% QBE / MERC 20% 11% HIH / FAI NRMA / SGIO 14% OTHERS 27% 9% 4% 9% WES ALLIANZ 12% QBE 23% IAG 24% SUN 11% QBE 12% SUN 12% PMN 26% IAG 12 ALLIANZ AMP/GIO 0% Share of top 3: 1997 35% 2005 50% 2008 59% Share of top 5: 53% 70% 72% Source: APRA, Deutsche OTHERS OTHERS 70% 10% 30% New market entrants 13 • New market entrants in Personal Lines classes • Direct channel e.g. Virgin, Budget Direct • Affinity channel e.g. Australia Post, Coles Technology and push to commoditisation 14 • Increased B2B and web based deployment • Brokers and underwriters moving into this space • Leading to further commoditisation Continued war for talent - challenges 15 • Talent shortage • Industry not seen as attractive • Demographic shifts impacting insurers • Affects the whole industry Continued war for talent - response 16 • Create talent pipeline • Become employers of choice • Improve staff engagement • Invest in training and development • Act together as an industry What is our reputation? 17 Reputation matters • Number one business risk • Where does insurance rank on reputation? • Good reputation = good business Insurance Companies Tobacco Companies Financial Institutions 18 + Reputation is an industry issue 19 • Improved reputation benefits all of us • Our story is a good one – lets tell it! What Next? 20 Positioning for the future 21 • Focus on your strengths • Streamline processes and drive accountability • Build employee commitment • Revisit your strategic goals in light of future trends 22 www.cgu.com.au
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