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