Chris Boys, Director of Assure Legal, discusses the performance of the domestic insurance market since September 2010, in light of news that insurers are now using “risk-based pricing”, which means that “high risk areas” won’t be offered certain classes of business. This is the first article in a two-part series on the topic.
The reason for my musings are that since the Canterbury Earthquake Sequence (CES) of events, earthquakes are a bit of a trojan horse/bogeyman. For example, if you talk to geophysicists, their assessment of the risks of “the big one” haven’t changed much for Wellington over the years.
The Kaikoura quake did some very localised damage to a specific class of building (non-base isolated high rises in the CBD) and EQC (for now) bear the risk of the first $20,000 of contents damage caused by earthquake, so the insurers exposure hasn’t changed. So what is going on to lead to first, Tower and now IAG deciding that “OMG Wellington has earthquakes!?” (*quite what they were doing before when their pricing wasn’t apparently based on pricing the risk is another question, given that an insurer’s two functions are pricing risk and paying claims)
A number of things are driving this:
- IAG advises that through it’s various brands it has over 50% of the Wellington domestic insurance market and is overexposed in Wellington;
- the Reserve Bank’s signalling that insurers will need to have more capital backing;
- the changes to EQC legislation removing EQC cover for contents; and
The last of these; return on investment raises the question, if insurance is about risk sharing, how much of the risk are the insurers (and their shareholders) sharing with us, the premium payers?
I recently renewed some of my business policies and had a fairly eye-watering bump in price. This raise, and others is driven by a number of factors:
- external factors such as; fire levies, EQC, the price of international re-insurance, and returns on the fund of invested premiums from which claims are paid;
- internal factors such as; the costs of paying claims, the costs of running the business, and
- market factors.
But in a healthy market prices rise and fall, however premiums have gone only one way in New Zealand over the last 10 years; up, and this seems to be the case across most classes of business.
In New Zealand the insurance market is small by global standards. This is true both in the scale of the market (NZD$5,727,157,999 in 2018 according to the ICNZ compared to the USD$2.7 trillion annually in the USA or the UK market which is worth USD$389 billion annually) and in terms of the number of providers. There are currently 88 insurers registered with the Reserve Bank to carry on insurance business in New Zealand, however, in each market segment (eg: Life, Health, Fire and General, Liability) there are only around a dozen providers.
In the main segments, the market pattern is for there to be 2-5 large providers and a scattering of smaller (usually niche) providers. Fire and General is a great example of this; Vero and IAG (both owned by Australian listed companies) dominate the segment with somewhere between 60% and 70% of the market between them, Tower next with about 7%, FMG with about 5% and a bunch of other smaller insurers making up the rest.
The small number of providers in any market segment means that consumer choice ( and therefore market effects on pricing) is not what it would be in Australia or the UK for instance. In specialty markets (such as the Financial and Professional Insurances market) the lack of providers is even more pronounced, and leads to significant pricing fluctuations as overseas providers (such as Lloyds syndicates) enter and leave the market. At one stage when I was a broker selling Solicitors PI there were a grand total of 4 PI providers in the market.
This leads to volatility, which can be seen in the premiums charged BUT NOT, it seems, in the profits made. This has been bugging me since 2011 when IAG CEO Jacqui Johnson announced to the New Zealand Insurance Law Association Conference that the aftermath of the Canterbury Earthquakes would see the Industry rebuilding Christchurch and changing public perceptions of insurance in New Zealand.
Despite this, a) premiums rose b) the claims response, albeit generous to begin with became less so by late 2015, and c) IAG posted after tax profits of:
- Au$660 million (2011),
- Au$832 million (2012),
- Au$1.428 billion (2013),
- Au$1.579 billion (2014), and
- Au$1.1billion (2015).
IAG paid dividends every one of those years.
If we look at Vero’s parent company SunCorp the results are similar; from the general insurance business after tax profits of:
- 2011 Au$392 million,
- 2012 Au$493 million,
- 2013 Au$883 million,
- 2014 Au$1 billion,
- 2015 Au$624 million, and
- 2016 Au$689 million.
These profits were made despite the following catastrophes (the majority of which were billion dollar plus insured losses);
- 2009 Victoria Bushfires
- 2010-2011 CES earthquakes
- 2010-2011 Queensland floods
- 2011 Cyclone
- 2014 Brisbane hailstorm
- 2015 Cyclone Marcia
- 2016 Kaikoura earthquake
Now to be fair, the profits aren’t shared around; Tower has struggled with losses from EQ related shortfalls in 2016 and 2017, and of course AMI had to be bailed out after its re-insurance arrangements were woefully inadequate to deal with its exposures to CES claims. However, the troubles of Tower and AMI seem to be related the particular reinsurance arrangements and geographical exposures of those insurers, as similar sized insurers reported no such problems.
Chris Boys, Director of Assure Legal, specialises in Insurance Law and Litigation. He is a co-author of the LexisNexis title Insurance Claims in New Zealand. Prior to entering the legal profession, Chris worked extensively in the Insurance Industry in New Zealand and England, handling claims, handling complaints and as a Lloyds Broker. Contact Chris at firstname.lastname@example.org or connect via LinkedIn