Aon`s 2015 1H Insurance Market Update

Australian
Insurance
Market
Update 1H
2015
Risk. Reinsurance. Human Resources.
Welcome
Aon Broking
Australia
Aon’s broking leadership team are supported by 40
professional insurance brokers. Located across Australia,
they align with 750 product and industry specialists through
our global broking network.
We specialise in negotiating the best deals available for our
clients across property, liability financial and specialty lines,
and are focused on achieving the optimum balance of cover,
security and price.
You will benefit from the expertise and purchasing power
of the world’s largest broker, as we work closely with you to
deliver innovative and tailored risk transfer solutions that
meet the needs of your organisation.
one
provider of
premium placed
in Australia
Experienced
broking team
collectively fluent
in 9
languages
with over
$2 billion
annually
Collectively over
400 years
of broking
experience across
Australia
Broking
team located in
5 capital
cities
Competition will be intense which is great position for
buyers but how will insurers attract new clients in an
environment where these is very little pricing differential?
If I think back to our last market report released in September
2014 we said that the concept of traditional hard and soft
markets that were punctuated with deep troughs and high
peaks were at an end and we now have a market norm that
will be characterised by gentle peaks and trouts of +/-10%.
We also said this shift was driving behavioural changes in
clients and insurers alike. Client’s loyalty was waning and
insurers were becoming increasingly aggressive in their
pricing approach whilst looking for deeper insights from data
in attempt to pick the right industries to place their bets.
Since the release of our last publication it would be fair
to say that these behaviours continue albeit with some
interesting developments that will certainly test the
concept that current market conditions are the norm.
Strength in numbers
Number
So what will 2015 hold?
Average
length of service
at Aon from broking
leadership team is
16 years
A diverse
team of over
50 broking
professionals
across Australia
There is no doubt that in last six months as predicted the
insurance market has continued to fall but we didn’t see pricing
movement correlate to business changing hands between
insurers, i.e. clients did remain loyal. What did happen of
course was that insurers were forced to reduce pricing to
retain business against their competitors. Interestingly when
we compare the actual rate movement from the data provided
from GRIP property classes had much heavier rate reductions
than general liability. This may suggest that client loyalty
is not as price sensitive in long tail classes of business.
The obvious answer to that question will be to provide more tailor
made solutions to clients and as brokers and clients we should
be challenging insurers to truly differentiate their offering. To
that end it is not just about expanding coverage but developing
new products in areas of increasing concern such as cyber.
The other potential but surprisingly little talked about issue is
the underlying profitability of the industry. It is very strong but
it should be remembered that the market is running combined
ratios in the low 90%’s which is clearly very good but this is
against a backdrop of a lower than average natural catastrophe
losses. In a normalised year for Nat cat it wouldn’t be that hard
to see combined ratios moving quickly to around 120%.
In the last few months we have seen the merger of XL
and Catlin, not long after that the announcement that
Axis and Partner Re would merge. Perhaps a sign that
at least some insurers feel that a consolidating their
positions in a challenging environment makes sense.
All that said there is no doubt that pricing will continue to fall
across the non-statutory classes of insurance in 2015 but with
these developments we will need to keep track on how the year
progresses as we assess longer term pricing movements into 2016.
Warm regards,
Which begs the question what can insurers do outside
of pricing measures to attract new clients?
As we moved through the first reinsurance treaty renewals of
2015 pricing for natural catastrophe covers continued to fall by
between 5% - 10% the drivers being another benign loss year and
the continued influx of so call disruptive capital from pension funds
and the like, (roughly an additional USD 60 billion of capital).
James Baum
Managing Director of Broking &
Chief Broking Officer, Pacific
Aon Risk Services
This has had a clear downward knock on effect to property
market pricing but it has also seen reinsurers look to
diversify their portfolios into the casualty space again
driving more competition and pressure on pricing.
Surplus capacity is not just the domain of the mainstream
property and casualty classes it is fair to say that we are seeing
this across the board including the Financial Specialties space of
Directors & Officers Liability, Financial Institutions and Cyber.
Aon’s Australian Insurance Market Update 1H 2015
3
Contents
Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
General Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Professional Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Directors’ & Officers’ Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Cyber . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Financial Institutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
New Zealand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
London . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Property
All Organisations
Up
Up
2.57%
Exposure
Large Organisations*
Whilst we saw a dip in declared values going into the market last
year with buyers amending their buying habits, we have seen
these start to increase again which will be welcome news for
insurers. Average declared value increases for the last quarter of
2014 increased by 3.65%...
1 Maintaining relationships is becoming a less critical factor
for buyers in current economic conditions.
2 Two speed market developing with more hazardous occupancies and
geographies likely to see more pronounced premium rate reductions.
2H 2014
Down
7.58%
Rate
3 Recent M&As, and their likely continuation, are
creating a level of uncertainty in the market although
it is unlikely to dent current capacity trends.
GRIP data shows rates are down an average 11 % for large corporate clients and by
8.5 % for those with an asset base up to $500m. Larger clients have experiencing
fierce competition for their business for some time now but competition for those with
smaller assets is fast catching up. This data shows that ‘soft’ occupancies, such as real
estate and healthcare, and those businesses in low-hazard natural catastrophe areas,
are seeing smaller reductions than the more volatile sectors or geographies where
premium adequacy remains and there is more scope for downward rate movement.
As we found in 2013 and 2014, insurer budget cycles should play an important
role in strategy setting. Insurers are likely to be far more aggressive in the run up
to the end of their financial year and Clients should be aware of these key dates.
Up
2.87%
Exposure
The benign claims environment continued in 2014 with record low natural
catastrophe claims globally allowing insurers to maintain solid results despite the
continued pricing pressure. Natural catastrophe losses globally totalled just over
$ 40bn and well below the ten year rolling average of $58bn. The vast majority
of these claims coming from the US, Europe and to a lesser extent Asia.
1H 2015 [f]
Down
8.31%
Rate
6
Aon’s Australian Insurance Market Update 1H 2015
Capacity
Australian insurers continue to remain competitive
at a global level and we are predictably still seeing
aggressive market behaviour out of Singapore,
London and the emerging Chinese market.
Global insurer capital increased 6% in 2014 to USD
4.2 trillion. There was a more substantial increase in
the reinsurance space which rose from USD 525 billion
to USD 575 billion. Roughly USD 60 billion of these
funds has come from alternative capital sources.
The local picture is no different with an over-supply of capacity
being driven by the benign claims environment and a stagnant
demand for insurance products. This dynamic accounts for the
fall in rates and looks set to continue for the forseable future.
The most notable new entrant to the market is Berkshire
Hathaway who add to their growing global presence in the
direct insurance space and with investment in teams of people
it would seem that they will have an aggressive push.
Up
4.69%
Exposure
2H 2014
Down
11.81%
Rate
Mergers, Acquisitions and Divestments
As mentioned, the benign claims environment has driven
an increase in insurer surplus capital. Insurers are getting
bigger and are being more bullish about what they retain.
Despite the continued reductions in reinsurance pricing,
there is a general trend to retain more in order to reduce
costs and combat front-end pricing pressure. The upshot
is that they are buying less reinsurance and are potentially
making themselves more vulnerable to a large insurance
event occur. The outcome of this reduction in reinsurance
purchase is the further driving of competition in this space.
This situation has led to a number of mergers and acquisitions
(M&As). With insurers buying less reinsurance, reinsurers
need to merge or acquire to become more relevant to
insurance companies for whom scale is becoming more
and more important. This is the key factor that could
potentially change the way the market operates.
The changing face of M&A is also worth noting. Historically,
M&As used to be about creating synergies. The current wave
of M&As appears to be more concerned with scale. That
means they are unlikely to contribute to a reduction in capacity
and indeed are likely to fuel the current market trends. The
recent acquisition of Catlin by XL and the merger between
Axis and Partner Re would certainly fit this mould and we
are likely to see similar mergers in the coming months.
Up
4.69%
Exposure
1H 2015 [f]
Down
11.81%
Rate
*Large organisations are defined
as those with total insured values
above $500M AUS
Aon’s Australian Insurance Market Update 1H 2015
7
General Liability
Market forces
Up
Buyer behaviour is becoming a significant issue for insurers. With the weakening
economic conditions in Australia, clients are still looking to minimise their insurance
spend. Insurers are keen to allow clients to reduce their deductible levels and broaden
coverage in an attempt to maintain premium levels and broaden their value proposition.
Generally, however, clients are happy with the retentions they already have, and
the coverage they have been able to negotiate is fit for purpose. Consequently,
they just want to drive prices as low as they possibly can. And they’re winning.
Up
0.96%
Exposure
• Surplus capacity is still having a favourable impact for the buyer
The analytics available to us continues to evolve as we continue to work with our
centres of innovation in Singapore and Ireland. We are now able to benchmark insurers
by minute detail, looking into their performance level by deductible, geography,
occupancy class and even measure margins of competitiveness compared to their peers.
2H 2014
Up
Up
2.93%
Premium
As we have suggested previously, we are unlikely to see the market conditions
challenged by an insurance event in the near future and more likely to see an economic
event change market dynamics. For example, we could see rating agencies begin to
scrutinise insurer and reinsurer behaviour in the current environment and challenge their
ability to cope with large market events. This could then the lead to buyers pulling away
from large sectors of the market if their ratings were no longer adequate for their needs.
With that said, combined loss ratios posted by most insurers in the low 90%s in what has
been a benign natural catastrophe environment, as losses start to normalise this could
quickly move combined ratios to well over 100%. The question will be whether carriers
will continue to burn capital in this scenario.
8
Aon’s Australian Insurance Market Update 1H 2015
In the current climate insurers are looking to mergers to create economies of scale.
We recently saw the merger of CGU and Lumley. Catlin and XL, who are major players
in the global liability market, have recently announced that they too are to merge. What
impact these mergers will have is yet to be seen, but there is the potential for capacity
reductions if the trend towards mergers continues.
A buyers’ market in most areas
Whilst prices have fallen in all other areas, obtaining cover for sexual misconduct is more
difficult. The market is proving very tight with little competition for clients with this risk.
At this stage prices haven’t been forced up, but the outcomes of the Royal Commission
later this year will see insurers make a firm commitment on whether to continue covering
these exposures and, if so, at what terms. We are also seeing a significant impact on the
way clients manage risk in this area.
With the continued squeezing of rates across the board, Insurers are also looking to find
the areas of the market such as local government and aged care, that have been under
serviced or simply ignored in recent years. Rates in these areas have been buoyant and
are attractive to many, particularly given the generally sound claims record and low
maximum loss potentials. Through the development of these market hotspots, we can
work with our clients to empower them to make more informed decisions. Despite this
reality, a number of insureds still believe that their options are limited and we continue
to challenge this thought process as many buyers are unaware of the options available
to them and the tailored solutions required to match their ever changing needs.
As we move through the next 12 months, a continuation and probable
acceleration of the current rate movement seems likely.
• A generally benign claims environment is continuing to push rates down
• Aggressive competition continues with insurers under pressure to meet budgets
We are not alone however as Data is also taking on a more vital role for insurers.
Not only does it help buyers make decisions on whether to remarket their
programs, it allows insurers to understand which occupancy types, product
lines, and geographic areas are more profitable than others. This data is helping
insurers understand that the less hazardous occupancies, such as real estate and
health care that have driven insurer appetite for so long, are far less attractive.
Whilst these areas provide consistent results, the continued pricing pressure has
pushed these once profitable segments into negative loss ratio territory. Whilst
more the more hazardous occupancies may provide volatility, at least they offer
an opportunity of profitability should the current claims environment continue.
Looking ahead
Overall, prices for general liability insurance products are
decreasing. Competition in the market is on the increase and
we are seeing surplus capacity which is bringing rates down.
Broad coverage is still available and the soft market would
indicate that this is a good time to review cover and ensure
that it is best in class…
Up
1.56%
Exposure
1H 2015 [f]
Ben Rolfe
Bushfire exposure also remains very tight. Whilst we have seen some discounts, they are
not generally easy to come by. However, there does appear to be more capacity available
as we see new insurers enter the bushfire risk market. A lot of this capacity is coming from
overseas and we are pleased to see interest from Asia, particularly from Chinese insurers.
We expect interest from emerging markets to continue to grow into the future.
The offshore energy market has stabilised over the past year and rates are now
considered flat.
Chief Broking Officer
Claims continue to be held in check
[email protected]
+61 2 9253 7452
Continuing the trend of the last five years, claims activity has remained modest and we are
seeing a very benign claims environment. That said, insurers are still continuing to monitor
worker-to-worker losses in relation to contractor and labour hire but are applying selfinsured retentions to manage the situation
for the time being.
Bill Pavey
Placement Director
- Casualty
[email protected]
+61 3 9211 3281
Up
3.07%
Premium
Looking ahead
Little overall change is expected in the coming 12 months. The current high levels of
competition look set to continue. This is compounded by insurers needing to write more
business to meet their budget targets, and in general it will remain a buyer’s market for the
foreseeable future.
Aon’s Australian Insurance Market Update 1H 2015
9
Professional Indemnity
Up
Up
1.1%
Exposure
Pricing has remained stable over the last six months.
Whilst rates remain much the same, the competitive
situation is allowing for some movement on premiums.
Although reductions are not necessarily easy to
come by, they can be achieved if other considerations
are made, such as increased deductibles.
• Insurers are seeking more granular information about what
businesses do and what their true exposure is
2H 2014
• The issue of compliance is becoming more topical for large
overseas businesses needing to buy correct local policies
Up
• Cyber risk is on the increase. Clients need to be educated on the
implications and increase cover to protect network security
Up
Insurers take a cautious approach
0.62%
Premium
The moderate claims environment we have seen over the past two years is
continuing with claims frequency remaining steady. There has, however,
been some loss settlement in the Australian market and globally.
Large-scale Australian projects that were placed in London some time ago are now
beginning to see their losses settled. This has made London insurers more cautious and
they are reviewing information more diligently before accepting Australian business.
Up
1.23%
Exposure
1H 2015 [f]
With many insurers suffering significant losses recently we have seen insurers adopt
a more technical stance when assessing claims. This at times is calling into question
their willingness to settle claims and has created some angst in the market and for
clients. To this end it is clearly important that clients engage early with their broker to
understand any potential issues and form a strategy around engagement of insurers.
Insurers also appear to be taking a much more conservative approach to loss-making
business than was previously the case and remarketing efforts are not necessarily
achieving the results we would hope to see. Overall, the market is displaying a general
reluctance to write business for loss-making portfolios or portfolios with a poor history.
Market movements increase competition
What the future holds
Recent market consolidations, such as the one between
Arch and Resource, and new entrants to the PI market are
giving cause to be watchful. All signs indicate that the new
entrants intend to take an aggressive approach to getting
PI business and taking over existing portfolios. This will
inevitably put pressure on pricing. The proposed merger of
XL and Catlin could also see price pressures loom large.
Over the next 12 months we can expect to see an increased
desire to look at the granular level of what businesses do and
what their true exposure is. Insurers will want to know more
detail, particularly when it comes to their larger clients.
The stimulus of new markets trying to enter the fray means
that capacity remains as high as ever. With rates down
overall and insurers under pressure to maximise diminished
returns caused by falling premiums, competition is high.
This competition is also creating a best-practice
environment with insurers being compelled to provide
the best wordings they can to be able to compete.
Emerging trends
Compliance has become a watchword for large overseas
businesses with the onus on them to buy the correct local
policies to comply with the law of the land. Early indications
show that overseas businesses are becoming more aware of
their responsibilities and are now more likely to be compliant.
Businesses have traditionally been diligent when it came
to compliance for D&O insurance, and we are beginning
to see the same behaviours emerging in PI insurance.
Long-term relationships between insurer and client are being
tested as clients prioritise their desire to save money. Incumbent
insurers are being placed under enormous pressure to reduce
premiums as discounted rates are widely available from markets
which are ‘new’ to the risk. This trend will continue, requiring
underwriters to use flare and imagination to retain their business.
The continuation of flat renewals looks set to continue
with the exception of those renewals where insurers
are keen to compete for desirable business.
Cyber insurance is likely to be purchased more readily as
clients become aware of the reality of the exposure and
the cost to their business should an event occur.
The exponential rise of cyber risk is of great concern.
With more and more businesses falling prey to hackers,
there is a general realisation that they need to have the
necessary cover in place to protect network security.
There is a real need for clients to be educated in this area
as it does pose a significant risk to going concern.
Up
0.23%
Premium
Paul Riding
Placement Manager
[email protected]
+61 2 9253 8266
10
Aon’s Australian Insurance Market Update 1H 2015
Aon’s Australian Insurance Market Update 1H 2015
11
Directors’ &
Officers’ Liability
Up
Up
0.71%
Exposure
2H 2014
In the last half of last year we began to see the market take a
more aggressive stance. Whilst there had been some softening
over the last two years with increasing competition, it hadn’t
been of any great significance. However, the changes we saw
towards the end of last year were new with an acceleration in
intense competition and noticeable price reductions. Average
discounts of 5 percent are not unusual in the current climate.
Despite the predicted rise in claims, even hard-to-place risks
are able to benefit from these reductions…
1 Clients are continuing to enjoy good times
Down
4.02%
Rate
2 The downward pressure on premiums and deductibles is set to continue
3 Insurers are remaining flexible in the breadth of policy cover offered
This competition is obviously having a beneficial effect on clients. Insurers are forced to
offer more and more for less and less and are becoming ever more flexible in the policy
cover they’re prepared to offer to clients and the deductibles and excesses available. As
insurers fight for their point of difference these items have become the new battlefront.
Surplus capacity continues to impact the market
Up
0.73%
Exposure
1H 2015 [f]
Much of this competition has been triggered by an oversupply of capital as insurers try
to retain and grow their portfolios in an increasingly tight market. With new entrants
vying for business, and other insurers starting to write D&O insurance to shore up losses
in other insurance classes, this aggressive outlook looks set to continue.
Economic downturn is a double-edged sword
Update on Bridgecorp
The level of claims in the D&O insurance class has remained
steady. However, the volatility in the economy at the moment
could signal a potential increase in claims in the near future. As
the Australian dollar continues to fall, and oil and iron ore prices
drop, several industries, such as the mining, resources and
energy sectors, are beginning to feel the pinch. The engineering
and construction sectors are also beginning to see a slowdown.
In an addendum to the Bridgecorp case from the previous
issue, the New Zealand courts have ruled that they do not
have jurisdiction to enforce the statutory charge on D&O and
other policies if a policy is issued outside New Zealand, e.g. in
Australia. This will provide local companies with some relief as
they may now be afforded protection under Australian policies.
Many larger companies are having to halt production
or shelve projects. This inevitably leads to an increase in
redundancies. With redundancies comes the risk of an
upsurge in claims from breaches of employment contracts
or irregularities in redundancy packages. Reducing
cashflow may generate its own problems as businesses
grapple with their debt and credit obligations.
As market forces change rapidly, company announcements
need to keep step. Companies and directors have a duty
to advise customers and investors of critical information,
and timing is crucial. If directors fail to provide an
appropriate response to new information quickly enough,
they may find themselves facing claims from disgruntled
investors. A number of larger companies are currently
before the courts for allegedly holding back information
which negatively affected shareholder investments.
With pressure mounting, it would not be unusual
to see an increase in claims in these industries.
What’s more, the last two years have been benign in terms of catastrophe losses across
the major classes of insurance. As a result, reinsurers have lots of capacity and are
prepared to provide it at a lower price than perhaps previously. Capital is flooding into
the global re-insurance market, with an injection of USD 6 billion in non-traditional
insurance capital coming from super funds and sovereign funds.
On the flipside, some industries, such as the export and
airline sectors, are benefiting from cheaper fuel prices and a
falling dollar. The likelihood of claims being brought against
them is diminishing. They are also more likely to find favour
with investors as people look to more positive stocks.
There is currently so much capacity that it can’t be absorbed quickly enough at product
level and it will be a few years before insurers see an upswing in rates.
The retail industry, in broad terms, also seems to
be moderately positive. The prevailing buoyancy at
consumer level is good for the retail industry and will
alleviate claims, although this could change quickly if
unemployment deteriorates to any significant degree.
Down
4.04%
Rate
Looking forward
The continuous flow of capital flooding into the global and
Australian markets looks set to continue over the coming year.
The continued high levels of competition will render inadequate
the reliance on reductions in excesses and deductibles to
attract customers. Insurers will have to remain focussed on
client needs in order to retain their custom. The lack of organic
growth may also result in a number of insurer mergers.
If the insurance industry is to increase returns in the future, it is
going to have to be far more efficient and be prepared for change.
The next 3-5 years are going to be so dynamic that they will set the
fundamentals in the insurance industry for the next 30-50 years.
In the future, the point of difference will be data and insights.
Savings are to be found everywhere, but information is
now the order of the day. Clients want to know how they
can prevent claims from happening in the first place.
Insurers who aren’t prepared to respond to these needs
and make the necessary changes may not survive.
Paul Smyth
Placement Director –
Financial Services
[email protected]
+61 3 9211 3123
12
Aon’s Australian Insurance Market Update 1H 2015
Aon’s Australian Insurance Market Update 1H 2015
13
Cyber
Cyber risks have continued their rapid climb moving into
the top five business risks globally for the first time this year.
In a recent survey of Australian CEO’s conducted by PwC
cyber risks was rated the second highest business threat
to organisational growth.
Counting the cost
Looking ahead
Businesses in the services sector, such as healthcare,
education, hospitality, government etc., have been the
most frequently targeted. These companies typically
collect and store vast amounts of valuable data.
Cyber crime is also evolving and becoming more targeted
and sophisticated, with the amount of malware and malicious
software rocketing by 400 percent since 2012. Every day cyber
criminals are working on new techniques to penetrate the
security of organisations in an attempt to disrupt systems,
access sensitive data, and steal intellectual property.
The potential consequence of a data, privacy, and/or network
security breach is significant. Data breaches now cost on
average USD 3.5 million, up 15 percent on 2013. The average
cost per lost or stolen record is USD 145, a 9 percent increase
on the previous year . Studies across 11 different industry
sectors in Australia show that this cost is continuing to rise.
There is a significant need for organisations and boards to
become more aware of the threat that cyber risk poses to
their bottom line and brand and reputation. As awareness
increases and high-profile breaches are seen in the media,
there will be a further uptake of cyber insurance with
companies looking to transfer some of the financial risk off
the balance sheet and on to an insurance mechanism.
1 If your organisation has yet to consider its cyber risk exposure, now is the time.
2 Examine the cyber risk framework and explore what options
are available in terms of risk mitigation and transfer
3 Make sure you know what’s happening in the market in terms of your
industry sector, the Privacy Act, and any legal requirements.
The rise of cyber risk can be attributed to a number of factors:
1 Company changes: New product launches, mergers, acquisitions, market
expansions, and the introduction of new technologies are all on the increase: these
changes invariably challenge the strength of an organisation’s cyber security.
2 Mobility: The use of the Internet, Smartphones and tablets, in combination with
bring-your-own devices, has made organisations’ data accessible everywhere.
3 Ecosystem: We live and operate in an ecosystem of digitally connected
entities, people and data, increasing the likelihood of exposure
to cybercrime in both the work and home environment.
4 The Cloud: Cloud-based services, and third party data management and
storage open up new channels of risk that did not previously exist.
Equally alarming is the associated backlash which sees customers
more likely to abandon companies following a data breach.
The average churn rate has increased by a further 5 percent.
Pricing in a state of flux
At the end of Q3 last year the Australian market was
worth AUD 8-10 million, as compared to the much more
sophisticated US market at almost USD 2 bn. However,
the market in Australia is growing rapidly and estimates
see the market doubling by the end of 2015.
As cyber risk is a fairly new insurance, the market has yet
to work out a consistent pricing model. We have seen a
general decline in pricing recently, but we are also seeing
vastly different numbers from different insurers depending
upon their appetite and the rating model used.
Insurers are keen to grow their book in a market where there’s
abundant capacity so, as competition grows, we should see
reductions in pricing in the long term once the market has
settled. Already we’re seeing significant changes in limits. Where
a year ago insurers would only provide AUD 5 million limits,
some now offer AUD 10 million or even AUD 20 million limits.
As more breaches start to hit Australian shores, premiums may
rise in the short term. But as insurers gain an understanding
of what the breaches entail, they will have a better idea
what to charge and prices should start to stabilise.
We will also see a significant increase in ASX takeup as companies become more aware of their brand
risk and of their obligations under the Privacy Act. We
can also expect companies that had already taken out
cyber insurance to purchase higher limits in the second
year as they begin to understand the true scope.
Mandatory notification is not currently required in Australia
under the Privacy Act. However, there is a sense that
the Australian Government may take steps in the next
six months to introduce legislation to make notification
mandatory in the event of a serious data breach.
It is worth noting that cybercriminals will never
stop trying to compromise systems to obtain data.
Organisations need to be aware of where they may be
open to attacks, how attackers can enter their environment,
and what to do if, and when, an attack occurs.
5 Infrastructure risk: Critical infrastructures, including public facilities, are
also vulnerable to cyber attacks. Industrial control systems are at risk
from attack by remote unauthorised access from anywhere in the world.
It is estimated that by 2018 oil and gas companies globally could face
costs of up to USD 1.87 billion from cyber attacks on infrastructure.
Eric Lowenstein
Cyber
[email protected]
+61 2 9253 7445
14
Aon’s Australian Insurance Market Update 1H 2015
Aon’s Australian Insurance Market Update 1H 2015
15
Financial Institutions
Following on from last quarter, broad coverage terms
continue to be available in the marketplace, but need to be
heavily negotiated. There is still abundant ‘theoretical’ capacity
in the market. However, when it comes to the actual provision
of capital, it can still be somewhat cyclical and uncertain,
particularly for large risks.
1 Insurance market conditions remain largely unchanged despite
continued claims activity across the financial services sector
2 Pricing has become a more dominant factor in purchasing decisions
3 Financial services clients continue to scrutinise their network security
and privacy exposures before making purchasing decisions
Regulatory obligations affect claims
Buyers benefit from increased competition
Since the financial crisis, considerable emphasis has been placed
on creating a more tightly regulated and less distressed financial
system. One consequence has been an increase in regulatordriven settlements. These settlements are changing the nature
of claims with claims being made without customer instigation.
The change is also encouraging the need to amend policy
language so that it not only responds to traditional customer
claims, but also meets certain regulatory obligations.
A number of large European financial institutions have stopped
purchasing Professional Indemnity insurance over the past
quarter. This decision has resulted in a large pool of premium
to the insurance market which needs to be replaced. A number
of London markets are taking up the gauntlet and focusing
heavily on writing new business. This translates to additional
competition for Australian buyers.
The Murray Inquiry has now handed down its report of
recommendations for the financial services sector. It is expected
that the additional emphasis on ‘consumer welfare’ will translate
to additional claims activity. Insurers, therefore, anxiously await
confirmation of what recommendations are to be implemented.
Pricing takes on more importance
As the market evolves, so too do client priorities. Pricing, longterm relationships and terms and conditions have, until now,
been the key drivers of purchase decisions. However, whilst
clients have historically been supportive of their long-term
insurer relationships, we are now seeing price become a more
dominant factor.
Despite this shift, however, financial institutions continue to rely
on brokers to select insurance markets that will provide the best
combination of attributes for their needs. They are still prepared
to make purchasing decisions in favour of the financial strength
of counterparties and their willingness to make claims payments
The change in purchasing attitude presents a clear challenge
to the insurance market. When reviewing their strategy and
value proposition, insurers must now consider whether to
continue competing largely on price for insurance products
that no longer entirely fulfil the needs of ever-evolving financial
institutions. Alternatively, they can propose risk transfer
solutions for some of the new and emerging risks.
Looking ahead
It is important to note that financial institutions tend to
experience more volatile premium rates than all other industries.
However, we don’t expect to see any material change to
current pricing levels in the near future given the abundance
of available capacity in the insurance and reinsurance markets.
Understanding and managing risk are critical success factors
for financial institutions, and financial services firms are now
experiencing a higher level of oversight from their boards than
any other industry. The insurance industry must, therefore,
continue to maintain its relevance as a valuable partner by
having a thorough understanding of the sector’s concerns and
providing appropriate solutions.
Whilst we know that buyers are now more keenly intent on
achieving lower premiums, it is worth asking whether financial
institutions should also demand more innovation from their
insurers to help them meet their long-term risk management
needs. The exponential rise of cyber risks is a prime example of
an area where insurers need to respond to the governance and
coverage requirements of financial institutions by providing
appropriate risk transfer solutions.
Eden Fletcher
National Financial Lines
Placement Manager
[email protected]
+61 2 9253 7610
16
Aon’s Australian Insurance Market Update 1H 2015
Aon’s Australian Insurance Market Update 1H 2015
17
Workers’ Compensation
and Work Health & Safety
New South Wales
Northern Territory
Workers’ Compensation
WorkCover NSW announced the successful applicants for its
scheme Agent tender in November 2014. As a result of the
tender, the existing seven Agents have been reduced to five; the
licences for Xchanging and Gallagher Bassett were not renewed.
WorkCover has reallocated the respective portfolios as follows:
Workers’ Compensation
For almost ten years, the workers’ compensation scheme in the
Northern Territory has struggled to remain financially viable.
As a result, the review of the Northern Territory Workers’
Rehabilitation and Compensation Act has recommended key
changes to the legislation which will restrict benefits from the
current ‘pension based’ model unless the worker is deemed to
be seriously injured.
• Gallagher Bassett Services Pty Ltd’s clients will transfer
to Allianz Australia Workers’ Compensation (NSW).
National
Seafarers
A recent Federal Court of Australia decision has significant
ramifications for employers that operate a ‘prescribed ship’
within Australian waters.
Previously it was felt that Seafarers legislation only applied
to ‘prescribed ships’ that operated for the purpose of ‘trade
or commerce’ either interstate or internationally. However,
the broadness of this decision indicates that operators of
prescribed ships for trade or commerce need to have Seafarers
workers compensation coverage or risk being uninsured.
Seacare is reviewing the implications of this decision and
will provide further directions in due course.
Comcare
The Amendment Bill to allow national employers the
opportunity to self-insure under the Safety Rehabilitation and
Compensation Act passed through the House of Representatives
on 26 November 2014. It will be debated further once
Parliament begins the autumn session on 9 February 2015. The
new Bill stipulates the removal of the ‘competition test’ from the
eligibility criteria for companies seeking entry into the Comcare
scheme as self-insurers.
This change will give more businesses that operate in two
or more states in Australia the opportunity to move into a
single workers’ compensation jurisdiction. This would enable
them to provide the same benefits for all their employees.
Multi-state companies that are already able to demonstrate
competition with a current or former Commonwealth Authority
(or that are themselves a current or former Commonwealth
Authority) do not need to wait for the Bill to pass through
Parliament to commence the application process.
18
Aon’s Australian Insurance Market Update 1H 2015
Work Health and Safety
Safe Work Australia Members met on 11 December 2014.
• Xchanging Limited’s clients will transfer to
Employers Mutual NSW Limited.
Members provided an update on the implementation of the
model WHS laws in their jurisdictions. The final report on the
examination of the model WHS laws requested by the Council
of Australian Governments will be sent to Ministers for their
consideration.
• GIO is to acquire an additional 5% of market share from QBE.
Members agreed to consider proposals to improve the
model WHS Regulations and to report back to Ministers by
end of April 2015.
Agreement in principle was reached on revised guidance
material for ‘Cranes and Plants in Rural Workplaces’ whilst
agreement could not be reached on guidance material for
‘Tree Trimming and Removal – Crane Access Methods’.
Australian Capital Territory
Work Health and Safety
The Dangerous Substances (Asbestos Safety Reform)
Amendment Bill 2014 came into effect on 1 January
2015 bringing ACT legislation in line with the national
model WHS laws developed by Safe Work Australia.
The reform package includes the Work Health and Safety
(Asbestos) Amendment Regulation 2014, and two supporting
codes of practice.
The Government also regulated the removal of asbestos in nonworkplaces through new additions to the Dangerous Substances
(General) Regulation 2004. From 1 January 2015 a person must
not remove asbestos or asbestos-containing material from any
premises (including residential premises) unless the person is an
appropriately licensed asbestos removalist.
It is expected that existing claims will be reallocated
to the successful agents from May 2015.
WorkCover NSW has also flagged its intention to change the
current premium calculation methodology for medium and
large employers. It is not yet known what the changes will
entail, however, it is anticipated that WorkCover may move to
a model that removes the current ‘hindsight adjustment’ and
allows for a fixed-premium rate for the period of insurance.
More information is expected over the next three months.
Work Health and Safety
Harmonised WHS laws for the NSW mining sector take
effect from 1 January 2015, with the Work Health and Safety
(Mines) Act 2013 replacing the Coal Mine Health and Safety
Act 2002 and the Mine Health and Safety Act 2004.
The Act and subordinate regulation are based on
Safe Work Australia’s model WHS legislation.
From 1 January 2015, compliance requirements for ‘hazardous
chemicals’ notification under Schedule 11 of the Work
Health and Safety Regulation 2011 have been simplified.
Queensland
Workers’ Compensation & Work Health and Safety
To provide streamlined access to safety and workers’
compensation information and services, the Queensland
government has established a website that combines Workplace
Health and Safety Queensland, WorkCover Queensland,
the Electrical Safety Office, and the Workers’ Compensation
Regulator into a single website available at www.worksafe.
qld.gov.au. All enquiries for the four organisations are
now funnelled through a single telephone number.
Work Health and Safety
NT WorkSafe has extended some transitional arrangements
under the WHS legislation. These include:
• the requirement to provide audiometric testing to
workers (Reg. 58 – extended to 1 January 2016);
• the requirement to hold High Risk Work Licence
(Reg. 81, Schedule 3 – extended to 1 July 2015);
• the requirement for independent clearance
inspection of asbestos removal areas (Reg.
473(2) (b) - extended until 1 January 2016).
Several transitional arrangements expired with effect
from 1 January 2015 and can be found on the NT
WorkSafe website at http://www.worksafe.nt.gov.
au/NewsRoom/Lists/Posts/Post.aspx?ID=88.
Victoria
Workers’ Compensation
The Victorian scheme remains in surplus. The Government
has indicated that any surplus accumulated by the Victorian
WorkCover Authority would be used to fund improved benefits
and access for injured workers, lower premiums for Victorian
businesses, and improve workplace safety and the health of the
Victorian workforce.
Work Health and Safety
With the recent change in government in Victoria, the previous
stance on rejecting Safe Work Australia’s model WHS legislation
may be reviewed. It is expected the current Government will:
• review the effectiveness of OHS legislation,
regulation and enforcement by the VWA;
• ensure labour-hire arrangements are not used
to compromise workers’ safety; and
• establish an independent research council to
report to Parliament on the latest research on
WHS, including occupationally linked disease.
Aon’s Australian Insurance Market Update 1H 2015
19
Tasmania
South Australia
Workers’ Compensation
WorkCover Tasmania issued their annual report in late October
2014. The report indicates that the scheme continues to be
unprofitable for insurers with the average premium rate being
21% below the suggested rate. Claims frequency was below the
expected volume, but claims payments were higher. In addition
the scheme has underperformed against the national Return to
Work Rate (86% vs Average of 87%) and Current Return to Work
Rate (76% vs Average of 77%). Premium rates are expected to
remain under pressure for the foreseeable future.
Workers’ Compensation
A new premium model has been proposed for the South
Australian Scheme to take effect on 1 July 2015. Whilst it has
yet to be finalised, the intention is to introduce one premium
model for all employers, with a discount being applied for
employers who have no ‘claims costs’. An employer’s premium
will now be adjusted upwards to a maximum percentage
which is based on the amount of claims costs paid during the
preceding year on all claims reported in the three-year window.
Only those costs actually paid will be included so there will be
no more estimates of future costs. Each dollar of paid cost will
only be used once in the premium calculation instead of three
times as is the case with the current premium calculation.
Work Health and Safety
Several changes to the Tasmanian WHS legislation took
effect from 24 December 2014. These changes included
• Technical amendments related to high-risk work and
licensing; mutual recognition of major inspections;
control measures for amusement devices to include
passenger ropeways; and cancellation of registration
issued for plant designs and items of plant.
• Removal of regulations related to protective structures
on earthmoving machines (Reg. 217); and
registering
designs for prefabricated formwork (Schedule 5).
• Deferral of commencement to 1 January 2017 for regulations
related to diving work (Regs. 168-170, 178-181); and
asbestos testing and analysis [(Regs.423 (2), 479(2)].
Western Australia
Workers’ Compensation
The WA Government has approved the drafting of a bill to
repeal and replace the Workers’ Compensation and Injury
Management Act 1981. No further announcements have
been made with regard to the timing of the drafting process.
However, the Government is committed to a consultative
approach and intends to release a draft of the bill for public
comment before it is introduced into Parliament.
The premium rate is to be fixed at the start of each policy
period. This means that there will just be an adjustment
at the end of the period based on actual wages.
The model is intended to reward employers who are able to
achieve an early and sustainable return to work for their injured
workers. The provision of suitable duties at the earliest possible
opportunity will help to minimise the cost of claims.
Work Health and Safety
Two new regulations came into effect on 1 January 2015:
• Recognition of asbestos removal licences in
other jurisdictions (Reg. 488); and
• Quarterly WHS reporting requirements for mining
(incidents as defined in Schedule 24).
Transitional arrangements also expired on
several regulations including:
• Licensing to carry out high risk work [Reg. 724(7), 724(8)];
• Asbestos licensing and work (Regs. 727- 729); and
• Duty of designers (Reg. 731).
Work Health and Safety
Unlike the majority of Australian jurisdictions, WA is
expected to maintain separate WHS and Dangerous Goods
laws when the WHS Bill is tabled in Parliament. On 11
December, Mines and Petroleum Minister Bill Marmion
advised that the reform of dangerous goods regulations
would combine six sets of existing rules into one.
As previously reported, the Work Health and Safety Bill
2014 remains open for public comment until 30 January
2015 and is available at https://www.commerce.wa.gov.
au/worksafe/work-health-and-safety-bill-2014.
Matthew Brown
Placement Director –
People Risk
[email protected]
+61 2 9253 7248
20
Aon’s Australian Insurance Market Update 1H 2015
New
Zealand
Aon New Zealand
• Property pricing continues to decline, with some variations across market
segments. Rate reductions are now common for property business
generally however there remains a differential in the level of reductions
between the corporate and commercial property sectors;
• Policy terms and conditions remain largely unchanged with insurers strongly
focused on ensuring policy wordings reflect their reinsurance arrangements;
• Non-property classes of insurance continue to be competitive with increased
interest in low risk liability products, from both existing and new markets, and in
short tail motor business as the IAG/Lumley merger creates potential opportunities;
• An increasing need to consider the insurance ramifications of new and
proposed legislation including the new Health and Safety regulations. The
higher level of FMA activity (investigations/prosecutions) has also precipitated
a review of the terms of cover afforded under Statutory Liability policies;
• IAG completed the acquisition of Lumley in Australia and New Zealand in July 2014
and the merger and restructuring of the two operations continues to make progress;
• Several new insurers have entered the market in the last 12 months including
Delta Insurance (a specialist liability underwriting agency), Berkshire Hathaway
Speciality (who will write property, casualty and financial lines) and Chubb (who
have obtained a NZ insurance licence through their Australian subsidiary);
The market has moved on from the global and NZ natural
catastrophes experienced in recent years. An influx of new
capital has come from both traditional reinsurers looking for
improved returns and from non-traditional sources in the form
of catastrophe bonds, often issued or backed by large municipal
pension funds looking for higher returns. This new reinsurance
capacity coupled with relatively low natural hazard losses has
driven improved profit results for local insurers. These local
insurers, on the back of their improved financial positions,
are looking to grow once again and this competitive tension
has driven the recent rate declines in the insurance market.
Set against this background of increased competition
insurers are however conscious of remaining disciplined
in how they assess, underwrite and price risk to avoid a
return to past eras where competition drove unsustainable
pricing. Increased regulation and oversight of the insurance
industry may also have some impact in this area.
Overall, the market is competitive however quality risk and
underwriting information remains important and preparation
for insurance renewals should commence well in advance
and be communicated effectively to ensure the best
possible pricing and terms can be achieved from insurers.
Many corporate clients are seeing value in benchmarking
their risk information against their local and international
peers. Aon, through its proprietary Global Risk and
Information Platform (GRIP) is able to assist in producing
comprehensive benchmarking reports that enable
companies and boards of directors to measure the
suitability of their risk transfer programme.
We encourage clients to review their business
risks and define what insurance is required to
ensure their objectives are achieved.
The NZ insurance prudential regime requires progressively
more capital allocation from insurers. A prolonged
low interest-rate environment will likely see insurers
increasingly turn to the new reinsurance capital to
meet these increased prudential requirements.
• Insurers are generally forecasting profit growth, with those having a
30 June balance date expecting strong contributions from their NZ
operations. These forecasts are tempered by the proviso that there
are no significant natural peril disasters before balance date.
Angus McCullough
Chief Broking Officer
– New Zealand
[email protected]
+64 9 362 9059
22
Aon’s Australian Insurance Market Update 1H 2015
Aon’s Australian Insurance Market Update 1H 2015
23
London
The Lloyd’s, London
and European market
The Lloyd’s, London and European property
market (The “London market”) continue
their strong appetite for Australian and
New Zealand clients. Business from this
region remains desirable given the strong
risk management culture, robust contractual
requirements, buying strategy and shared
social, cultural and historical similarities.
The attraction of carrier headquarter decision making in
London and Europe remains strong and many insureds
strategically elect to maintain a global diversification of their
panel - increasing competition and mitigating against any short
term local market rating spikes, as evidenced in the aftermath
of the Canterbury earthquakes and Queensland floods.
The London market as a collective underwrite more written
premium than any individual carrier in Australia and New
Zealand and therefore are a decisive factor in the surplus
capacity in the Australian and New Zealand market and the
continued downward rate movement. Premium from the
US continues to dominate the market and strong appetite
in the US domestic market remains putting increased
pressure on markets in London. Underwriters attempts to
defend their existing portfolio and offset any lost business
with new opportunities on a global basis has resulted in
further London and European entrants to the Australian
and New Zealand property space in 2015. There are those
exploring Australasia as a territory to diversify from their core
geographical folder and those already engaged territorially,
targeting traditionally more challenging and heavy industrial
occupancies as another avenue for new business possibilities.
As we have seen within the local Australasian market
with declining rates across all occupancies, the focus on
risk selection and the profitability of specific industry
sectors has become even more of a focus and the London
market continues to provide options to those Australasian
clients with more challenging occupancies, high hazard
natural catastrophe exposures and claims frequency.
Rates in the London and European market continued to fall in
the latter stages of 2014 and indeed rating pressure escalated
in the run up to year end as budget pressures mounted.
Low double digit rate reductions were common and in
line with rate movement in Australia and New Zealand.
Expectations for 2015
Against this fiscal backdrop, a highly capitalised market and
assuming the benign natural catastrophe events continue,
we expect similar rating environment to that enjoyed by
insureds over the past twelve months. Whilst many markets in
London are keen to highlight a reduced gross written premium
expectancy in 2015, the reality is that the vast majority will need
to grow their policy count to be in a position to match budget
targets and these pressures will continue to drive behaviour.
Aon’s exclusive Sidecar agreement with Berkshire Hathaway has
been extended to cover renewal dates up to March 2016. This
will continue to drive competition within the market and allow
enhanced options for our clients placing business into London.
Andrew Laing
Chief Broking Officer –
Global Broking Centre
London
[email protected]
+44 (0)20 7086 4592
Aon’s Australian Insurance Market Update 1H 2015
25
Reinsurance
The quality of the financial security for the (re)insurance
market has never been higher. Reinsurers, like their insurer
counterparts, are taking less risk per unit of capital than
they ever have before. The price of traditional reinsurance,
particularly property catastrophe reinsurance, has fallen
in response to disruptive alternative capital. This capital
has become increasingly more influential and is now
a price maker rather than a price taker. Based on the
combination of quality and price, the value proposition
of reinsurance today has never been higher.
Retention levels on all classes of business remained steady on
a nominal basis. This translates into effective reductions based
on the probability of attachment from a loss perspective.
• The insurance industry has access to record
levels of reinsurance capital from both
traditional and alternative sources
Looking ahead
• The quality of the financial security for the
(re)insurance market has never been higher
• Insurers have the widest selection of high quality offers
of accretive underwriting capital choices we can recall
January 2015 renewals
Australian and New Zealand catastrophe placements at January
saw the favourable market conditions continue. However,
risk-adjusted rate reductions tapered off slightly when
compared to July 2014 with around 5 to 10 percent being cut
off the previous January 1 renewals. The main driver for these
reductions was the ready availability of quality capacity. The
increased competition is putting pressure on smaller reinsurers
to maintain their shares and relevance on placements.
Whilst the majority of reinsurance capacity is still provided
by the traditional reinsurance market, renewals saw
further interest from non-traditional markets, particularly
in the main catastrophe excess of loss placements. These
markets have also increased relationships in Australia and
New Zealand by providing more exotic coverage.
Insurers have the widest selection of high-quality offers
of accretive underwriting capital choices we can recall.
Growth and consolidation plans for leading insurers
have found complementary support from partners in
the reinsurance market. We expect the trends seen
in January to continue into April, June and September
catastrophe reinsurance renewals, and our expectation
is that market conditions will remain favourable with riskadjusted rate reductions in the order of 5 to 10 percent.
Whilst we expect to see rate reductions continuing, we
believe that the rate of these reductions will moderate
somewhat as reinsurers evaluate pricing adequacy levels
more closely before committing capacity. However, in
return for a moderation of rate reduction, insurers are
likely to seek coverage improvements and enhancements
that will assist their original insurance offerings.
Risk-adjusted reductions are being tempered by the higher
(capacity) layers on ANZ programs where exhaustion points
exceed a 300-year return period. These layers are reaching
‘new minimum’ ROL levels so are typically not achieving the
same level of reductions seen in other parts of programs.
This information may be regarded as general advice. That is, your
personal objectives, needs or financial situations were not taken into
account when preparing this information.
Accordingly, you should consider the appropriateness of any
general advice we have given you, having regard to your own
objectives, financial situation and needs, before acting on it. Where
the information relates to a particular financial product, you should
obtain and consider the relevant product disclosure statement before
making any decision to purchase that financial product.
No Warranty
We make no representations or any warranty of any kind whatsoever
(expresses or implied) regarding the content of this information or its
suitability or fitness for any purpose.
Financial and Legal Advice Disclaimer
This information is intended to provide general insurance related
information only. It is not intended to be comprehensive, nor does it,
or should it (under any circumstances) be construed as constituting
legal or financial advice. You should seek independent legal or other
professional advice before acting or relying on any of the content of
this information.
Exclusion of Liability
You agree that we (Aon) will not be responsible for any loss, damage,
costs or expense you or anyone else incurs in reliance on or use of
any information contained in this information/presentation/report.
John Carroll
Head of Broking
[email protected]
+61 2 9650 0460
Aon’s Australian Insurance Market Update 1H 2015
General Advice Warning
All references to reported past performance is not an indication of
future performance.
Soft market conditions also continued across casualty
market placements with reinsurers seeking to support these
placements to diversify away from catastrophe exposures.
This is also part of their strategy to build deeper relationships
with clients. The resulting increase in the supply of casualty
business is driving very competitive terms and conditions.
26
Disclaimer
© 2014 Aon Corporation Australia Limited
ABN 58 004 756 772
ARS0078A 0314
Adelaide
Level 10, 63 Pirie Street
Adelaide SA 5000
08 8301 1111
Melbourne
Level 51, 80 Collins Street
Melbourne VIC 3000
03 9211 3000
Brisbane
Level 2, 175 Eagle Street
Brisbane QLD 4000
07 3223 7400
Perth
Level 7, 28 The Esplanade
Perth WA 6000
08 6317 4000
Hobart
Level 2, 100 Melville Street
Hobart TAS 7000
03 6270 0400
Sydney
Level 33, 201 Kent Street
Sydney NSW 2000
02 9253 7000
aon.com.au
ARS0130 1214