pwc.com.au Insurance Facts and Figures 2012 June 2012 Scan the QR code to download FS Connect as a free App for your ipad Download QR Reader app from App Store.
Editor: Scott Fergusson Publication Team: Kudzaishe Tagwireyi Michelle Oliver Tony Kamberi Contributors: Scott Hadfield Christopher Verhaeghe Sarah Long Naomi Jones Roland Fan Andrew Smith Michael Bibas Samuel Lee Peter Kennedy Nadisha Mataraarachi Voula Papageorgiou Scott McKay Lee Hudson Adele Yee Bayne Carpenter Andrew McPhail Renae Cooper Anna Donoghoe Billy Bennett Magalie Engelmann Gavin Nathan Praveena Karunaharan Insurance Facts & Figures 2012 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australia member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This publication is designed to provide an overview of developments the accounting, tax and regulatory environment relating to insurance in Australia. Information contained in this booklet is based on the law and Government announcements as at 21 April 2012. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability limited by a scheme approved under Professional Standards Legislation. PwC Australia helps organisations and individuals create the value they re looking for. We re a member of the PwC network of firms in 158 countries with close to 169,000 people. We re committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.au. WL 238929
Contents 02 Foreword 04 Accounting and regulatory update 14 17 Taxation Sectors in update review
Foreword Scott Fergusson We are delighted to share with you PwC s Insurance Facts & Figures for 2012. It focuses on the key developments in accounting, regulation and tax for the insurance industry over the past year as well as providing on analysis of the general, life and health insurance sectors in Australia. 4 Insurance Facts and Figures 2012
It is also exciting to present this edition in an App version as well as in pdf. By being part of PwC s FS Connect App series, users of Facts & Figures can also easily explore the broad range of current thought pieces produced by PwC on the insurance, banking and asset management sectors. People working in the insurance industry should be proud of how they help contribute to Australia and its community. This has been clearly demonstrated in the industry s excellent response to recent catastrophes, and is reflected in the life industry s ongoing Lifewise initiative. Despite this there is an ongoing need to improve the public perception around the value of insurance so that more Australians are encouraged to participate in seeking protection. While the FSC, ICA and Private Healthcare Australia are working to address this, never before has the need to focus on the customer been so strong for insurers. With changing customer behaviour and the effect of digital disruption to distribution methods, winners in the industry will be ones that have a better understanding of the customer and that take an outside-in view to value propositions and operating models. To help with your thinking about how global trends may impact the insurance industry, please see our white paper Insurance 2020: The Future of Insurance on the App, website, or through your usual PwC contact. On behalf of the PwC Insurance team, I trust you find this edition of Facts & Figures of value. Scott Fergusson PwC Australia Insurance Leader PwC 5
G General Insurance L Life Insurance H Health Insurance Accounting and regulatory update 1 The following section provides an update on key changes to accounting and regulatory requirements for insurers since the previous Insurance Facts and Figures in May 2011. Life and General Insurance Capital (LAGIC) review G L Background APRA is now in the latter stages of reviewing its capital standards for general insurers and life insurers. APRA s objective is to improve the risk-sensitivity of the capital standards and to harmonise the approach across all APRA-regulated industries where appropriate. The review process commenced in May 2010 and has involved the majority of insurers participating in two quantitative impact studies and over 120 submissions on the proposals provided to APRA. On 31 May 2012, APRA released its latest Response to Submissions paper along with eleven final prudential standards relating to the calculation of the prescribed capital amount for both general and life insurers. On 31 May 2012, APRA also released draft prudential standards on the composition of the capital base for general and life insurers and draft revisions to other prudential standards reflecting amendments that largely stem from the capital standard changes. Capital requirements The implementation of the final and remaining proposed prudential standards will affect the capital requirements of all insurers and while the impact on capital requirements for many insurers will be modest, for a small number the impact may be material. In the industry s most recent submissions on APRA s proposals, some of the key areas of focus included the quality of capital limits in determining Tier 1 and Tier 2 capital, the internal capital adequacy assessment process, how and when the supervisory adjustment would be determined by APRA, how to apply asset risk charge rules, and the treatment of life company deferred acquisition costs and deferred tax assets for capital purposes. 6 Insurance Facts and Figures 2012
On 14 March 2012 APRA communicated to general insurers that the commencement of the horizontal requirement of the insurance concentration risk charge (ICRC) would be deferred to 1 January 2014. This was in response to industry concerns around the potentially significant capital burden of the requirement and the time required to implement a suitable strategy to satisfy this requirement. Insurers will still need to address in their ICAAP in 2013 how they will meet the horizontal requirement by 1 January 2014. On 30 March 2012, APRA released a letter to life insurers describing APRA s proposals for the measurement of illiquidity premiums in discount rates where annuity liabilities have illiquidity characteristics, for example where the only insurance risk relates to longevity and servicing expenses. Internal Capital Adequacy Assessment Process (ICAAP) Aside from the calculation of the revised capital requirements the implementation of the ICAAP is a new challenge for insurers this year. The ICAAP is an ongoing process to be adopted by insurers to manage their capital levels according to the levels of risk in the business. The ICAAP will vary in complexity depending on the nature of the insurer, will need to address all aspects of the insurer s capital adequacy framework, and will need to be overseen by the Board. The most effective ICAAPs will be those that enable management to support the Board in understanding the changing profile of risk in the business, the sensitivities around these risks, and making decisions around capital levels in the context of the insurer s risk appetite. Other notable changes Among the broad range of other changes to the prudential standards as part of the LAGIC review are the requirement for general insurers to submit their FCR and ILVR within three months of year end as opposed to four, the requirement for life insurers to take responsibility for capital rather than this being the responsibility of the Appointed Actuary, and the incorporation of the ICAAP process into the risk and reinsurance management strategies. These changes, along with the rest of the LAGIC package, clearly have a broad and deep impact on the governance structure, operational, risk and reporting processes of insurers. Timing Comments on the draft prudential standards released on 31 May 2012 are due to APRA on 27 July 2012. Draft reporting standards, forms and instructions will be released by APRA for comment in June 2012 with submissions due on these in August. APRA anticipates having issued all final prudential standards by October 2012. The final prudential standards will be applicable from 1 January 2013, with the exception of the horizontal requirement of the ICRC which will apply from 1 January 2014. Where insurers do not expect to be able to comply with the revised standards in time, they may apply for transitional arrangements which APRA will consider on a case by case basis. These submissions must be made before 30 September 2012. PwC 7
APRA release of consolidated prudential standards G L On 12 September 2011, APRA released in final form four consolidated prudential standards on governance, fitness and propriety, outsourcing and business continuity management that will consolidate and replace 12 existing standards across the authorised deposit-taking (ADI), general insurance and life insurance industries. The consolidated standards closely reflect the existing industry-specific prudential standards, with minor amendments to clarify requirements and ensure consistent application across industries. The consolidated standards will be effective from 1 July 2012. Natural Disaster Insurance Review recommendations released G On 14 November 2011, Assistant Treasurer Bill Shorten released the recommendations of the Natural Disaster Insurance Review, which encompass flood risk management, insurers claims-handling and dispute resolution processes, and the provision of flood insurance. Under the review s proposals, every Australian seeking to purchase or renew home and contents insurance will be offered flood cover, but will have the option to opt out. The recommendations include: A standard definition of flood All insurers must offer flood cover as part of home building and home contents insurance policies, while giving consumers the opportunity to opt out of that cover The Government will spend up to $12 million to establish a flood risk information portal A one-page key facts sheet to explain the major aspects of a policy A reinsurance pool for high-risk properties Lending institutions to remind borrowers annually of their obligation to be insured Reforms to the General Insurance Code of Practice. The ICA has agreed to changes to the General Insurance Code of Practice, and one of the key changes to the Code relate to clear timeframes for claims handling, including during declared catastrophes. The ICA has also committed to releasing future Code Compliance Committee reports that emcompass a legislated standard definition of flood. 8 Insurance Facts and Figures 2012
APRA releases final package for refinements to the prudential framework for general insurance groups G On 5 October 2011, APRA released the final package relating to refinements to the prudential and reporting standards for general insurance groups. The refinements to the prudential framework address minor issues identified since the implementation of APRA s prudential framework for the supervision of general insurance groups in 2009. Refinements to the reporting framework align aspects of general insurance group reporting with the reporting framework for individual APRA authorised general insurers. The refinements reflected in the final prudential and reporting standards are largely consistent with APRA s proposals in the May 2011 discussion paper. The prudential standards were effective from 1 December 2011. The reporting standards became effective for reporting periods ending 31 December 2011. ASIC clarifies requirements for telephone sales of general insurance products G On 28 October 2011, ASIC made class order relief to change the time for giving a Product Disclosure Statement (PDS) for a general insurance product when a retail client seeks a quote for the product during a telephone call. Under the relief, the client can choose to receive the PDS, and, if they do, the general insurer or intermediary must give a PDS as soon as practicable after the quote is given. This means that the PDS can be given after the telephone call. The relief given by ASIC does not affect the time at which a PDS must be given if a quote is given during an unsolicited telephone call, or is otherwise unsolicited by the retail client. This relief seeks to balance the consumer protection interest of retail clients with industry concerns about compliance costs. PwC 9
ASIC seeks improvement in CCI sales practice G L On 19 October 2011, ASIC issued a report of findings and recommendations from its review of how consumer credit insurance ( CCI ) is sold. The recommendations cover the areas of sales practices, disclosure, training programs and monitoring systems. In its review of sales practices, ASIC identified the following risks: Consumers not being made aware that they have purchased CCI or that CCI is optional Consumers not being asked whether or not they wish to purchase CCI Consumers not being eligible to claim on all components of the CCI policy they have purchased The potential for consumers to be pressured or harassed by sales staff, and Consumers not understanding the cost or the duration of the CCI policy. ASIC has made 10 recommendations to improve the way in which CCI is sold in Australia so consumers are better informed and more confident in deciding whether or not to purchase CCI. ASIC plans to conduct a further review of claims handling and insurer practices for CCI, and industry has indicated support for the second stage of the review. The Financial Services Council has committed to produce guidance for life insurers that issue CCI, based on any relevant recommendations arising from both stages of the review. Future of Financial Advice (FOFA) L In August and September 2011, the Assistant Treasurer and Minister for Financial Services and Superannuation, Bill Shorten, released the two tranches of draft legislation of the Future of Financial Advice (FOFA) reforms for public consultation. The draft legislation was subsequently tabled in Parliament in late 2011 and then referred to both the Parliamentary Joint Committee as well as the Senate Economics Committee for review. Both Committees have reported back, and are broadly in favour of the reform package, suggesting minor amendments or clarifications. Key aspects of the FoFA reform package include: A proposed ban on conflicted remuneration structures regarding the distribution and provision of advice for retail investment products including managed investments, superannuation and margin loans. This includes commissions and volume based payments in relation to these products. The legislation as currently drafted will prohibit commissions on risk insurance within Superannuation. However, General insurance or Life insurance outside of Superannuation are not caught by the prohibition on commissions. A proposed introduction of a best interests duty for advisors towards their clients. The duty will oblige advisers to act in the best interests of their clients and to place these ahead of their own when providing personal advice to retail clients, subject to a reasonable steps qualification. 10 Insurance Facts and Figures 2012
Providing ASIC with greater powers to refuse licences and ban advisers. The current threshold of will not comply will be amended to is likely to contravene, making it easier for ASIC to take action at both the licensing and ongoing supervision stages. While originally scheduled to commence 1 July 2012, the Government has recently announced a deferral of compulsory implementation until 1 July 2013. This is predominantly based on industry concerns that they require more time to prepare for the significant reforms, and also to allow industry to synchronise these reforms with the Stronger Super reforms. Churning in life insurance L The Financial Services Council (FSC) announced on 4 August 2011 that the Council would issue a Standard to address the practice of churning in life insurance. Churning is a practice whereby consumers with an existing life insurance policy are sold a new policy by a financial adviser that has no net benefit for the consumer. Key reforms under this Standard will include: The removal of takeover terms (that is, banning the practice of the relaxation of the standard underwriting process for replacement business) for a policy or a group of policies that are transferred by an adviser between insurers; and The establishment of a consistent adviser responsibility period across the industry of two years with 100 per cent commission clawback if the policy lapses with an insurer within one year, and 50 per cent commission clawback if the policy lapses with an insurer during the second year. The new policy will see financial advisers being paid a level commission if replacement business is arranged. According to the FSC, replacement business occurs where a financial adviser makes arrangements for a client to replace an existing individual life, lump sum benefit or income protection policy with a new policy of the same kind within five years from the commencement date of the original policy. FSC s policy on churn would also see the removal of takeover terms for a policy or a group of policies that are transferred by a financial adviser between insurers. The FSC will consult with financial advice and life insurance industries on the policy and aims to implement a framework by 1 July 2013. PwC 11
National Disability Insurance Scheme H On 4 December 2011, the Australian Labor Party announced that the adoption of a National Disability Insurance Scheme (NDIS) and a National Injury Insurance Scheme (NIIS) would be a key policy platform for the Party with a view to implementing the Scheme effective 2018. The Australian Government had asked the Productivity Commission to undertake a public inquiry into a long-term disability care and support scheme. The Commission recommended the NDIS in its final report to the Government on 31 July 2011. The NDIS would provide insurance cover for all Australians in the event of significant disability, funding of which would be a core function of government, akin to Medicare. In addition to funding long-term high quality care and support for people with significant disabilities, some of the other aims of the NDIS would include providing frameworks for linking community and people with disabilities and for supporting best practice among providers. The NIIS would provide insurance cover for the lifetime care and support needs for all people who experience a catastrophic injury. Means Testing of Government Rebates for Private Health Insurance H The three Fairer Private Health Insurance Incentives Bills were approved by the Senate in March 2012, meaning that from 1 July 2012, the rebate will be means tested based on earnings. There will be no change for single tax payers under 65 earning $84,000 or below (families: $168,000), who will retain the full 30% rebate. However, this change will phase out the private health insurance rebate for higher income earners as follows: Tier 1: Single tax payers under 65 earning between $84,001 $97,000 (families: $168,001 $194,000) will receive a 20% rebate; Tier 2: Single tax payers under 65 earning between $97,001 $130,000 (families: $194,001 $260,000) will receive a 10% rebate; and Tier 3: Single tax payers under 65 earning more than $130,001 (families: $260,001) will not be eligible for any rebate. For ages over 65, the maximum rebate amount will remain the same as the current legislation. That is, a 35% rebate for ages 65-69 and 40% rebate for ages 70+ with the same income thresholds noted above phasing the rebate to nil. The Department of Health and Ageing has estimated that 99.7% of people with private health insurance hospital cover will keep their insurance, however 27,000 of these people will reduce their level of cover. 12 Insurance Facts and Figures 2012
Annual premium rate increase approved by government H The Minister for Health approved an increase in private health insurance premiums by an average of 5.06% effective 1 April 2012 (2011: 5.57%). This saw a range of rate rises between 2.19% and 7.85%. Whilst this is the lowest rate rise in four years, it is worth noting that over 70% of health insurers were asked to resubmit their applications prior to the finalisation of the overall pricing process. The main reasons cited by insurers in their price increase submissions are current and forecast increases in benefit outlays. More specifically, this includes the increasing costs of treatments and services, and higher utilisation of treatments and services. Medicare Levy Surcharge increase 1 July 2012 H The changes arising from the Fairer Private Health Insurance Incentives Bills also increases the MLS on a tiered approach. For Australian tax payers who do not have private hospital cover the following MLS will apply: Single tax payers earning $84,000 or below (families: $168,000) will not be charged the MLS Single tax payers earning between $84,001 $97,000 (families: $168,001 $194,000) will remain at 1% Single tax payers earning between $97,001 $130,000 (families: $194,001 $260,000) will increase from 1% to 1.25% Single tax payers earning more than $130,001 (families: $260,001) will increase from 1% to 1.5%. PHIAC Prudential Standards H PHIAC has sought comment on a draft Outsourcing Standard. This standard will require insurers to have appropriate policies, risk management, approvals and notification to PHIAC in relation to their outsourcing arrangements. This draft standard was open for comment until 6 April 2012. This was the second consultation period PHIAC have offered after taking into account 15 submissions from the first consultation period. PHIAC continues to work on a range of other prudential standards. PwC 13
IFRS for Insurance Contracts Exposure Draft G L H Since the comment letter period for the Insurance Contracts Exposure Draft ended on 30 November 2010, the International Accounting Standards Board (IASB) has been in extensive redeliberations following the large number of submissions from relevant stakeholders, and the change in IASB composition effective 1 July 2011. Whilst there was general support for a single global accounting standard, diverse points of view remain that are broadly split by geography and type of insurance. Also critical to the debate and ultimate outcome is the position to be taken by the SEC on convergance with IFRS. An announcement from the SEC is expected in second quarter of 2012. Given the level of changes being worked through, the IASB expects to re-expose the draft standard in the second half of 2012. Advertising in Financial Services G L H ASIC has released guidance to help product promoters comply with their legal obligations when advertising financial products and services. RG204 Advertising financial products and advice services: Good practice guidance was released in February 2012. ASIC Commissioner Peter Kell explained that the guidance will help industry participants understand their obligation. The Guide contains not only examples of good practice, but examples where industry practice fell short of ASIC s expectations. There are a number of examples of poor practice relevant to the insurance industry, such as: Comparing premiums with other products where there is a different excess Using misleading images (e.g. younger or older) to suggest that a product or price might be available to someone when age restrictions mean that person would not be eligible. Insurance Contracts Act Amendments G Amendments to the Insurance Contracts Act were passed by Parliament in March 2012, containing a number of measures to improve consumer understanding of insurance policies. One of the measures, the introduction of a Key Facts Sheet (KFS) for Home Building and Home Contents insurance policies, will allow consumers to quickly and easily check the basic terms of the insurance policy, including the nature of cover and any key exclusions. The introduction of KFS s will also help consumers to compare the features of various insurance policies and select appropriate insurance products for their needs. In February 2012, the Treasury released a discussion paper that seeks public comment on the content, format, structure and provision of the Key Facts Sheet. The other measure amended is the inclusion of a standard definition of flood, once this definition is incorporated into relevant Regulations. 14 Insurance Facts and Figures 2012
Privacy law G L H Privacy reforms have been discussed for a number of years, however we are yet to see a finalisation of the reforms. To recap, in June 2010 the Senate referred the Exposure Drafts of Australian Privacy Amendment Legislation to the Senate Finance and Public Administration Legislation Committee (the Committee) for inquiry and report. The exposure draft consists of 2 parts: Part 1 Australian Privacy Principles The exposure draft of the new Australian Privacy Principles (APP) will form a key part of the proposed amendments to the Privacy Act. The APP will replace the current Information Privacy Principles (for the Commonwealth public sector) and the National Privacy Principles (for the private sector). The Committee reported their views in June 2011, making 29 recommendations (mostly seeking to clarify or simplify the proposed legislation). Part 2 Credit Reporting In January 2011, the Minister for Privacy and Freedom of Information provided draft comprehensive credit reporting provisions to the Committee for review and tabling. This exposure draft contains new provisions relating to the collection, use and disclosure of credit reporting information and aims to simplify existing laws. The new scheme will be underpinned by a new industry-agreed Credit Reporting Code of Conduct (the Code) which will be subject to approval by the Australian Information Commissioner. Insurers who offer credit products will also be subject to the new amendments when they eventuate. The Committee reported in October 2011. At the time of writing, there is no firm indication of when the above Privacy reforms will be implemented.
G General Insurance L Life Insurance H Health Insurance Taxation update 2 The following section provides an update on key taxation changes or developments since May 2011 that are directly related to insurance activities. The US Foreign Account Tax Compliance Act (FATCA) G L H The Foreign Account Tax Compliance Act ( FATCA ) has been enacted and will apply to payments made after 1 January 2013. FATCA is designed to stop US tax avoidance known as round tripping, where US persons invest offshore and then into onshore US investments, reducing US tax. FATCA will apply to Foreign Financial Institutions ( FFIs ) and Non Financial Foreign Entities ( NFFEs ). Both are very broad terms and include providers of vanilla investment products, e.g. trustees of certain but not all superannuation funds and unit trusts, and these products will fall within the meaning of a foreign account. These US rules will impact Australian insurers investing (directly or indirectly) into the US. The US issued the FATCA regulations on 8 February 2012. The International Dealings Schedule (IDS) G L H Replacing the existing Schedule 25A and Thin Capitalisation Schedules, the International Dealings Schedule ( IDS ) will be required to be completed by all taxpayers commencing from the 2012 financial year. Many of the disclosures within the form will continue to target transactions specifically relating to the broader Financial Services (including Insurance) industry. Our experience to date through working with taxpayers engaging in completion of the IDS-FS in the 2011 pilot program was that preparing the schedule was often onerous and data intensive for taxpayers engaged in numerous and complex cross-border dealings. It is therefore recommended that taxpayers continue to assess the capability of their information and operating systems to capture the data required to complete the new schedule, as well as flagging potential areas of risk arising due to the information disclosed. 16 Insurance Facts and Figures 2012
ATO TOFA Compliance Activity L As alluded to in the 2011-2012 ATO Compliance Program, the ATO has recently commenced the pilot of its TOFA Implementation Reviews by sending TOFA questionnaires to a number of taxpayers, seeking information in relation to a range of issues, including: identifying taxpayers who meet the TOFA threshold to ensure they are applying the TOFA rules; calculating the balancing adjustment for taxpayers who have made the transitional election; the validity of elections made under the TOFA rules; and the appropriate application of TOFA tax-timing methods. Stamp Duty and Life Insurance L The South Australian Court of Appeal handed down its decision in National Mutual Life Association & Ors v Commissioner of State Taxation [2011] SASCFC 106 on 30 September 2011. The Court of Appeal dismissed the appeal of the four insurers against assessments of stamp duty made by the South Australian Commissioner of Taxation. The Court found that the amount of stamp duty payable on life riders is the higher rate applicable to premiums relating to policies of any kind (other than life insurance policies) and not the lower rate of duty payable on premiums relating to life insurance. The relevant insurance duty provisions dealt with in this case were amended prior to the delivery of the decision. The amendments clarified the Commissioner s position that any premiums relating to life riders are payable at the higher rate of duty applying to life insurance. ATOID 2011/58: The Taxation of tax preferred Amounts G L H In July 2011, the ATO issued ATO Interpretative Decision ATO ID 2011/58. This ATOID indicates that tax preferred distributions made by a Managed Investment Trust (MIT) to an insurance company should be included in the unitholder s assessable income, as ordinary income. Insurance companies are distinguished from other entities by the fact that they hold their investments on revenue account. The ATOID states that the investment of funds is as much a part of the business as is the collection of premiums. Tax preferred amounts may include: a. income which is sheltered by non cash deductions e.g. building allowance (tax deferred amounts) b. capital gains realised by the trustee that are not included as assessable income (e.g. CGT concession amounts). We note however, the industry does not agree with the position adopted in this ATOID. The Financial Services Council has raised this with the ATO. PwC 17
Goods & Services Tax and Life Insurance L The ATO has been undertaking a coordinated Phase 1 review of GST Apportionment Methodologies adopted by Life Insurers in order to obtain a better understanding of the spectrum of approaches adopted in the industry. It is expected that the ATO will collate the results of its reviews to date and undertake further activity in this area in the near future. While no specific GST technical developments have occurred in recent times, the significant change in the industry as a result of the Future of Financial Advice Reforms (FoFA) will have significant GST implications. These implications include: technical GST considerations regarding the entitlement to input tax credits on payments made to advisers operational systems considerations regarding changes to GST coding, distinguishing between pre and post FoFA arrangements, GST accounting issues compliance considerations in relation to the correct GST commentary regarding PDS disclosures and unit pricing calculations. Draft GST regulation from Department of Transport case G H In response to the decision, the ATO has released an Addendum to the GST Ruling (GSTR 2006/11) which amends the ATO s previous views in relation to when insurers will be entitled to claim input tax credits (ie GST credits) in respect of certain claims expenses. The Department of Transport case caused significant unexpected implications for certain classes of insurance, the most notable being the health insurance industry. The commercial issue related to the potential increase in claims costs as a result of certain tripartite or third party payer scenarios between insurers and health service providers. Due to the significance of these implications, in March 2012 the government released draft legislation to address the issue. The draft legislation focuses on the GST treatment of GSTfree health services and proposes new legislative provisions that allow services provided to health insurers to be treated as GST-free rather than the current treatment where GST would apply (as a result of the recent GST case mentioned above). At the time of printing, the draft legislation is expected to be passed by Federal Parliament, however, due to the proposed wording of the new law, health insurers will need to actively review the implications of the options provided under the new legislation for their business. 18 Insurance Facts and Figures 2012
Sectors in review 3 PwC 19
General Insurance Scott Hadfield 2010 was a challenging year for insurers, 2011 proved to be even more so. Not only did the trend of natural disasters continue with events such as the Queensland floods, Cyclone Yasi and the Melbourne storms, but we also endured a weakening economic environment that saw yield curves fall. If one then overlays the additional reinsurance costs incurred in the form of reinstatement premiums for current year programs along with the inevitable increase in cost of the subsequent year s program, it is hard to see how to see how insurers could have had a worse year. 20 Insurance Facts and Figures 2012
Outside of Australia the global environment was not much better. 2011 included New Zealand and Japanese earthquakes and it is fair to say the market was caught out by the nature and quantum of the losses incurred in relation to the Thailand floods. On the plus side, there is clear evidence that rates are rising in the property classes, with home lines the stand out, however pricing in liability remains mixed. Whilst this is generally positive, underwriting discipline in such volatile times remains key. On the regulatory front all eyes are on APRA as they finalise the LAGIC proposals. Feedback from the industry over the last year has seen some changes to the initial proposals, but increases in capital are still expected for many. Operationalising other aspects of the proposals such as the ICAAP requirements, are also getting focus from management teams. A summary of the year would not be complete without reference to the IASB s Insurance Contracts project. Delays in the project mean that we have yet to see a standard and with current discussions indicating some significant changes to the initial proposals, some form of re-exposure will be required. This is not expected until late in 2012, which means a final standard in 2013 at the earliest. Overall, the events of the last year will remain with us for many years to come. The tragedy and loss are incomprehensible in many ways, but it does reinforce the role of our industry in society. With more stable conditions there is opportunity to bounce back, however in the short term those that manage costs well and maintain the underwriting discipline are the most likely to succeed. PwC 21
Statistics Top 15 general insurers Entity Year end Ranking Measure: Net earned premium Rank Rank % Change Underwriting result Performance: Investment result 1 QBE Insurance Group 12/11 14,759 1 12,416 1 19% 475 1,276 487 483 2 Insurance Australia Group 06/11 7,238 2 7,065 2 2% 171-61 711 774 3 Suncorp 06/11 6,277 3 6,310 3-1% -96 3 714 796 4 Allianz Australia 12/11 2,483 4 2,295 4 8% -174 91 498 286 5 Wesfarmers 06/11 1,120 5 1,089 5 3% -41 59 N/A N/A 6 Zurich Australian Insurance 12/11 856 6 805 7 6% -131-46 138 112 7 Munich Reinsurance Company Australia 12/11 851 7 915 6-7% -37 91 204 102 8 Westpac Insurance 09/11 377 10 335 11 13% 62 105 61 56 9 Commonwealth Insurance 06/11 376 11 344 10 9% 29 11 14 9 10 Genworth Financial Mortgage Insurance 12/11 368 8 358 9 3% 89 161 278 169 11 Swiss Re 12/11 347 9 398 8-13% 51 151 131 102 12 Chubb Insurance 12/11 316 12 286 12 10% -48 20 116 59 13 RAC Insurance 06/11 260 14 251 14 4% 47 43 14 19 14 Chartis 12/11 256 13 264 13-3% 202 65 69 59 15 ACE Insurance 12/11 225 15 201 15 12% 25 55 46 28 NR Lloyd's 12/11 1,747 NR 1,397 NR 25% n/a n/a n/a n/a Source: Published annual financial statements or APRA annual returns, including segment reporting for organisations with significant non-general insurance activities. Notes: World wide premium is included for those companies/groups based in Australia, while only premium under the control of the Australian operations are included for those with overseas parents. Where a group has significant non-general insurance operations, only performance and position information relating to general insurance is disclosed (subject to availability). In some instances this involves estimating a notional tax charge for the result after tax. Outstanding claims are net of all reinsurance recoveries. Where applicable, comparatives have been updated to be in line with updated comparatives in current year financial reports. 22 Insurance Facts and Figures 2012
Performance: Result after tax Outstanding claims Investment securities Financial Position: Net assets Total assets 676 1,396 16,616 14,673 25,893 23,012 10,212 10,155 45,725 41,222 338 190 6,879 6,765 11,893 11,734 4,580 4,656 22,923 20,442 394 557 6,317 6,335 10,782 11,151 7,678 8,376 24,683 21,891 256 302 3,813 3,498 4,159 4,277 1,846 1,833 8,935 8,210 14 85 556 502 988 1,065 1,366 1,377 4,325 3,641 0 35 1,135 1,061 1,640 1,668 601 602 4,440 3,404 333 208 1,325 1,285 2,218 2,016 1,002 795 4,950 3,284 87 112 91 89 964 1,126 677 771 1,419 1,572 26 10 110 105 228 208 143 107 609 561 250 191 335 260 3,307 2,929 1,989 1,799 3,626 3,275 111 160 785 1,073 1,525 1,606 727 595 4,103 2,725 47 55 516 472 1,038 938 462 415 1,461 1,294 16 18 49 48 199 194 250 234 507 572 129 35 240 411 1,099 1,360 564 446 2,603 2,925 48 60 207 204 468 395 272 262 1,431 1,137 n/a n/a 2,154 1,536 2,193 2,016 n/a n/a 2,910 2,016 1 Lloyd s Underwriters are authorised in Australia under special provisions contained in the Insurance Act 1973. Because of the unique structure of the Lloyd s market Lloyd s reports to APRA on a different basis from Australian general insurers. Lloyd s is required to maintain onshore assets in trust funds and as at 31 December 2011 its Australian assets comprised of $2,908m in trust funds and a statutory deposit of $2m. PwC 23
Top 10 government insurers Entity Year end Ranking Measure: Net earned premium Rank Rank % Change Performance: Underwriting 000 1 WorkCover NSW 06/11 2,495 1 2,395 1 4% -1,024-584 2 Victorian WorkCover Authority (Work Safe Victoria) 06/11 1,802 2 1,712 2 5% -77-502 3 Transport Accident Commission (Vic) 06/11 1,324 3 1,257 3 5% -336-817 4 WorkCover Queensland 06/11 1,136 4 959 4 18% -375-651 5 NSW Self Insurance Corporation 06/11 946 5 804 5 18% 173-158 6 WorkCover Corporation (SA) 06/11 591 6 610 6-3% -53-18 7 Motor Accident Commission (SA) (MAC) 06/11 517 7 471 7 10% -30-44 8 Insurance Commission of WA 06/11 426 8 406 8 5% -188-79 9 Comcare (Cwlth)* 06/11 221 9 213 9 4% -225-88 10 Victorian Managed Insurance Authority (VMIA) 06/11 181 10 139 10 30% -165-43 000 Source: Published annual financial statements Notes: Outstanding claims are net of recoveries. * Underwriting result has not been disclosed in financial statements and has been recalculated as net earned premium less net claims incurred 24 Insurance Facts and Figures 2012
Performance: Financial Position: Investment Result after tax Outstanding claims Investments Net assets Total assets 922 1,080-780 -101 14,268 12,662 11,381 10,719-2,363-1,583 13,327 12,464 1,044 984 521 176 8,991 8,768 9,692 8,840 1,511 990 10,901 10,171 727 696 279-81 7,833 7,313 7,405 6,678-239 -419 8,661 7,987 316 280-42 -259 2,763 2,506 2,484 2,305 343 385 3,285 3,081 479 483 247-42 5,314 5,081 5,335 4,987 312 66 5,929 5,535 139 138 30 77 2,664 2,497 1,618 1,389-952 -982 1,754 1,571 231 212 193 169 2,009 1,920 2,631 2,334 431 239 2,682 2,381 232 228 43 127 1,579 1,451 2,392 2,176 886 833 2,932 2,706 20 16 3 8 2,437 2,236 197 160 9 6 2,522 2,308 129 101-42 52 1,286 1,101 1073 948-82 -46 1,762 1,536 PwC 25
Major Australian catastrophes (>$100m) Original cost adjusted to June 2006 CPI 2012 2011 2010 2009 2008 2007 2006 2005 2003 1999 1996 1992 1991 1990 1989 1986 1985 1984 1983 1976 1975 1974 Floods NSW and Vic, 2012, $94m Floods QLD, 2012, $108m Severe storm Melbourne, 2011, $590m Cyclone Yasi QLD, 2011, $838m Severe storm Vic, 2011, $321m Queensland floods, 2010-2011, $2,310m Melbourne storm, 2010, $933m Perth storm, 2010, $941m* Victorian bushfires, Victoria, 2009, $1,200m** Flash flooding: Mackay QLD, 2008, $342m Severe storm southeast QLD, 2008, $289m NSW east coast storm and flood event, 2007, $1,437m Severe hailstorm Sydney, 2007, $205m Tropical cyclone Larry, QLD, 2006, $367m Hail, storm, winds NSW, Tas, Vic, 2005, $220m Hail, storm Melbourne metro, 2003, $132m Bushfires Canberra, 2003, $373m Hailstorms Sydney, 1999, $2,093m Hailstorms Armidale/Tamworth NSW, 1996, $131m Storms Sydney, 1992, $166m Storms Sydney, 1991, $321m Flood and wind from Cyclone Joy QLD, 1990/1, $110m Hailstorms Sydney, 1990, $564m Earthquake Newcastle, 1989, $1,364m Hailstorms Western Sydney, 1986, $207m Hailstorms Brisbane, 1985, $389m Floods NSW, 1984, $184m Ash Wednesday Bushfires SA & VIC, 1983, $421m Hailstorms NSW, 1976, $189m Cyclone Joan, WA, 1975, $106m Cyclone Tracy, Darwin, 1974, $1,240m Cyclone Wanda, Brisbane, 1974, $421m 3,000 2,500 2,000 1,500 1,000 500 0 AUD () Source: Insurance Disaster Response Organisation, Major disaster event list since June 1967. Revised to March 2006. * Source: Emergency Management Australia, EMA Disasters Database. ** Source: Figure not supplied by EMA. Figure comes from Swiss Re, Natural catastrophes and man-made disasters in 2009: catastrophes claim fewer victims, insured losses fall, No 1/2010. 26 Insurance Facts and Figures 2012
World catastrophes 2011 Hurricane Irene, USA, $5.3bn Floods cause by heavy rains, Thailand, $12bn Severe storms and torandoes, Missouri USA, $7.1bn Severe storms and torandoes, Alabama USA, $7.3bn Earthquake and tsunami, Japan, $35bn Earthquake, New Zealand, $12bn 2010 Earthquake, over 200 after shocks, Chile, $8.0bn Earthquake, over 300 after shocks, New Zealand, $4.5bn 2009 Winter storm Klaus, France & Spain, $3.7bn 2008 Hurricane Ike, US & Caribbean et al, $28.5bn Hurricane Gustav, US & Caribbean et al, $5.7bn 2007 Winter storm Kyrill, Europe, $6.1bn 2005 Floods caused by heavy rain, UK, $4.5bn Hurricane Wilma; torrential rain, floods, US, $13.0bn Hurricane Rita; floods, damage to oil rigs, US, $10.4bn 2004 Hurricane Katrina, US, $66.3bn Hurricane Jeanne; floods, landslides, US & Carribean, $4.0bn Typhoon Songda, Japan & Sth Korea, $3.8bn Hurricane Ivan; damage to oil rigs, US, $13.7bn Hurricane Frances, US & Bahamas, $5.5bn 2003 Hurricane Charley, US & Carribean, $8.6bn 2002 Thunderstorms, tornadoes, hail, US, $3.5bn 2001 Terrorist attacks on WTC, Pentagon etc, US, $21.4bn Tropical storm Allison; rain, floods, US, $4.1bn 1999 Winter storm Lothar over Western Europe, $7.0bn 1998 Typhoon Bart, South Japan, $4.9bn 1997 Hurricane Floyd, Eastern US, Bahamas & Caribbean, $3.4bn 1996 Hurricane Georges, US, Carribean, $4.4bn 1995 Hurricane Opal, US, $3.3bn 1994 Great Hanshin earthquake in Kobe, Japan, $3.3bn 1993 Northridge earthquake, US, $19.0bn 1991 Hurricane Andrew, US, $23.0bn 1990 Typhoon Mireille, Japan, $8.4bn Winter storm Vivian, Europe, $4.9bn 1989 Winter storm Daria, Europe, $7.2bn 1987 Hurricane Hugo, Puerto Rico, $7.4bn 1979 Explosion on the Piper Alpha oil rig, UK, $3.4bn 1975 Storms and floods in Europe, $5.5bn 80 70 60 50 40 30 20 10 0 USD ($bn) Source: Swiss Re, Natural catastrophes and man-made disasters. 1970 2005, Sigma no.2/2006; Natural catastrophes and man-made disasters in 2007, Sigma 1/2008; National catastrophes and man-made disasters in 2008: North America and Asia suffer heavy losses Swiss Re No. 2/2009; National catastrophes and man-made disasters in 2010, Sigma 1/2011. National catastrophes and man-made disasters in 2011, Sigma 2/2012. PwC 27
Life Insurance Voula Papageorgiou Life insurance is sold and not bought. As unlikely as it might seem this long held belief may be turned on its head in the next few years. The old adage is underpinned by apathy, a lack of understanding of the products, and a lack of comparability of pricing and coverage terms. Technological and social networking developments, if harnessed appropriately by life insurers, could be the catalysts for change. 28 Insurance Facts and Figures 2012
The meteoric rise of social networks has been one of the fastest global adoptions ever. In just six years since its launch, Facebook has over 600 million users; only China and India can claim greater populations. As consumers get more savvy with social networks and exchange more personal information, these online communities could wield substantial purchasing power and become the new group channels. This implies an increasing shift of power from distributors to customers. Following global trends, price aggregators are entering the Australian insurance market. This has the potential to improve comparability of pricing and terms across insurers and products but requires buy-in from insurers and for comparisons to be on an apples-to-apples basis. Technological developments are also transforming big data into actionable insights. Life insurers are still clearly focused on the value of active claims and retention management to bottom line results. Claims and retention continue to be big issues but management of these areas is becoming more sophisticated, targeted and effective as the ability to better segment data and analyse trends on a real-time basis improves with new technology. It s not all about the digital era though. Insurers focus on APRA s new capital standards will continue to take centre stage over the coming year. The new regime presents both challenges and opportunities for life insurers. One of the primary opportunities (and expectation of APRA) is for insurers to integrate their risk and capital management practices and to embed capital metrics into the business at a granular level. This will allow for transparency and accountability in the allocation and use of capital. Key challenges will include implementing the systems and processes supporting Pillar I and the Internal Capital Adequacy Assessment Process (ICAAP) by the 1 January 2013 deadline, and properly embedding the management practices and policies to support the ICAAP process. The group market remains very competitive with margins continuing to be squeezed. Coupled with the emergence of worsening experience on life and group salary continuance during 2011, the future profitability of this business is uncertain. APRA has communicated its concerns regarding pricing practices and data quality and has indicated that it intends to review pricing reports for large tenders. Direct insurance business is also on APRA s radar. This business is experiencing high growth rates, attractive profits, an increasing number of players and products, and consequentially increased competition. APRA has expressed concerns about the rising lapse rates and the quality of the products from a customer s point of view. Given these developments, players in the group and direct business markets should consider whether their risk management practices are keeping pace with the growing pricing, operational, reputational and strategic risks. Life insurers continue to face a challenging environment over the next year with a sizeable number of business and regulatory issues to balance. PwC 29
Statistics Top 15 life insurers Entity Year end Ranking Measure: Performance: Net Insurance Prem Rev Investment Revenue Result after tax Rank Rank % Change 1 AMP Life 12/11 1,914 1 1,003 2 1% 605 3,936 756 741 2 MLC (NAB) 09/11 1,317 2 1,230 1 7% 1 2,261 315 355 3 CBA Life (CMLA) 06/11 1,052 3 979 3 7% 1,309 1,514 296 388 4 OnePath Life 09/11 989 4 652 5 52% -411 419 315 116 5 TAL 09/11 761 5 597 6 27% 33 107 123 112 6 American International Assurance Company Australia 11/11 709 6 590 7 20% 69 70 49 42 7 Swiss Re Life & Health Australia 12/11 554 7 467 9 19% 99 53 24 22 8 RGA Reinsurance Company of Australia 12/11 524 9 461 10 14% 61 36 46 35 9 Suncorp Life & Superannuation 09/11 506 8 483 8 5% 540 640 108 190 10 Westpac Life 09/11 383 10 340 11 13% 18 348 192 170 11 Munich Reinsurance Company of Australasia 12/11 356 11 310 12 15% 86 36 (89) 16 12 MetLife Insurance 12/11 267 12 284 13-6% 41 36 26 48 13 Hannover Life Re of Australasia 12/11 263 13 228 14 15% 87 51 46 28 14 General Reinsurance Life Australia 12/11 182 14 166 15 10% 27 12 6 13 15 Zurich Australia 12/11 167 15 141 16 18% 13 74 84 32 Source: Published annual financial statements or APRA annual returns for Australian life insurance operations. Where applicable, comparatives have been updated to be in line with updated comparatives in current year financial reports. 30 Insurance Facts and Figures 2012
Performance: Financial Position: Net Policy Liabilities Solvency Ratio Financial Assets Held at FV Net assets Total assets 77,258 78,929 1.8 1.9 76,282 79,070 4,341 4,262 84,956 86,340 52,310 53,964 2.1 1.8 54,758 55,491 3,004 2,839 56,574 57,187 12,200 13,161 1.9 2.2 13,570 14,523 1,412 1,406 14,064 15,097 27,193 28,682 1.7 1.6 26,075 26,968 1,945 1,874 30,201 31,499 1,717 1,826 4.7 2.6 2,372 2,481 815 709 3,348 3,221 751 640 1.4 1.5 1,092 886 354 305 1,726 1,359 1,008 843 1.7 2.5 1,129 1,048 307 297 1,478 1,246 378 345 3.0 1.9 802 697 377 332 1,394 1,797 5,457 5,424 2.4 2.4 6,373 6,357 1,433 1,364 7,494 7,337 6,321 10,244 3.4 3.6 7,196 11,012 939 850 7,440 11,390 490 296 1.9 5.0 981 699 319 198 1,618 1,042 162 137 3.9 3.8 435 422 351 354 714 676 741 642 3.7 3.2 924 831 297 252 1,221 1,035 248 191 5.2 10.5 317 283 94 91 406 345 1,786 2,163 1.7 1.7 2,276 2,533 553 490 2,527 2,832 Notes: 1. AXA was acquired by AMP on 8 March 2011. The 2010 comparative for AMP is for AMP only. 2. During the prior year, ING Life changed its name to OnePath Life. Following its acquisition by the ANZ Bank, OnePath Life has reported a 9 month period to 30 September 2010 to align with the year end of its parent. The 9 month results are reported for the prior period in the table above versus the 12 months results reported as the current year results. PwC 31
Private health insurance Andrew McPhail The private health insurance industry remains an integral part of the Australian health care system, providing hospital treatment insurance coverage to more than 10 million people, or approximately 45 per cent of the Australian population. This represents a 3 per cent increase from prior year, and is the highest level of coverage since the introduction of Medibank in 1975. At 30 June 2011, there were 34 private health insurers registered in Australia. Among this total are 7 for-profit insurers with the remainder being not-for-profit. The for-profit providers accounted for almost 70% of total market share at 30 June 2011. 32 Insurance Facts and Figures 2012
The industry issues are well known (an aging population, increasing benefit costs and volatility of investment returns). How best to respond to these issues is not so clear. Membership growth and retention remains a high priority of all insurers. We have seen many insurers increase their focus on broader health offerings. The role of the aggregator is also becoming increasingly important across the insurance sector as a whole. Existing aggregators have broadened their product offerings, new entrants are poised to enter the market with more expected to follow, and all of whom offer different incentives and offerings to customers and insurers. Adding to the industry uncertainty is the impact of government policy, which is again expected to play a significant role in shaping private health insurance in Australia. From 1 July 2012, the Government will, subject to Royal Assent, introduce three new Private Health Insurance Incentives Tiers. This will have the effect of means testing the private health rebate on a tiered basis for higher income earners. Also impacted by these changes is the Medicare Levy Surcharge, which will also increase for those higher income earners who do not purchase private cover. There are varying views of the impact these changes will have on participation in private health insurance levels from minimal changes to members reducing levels of coverage to ceasing membership entirely. It is agreed that the full impact will only be seen over the passage of time. Innovation is also playing an increasingly important role in the broader health industry. The Personally Controlled Electronic Health Records (PCEHR) system is a key element of the Australian Government s national health reform agenda, designed to provide better health services and outcomes for all Australians. From 1 July 2012, individuals will be able to register for their PCEHR and access their health information when and where they need it, as well as being able to share this information with their trusted healthcare providers. Consolidation in the private health insurance industry was minimal during the year. The only changes that occurred during 2010-11 included the merger of the three funds that operated within the BUPA Australia group, and the merger of the HCF and Manchester Unity funds that took place at 30 June 2011. With competition amongst the private health insurance industry set to become even greater, the expectation going forward is that further consolidation is highly likely. Amongst all of this, the industry regulator, being the Private Health Insurance Administration Council (PHIAC), continues to raise the bar and promote best practice by Australian health insurers. The two capital standards (i.e. Capital Adequacy and Solvency) are currently under intensive review, with comments expected sometime in 2012. This of course follows the proposed outsourcing standard that saw a discussion paper released for a first round of comments in August 2011, with a second round of comments now due to PHIAC by 6 April 2012. PHIAC is also expecting to commence work on a prudential standard dealing with risk management in due course. Despite all of this, the outlook for the industry continues to be positive. 2010-11 saw a strengthening of the industry as a whole, and the strong capital position of Australia s private health insurers should see them well placed to respond to the challenges that lay ahead. PwC 33
Statistics Top 15 health insurers Entity Ranking Measure: Performance: Contributions Membership Other revenue Result after tax Rank Rank % Change 1 Medibank Private Ltd (including AHMG) 4,593 4,268 1 1 8% 1,754 1,738 189 161 325 300 2 BUPA Australia Health Pty Ltd (Including MBF) 4,361 4,050 2 2 8% 1,538 1,503 99 133 290 237 3 HCF (including MUA) 1,679 1,526 3 3 10% 599 571 76 57 104 75 4 HBF 1,008 933 4 4 8% 441 424 104 72 136 98 5 nib 991 901 5 5 10% 431 407 21 31 58 55 6 Australian Unity Health Ltd 464 423 6 6 10% 179 168 8 14 27 32 7 Teachers Federation Health 330 299 7 7 10% 102 98 14 12 31 25 8 Defence Health Ltd 248 224 8 8 11% 90 85 14 12 31 22 9 GMHBA Ltd 248 217 9 9 14% 98 91 8 7 13 6 10 CBHS Health Fund Ltd 228 205 10 10 11% 74 70 8 6 13 10 11 Westfund Ltd 114 102 11 11 12% 45 44 7 7 11 7 12 Latrobe Health Services Inc 106 91 12 13 16% 41 38 7 5 10 8 13 Health Partners 105 96 13 12 9% 37 36 8 7 11 8 14 Queensland Teachers' Union Health Fund Ltd 92 82 14 14 12% 25 23 3 2 9 6 15 Grand United Corporate Health Ltd 87 73 15 16 19% 22 18 2 2 7 11 000 000 Source: The statistics are in respect of registered health benefit organisations as reported in the PHIAC annual statistics as at 30 June 2011 and 30 June 2010. Notes: Membership is based on the number of policies in force. Other revenue comprises mainly of investment income. Benefits ratio is benefits paid as a proportion of contributions. Where there is more than one entity within the group, a weighted average based on net assets is used to estimate the overall solvency ratio, and a weighted average based on contributions is used to estimate overall net margin. 34 Insurance Facts and Figures 2012
Financial Position: Outstanding claims Investment securities Net assets Total assets Solvency Benefits Net margin 367 397 1,976 2,063 1,803 1,925 2,873 3,060 2.95 3.02 84% 85% 6.4% 3.8% 487 499 1,296 1,405 985 978 1,816 1,685 2.85 2.97 83% 83% 7.2% 5.7% 126 118 689 559 705 714 1,150 1,105 2.61 3.11 88% 88% 5.0% 3.2% 93 87 718 596 630 494 950 796 5.05 3.17 87% 88% 3.1% 2.8% 66 62 241 187 203 226 432 424 2.46 2.98 83% 83% 6.1% 5.2% 37 37 94 76 101 84 269 242 2.64 2.35 81% 82% 7.2% 8.1% 35 33 210 183 174 143 247 217 7.74 6.68 86% 86% 4.9% 4.5% 28 28 211 174 169 138 228 196 10.82 9.32 86% 88% 6.9% 5.6% 17 17 152 142 110 97 179 165 5.69 6.15 87% 90% 2.0% -0.3% 27 20 131 109 99 86 149 123 8.63 9.08 91% 91% 2.3% 2.0% 11 8 103 89 83 73 116 100 8.12 7.44 86% 88% 3.7% 0.4% 9 8 118 111 113 102 137 124 9.63 9.50 87% 87% 2.8% 3.0% 5 5 61 54 68 57 85 72 7.98 6.87 88% 91% 3.1% 0.6% 7 7 58 42 71 62 89 78 7.78 7.39 84% 85% 6.6% 5.4% 8 7 16 14 30 25 55 48 2.03 2.03 74% 62% 10.2% 13.1% % % % Ratios: % % % PwC 35
Insurance Intermediaries Billy Bennett The roles and opportunities for insurance intermediaries in Australia are at a turning point with the increasing focus by the business community on risk management and the need to consider their Risk Appetite, Intermediaries can play a vital role and further increase their relevance to their client base. Insurance intermediaries are a key component of the insurance value chain and play an important role in the purchase of insurance and risk products for both the policyholder and the insurer. Intermediaries comprise brokers, managing agents and a variety of other forms of agencies. The nature of intermediaries ranges from being fully independent to being a subsidiary of an insurer. The market has a number of large multinational players as well as many midsized and smaller intermediaries. 36 Insurance Facts and Figures 2012
Particularly, within the non-life insurance intermediary industry, there continues to be significant competition among intermediaries in an environment where rates are hardening as a result of the string of catastrophe events in the region over the past two years. This has resulted in a number of key trends including: Key talent: Wages are a major expense for intermediaries given the service based nature of the industry. Intermediaries employ a highly qualified and experienced workforce and pay them above average wages to ensure high levels of staff retention. However, they are facing fierce competition from other intermediaries, as well as insurance underwriters and other financial services players. This competition adds further pressure to wage costs and leaves insurance intermediaries emersed in a war for talented resources; Broking margins: Intermediaries will need to deliver on cost containment to maintain profitability when faced with reduced margins and increased competitor activity; Technology: Recent years have shown increased competition from alternative distribution channels such as direct selling as insurers focus on cost cutting mechanisms and look for ways to distribute insurance products without paying commissions (such as internet sales, telemarketing and call centres). An increasing observable trend has been the advances in consumer technology and social media at a greater pace than corporate IT. The winners will be those organisations which harness lower cost technological advancements that resonate with their customers. Consulting and management services: In recent years, the offerings of intermediaries have expanded into various other services such as such as consulting, risk management, claims management, mergers and acquisitions, due diligence audits and advisory services. As competition erodes profitability there will be an increased focus on providing higher margin services. Many organisations and businesses, from customer-facing teams to the senior management level, have concluded that there should be an increasing focus on risk management. This has resulted in organisations appointing a dedicated Chief Risk Officer or this role being contemplated. As businesses consider their risk appetite, insurance intermediaries are well placed to assist and add value in broadening conversations across the broader risk spectrum. Given this environment, there are a number of key opportunities for insurance intermediaries. To maintain their competitive edge, the role of the intermediary has moved from a mere proponent of insurance to that of a valueadding business partner for insurers and their clients. Intermediaries must ensure they deliver their core services while increasing the value they add to their customers, with a real focus on strategic differentiation. PwC 37
Insurers who anticipate and plan for change can create their own future January 2012 www.pwc.com/insurance 2010 PricewaterhouseCoopers. All rights reserved. In this document PwC refers to PricewaterhouseCoopers which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. Further related PwC publications can be found at pwc.com.au/industry/insurance or on the FS Connect ipad App and include: How insurers can succeed (continued) whatwouldyouliketogrow.com.au Insurance 2020: Turning change into opportunity 2. Invest time in understanding your employees Understanding what makes your people tick is key to maintaining employee engagement. When it comes to motivation, research shows that financial incentives may not always be the most effective. Instead, career development opportunities has come to be amongst one of the most important factors for employees. A key question is: How do we as insurance organisation develop talent and create a genuine learning environment? One effective approach is to develop collaborative networks at the industry level to provide development opportunities across organisations e.g. graduate programs, middle-manager industry-wide projects, and Executivesponsored mentoring for high potentials. However, the programs would need to be carefully managed to ensure shared outcomes were achieved, with control over competition to attract talent to specific organisations. 3. Identify and retain your key talent Like professional services firms, insurance companies are knowledge worker organisations that need to focus on attracting and retaining talent. However, too often companies focus on retaining star performers or leadership talent, overlooking pivotal roles that is, jobs that have an outsized ability to create (or destroy) the value customers expect. As agreed by the majority of participants, there are benefits in engaging pivotal roles to ensure they are motivated enough to deliver consistent performance, while also improving overall business performance. To achieve this, insurers can identify pivotal roles in the business in which to place stars by analysing how much impact each role has on customer and shareholder value. Targeted development strategies can then be developed to ensure the right people are recruited and retained across different roles. April 2011 Attracting and retaining top finance talent - How insurers can succeed pwc.com.au To discuss how these and other strategies may help your business, please contact your usual PwC representative or alternatively one of the following team members from PwC s Talent Consulting practice: Jon Williams +61 (2) 8266 2402 jon.williams@au.pwc.com Chloe Hawcroft +61 (2) 8266 1653 chloe.hawcroft@au.pwc.com Chris Greenwood +61 (2) 8266 0694 chris.j.greenwood@au.pwc.com Jessica Leitch +61 (2) 8266 0290 jessica.leitch@au.pwc.com Insurance 2020: Turning change into opportunity Attracting and retaining top finance talent pwc.com.au pwc.com.au Reflecting on progress towards a comprehensive IFRS for insurance contracts Why offshoring is becoming increasingly relevant in the Australian insurance industry September 2011 Insurance insight 2011/5 July 2011 Insurance insight 2011/4 Reflecting on progress towards a comprehensive IFRS for insurance contracts Why offshoring is becoming increasingly relevant in the Australian insurance industry For more information please contact: Scott Fergusson Australian Insurance Leader, PwC Australia +61 (2) 8266 7857 scott.k.fergusson@au.pwc.com Scott Hadfield Partner, PwC Australia +61 (2) 8266 1977 scott.hadfield@au.pwc.com Andrew McPhail Partner, PwC Australia +61 (3) 8603 2840 andrew.mcphail@au.pwc.com Voula Papageorgiou Partner, PwC Australia +61 (2) 8266 7802 voula.papageorgiou@au.pwc.com Billy Bennett Partner, PwC Australia +61 (2) 8266 7627 billy.bennett@au.pwc.com 38 Insurance Facts and Figures 2012
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pwc.com.au 2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. Liability limited by a scheme approved under Professional Standards Legislation.