H2 2019 MARKET OVERVIEW
In the last Market Overview Report published earlier this year there was a general sense of anticipation in the business community that the planned Federal Government election would usher in a period of greater economic certainty and sustained growth. However, the implied improvement has not completely materialised, with Australia just one of a number of countries that has been affected by a broader economic slowdown. This is partly due to protracted Brexit and United States–China trade negotiations, which has filtered through to the global economy.
Closer to home the long mooted house price correction has continued to play out, with the record market slump continuing until the third calendar quarter of this year until a slight correction indicated some ‘green shoots’ improvement. This was likely due to action taken by the Reserve Bank of Australia (RBA) in lowering interest rates. However, the RBA has since acknowledged that the strategy might not be working as well as hoped, and expectations are that growth in this sector of the economy will continue to be slow.
Adding to this, efforts by the Federal Government to stimulate spending via an enhanced low and middle-income tax offset in the 2019 Federal Budget were also unsuccessful, with limited evidence to show that it has prompted additional consumer spending or encouraged greater consumer confidence.
At a macro level this combination of activity has resulted in Australia being positioned for an overall economic growth forecast of just 1.7% by the International Monetary Fund (IMF) in October 2019.
A significant backdrop to all of this has been the cascade of recommended practice and legislative changes that have come through the findings of The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry which were announced in February this year. The recommendations were wide ranging, with the spotlight largely on the consumer banking, insurance and superannuation sectors. Fifteen recommendations were made for the broader insurance sector, with the focus on wider powers for regulators (including Australian Securities and Investments Commission – ASIC), simplifying the legislative framework across the insurance and financial services industry, and providing a greater focus on consumer protections.
From a practical standpoint, there is minimal immediate impact on the general insurance broking industry. However, one of the most significant changes from an advisory point of view means that there is now a larger onus on insurers to ensure that they have garnered sufficient information prior to writing a risk. As a result this will bring added focus on underwriting in pre-contractual stages.
The Government (in consultation with ASIC) will conduct a compulsory review in three years' time to ascertain the effectiveness of measures that have been implemented by the Government, regulators and financial services entities to improve the quality of financial advice. Globally, there is also a call for increased rigour and scrutiny within the insurance sector but for different reasons.
Globally, there is also a call for increased rigour and scrutiny within the insurance sector but for different reasons.
This is being spearheaded by Lloyd's of London as it proactively addresses underlying profitability issues and simultaneously commits to meeting its Blueprint One technology strategy. In 2018 we saw Lloyd’s clearly indicate the need to address performance. This resulted in three areas of focus for its business:
- syndicates that had not been profitable for each of the last three years of account;
- syndicate classes that were the material drivers of underperformance in each of the eight Portfolio Review classes and
- the worst performing 10% of premium for each syndicate, (which managing agents were asked to identify through their Decile 10 review).
As a result syndicates have closed – triggering a cascade effect which has removed players from the market – and subsequently limited capacity, particularly if the risk is deemed significant.
While this has been reflected in some upward premium movement, for many businesses it has meant elevating their approach to their insurance from the transactional to the strategic and recognising the benefits of partnering more closely with their brokers to ensure a positive outcome.
AUSTRALIAN MARKET OVERVIEW
Risk and risk management continue to be common themes throughout the Australian market in numerous sectors also, with the clear trend being an increased level of engagement by leaders in their risk management and insurance strategies.
For company directors and officers (D&O) the driving force comes from the intensified scrutiny they currently face as the result of parallel regulatory and class action activities. Cover included for the corporate entity against securities class actions under D&O policies is attracting the heaviest risk and, consequently, underwriters in this space are concentrating their attentions on corporate financial stability, operations and performance. With Australia’s economic growth slowing and the likelihood of more D&O claims high, it is critical that directors and boards ensure they have solid governance structures and reporting processes in place to best manage any potential vulnerabilities.
Risk management in the cyber space also continues to be an area of interest and concern, particularly for listed companies. Where previously businesses might have presumed that the after-effects of any cyber-attacks were covered under their existing, general policies, the prevalence of such attacks is so common that cyber cover is now deemed a necessary part of any insurance portfolio.
However, insurers’ focus is starting to shift to prevention rather than recovery. This will raise challenges for those companies that do not take their cyber security status seriously and work with their brokers to undertake a thorough analysis of their insurance portfolio both to ensure they are covered against such an attack, and also to identify what deficiencies might exist in their current cyber security arrangements.
Risks around aluminium composite panel cladding (also known as ACP cladding) is something we have covered in previous reports and it remains a critical concern. While insurers have not restricted cover, we are now seeing ACP emerge as a discussion point with regard to general liability, with some now capping or sub-limiting liability exposures. With no Australian industry guidelines in place for the management of ACP cladding risk, there remains confusion around industry standards for the responsibility for and removal of the cladding, which is also resulting in professional liability exposure. As a result, insurers are either imposing a blanket exclusion or a very small sub-limit for those with ACP-associated risks, leaving professional consultants such as architects, surveyors, certifiers and fire engineers exposed.
Changes in our climate are affecting all types of businesses and the insurance sector is no exception. The increase in the frequency and severity of secondary perils such as hail or flooding are being driven by climate change and a growing, sprawling population, and are now influencing insurance business strategy and which sectors insurers are choosing to cover.
Then-CEO Michael Cameron called on the Federal Government to make it compulsory for businesses to implement climate change action plans in preparation for natural disasters.
Linked to this, and as a broader indication that insurers are increasingly expecting businesses to include climate change impact and action in their overall strategy, Liberty declined to provide insurance for the Adani coal mine. In addition, as of July 2019, Suncorp “will no longer invest in, finance or insure new thermal coal mines and power plants, and will not underwrite any existing thermal coal projects after 2025”. These decisions within the Australian market follow similar moves in the US by the likes of insurance giants Chubb and Axis Capital.
There is every indication that this trend will only continue and that we will see an increased move by insurers towards support for low-carbon economy and further activity in renewable energy insurance.
Managing Director – Placement
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Australian House Price Index QoQ, Trading Economics, 2019
‘IMF slashes growth as PM rejects stimulus call’, Financial Review, 16 October 2019
Royal Commission into the Banking, Superannuation and Financial Services Industry, Federal Government of Australia
Lloyd's Market Bulletin, Dunn & Chaudhry, 17 January 2019
‘Insurance giant Suncorp says it will no longer cover new thermal coal projects’, The Guardian, 26 July 2019
‘Adani beware, coal is on the road to becoming completely uninsurable’, ABC News, 13 August 2019