INSURANCE MARKET UPDATE

Transcription

1 INSURANCE MARKET UPDATE NEW ZEALAND January 2010

2 CONTENTS Introduction 1 Summary of the 1 January 2010 Willis RE 1st View Global Insurance Market Report 1 The main loss events affecting the global property insurance Markets 2 How this translates for the insurance buyer in New Zealand 3 Selecting the Right Insurer 5 Statistics representing the local insurance market 5 Further Information 7 About Willis About Willis Willis Group Holdings Limited is a leading global insurance broker, developing and delivering professional insurance, reinsurance, risk management, financial and human resource consulting and actuarial services to corporations, public entities and institutions around the world. Willis has more than 400 offices in nearly 120 countries, with a global team of approximately 20,000 Associates serving clients in some 190 countries. Additional information on Willis may be found at Copyright 2009 Willis New Zealand Limited. All rights reserved: No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, whether electronic, mechanical, photocopying, recording, or otherwise, without the permission of Willis New Zealand Limited. Some information contained in this report may be compiled from third party sources we consider to be reliable; however, we do not guarantee and are not responsible for the accuracy of such. This report is for general guidance only, is not intended to be relied upon, and action based on or in connection with anything contained herein should not be taken without first obtaining specific advice. Willis New Zealand Insurance Market Update January 2010

3 INTRODUCTION The following market commentary is an overview of the global insurance market including a closer look at the New Zealand and Australian insurance markets. The Trans-Tasman insurance market experienced insurance prices at or near all time lows over 2007 and Towards the end of 2008 it was expected that the market would seek lofty broad based pricing increases due to the erosion of the insurers capital caused by the credit crisis. What occurred in 2009 was a mixed bag. The insurers became more selective with their underwriting practices; seeking improved underwriting profits, however there was still a desire to retain market share. The outcome lead to some insurance buyers experiencing flat renewal pricing, some had decreases, whilst the majority faced up to unavoidable increases. Now we need to look at what 2010 is expected to bring. The Willis Re 1 January st View market report published 5 January 2010 provides the explanations for the global market pricing over latter 2009 and the bases of the 2010 predictions. Insurance buyers should use this as guidance only for what levels of pricing the retail insurers set for insurance buyers to pay. SUMMARY OF THE 1 JANUARY 2010 WILLIS RE 1ST VIEW GLOBAL INSURANCE MARKET REPORT The report covers a number of territories and insurance classes. The massive European, North, Central and South American, Middle Eastern, Asian and South African markets in the main renew their reinsurance programmes at 1 January, hence the importance of this 1st View Willis Re Report of early January. The principal renewal season for the global reinsurance programmes for the Australasian region is 1 July (2010) with only a few programmes renewing at 1 January. As in previous years the report covers the rate movements across numerous territories and classes with comments from our product line experts. The key findings of the report include: Supported by excellent underwriting results combined with the recovery in global financial markets, reinsurers will be posting strong results for There is an underlying concern that the good 2009 underwriting results for reinsurers are a result of below average natural catastrophe and human-made losses, for example no major US hurricanes, and not necessarily as a result of increased insurance pricing and/or superior risk selection. Reinsurers have maintained an orderly approach to rating and reductions have been modest and largely exposure related. There is no sign of the market hardening in long tail classes mainly the liability policies - which remain soft (low) despite the fear of inflation which could cause escalations in actual claims settlements compared to the estimates of settlements made at the time of claims being lodged. There is concern at the growing disparities between the reinsurers results and the retail insurers. Retail insurers experience the direct effects of the global financial crisis in terms of contracting economies that is, less business, same insurers meaning nil or low growth placing pressure on cost control. One response is to buy less reinsurance, but this means higher retained claims. The catastrophe bond market has recovered in the second half of 2009 with aggregate bond limits issued in 2009 exceeding the 2008 figure. Willis New Zealand Insurance Market Update January

4 THE MAIN LOSS EVENTS AFFECTING THE GLOBAL PROPERTY INSURANCE MARKETS Addressing the usual key insurance risk factors that impact on insurance capacity and pricing for property insurance (the world s natural catastrophes) it is the experience of the south and east coast of the US hurricane season June to the end of November and the European catastrophe losses that tend to be the trigger for significant swings in the pricing cycle. The resulting large insurance claim aggregations are passed through to re-insurers, whose performances ultimately drive their new year s pricing models, which directly impacts on all insurance companies around the world proved to be the second costliest year ever for insurers, with a global total of US$50 billion in claims incurred of which US$43 billion were as a result of natural disasters. Hurricane Ike was estimated at US$15 billion and Gustav at US$5 billion, with Ike the third costliest hurricane on record after Katrina in 2005 costing US$41.1billion, and Andrew in 1992 valued at US$15.5bn. The tragedies in May of 2008 of China s devastating Sichuan province earthquake - 70,000 fatalities - and the Myanmar/Burma cyclone Nargis - 84,500 fatalities, had less impact on insurance markets, with US$300 million in claims for the earthquake, and nil from the cyclone. This is largely due to the fact that many of the affected people and businesses did not have any form of insurance. It is why that in the future the inexorable, exponentially increasing, contribution to the global insurance premium pool from China s economy along with the associated potential for massive natural disaster insured losses will feature as strong new drivers in the global insurance market. For 2009, while predictions were made early in the year for an average hurricane season (for North America), in fact it proved to be one of the lowest, both in terms of numbers of events and also the insured losses. The 10 th January 2009 winter storms in China, plus the 1st March storm Emma in Europe racked up US$1.6 billion and US$1.5 billion in insurance claims respectively, and another 6 storm, tornado and flood events over 2009 in Europe, USA and Australia were at or near the US$1 billion mark. The November 2009 floods in the UK will cost insurers around million with the associated weather pattern causing losses in Ireland at some 200 million. Willis New Zealand Insurance Market Update January

5 HOW THIS TRANSLATES FOR THE INSURANCE BUYER IN NEW ZEALAND BACKDROP From the sudden and severe escalation of pricing over years 2001 into 2004, the insurance buyer experienced pricing on insurance classes steadily falling back to very low levels over the 2005 period through to early Toward the end of 2008 the insurance market had sunk to its lowest pricing point over the past five years. Insurance buyers experienced the first push back from insurers since 2003 as they begin to look for increased pricing across a number of insurance lines. The looming storm clouds - deteriorating loss ratios - featured in this Willis insurance market reports over late 2006 and 2007 have now come into play: most of the insurers in the Trans-Tasman market took a pounding over 2007 and 2008 from windstorms, serious multiple floods, hail storms, big fire loss events, increased frequency of fires generally, the Gisborne earthquake of 20 December 2007 and increased liability risks litigation. The first half of 2009 provided no respite from flood, storm and fire losses from both sides of the Tasman. Many of the big loss events such as the commercial and industrial premises fires and both the Australian bush fires and New Zealand storms featured in the news media. THE INSURERS RESULTS The insurance industry statistics for the five years to year end 2008 in New Zealand show that the combined loss ratio the sum of: claims plus operating expenses, expressed as a percentage of earned premium - had ranged from the 2005 low of 89.28% to the highest at % for Couple the profits, albeit with slender margins, of years 2004 to 2007 with investment earnings charging along on high returns, and the results provided a solid return on investment for the shareholders of insurance companies. This combination of acceptable loss ratios and strong investment earnings took a classic double-whammy hit, with insurance claims increasing significantly over the period 2007 to 2009, coupled with the sudden, massive drop in investment earnings in This has lead to the untenable position of the 2008 result of a combined ratio of %, meaning $ was paid out in insurance claims and expenses for every $ earned. The 2009 insurance company results in New Zealand are expected to show the benefits of the recovery thus far in the global financial markets, but tempered by continuing poor underwriting results, although the corrective pricing applied to most houseowners type policies should begin to bear fruit. In addition, selective adjustments made to pricing across all business classes of insurance where warranted also will help correct the poor % loss ratio. However, the extremely competitive nature of the insurance industry ensured there was not a coincidental mass approach by the whole market which means that attractive risk insurance buyers were able to leverage some competitive tension and hold their pricing to similar levels or only suffer small increases. Willis New Zealand Insurance Market Update January

6 GENERAL OBSERVATIONS ARE TEMPERED BY SPECIFIC RISK DRIVERS Individual claims experience per insurance type of each insurance buyer; The type of risk mitigation, for example automatic fire suppressant systems, product identification methods (for product liability risk), corporate governance standards, and overall risk management protocols; The nature of the risk, for example on property insurance high or low fire hazard and/or high, medium or low risk earthquake zone, maintenance standards for plant and so-on; for professional indemnity the type of advice being given, for general liability the type of product and whether or not exported; marine hull type of use and sailing limits; on motor fleets it is a focus on actual claims experience that counts most; The level of cover needed very high values at risk of buildings, plant and stock, or very high Limits for liability policies: needing greater underwriting capacity affects the pricing bandings; Some insurance buyers are being asked to improve loss control measures where a problem has already arisen, or where the hazard or other risk factor is deemed very high; The insurance buyer demonstrating confidence in their loss control by way of voluntarily increasing the level of claims Deductibles or Excesses, for both property and liability insurance classes. FACTORS THAT DRIVE EACH INSURANCE BUYER S INSURANCE PRICING AND TERMS Previous renewal pricing variations, up or down The historic claims experience The limits or sums insured required The amount of Deductible or Excess The strength of the niche insurance markets that may apply to the insurance buyer s particular risks Level and focus of risk management PREDICTIVE MARKET COMMENTS: LOOKING AT PRICING OVER 2010 In summary the indications are that pressure for increased pricing will be maintained by the insurance market, but the actual results will more likely be hold even over the next months, with variations depending on which policy type and what type of risk profile each insurance buyer presents to the insurance markets. Variables: Hazardous property based risks and higher risk liability insurance buyers are experiencing the greater pressure from the insurance market Those buyers with persistent claims incidents are in the same bracket, with firmer calls from insurance underwriters for improved loss control and/or increased claims Deductibles or Excesses Favourable deals are available for some buyers underwriters are anxious to not be the first to actually lose business to competitors because they jumped the gun on demands for increased pricing The insured business buyer that offers something of value to insurers, such as significantly higher deductibles or excesses, and/or measurable loss control standards, gain better deals YOUR WILLIS CLIENT ADVOCATE Your Willis Client Advocate is well aware of the options for negotiation in the market and will make the most of opportunities to negotiate the best possible terms for each of our clients. Key in this are the efforts that Willis employs nationally to create market tension for each client s insurance placements so as to extract the best possible results. Willis New Zealand Insurance Market Update January

7 SELECTING THE RIGHT INSURER While the market element of pricing is so important to insurance buyers, so too can be other criteria for selecting the right insurer/s: Experience of the insurer in the insurance buyer s business sector Attitude to and facilitation of claims settlement Flexibility to adapt to changes in the insurance buyer s business type of activity or geographical moves, etc Demonstrative commitment to a presence in New Zealand Specialist risk and/or large capacity of offshore markets, for example London Consistency of performance over time And pricing, of course. STATISTICS REPRESENTING THE LOCAL INSURANCE MARKET At year end 2008 New Zealand was the world s 44th largest non-life, 42nd largest life market, and 45th largest market overall. One noteworthy observation on the New Zealand insurance market is that we are one of the few countries in the developed world where life and pensions constitute a smaller part of the total insurance market than non-life. Of course sometimes statistics don t quite tell the whole story! Our New Zealand Government universal superannuation plan funded via taxation, plus our KiwiSaver savings plan - both for which the contributions don t get measured as part of the insurance market - provide for significant retirement benefits for every citizen. Premium Income (Using a 30 June year end 2008) Members of the Insurance Council (non-life) Guesstimate for non-members of the Council NZ$3,214 million NZ$250 million TOTAL: NZ$ 3,464 million Plus: Premiums for risks located in New Zealand but insured by and paid into offshore insurance markets, exact quantum not measured, but known to be considerable by informed insurance industry commentators. EQC ACC NZ$86 million NZ$3,652 million Willis New Zealand Insurance Market Update January

8 INSURERS PROFITABILITY The combined ratio ( CR ) is the universal measure of insurance companies insurance performance. This excludes the major effect of the income from their massive investment portfolios. The CR is: the sum of claims paid or reserved, plus operating expenses, expressed as a percentage of net earned premiums. The figures are the aggregate of all Insurance Council members (insurance companies) in NZ, not including ACC nor EQ: YEAR CR (%) Expenses, includes brokerage/commissions, (excludes claims paid): %age of net earned premium This shows how over year 2008, insurers paid out $ for every $ premiums earned. The importance of investment income to insurers is thus highlighted. In fact, both expenses and claims costs increased progressively over this period. With investment earnings down, relatively, (as related to the global economy), the drive to recover operational profitability is now emerging by way of expense reductions and increases in premiums. The actual insurance claims paid by all private insurers, not ACC nor EQC, totalled some: $2,290 million Reference: Statistics from Axco Insurance Market Information Services. Willis New Zealand Insurance Market Update January

9 FURTHER INFORMATION Should you have any queries relating to this Insurance Market Update, please contact your Willis Client Advocate. CONTACT WILLIS WILLIS NEW ZEALAND LIMITED Auckland Level 18, 1 Queen Street, Auckland t: Wellington Level 24, Boulcott Street, Wellington t: Christchurch Level 5, 254 Montreal Street, Christchurch t: Willis New Zealand Insurance Market Update January