Thirty-seven. The number of different issues listed as potentially impacting the current general insurance industry. A list that is likely incomplete.
This was how the scene was vividly set at the start of the 2023 General Insurance Appointed Actuaries Forum held on Friday, 3 November 2023.
A poll of the audience ranked the top four issues as affordability, IFRS17, climate change and inflation.
Naturally, but unfortunately, there wasn’t time to discuss the vast array of issues mentioned, so this year’s Forum featured four particular areas of interest – a global perspective, pricing practices, the reinsurance market, and insurance affordability.
Setting the scene
With a large in-person turnout of Appointed Actuary representatives and a number more watching virtually, the session began with a welcome from 2024’s Actuaries Institute President David Whittle, who saw the Forum as an important way to bring the Appointed Actuaries community together and to acknowledge insurers’ purpose in supporting policyholders in an ever-changing market.
This was followed by Adam Searle – organiser and host again for this year’s Forum – giving an overview of the multitude of issues impacting or complicating the general insurance industry – across areas covering:
- Natural catastrophes and market cycles
- Political and socioeconomic happenings
- Market initiatives, reforms and exits
- Regulation change and legal actions and;
- Technology developments and latent claims.
There isn’t enough room in this article to recite each and every sub-issue that was outlined, but suffice to say, the general insurance industry currently has it all.
A global perspective
Tim Clark spoke from a global perspective as someone recently returned to Australia by presenting – and these are Tim’s words – the “naïve views from a local boy cast adrift in the swirling ocean of global insurance”. But what was discussed was anything but naïve.
The whirlwind of information covered the drivers of inflation impacting the global insurance and economic markets but touched on the differences depending on what basket of inflation was chosen, along with the importance of being specific on “which” inflation when communicating with Boards.
Reinsurers are recalibrating their business and pricing models, as well as striving towards reduced information asymmetry, and this is driving insurers to hold a greater share of the more common, higher frequency, lower severity peril events.
Tim also encouraged one to be aware of the importance of product governance – a heightened risk in an unstable environment. Tim shared his observations of insurers being surprised and challenged by how wording has been interpreted post-events, with examples such as:
- The Christchurch series of earthquakes and determining which event, which insurer (including the Earthquake Commission which had broader coverage), and which reinsurance contract ultimately paid; or
- The war in the Ukraine and whether the Russian commandeering of aircraft and ships triggers an insurance claim, and if it does, whether the war exclusion applies; or
- The recent COVID-19 pandemic and how exclusions applied locally and globally.
What was most interesting was the idea that the common saying that “we have returned to pre-pandemic normal” is what’s truly naïve.
So much has changed post-pandemic that most similarities are really just a coincidence, forming just one data point of the new norm. Enhanced consumer regulation, such as in Australia, is creating similar challenges in many global markets to those we experienced here.
All in all, Tim was surprised that our global insurance colleagues seem to be heavily focused on daily “tactical” responses to these shorter-term issues, and lesser on the longer but more strategic issues that might have been the norm pre-pandemic.
Mudit Gupta delved into the attention that pricing issues are currently seeing, with a brief history of regulatory investigations into pricing practices.
With more and more action being taken by the Financial Conduct Authority in recent years and ASIC reporting an estimated $815.6m in pricing remediation for over 6.5m policies as of June 2023, there’s no wonder that the implication for and involvement of Appointed Actuaries is significant – there are a number of articles for further reading on pricing practices reviews,.
Mudit encouraged the audience to review ASIC Report 765, which gives specific recommendations on product governance, supervision, and other aspects of pricing practices.
In terms of the implications for Appointed Actuaries, the financial “balance sheet” impacts are obviously not small, with costs of pricing promises, remediation programs and system fixes often being quite significant for many insurers. There may also be an impact on future premiums and loss ratio assumptions in reserves.
However, indirect costs are also material when considering the disruption to business. Insurers are managing the challenges of finding the people to resource these remediation programs while minimising disruption to business-as-usual operations. The role of actuaries in risk management is particularly important here in terms of future uplifts to the risk management framework, with a focus on the controls and procedures needed to prevent such issues from happening again.
Appointed Actuaries may also consider commenting on these issues in the Financial Condition Report, particularly regarding the robustness of the pricing practice reviews and adequacy of risk management going forward.
With all this considered, it is expected that there will be lots of activity in this space now and into the future. Mudit is leading the Working Group for Professional Support for Actuaries involved in general insurance pricing, with a Research Paper to be published in early 2024 to provide guidance material and facilitate broader discussion on pricing practices with members.
The reinsurance market
Kate Bible, an experienced actuary working in reinsurance broking, told the story of what led to the recent state of the reinsurance market.
In Kate’s words, the reinsurance industry’s results have essentially been “Groundhog Day” – for those that unbelievably haven’t seen the movie, please right that wrong as soon as you can.
2022 was another high catastrophe year, with secondary perils continuing to have a large impact. Droughts and floods were severe, and the Australia and New Zealand February/March 2022 floods made it into the top 10 catastrophe events globally. By the end of 2022, only a handful of reinsurers were meeting their cost of capital. By the time of the January 2023 renewals, brokers around the world were describing it as the most challenging time in the last 30 years. Countries that had been relatively loss free were seeing 20-30% increases. Countries that weren’t so loss free were seeing increases often around or above 50%.
Even with this knowledge and prepared view – and this is where the Groundhog Day reference comes in – the worsening view seemed to happen all over again at the July 2023 renewals, with experiences such as cyclones and floods in New Zealand, a 7.8 earthquake in Turkey and Syria, and post-July, Hurricane Idalia and wildfires in Hawaii. And while reinsurers were still happy to do business in Australia and New Zealand as a “diversifier”, they wanted to move away from the “noise”. Some covers – for example, aggregation programmes – that were previously expensive but available, were suddenly were no longer available at all.
Looking towards the January 2024 renewals some reinsurers have an improving outlook, while others are pushing for more rate increases. But reinsurers are looking to recalibrate their margins to be sustainable for many future years rather than just having a 1-year horizon. But whether we’ll truly break out of the Goundhog Day or not will depend on future catastrophe losses – whether they’re “really really big” or just “really big” – how inflation trends, whether capital depletes or grows, and the overall uncertainty in insurers’ results and in the market on the whole.
Evelyn Chow discussed the two recent Actuaries Institute Reports on insurance affordability – Home Insurance Affordability Updateand Funding for Flood Costs , the latter of which she chaired the authoring Working Group. While covered in more detail in a previous Insights Session, a number of key insights were highlighted from both reports.
The Home Insurance Affordability Update found that based on the Australian Actuaries Home Insurance Affordability Index, the proportion of households that spend more than one month’s worth of their gross annual income on home insurance has risen from 1 in 10 households to nearly 1 in 8. There has been a 28% median increase in home insurance premium over the last year, driven by increases in building costs, increased perils, and increased reinsurance. However, while there have been premium increases for all households, these increases have been much more severe for higher-risk households.
Flood risks drive the difference between non-stressed and stressed households. Exposure to flood risk is localised and represents the most significant natural peril premium component for stressed households living in those areas.
On the other hand, cyclone risk impacts Queensland, the Northern Territory, and Western Australia across stressed and non-stressed households more broadly. Another highlight is that insurance taxes – which consist of stamp duty and, for NSW, the Emergency Services Levy (ESL) as well – compound costs even further. While $600m of premium savings for over 600,000 households is expected from the Cyclone Reinsurance Pool as it’s implemented, non-cyclonic flood is still a major component of premiums for stressed households.
Funding for Flood Costs looked at categories of measures to address insurance affordability pressure due to flood risk. While risk sharing (e.g., cross-subsidisation, insurance and reinsurance pools, compulsory levies) and government direct cost reductions (e.g., targeted subsidies which are means-tested, tax reforms) were noted as two valuable categories of measures that could be taken in the medium term, risk reduction (e.g., risk avoidance via relocation or reforms to land use planning, risk mitigation via levee construction or the strengthening of building codes and land-use planning for flood resilience) was seen as the only way to actually reduce the risk in the longer term.
After a brief mention from Suzanne Patten to encourage ongoing support and participation of the profession in the work of the General Insurance Practice Committee, a brief Q&A session took a deeper dive into some issues.
With further questions being raised on wage inflation, pricing remediation programs, APRA’s commentary on reinsurance, whether some countries are ahead of others in responding to change and emerging issues, and succession planning for Appointed Actuaries, it’s clear that our Appointed Actuaries are aware of the high and ever-changing uncertainties present in the current insurance climate. It is through continued professional discussion and support that the actuarial community will help insurers find their feet in dealing with each and every one of the thirty-seven (and likely more) issues currently challenging the general insurance industry.
CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.