Undaunted insurers focus on future growth after earthquakes
The past few years have been big ones for the insurance industry. For a start, it's become prudentially regulated, something Tower Insurance chief executive David Hancock says he's used to from Australia.
Second, it is still grappling with the aftershocks of huge losses from the Christchurch earthquakes, and the consequences that have followed for its customers.
Third, Hancock says technology has changed the way people shop for insurance, raising the bar for insurers in terms of service and products.
Tower is also at an interesting point in its history. After divesting itself of its health insurance, investment and most of its life insurance over the past year, the company is now centred on general insurance.
Cashed up and well capitalised, Tower is in a good position for the next stage, but how it performs in the competitive general insurance market is yet to be seen.
Hancock, an Australian who became chief executive in July after former Tower boss Rob Flannagan retired in March, believes it will go well, partly because Tower already holds a reasonable market position. "It is a competitive market but we do like the dynamics there . . . We've got a 10.5 per cent share of the house insurance market, we have a 10.3 per cent market share in the contents business and we have about a 6.4 per cent market share in motor.
"So clearly we see opportunity to grow our business."
He believes Tower is underweight in car insurance and potentially more nimble than its biggest rivals, IAG, which owns AMI and State, and Suncorp, which owns Vero and AA.
"These guys are foreign, they're Aussie. We're local. We think that resonates with a vast majority of people. We just have to articulate that more, and deliver value up, and take share."
From here on in, Tower and its competitors face a very different landscape. Premiums are higher and the concept of unlimited house cover seems headed for extinction.
After the Christchurch quakes, the overseas reinsurers re-rated New Zealand, although Hancock says they were always well aware that the country was seismically challenged.
He says the main reason premiums went up was not just the local risk but a string of global catastrophes.
"We get the benefits of being part of a global industry, that is, people will take on these risks."
The big question on many people's lips is whether premiums will ever come down again. Hancock is not sure they will, although without another major disaster, they might plateau.
Higher reinsurance is just one of the challenges the industry faces. There's also the twin challenge of keeping insurance affordable and helping customers understand its almost wholesale shift to "sum insured" policies.
"Sum insured" means people have to put a figure on the amount of cover they want for their house, rather than the open-ended "total replacement" cover of the past.
Insurers favour this method because they can more accurately assess risks and charge for them accordingly.
It also allows customers to take on some of the risk in return for lower premiums.
The problem for the industry is that many policy-holders have done nothing about it, making them potentially under or over-insured.
Recently KiwiBank's insurance head Tracey Berry estimated that 90 per cent of people were just accepting the default sum assured from their house insurer.
So just how responsible are insurers for educating Kiwis about the change?
David Lamb, a PwC partner and its insurance sector leader, says they do have a role to play.
"People have to make informed decisions . . . But it's a question of how you get people to engage with that, and one of the things which insurers have been trying to do, certainly if you look at Christchurch, is be more involved in community groups, be out there more in the public face."
Another challenge for insurers will be finding ways of making insurance more affordable.
Innovative products are one remedy. In the US, car insurers are already starting to offer infrequent drivers a pay-as-you-travel policy, using the GPS systems in modern cars.
Lamb agrees there is a point where people won't pay for insurance.
But Christchurch has heightened people's literacy around insurance and how "if you don't have it, just how bad things can be".
Generally, though, the insurance industry is in a much better place. IAG New Zealand's profit rose nearly 12 per cent this year, boosted partly by the purchase of AMI and partly by increased premiums.
Suncorp's results were hit by bad bank loans but its general business grew strongly.
Insurance Council chief executive Tim Grafton says these insurers wrote off huge losses two years ago and imported massive amounts of capital.
He would like greater transparency so people understand what makes up their premiums - 40 per cent goes to GST, Fire Service and EQC levies, and reinsurance makes up 20 per cent.
He expects reinsurance costs to rise another 10 per cent in the next three or four years. And he wants people to realise New Zealand is a perilous place to live.
"The difficult message to get across is that New Zealand has been paying a very cheap rate for the risk that it faces. There's a Lloyds study done last year . . . that showed New Zealand was the third country out of 42 . . . most at risk from natural catastrophe.
"But the saving grace for us is that we are one of the most highly insured countries in the world, that is, we have a very high level of insurance penetration. And that's kinda what saves us."
Tower Life: bought by unlisted Fidelity Life for $189 million
Tower Medical: bought by Australia's NIB for $103.1m
Tower Investment: sold to Fisher Funds for $79m
Released capital on the three businesses: $370m
Return to shareholders: $120m
Additional return due to shareholders: $114.5m*
*Tower said this week it would return $70m of this amount via a voluntary share buyback.