Insurers put focus on future growth
The insurance industry has undergone seismic changes in the past couple of years. CATHERINE HARRIS talks to Tower's new boss and others about the challenges ahead.
There's something ironic about New Zealand's largest remaining locally-owned insurance company being run by an Australian.
But Tower Insurance chief executive David Hancock bats this away with good humour. As far as he is concerned, Tower is Kiwi through and though, and he's enjoying being here.
A career traveller, Hancock says he "absolutely loves" living in Auckland. "People are friendly and engaged".
Hancock's entire career has been in financial services. He has worked for big names like JP Morgan, Citigroup and as interim chief executive at Australian financial services firm Firstfolio.
Most recently he was at the Commonwealth Bank of Australia, the owner of ASB Bank, and his last job was executive general manager of its institutional banking division.
"My career's taken me everywhere basically from Sydney to Hong Kong, to New York, to London, and now it brings me to New Zealand. But New Zealand's always been a place I've always had an attachment to or I've always had businesses that have reported to me.
"So I know New Zealand particularly well and I've done quite a lot of work for a lot of corporates here."
Hancock was tapped to join the Tower board late last year.
"I was asked to go onto the board because I think they saw a real fit in regards to my skills in risk management, companies and investments, and that was a skill base they were probably missing.
He took on the job of chief executive in July after former Tower boss Rob Flannagan took up his long-flagged retirement in March.
Hancock's two children are in boarding school back in Australia so he still commutes across the Tasman regularly. And he finds himself boarding the same plane on a Sunday nights as many other trans-Tasman executives, especially in financial services.
"Barbara Chapman, who runs ASB, Gary [Dransfield] who runs Vero, Simon Swanson who runs Sovereign, there's a lot of people who do the commute."
He also spends time in the Pacific, where Tower has a big customer base and travelling internally, he says.
"The organisation has a large footprint and an old footprint, given its long history of 144 years in insurance."
However, the last few years have been big ones for the insurance industry in New Zealand. For a start, it's become prudentially regulated, something Hancock says he's used to from Australia.
Secondly, it is still grappling with the aftershocks of huge losses from the Christchurch earthquakes, and the consequences that have followed for its customers.
Thirdly, he says technology had 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 last year, the company is now a smaller, more focussed business centred on general insurance.
Cashed up and well-capitalised, Tower is in a good position for the next stage in its journey, but how it performs in the competitive general insurance market is yet to be seen.
Hancock, ever the risk specialist, 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 are facing a very different landscape. Premiums are higher and the concept of unlimited house cover seems headed for extinction.
After the Christchurch quakes, the overseas underwriters of insurers, the reinsurers, re-rated New Zealand, although Hancock says they were always well aware 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 in the absence of another major disaster, they might plateau.
Higher reinsurance is just one of the challenges the industry now faces. There's also twin challenges 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 their 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 around 90 per cent of people are 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, particularly in helping people under the rising cost of construction.
"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 is one such 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 the fact that "if you don't have it, just how bad things can be".
Generally, though, it's clear 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 massive losses two years ago and imported massive amounts of capital.
Grafton would like to see 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 Fidelity Life, an unlisted Kiwi-owned life insurer for $189m
Tower Medical: bought by Australian health insurer 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 announced this week it would return $70m of this amount via a voluntary share buyback.
Tower hopes that by the end of 2015, it will have settled all its Christchurch earthquake claims. At the moment, 74 per cent are closed and 65 per cent of house claimants have chosen cash settlements.
"What they want to do with it is obviously up to them, but obviously getting closure is really important for us, just from a community point of view," says David Hancock.
He plans to come to Christchurch next week to meet face-to-face with stakeholders and customers.