Embattled insurers make their clients pay

By Chris Hutching

Friday 22nd November 2002

Insurance brokers are fearful rationalisation among leading insurance companies here will accelerate a trend toward higher costs and less cover.

They are alarmed at the announcement British insurance group Lumley is selling its general insurance and financial services operations in Australia and New Zealand.

At the same time, Royal & SunAlliance is floating its Australasian business to raise capital, and Insurance Australia Group (IAG) has agreed to buy Aviva PLC's Australian and New Zealand general insurance businesses CGU and NZI. IAG New Zealand trades under the State Insurance and Circle brands and they will buy NZI general insurance, if successful.

Corporation of Insurance Brokers president Gary Young said the IAG sale amounted to New Zealand's second- and third-largest general insurers merging, which could affect the market, especially earthquake cover.

The sale raised questions about whether there would be enough earthquake capacity in Wellington, Independent Insurance Brokers' Association president Robert Martin said.

Other fire and general insurers have made similar warnings, noting bad weather coupled by losses on investment markets over the past two years.

Local insurers, with the exception of New Zealand-owned AMI, have been trimming their branch networks, especially in provincial areas, replacing them with call centres.

Tower Insurance general manager Colin Taylor said commercial fire and general insurance had been affected most. Tower's business was mostly in personal lines and house contents might be less affected.

But the main effect comes from the ability of international reinsurers to support the industry. SwisRe's credit rating was recently downgraded from triple A to AA+ and the credit-rating of Royal & SunAlliance was downgraded by Standard & Poor's in August from A+ to A, reflecting a decline in the insurer's capital base amid the downturn in sharemarkets. During August, Royal & SunAlliance announced that 1200 jobs would be made redundant in the UK, it was short of capital and was considering a rights issue.

The World Trade Centre bombing, estimated to cost $US50 billion, was the single biggest event but the fall of international investment markets means that those reinsurers are now seeking higher returns on their investments.

"If they withdraw from the market it would leave a big question mark hanging over the whole industry," Mr Taylor said.

The two main risks for fire and general insurers in New Zealand are a Wellington earthquake and increasing number of floods.

Commercial and retail premises in the capital have seen premium increases of anywhere between 20% to 100%. Owners of commercial car fleets have also been hit by markedly higher premiums.

The fire and general insurance market in New Zealand is worth about $2 billion, split almost evenly between personal and commercial lines.

In recent years AMI has boasted strong year-on-year growth and profitability but this year was affected by several weather events that reduced profits. They included storms in the North Island in November last year, hail and rain damage in Christchurch and Dunedin in January this year, and a "weather bomb" in June mainly affecting Thames/Coromandel with an estimated cost of about $21 million.

Meanwhile, insurance broker Lance Ryan in Christchurch said insurers were more carefully selecting what they would cover and how much. "They're covering less and asking for more in the way of premiums. Some brokers are struggling to get the last 20% insured. And professional indemnity has been hit," he said.

"I spoke to a valuing firm whose premiums went from $20,000 to $68,000. So there will be increases for lawyers, architects, designers, accountants and surveyors. In fact I'm surprised it hasn't already shown up in inflation figures.

"Freight-forwarding firms have been hit by colossal increase in the order of 100% or more and that's based on the increasing number of accidents involving trucks which are getting bigger and are on the road longer.

"Underlying all this is that there are fewer and fewer companies in the business."

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