19 August 2019
Securing professional indemnity (PI) cover will remain tough for building certifiers and other high-risk professionals as insurers look to cut their losses, according to an Aon report.
Insurers lost $1.03 for every $1 in premium earned in the March quarter, the broker says, citing statistics from the Australian Prudential Regulation Authority.
“With limited investment return, insurers are experiencing increased scrutiny from overseas parent entities and Lloyd’s to return their books to profitability,” Aon says.
“As a result, several Lloyd’s syndicates have stopped writing Australian PI business and Australian insurers are reassessing their appetite for certain professions. Less competition has allowed other insurers to return to profitability by significantly increasing their premiums.”
Certifiers, fire engineers and other consultants caught up in the construction industry’s cladding crisis are encountering triple-figure premium increases – if they can find an insurer willing to provide cover.
“The [PI] insurance market continues to deteriorate and has become severe for some industries,” Aon says in the report.
“Increased claims activity and several large settlements have tipped insurers’ loss ratios to unprofitable. Consultants exposed to cladding have been most heavily impacted. They’re experiencing significant premium increases.
“Looking ahead, the trajectory will continue to worsen for some industries.”
The situation is also grim for lawyers and accountants, as insurers are worried about the rising number of shareholder class actions and mergers and acquisition activities.
The General Insurance Code of Practice will be a crucial tool in helping the industry embed Hayne royal commission reforms, the Insurance Council of Australia (ICA) says.
The code is being reviewed following “the most extensive and inclusive consultation process” and should be finalised and ready for implementation by early next year.
CEO Rob Whelan told last week’s 10th anniversary Australian Insurance Law Association (AILA) Young Professionals Luminaries Dinner in Sydney the Hayne reforms will stretch the industry “to its limits” and create a “seismic shift” in the way it operates.
Mr Whelan lists planned reforms in product and distribution obligations, claims as a financial service, unfair contract terms, anti-hawking provisions, and sanctions and enforceability in codes.
“Any one of these initiatives in isolation would be a challenge to implement. The combined or aggregate effect of all these changes simultaneously is a whole different prospect."
But he says the industry “has at its disposal a tool that can assist with the transformation – the General Insurance Code of Practice”.
“ICA and its member companies have toiled long and hard over the past two years to craft a revised Code of Practice that will go some way to defining the path forward,” he said.
“The code looks to respond to an environment where some of our customers may be suffering various forms of vulnerability – domestic abuse; mental illness; financial stress.
“It also looks to address the key criticism by the royal commission – specifically compliance and enforcement through the role and powers of the Code Governance Committee and ultimately the Corporations Act.
“The overarching intention of the code has always been to provide a living document that goes beyond the law, continuously improving the industry’s response to the ever-changing needs of customers and the community.”
Access to local government flood data for Moreton Bay Regional Council and the City of Gold Coast would allow for more accurate pricing of premiums in the two Queensland precincts, the Insurance Council of Australia (ICA) says.
They are the only two areas left in the state where insurers are still relying on secondary data to assess flood risk, according to ICA Head of Risk and Operations Karl Sullivan.
“In both locations, insurers must rely upon sources other than official flood data, introducing uncertainty and limiting capacity to recognise mitigation measures,” he wrote in a LinkedIn post.
Sharing the data with insurers would be “helping residents by allowing premiums to more precisely reflect official data.”
More than half of all land parcels in the Gold Coast may be exposed to some level of flooding, and about 24% of land sites in Moreton face a similar risk, industry estimates suggest.
The ICA has been reviewing the status of flood data for each state, with Queensland the first on the list.
Lloyd’s has welcomed Wickshire as the market’s first Australian-based registered broker as rising technological uptake makes it easier to transact business from global locations.
The London-based market has stepped up its focus on electronic business since Placing Platform Ltd (PPL) launched in 2016. More than half of all deals were completed using the system during the second quarter, while accounting and settlement has been modernised through Xchanging systems.
The Lloyd’s broker registration process includes a pre-application meeting and providing formal and supporting documentation and can take some time to be completed.
“We have a number of Lloyd’s registered brokers around the world but they [Wickshire] are the first to be approved, resident in Australia,” Lloyd’s Australia GM Chris Mackinnon told insuranceNEWS.com.au.
“This status will allow them to transact business directly with the Lloyd’s market in London and to process transactions through the Lloyd’s technology platforms, including the PPL initiative and through Xchanging.”
Mr Mackinnon said Sydney-based Wickshire is not the only firm to have shown interest in registering.
“I am unable to comment on any specific applications, but I would expect that Wickshire will not be the only one in Australia,” he said.
Wickshire Director Dane Wickens says the firm had been placing business with local companies and through Lloyd’s syndicates in Sydney and Singapore but will now be able to transact directly into London.
“We think it is a great opportunity for our clients and any potential new clients,” he told insuranceNEWS.com.au.
Wickshire’s business areas include reinsurance and working with underwriting agencies on binders and line-slips.
The firm was started by Owner/Director Neale Wickens in 2013. Previously he worked at companies including Gallagher Re, Berkshire Hathaway’s General Reinsurance Corp and Mercantile Mutual.
New research estimates that fixing defects in apartment buildings constructed in the last decade will cost $6.2 billion.
The independent report – commissioned by the Construction Forestry Maritime Mining and Energy Union – also says an estimated 3461 residential buildings containing 170,000 apartments have combustible cladding.
The worst is in NSW (1411 buildings), followed by Victoria (1069), Queensland (570), the ACT (157), WA (154), SA (69) and NT (31).
The total value of new apartment construction in 2018-19 is $31.7 billion – 14% of the building and construction sector.
The report blames the “systematic weakening of government as the protector of the public interest in an industry that is riddled with asymmetries, informational and financial”.
It says building standards haven’t been enforced or kept pace with evolving building practices. Public sector skills and capability have been lost, leading to poor project scoping and design, and outsourced building approvals have resulted in conflicts of interest and no oversight.
Many of the operators cutting corners on building quality are the same ones cutting corners on worker safety, the report says.
“In what amounts to a sort of ‘cognitive dissonance’ in public policy, our political and industry leaders are well aware that we have a massive problem on our hands, but are paralysed by the fear that the necessary actions required to improve our industry could dampen activity in a still otherwise fragile national economy.”
The report calls for the strictest practical standards to be applied to new construction, saying maximum transparency needs to be introduced in the country’s existing housing stock.
Calculating potential underwriting losses from poor construction remains impossible as governments prove reluctant to share information on building issues, Insurance Council of Australia (ICA) Head of Risk and Operations Karl Sullivan has told a NSW parliamentary inquiry.
“We still do not have any data from government about how many buildings have been assessed, how many have dangerous cladding [and] how many may ultimately require remediation,” he told a hearing last week.
“In the absence of information – and I stress that it is not NSW alone but all states and territories – it is impossible to calculate the losses going forward.”
Mr Sullivan says he understands the complex reasons for not publicly releasing information from registers of high-risk buildings, but details should be provided to insurers as solutions are considered so the industry can analyse potential maximum losses and how that will influence future products and prices.
Remediation work for buildings also remains difficult to cover under professional indemnity policies, as there has been no agreement on remediation standards and how they will be achieved.
“That is a fundamental step that needs to be achieved before insurers can even begin to assess whether they can insure the risks of people signing off on those plans,” he said.
The current “uncapped liability” has required the continued use of exclusions.
Mr Sullivan says he understands no Australian insurer would offer terms for Sydney’s Opal Tower apartment building, which was evacuated the day before Christmas due to cracking.
Coverage was sought from the international market. “The only terms I believe they could get were a tenfold increase at least in the premium, and a vast restriction in what they would insure the building for.
“Most of the natural perils that most buildings would be insured for were ruled out. Essentially the building is insured for fire only and at a reduced sum.”
The NSW Legislative Council Public Accountability Committee, chaired by Greens member David Shoebridge, is inquiring into the regulation of building standards, building quality and building disputes.
Hearings will be held again on August 27, with an interim report due “as soon as practical” and a final report by February 14.
A recent Federal Court of Australia order in the Radio Rentals class action indicates insurers are increasingly going to have to disclose details of their clients’ insurance policies, law firm Allens says.
Justice Jacqueline Gleeson this month ordered AIG, the third respondent in the lawsuit, to provide documents including the directors’ and officers’ (D&O) insurance policies procured by Radio Rentals.
The applicant in the lawsuit had sought production of the D&O and professional indemnity policies the company had procured.
“This decision confirms a recent trend within the Federal Court for judges in class actions to order respondents' liability insurance policies to be produced to applicants even though such policies are not relevant to the disputed issues in those proceedings,” Allens says.
“It may become routine for class action applicants to seek and successfully obtain production of respondents’ insurance policies.”
Industry losses on property insurance from Townsville’s summer flood, which began on Australia Day, have reached $1.22 billion, according to Swiss modeller Perils estimates.
The estimate is the highest flood-loss figure since Brisbane was deluged in 2011.
The estimates are based on collected insurance loss data and cover only property lines, not motor and other lines. In May, the independent provider of catastrophe insurance data had put the figure at $1.04 billion.
The Townsville floods were the result of a slow-moving monsoon system which brought exceptional rainfall to northern Queensland in late January through to February 10. The Bureau of Meteorology reported numerous sites recorded 10-day rainfall accumulations exceeding 2000mm.
“By combining the loss information with Perils’ market sums insured, damage degrees as a percentage of sums insured can be derived and correlated with the flood metrics. This enables users to validate vulnerability functions in probabilistic Cat models,” Perils says.
The Zurich-based modeller will publish another loss estimate for Townsville in February.
The Bank of Queensland (BOQ) has won in its legal appeal to make an indemnity claim from its civil liability policy.
Early this month the NSW Court of Appeal overturned the decision by a Supreme Court judge who had ruled the bank was not entitled to seek indemnity for $6 million it paid to settle a class action filed by 192 investors.
The appeal court directed AIG — the lead insurer in the civil liability policy issued to BOQ — and Catlin Australia to agree on a settlement amount including interest.
Last November Justice James Stevenson had found in favour of the insurers. The insurers maintained the bank had no grounds to be indemnified because the liability policy came with a $2 million deductible that applied individually to each of the 192 investors.
Since no one single claim exceeded the deductible amount, the insurers argued they were not liable for the losses BOQ had incurred.
Zurich, which was also a defendant in the lawsuit, had opted to settle with BOQ during the court proceedings.
But the appeal court ruled AIG and Catlin are liable for the losses and must indemnify the bank.
It says while there were multiple claims, they must be assessed as a single claim within the meaning of the insurance policy, which has a limited liability of $40 million for all claims and a retention of $2 million for each claim.
“The multiple claims arose out of, or were based upon or attributable to, one or a series of related wrongful acts and should therefore be aggregated, with the result that only one retention was applicable in respect of all of the claims,” the appeal court judges said in their ruling.
Anecdotal evidence suggests that insurers are reducing their capacity and availability for defamation cover amid an “explosion” in lawsuit damages, Victorian barrister David Gilbertson QC says.
He says higher premiums for defamation insurance are inevitable because of out-of-control payments. “Reputation and hurt feelings are worth more than serious personal injuries.”
A current cap of $407,000 for non-economic loss exists, but aggravated or special damages – such as for lost income – don’t attract a payment cap.
Actor Geoffrey Rush received $2.9 million in total damages for a defamatory article alleging abusive behaviour. Actor Rebel Wilson received $4.6 million damages in a court case she won against Bauer Media, which was reduced to $600,000 on appeal. Former treasurer Joe Hockey received $200,000 in damages in a defamation lawsuit.
Some complainants are taking Federal Court Action to avoid jury trials in certain jurisdictions, Mr Gilbertson says. The laws are not keeping pace with advances like social media. It is unlikely laws will be reviewed quickly and there are no easy solutions.
“Today, everyone is a publisher.”
According to media reports earlier this year, Malcolm Turnbull’s publisher Hardie Grant was forced to find new defamation cover after Chubb declined to renew the company’s policy over fears that the former prime minister’s memoir would lead to defamation lawsuits. Chubb declined to discuss the report with insuranceNEWS.com.au.
Mr Gilbertson will address the Australian Insurance Law Association’s national conference in Tasmania from October 30.
The New Zealand High Court has ruled that Southern Response engaged in misleading and deceptive conduct in its handling of a Canterbury quake claim.
Justice David Gendall in his verdict last week ordered the agency to compensate Christchurch residents Karl and Alison Dodds $NZ178,894.30 ($170,000) plus interest.
Southern Response was set up by the Government to settle the Canterbury earthquake claims of policyholders who were insured through local insurer AMI, which sought government financial support to cope with the claims.
When AMI was acquired by IAG in 2012, the earthquake claims were set aside to be paid by the state through Southern Response.
The Dodds took legal action after discovering Southern Response had provided them with a modified report that did not state the actual cost of rebuilding their property, which was among the options available to the couple.
They had agreed to settle their claim in December 2013, choosing to purchase a replacement house with a cash payout of $NZ894,937 ($846,921) instead of rebuilding their damaged house.
In the detailed costing report that was withheld from the couple, it was estimated a rebuild would cost another $NZ200,000 ($189,000) in the form of demolition costs, professional and design fees and other expenses.
“The failure by Southern Response to disclose that this [settlement] figure omitted certain costs was an important factor influencing them to enter into the settlement agreement at the figure they accepted,” Justice Gendall says in his ruling.
“I am satisfied that Southern Response’s misrepresentation produced a misunderstanding in the minds of the Dodds as to the true rebuild cost of their house.
“They relied on this, and it was one of the reasons which induced them to settle their policy claim at the figure they did and to enter into the settlement contracts.”
QBE has maintained its earnings targets after a strong first-half which saw net profit increase 29% to $US463 million ($682 million) from a year earlier.
The business is on track to achieve a combined operating ratio of 94.5-96.5% and net investment return of 3-3.5% as previously flagged.
Hardening prices and strong investment returns combined to offset challenging conditions in the North American crop season, which was affected by a particularly wet spring, QBE says.
“The group’s half-year financial performance reflected a further significant improvement in attritional claims experience across all divisions, coupled with materially stronger investment returns,” CEO Pat Regan said.
“With a strong first half now behind us, good pricing momentum and our full-year targets unchanged, we will continue to build on the good progress we have made against our priorities in the second-half of [the year].”
Average group-wide premium rates went up 4.7% in six months to June, up from 4.6% in the first-half of last year.
Net earned premium increased to $US5.67 billion ($8.4 billion) from $US5.65 billion ($8.3 billion). The adjusted combined operating ratio strengthened to 95.2% from 95.8%.
Cash profit after-tax rose to $US520 million ($766 million) from $US385 million ($568 million).
Gross written premium (GWP) increased 1% on a constant currency basis despite falling 3% to $US7.64 billion ($11.3 billion) in absolute terms.
In the Australia Pacific market, GWP increased 2% on a constant currency basis and rates went up 6.8% compared to 6.4% a year earlier.
Commercial lines achieved price rises of 7.5% on average, up from 7%, underpinned by a 17% jump in commercial property rates, 10% in strata, 8% in commercial motor and 6% in commercial packages.
The net cost of catastrophe claims went up to $US116 million ($171 million) or 6.5% of net earned premium, compared with $US42 million ($62 million) or 2.2% a year earlier.
The Townsville floods, Queensland storms and bushfires in NSW and Tasmania were significant events in the June half.
In the key North American business, the pricing environment remained strong with rates up 4.1% on average compared with 3.1% a year earlier.
A particularly wet spring pushed the accident year combined ratio to weaken to 97.7% from 92.6%.
In a separate statement, QBE announced North America CEO Russ Johnston is leaving and will be replaced in October by Todd Jones, who was most recently Willis Towers Watson head of global corporate risk and broking.
Private equity investor Pemba Capital Partners is seeking court orders to have Coverforce shareholding documents corrected in a dispute centring around equity issued to the owners of the Resilium broking business.
Documents filed in the NSW Supreme Court in Sydney, and seen by insuranceNEWS.com.au, contest which of two shareholder agreements is in force and whether Pemba has the right to push through a sale of the entire company to AUB Group.
AUB was scheduled to complete due diligence on the $150-200 million deal by September 30, but the dispute is not expected to return to the court until the second half of October.
South African-owned Pemba acquired a stake in Coverforce in 2012 and says a shareholders’ agreement later entered into remains in force. Pemba believes it properly triggered exit clauses after receiving a sale proposal from AUB in May.
But Coverforce founder Jim Angelis says a revised agreement that led to new shareholdings was decided in October, and even if previous arrangements still apply, Pemba has not met sale notice requirements.
Under the revised agreement, equity was issued on June 1 to Adrian Kitchin, Drue Castanelli and Ben Hastie, who completed the buyout of authorised representative company Resilium from Suncorp this year. Mr Kitchin is the Resilium MD, Mr Castanelli is Director Operations and Compliance, and Mr Hastie is National Manager of Sales and Distribution.
Pemba says the new agreement involved Coverforce entering into a binding term sheet with Mr Kitchin relating to the Resilium buyout. The term sheet mentions a loan to Mr Kitchin, which would have triggered rules that say certain financial actions above $50,000 require special majority approval.
The investment company says there was no special majority board decision, and “it is aggrieved by the incorrect inclusion” of Mr Kitchin, Mr Hastie and Mr Castanelli in the share register and in ASIC records.
ASIC documents show Mr Kitchin holds 10% of Coverforce and is a director. Mr Angelis controls 42% and two Pemba entities have around 43%.
But Pemba says Mr Kitchin “is not and has never been a director of Coverforce”.
The Australian Financial Review says Coverforce raised the capital to fund the Resilium management buyout and held options to acquire the company.
A Resilium spokeswoman told insuranceNEWS.com.au the firm will not comment on the matter while proceedings are before the court.
Allianz has to keep an extra $250 million in capital requirement until the business has finished the remediation work to improve its risk oversight and addressed lapses uncovered in a self-assessment test, the Australian Prudential Regulation Authority (APRA) says.
The prudential adjustment applies to the insurer’s prescribed capital amount and will take effect on September 1, an Allianz spokesman told insuranceNEWS.com.au.
He says the insurer has a “comprehensive program of work arising out of the [self-assessment test] and we will continue to work with APRA in relation to this”.
APRA statistics show Allianz had a prescribed capital amount of about $1.4 billion last year.
“By imposing this additional capital requirement, APRA is providing a financial incentive for Allianz to quickly and effectively implement its planned remediation work,” Executive Board Member Geoff Summerhayes said.
He says APRA also wants “to send a message to the broader insurance and superannuation industries that APRA expects the same high standards of risk management, including for non-financial risks, as we do for the banks”.
Allianz is the first insurer and fifth financial institution in Australia that APRA has imposed additional capital obligation on over increased operational risk concerns.
APRA had ordered the self-assessment tests on 36 financial services providers, including nine general insurers, to determine if they had governance issues similar to those that were uncovered by its prudential inquiry into the Commonwealth Bank of Australia (CBA).
Last month APRA imposed an additional $500 million capital requirement on three banks – ANZ, NAB and Westpac. In May last year, the regulator applied a $1 billion capital adjustment to CBA following its prudential inquiry.
Johns Lyng Group has bought a controlling stake in Sydney-based strata and facilities management business Bright & Duggan in a deal it says is a “game changer”.
The group will pay $13.8 million cash for a 46% equity stake and 51% voting interest in the business, which has 14 offices across four states and territories and more than 220 full-time equivalent staff.
“Leveraging the Bright & Duggan business portfolio to cross-sell and grow Johns Lyng’s other core service offerings, including emergency and scheduled repairs, and maintenance and building, is the key to this acquisition,” CEO Scott Didier said.
“It will allow for national expansion, both organically and through further acquisitions.”
The firm has more than 55,000 strata titled units under management across more than 1500 strata schemes.
Co-founder Phil Duggan will retire from the business while Executive Chairman Trevor Bright and MD Chris Duggan will retain residual equity and key management roles.
The deal is expected to contribute revenue of about $31 million and earnings before interest, tax, depreciation and amortisation of about $4.5 million for Johns Lyng in the current financial year.
QBE is launching a new Customer Charter, a project that involved input from more than 100 representatives from the insurer’s property supplier network.
The charter follows a strategic review of the claims division, and aims to deliver better and more consistent outcomes for customers during the claims process.
“The claims experience is the moment of truth for insurers and we know that each and every touchpoint can influence the customer’s view of the entire process,” Chief Claims Officer Jon Fox said.
“Our recent [request for proposals] process has enabled us to enhance our approved supplier network with new and existing partners that share our customer-first ambition.
“The next step was to bring everyone together and map out what this looks like in practice through the creation of a unified customer charter.”
Australian Seniors Insurance Agency has opened a second bricks-and-mortar store, building on the successful launch of its first branch last November in Castle Towers, NSW.
The branch in Lake Haven in the NSW Central Coast region is staffed by insurance specialists, a concierge and connect officer.
Free in-house workshops for customers will be held throughout the year.
“The opening of our second Australian Seniors retail store is paramount to ensuring we continue to speak to our customers in a way that best suits them,” spokesman Sarah Richards said.
“Our research tells us our customers value face-to-face conversation and we’ve found that to be true with the success [of] our Castle Towers store in Sydney.”
Auckland-based Delta Insurance has introduced cover to protect individuals and households from cyber-attack losses.
Delta’s Personal Cyber Insurance will initially be available for organisations to offer their employees and customers in conjunction with DynaRisk, a cyber risk-management offering Delta introduced earlier this year.
“Families will be able to significantly reduce their exposure to hackers and online criminals, but organisations will also benefit,” Delta cyber-risk specialist Fred Boles said.
“More and more employees work from home and use their own devices which raises the risk of a device acting as a Trojan horse, bringing harm into the business.”
Delta says the insurance has no excess, limited paperwork and sits on a digital platform for ease of use. It addresses theft of financial assets, attacks on smart devices, viruses, ransomware, identity theft, unauthorised online transactions and theft of digital photographs.
Insurance is squarely in the Federal Government’s sights, with Treasurer Josh Frydenberg setting out a schedule to rapidly introduce Hayne royal commission reforms.
“The scale of these reforms, detailed in the Government’s implementation plan, represents the biggest shake-up of the financial sector in three decades and the speed with which they will be implemented is unprecedented,” Mr Frydenberg says in an opinion piece in The Australian today.
The Government will follow up the reforms by establishing an independent review in three years’ time to assess the extent to which changes in industry practices have led to improved consumer outcomes and the need for further action.
“Industry is on notice,” he says. “The public’s tolerance has been exhausted as they now expect, and we will ensure, that the reforms are delivered and the behaviour of those in the sector better reflects community expectations.”
By the end of this year more than 20 royal commission commitments, about a third of the total, will have been implemented or will be included in legislation before the parliament, according to the schedule.
That will rise to more than 50 commitments, or almost 90% by the middle of next year, with legislation covering the remainder to be introduced by the end of next year.
Mr Frydenberg says the implementation plan will make up 75% of Treasury’s legislative agenda over the next year.
The Opposition will be fully briefed by Treasury on the implementation plan and pieces of legislation required and it is critical Parliament deals with the reforms constructively and with a sense of urgency, he says.
The Australian Securities and Investments Commission (ASIC) is also stepping up its activity in response to the royal commission, with $404 million of additional funding provided over four years.
The regulator’s new Office of Enforcement is working on 13 matters referred from the inquiry, while also investigating and assessing 30 of the case studies that came to light during the hearings, ASIC Deputy Chairman Daniel Crennan says in an update provided with a half-yearly report.
“While we do not comment on actual or potential investigations, we are prioritising our work on these matters and a significant number of other investigations in Australia’s major financial services institutions,” Mr Crennan says.
ASIC will be recruiting more enforcement officers, including analysts, investigators and lawyers, and step up use of external resources, including seeking advice from members of the bar, he says.
The six-month update shows the regulator opened 77 investigations and completed 48 investigations during the period, 70 criminal charges were laid, and six people imprisoned.
Penalties of $370,800 were paid while $19.2 million was provided in compensation and remediation for consumers and investors.
A total of 103 individuals were removed or restricted from providing financial services or credit and 29 people were disqualified or removed from directing companies.
The Australian Prudential Regulation Authority (APRA) may be open to changing the release date of the Cost Recovery Impact Statement (CRIS) that accompanies the annual supervisory funding levy consultations.
Treasury has released a paper seeking submissions on the methodology it uses to calculate the annual supervisory levy. It asks what changes industry would find useful to the levy consultation process, and whether the current levies system is transparent and appropriate for industry sub-sectors.
“Regarding the timing of the annual CRIS, industry has indicated concerns during annual consultations that APRA publishes its CRIS after the consultation process,” the paper says.
The CRIS holds expenditure information, including accounting for cost-recovered activities, the efficient allocation of resources and its licensing and authorisation charging activities. The next one is due after the outcome of the methodology review.
Last year the Insurance Council of Australia attacked the timing of the CRIS in consultation on the financial supervisory levies.
“It is poor process that the sector is being asked to respond to this consultation in the absence of the CRIS from APRA,” ICA said. “It is critical that an adequately transparent framework be in place to ensure regulators deliver value for money.
“The general insurance sector’s contribution to the levies is significant. It is therefore important that the sector knows how its contribution will be allocated and used.”
APRA’s levy requirement on the general insurance sector for 2019-20 was $30.5 million. Its total funding for that period is $186.1 million. The levy maximum for the general insurance industry was increased by about 44% to accommodate the increase to APRA’s increased future funding requirements, drawing criticism from industry that the rise outstripped the levy on the major banks – which got a 24% increase.
Treasury also wants feedback from industry over whether the current levy base is appropriate for each industry sector, and if the design and operation of the levy framework is still fit for purpose.
This year the levy will also recoup the costs Treasury incurred in conducting a capability review of APRA.
One of the challenges of the levy methodology is avoiding cross-subsidisation – when a disproportionately large levy is charged to part of the industry when compared to the actual cost of APRA supervision, the paper says.
The proposed life insurance industry funding levy for 2019-20 is $19.9 million, or 8.4% of total levies.
“Addressing harms in insurance” is one of seven top strategic priorities listed in the Australian Securities and Investments Commission’s (ASIC’s) new Corporate Plan, to be published at the end of the month.
ASIC supports insurance law reform, Commissioner John Price told delegates at the Risk Australia Conference on Thursday, particularly surrounding unfair contract terms and issues in claims handling.
The regulator gave a damning review last month of consumer credit insurance (CCI) in which consumers were found to be paid out only 19 cents in claims for every dollar paid in premiums. Allianz has since dropped the product line and National Australia Bank is the subject of a CCI class action.
ASIC will continue reviewing specific insurance areas, including CCI, total and permanent disability insurance, travel insurance and fraud investigation practices, and is “prepared to take enforcement and other regulatory action against insurance mis-selling,” Mr Price said.
“Embedding appropriate norms of conduct at all levels of your organisation is your best defence against misconduct that can cause harm to your clients, the wider market and ultimately, your own firm,” Mr Price said in a speech delivered in Sydney.
“Poor culture, a lack of accountability and insufficient concern for consumer and investor outcomes often drive harms in the sectors we regulate.”
ASIC’s seven strategic priorities:
The Australian Prudential Regulation Authority (APRA) is trying to boost its staff numbers by up to 150 people with additional funding provided by the Federal Government.
APRA Chairman Wayne Byres confirmed the recruitment drive during a recent Parliamentary Economics Committee hearing. APRA’s employee numbers have been stable at about 600 staff for the last decade, up until last year.
“We now have capacity [for] probably up to 700 or 750 [people] and we’re actively trying to grow our staff numbers now,” he says.
Canberra provided more than $550 million over four years to the Australian Securities and Investments Commission (ASIC) and APRA to enhance their oversight and enforcement capacity, after the Hayne royal commission recommended that APRA take a more pro-active approach to its enforcement activity and that its resources – and ASIC’s – were increased commensurately.
APRA recently completed a capability review to determine if it was properly equipped and resourced to fulfil its mandate. Mr Byres says that review noted that the regulator’s staffing levels stayed the same even while its regulatory activity was expanding.
Committee member and Labor MP Dr Andrew Leigh questioned Mr Byres if long-term budget constraints led to APRA taking a more conservative approach to enforcement.
“Supervision is all about making choices, and we deploy those resources where we think we can get maximum effectiveness and achieve the best outcomes for the community… we make do with what we’ve got,” Mr Byres says.
“I think we’ve done well utilising the resources that we’ve had.”
The Insurance Council of New Zealand (ICNZ) has warned property buyers in earthquake-affected Christchurch and surrounding areas to check carefully before buying homes.
The New Zealand Government last week said it would make special payments to homeowners in the region who bought properties which they later found required expensive quake-related repairs that fell outside insurance options.
“The fact the Government is making ex-gratia payments to repair on-sold properties should not be seen as a green light to buy houses without due care,” ICNZ CEO Tim Grafton said.
“Insurers will always expect properties to be properly repaired before taking on the risks of insuring them.”
The Government estimates 1000 homes could qualify for the payments. Repair costs could total about $NZ300 million ($285 million), to be paid through the Earthquake Commission (EQC).
The EQC has in the past paid for earthquake repairs up to $NZ100,000 ($95,045), with costs above that level covered by homeowners’ private insurance.
But disputes have arisen where a property had repairs completed below the cap, but later problems pushed the costs above the threshold, while insurance arrangements had changed because of a sale.
“This new policy will hopefully create certainty for homeowners and avoid the delays, stress and significant cost associated with court proceedings,” EQC CEO Sid Miller said.
Homeowners have 12 months to register their interest for the payment and anyone buying a house after last Thursday’s announcement is ineligible.
The Australian Securities and Investments Commission (ASIC) has updated its guidance for climate change-related disclosure.
It says regulated companies should include climate change risks developed by the G20 Financial Stability Board’s Taskforce on Climate-Related Financial Disclosures (TCFD), and also emphasise climate change as a systemic risk to future financial performance.
Disclosures both inside and outside of an operating and financial review should be synchronised, it says. ASIC is urging companies with material exposure to climate change to adopt the TCFD framework, which is voluntary. It is planning to monitor climate change related disclosure practices in the coming year.
The guidance review follows ASIC’s publication last year of a climate risk disclosure report in which it urges companies to be proactive in its response to emerging climate change risks, and develop strong corporate governance to assess it.
“Directors should be able to demonstrate that they have met their legal obligations in considering, managing and disclosing all material risks that may affect their companies,” ASIC Commissioner John Price said. “This includes any risks arising from climate change, be they physical or transitional risks.”
Compulsory third party (CTP) insurance schemes across Australia should be amended to cover automated vehicles, Australia’s transport ministers agreed at a meeting in Adelaide earlier this month.
Members of the Transport and Infrastructure Council (TIC), who include Deputy Prime Minister Michael McCormack and state and territory transport ministers, recommended governments undertake a review of their CTP and national injury insurance schemes to identify any eligibility barriers to accessing these schemes by occupants of an automated vehicle, or by those involved in a crash with one.
“Council agreed to advocate that existing motor accident injury and insurance schemes be expanded to cover crashes caused by automated vehicles and states and territories should review and amend their schemes,” the latest TIC Communique states.
The reforms should be nationally consistent wherever possible, the TIC said. There is strong support from governments, insurers, manufacturers and other stakeholders for a consistent approach across Australia to automated vehicles and related regulation.
The TIC also recognises automated vehicle technology will generate new data and notes the importance of safeguarding privacy.
A submission from IAG late last year recommended consumers be offered degrees of opt-in when agreeing to supply their data under consistent nationwide laws.
“The importance of national harmonisation and benchmarking of standards for all aspects of a CAV (Connected and Automated Vehicle) transport system cannot be overstated,” IAG’s submission says.
The Australian Reinsurance Pool Corporation (ARPC) has promoted Janice Nand to a new position of General Counsel on its senior executive team.
Ms Nand was previously ARPC senior manager, governance, compliance and board secretariat. She was also a partner with HWL Ebsworth Lawyers and worked on the Hayne royal commission.
CEO Dr Christopher Wallace says the appointment will strengthen the ARPC’s organisational governance and leadership.
The State Insurance Regulatory Authority (SIRA) is reviewing the “minor injury” provisions contained in the Motor Accident Injuries Act, which underpins the no-fault compulsory third party scheme launched in 2017.
It is seeking feedback on whether the provisions have achieved the intended outcomes suggested for changes.
The review will be completed by December. It will be followed by a public report early next year.
For more information, click here.
The New Zealand Council of Financial Regulators is establishing a new vision to better coordinate financial system regulation and more effectively recognise the specific responsibilities of its member agencies.
The council is made up of the Reserve Bank, Financial Markets Authority, Treasury, and Ministry of Business, Innovation and Employment. The Commerce Commission is also becoming a member. It tries to identify issues of relevance for multiple agencies.
The council was instrumental in launching the recent conduct and culture review of the country’s banks and life insurers.
Financial Markets Authority Chief Executive Rob Everett says the conduct and culture review shows the importance and benefits of regulators working together to tackle issues that span across the financial markets’ regulatory system.
“Ensuring a coordinated response to such issues will help to build confidence in the regulation of New Zealand’s financial markets,” he says.
Life insurance sold through the adviser channel has a higher level of under-disclosure than policies bought directly from insurers, new research has found.
The Adviser Effect On Insurance Disclosures study is based on applications for disability, total and permanent disability, trauma and life policies between November 2014 and December 2018 with an Australasian insurer.
“We argue that the adviser, who receives a commission when a contract is accepted, may be motivated to influence disclosures in order to increase the chance of an accepted contract in affordable terms and therefore maximise own returns,” the study says.
“By doing so, the adviser exposes the customer to legal remedies whereby the insurance company may cancel the contract or refuse a claim.
“Our results support the findings of various inquiries that call for an end to commission-based sales.”
Dr Doron Samuell, Director of the economics group Behaviour and co-author of the study, says the current sales-driven commission structure needs to be realigned towards customer outcomes.
He says personal information should only be collected by insurers.
“Our conclusion is that obtaining personal information through an adviser lowers the disclosure rates…to an implausible level,” Dr Samuell told insuranceNEWS.com.au.
“That is not good, because it means insurers are taking on risks they are unaware of and they have not provisioned for. We believe that the low disclosures are contributing to the sustainability problem of disability insurance.”
Challenger is warning investors it is still struggling with a challenging financial advice environment and it doesn’t expect any improvement in domestic local sales next financial year.
The group recorded a $15 million drop in statutory profit in FY2019, according to its end of year results. The $308 million profit includes an $88 million investment loss on Challenger Life’s assets and liabilities. Domestic sales in the life business was marginally down.
Total life sales – including overseas – declined 18% ($4.6 billion) compared to last financial year. Total sales for its annuities and Other Life sales have declined $500 million each. Domestic annuity sales have dropped by $140 million to $3.3 billion.
Lower sales by the big banks are being offset by sales from independent financial advisers, it says.
Challenger has been warning since April of a disrupted advice market. It recorded a $508 million drop in its six-month annuity sales in June, with the biggest falls occurring among the major banks, AMP and IOOF.
Japanese annuity sales are also falling due to higher US interest rates relative to Australia, reducing the demand for Australian-dollar products. Sales have dropped by 54%.
CEO Richard Howes says the company is responding to the difficult environment with a range of initiatives aimed at addressing adviser disruption. Its $15 million investment in new distribution, product and marketing initiatives is aimed at making annuities more mainstream, driving bottom-up customer demand, and helping more advisers write annuities.
Challenger is also increasing the availability of its annuities via super and investment platforms, including BT Panorama, Hub24 and Netwealth.
It is targeting a before-tax profit of $500 million next financial year.
Financial adviser Tarandeep Aujla has been banned for three years, with the Australian Securities and Investments Commission (ASIC) saying he failed to act in his clients’ best interests.
Surveillance found Mr Aujla recommended new insurance products to clients without identifying or considering their existing products, and made recommendations about the level of cover based solely on client direction instead of thoroughly analysing their needs or determining the impact of insurance premiums on their super balance.
He also didn’t obtain adequate information about his clients’ personal circumstances, financial details, needs and objectives, ASIC says.
The regulator investigated his conduct while he was an authorised representative (AR) of Infocus Securities, from February 1 2013 to October 5 2017, and when he was an AR of Chaucer Group from October 5 2017.
Mr Aujla was previously banned in 2009 for 18 months, which was reduced on appeal to eight months.
Life and business risk planning practices MBS Insurance and Complete Risk Analysis (CRA) are merging to create one of the industry’s largest life advice groups.
The combined business will have approximately $55 million in premiums under management, 18 advisers and 40 administration staff. The group has 10 joint ventures and will use its enlarged scale to develop more joint ventures as a key growth driver.
CRA insurance adviser Nicholas Brian and MBS General Manager Carolyn Clark will become equity partners in the new business, joining five other existing equity holders — MBS co-founders Drew Burden and Kris Mason, MBS directors Chris MacKenzie and Brent McCullough, and CRA founding partner Glenn Kerr.
Both groups are authorised representatives of Bombora Advice, an independent boutique dealer group.
MBS and CRA are based in Sydney and Melbourne, respectively. The two practices will continue to operate from their own offices and with their own management, guided by a common board of directors, while a new identity and brand are developed. It will be announced before the end of the year.
“The main benefit is that the merger will enhance our national presence and footprint,” Mr Burden says.
MetLife has appointed Lina Saliba as Head of Customer Experience.
She will responsible for working with MetLife’s super fund partners to improve their members’ life insurance experience. She has consulted for Macquarie, Allianz, and CommInsure as well as telecommunications companies.
MetLife has been working to strengthen its customer experience team. It created the new role of Chief Customer and Marketing Officer a month ago, and appointed Chesne Stafford to the position.
MetLife is working with its business partners to manage significant changes across the industry and make sure their customers’ experience is positive, Ms Stafford says.
Insurer PPS Mutual is strengthening its relationships with its advice partners with two senior appointments.
Steve Salter has been named as State Manager for Western and South Australia, and will manager key financial adviser relationships and support PPS’s offering in those states. He was formerly a senior business development manager for Asteron Life. He will report directly to Director of Distribution Brian Pillemer.
David Lowe has been appointed as Senior Underwriter at PPS and will deliver comprehensive underwriting support to the insurer’s adviser partners. He was previously a senior underwriter at ANZ Wealth, and also has experience as a private wealth protection planner.
Mr Lowe’s capability to foster relationships with reinsurers and advisers will be pivotal to his role, says Head of Claims and Underwriting Marcello Bertasso.
PPS also launched a super fund earlier this year to offer customers a complete life insurance solution through a partnered financial adviser.
The Association of Financial Advisers (AFA) has announced its finalists for Adviser of the Year and the AFA Rising Star awards.
Simone Du Chesne, of EQWealth, Joseph Hoe from Wealthwise, and Elliot Watson, of Elliot Watson Financial Planning, have reached the final stages for the Adviser of the Year award. The award is in its 16th year and celebrates visionary financial advisers and professional excellence.
The Rising Star award recognises emerging talent in financial advice and helps winners develop professionally. Chris Carlin, of Master Your Money Now, Victoria Devine, of Zella Wealth, Ellie Fordham, of Dozzi Financial Advice, Daniel Jackson, of DBK Financial Solutions, Jade Louise McKay, of Essential Financial Advice, and Rebecca Maher, of The Fiscal Mum, have been named as finalists. They will attend a workshop in Sydney.
The winners will be announced at the AFA gala dinner at its national conference in Adelaide on August 29.
A consortium of financial planning professional organisations have made a submission to monitor industry compliance with the Code of Ethics published by the Financial Adviser Standards and Ethics Authority (FASEA).
The monitoring body – Code Monitoring Australia – is a fully-owned subsidiary of the Financial Planning Association (FPA). It was established late last year. The FPA, the Association of Financial Advisers, Boutique Financial Planners, Financial Services Institute of Australasia, the Self-Managed Super Fund Association and the Stockbrokers and Financial Advisers Association submitted the proposal to the Australian Securities and Investments Commission.
All financial planners are required to subscribe to an approved code monitoring body by November 15. The Code of Ethics comes into effect from January 1 next year.
The FPA has begun recruiting for a chair and deputy chair, as well as positions on the governing body and disciplinary panel via SEEK. Applicants must have legal procedural experience, consumer advocacy experience and financial services experience.
“Given how tight the timeline is until November we’re preparing as much as we can in readiness for a green light, just in case. To that end, Code Monitoring Australia has also commenced advertising roles for the Compliance Scheme Governing Body,” FPA CEO Dante De Gori says.
The four contenders for this year’s Valerie Baker Memorial Award have been announced.
They are Beau Munn, of Origin Insurance, Belinda Smith, of Western Insurance Brokers, Kim Gilbert, of Zenith Insurance Services, and Lisa Carter, of Clear Insurance.
The winner will be announced next week and will receive an expenses-paid educational trip to London.
The award celebrates the achievements of Gold Seal founder Valerie Baker and is sponsored by Gold Seal, AIMS and the Steadfast Group, with additional support from Lloyd’s.
More than 800 insurance industry professionals are expected to attend this year’s Australian Insurance Industry Awards on Thursday night.
The awards, hosted by the Australian and New Zealand Institute of Insurance and Finance, take place at The Star Event Centre in Pyrmont, marking the 16th year of the event.
Master of Ceremonies will be Australian comedian, writer and practising lawyer Corinne Grant.
Finalists and winners will be recognised in 17 categories. Click here to see the full list of finalists.
Bruce Copp, a London-based specialist Lloyd’s broker who regularly travelled to Australia to negotiate facultative business with local insurance professionals, has died at 65 after a battle with cancer.
Mr Copp, who spoke at several NIBA Conventions, was a shareholder and director of major Australian underwriting agency SRS, which was acquired by Gallagher in 2012. Mr Copp handled the SRS portfolio, which at the time was the largest binder of Australian business placed at Lloyd’s.
Former SRS MD Paul Lynam told insuranceNEWS.com.au that Mr Copp was a 40-year veteran of the Lloyd’s market, and travelled to Australia about 60 times.
“He knew Australia very, very well,” he said. “The underwriters in London trusted that he was well connected and knew the territory.”
Through his career Mr Copp worked in several London broking houses. His last professional role was at Capsicum Delegated Authority, formerly known as the Binders and Facilities Division within Gallagher.
Mr Copp retired a few years ago to a farm in the south-east of England with his wife Sue and two dogs. He collected vintage Aston Martins and Ferraris and “loved to shoot pheasant”, according to Mr Lynam.
Mr Copp’s funeral will be held at Wealden Crematorium in Sussex on September 3. Donations can be made to ‘Blind Veterans UK’, ‘Help for Heroes’ or ‘RNLI’ via www.cwaterhouseandsons.co.uk.
NSW state insurer icare is funding three psychiatry fellowships for advanced trainees to study brain injury.
It has partnered with the University of Sydney’s Brain and Mind Centre, the Royal Australian and New Zealand College of Psychiatry and Northern Sydney Local Health District to establish the fellowships, at a cost of $1.5 million.
There hasn’t been any specialist fellowship training for psychiatrists in the area of brain injury until now. Seventy per cent of icare’s Lifetime Care participants have a brain injury and 50% of those have a mental health condition.
“We want to be able to address complex behavioural and mental health needs and optimise the lives of participants with brain injury. The aim is that we will be able to support them as they go through their rehabilitation and reintegration into the community,” says icare General Manager Care Innovation and Excellence, Suzanne Lulham.
“There are only a very small number of psychiatrists in NSW who specialise in this clinical area so we’re hoping to change that,” she adds.
The QBE Foundation pledged $300 per goal during a netball “Goals for Good” charity shoot out on Saturday, bringing the insurer’s philanthropic contributions this year to almost $950,000.
Eighteen goals were scored by Under 12s player Hayley Martin in a one-minute shootout at the Super Netball match between the NSW Swifts and the Melbourne Vixens, raising $5400 from QBE.
The Kids’ Cancer Project has been supported by The QBE Foundation since 2015 with financial contributions, employee volunteering, fundraising and initiatives to help raise awareness. Donations support medical research, improved treatments, building capabilities, and survivor programs.
Applications are open for the annual Insurance Council of New Zealand (ICNZ) and the Australian and New Zealand Institute of Insurance and Finance Scholarship.
The program aims to recognise and support the professional growth of developing industry professionals. The winner will receive up to $NZ10,000 ($9535) to attend an international industry event, leadership conference or seminar program.
Applicants must submit a 2500-word essay on the implications of granular pricing for insurers and their dealings with customers.
Entrants must be a direct employee of an ICNZ member, under 35 and a citizen or permanent resident of New Zealand.
Closing date for essay submissions is October 16.
Global economic losses from all disasters fell to $US44 billion ($64.93 billion) in the first half of the year, Swiss Re’s preliminary estimates show, down 13% from the first half of 2018.
Natural catastrophes fell 30% to $US40 billion ($59.02 billion).
An estimated $US19 billion ($28.04 billion) of the total bill was borne by insurers. Several events, such as cyclones in Africa and India, occurred in areas with low insurance penetration and as a result only 42% of total losses were insured.
The highest losses came from thunderstorms, torrential rains and snowmelt in the US, Canada, Europe, Australia, China and Iran. Swiss Re estimates total economic losses from these events at $US32 billion ($47.23 billion), with about $US13 billion ($19.18 billion) insured.
Up to 89% of UK businesses have no dedicated cyber insurance cover, leaving them potentially exposed to huge financial losses in the event of an attack, the Association of British Insurers (ABI) says.
The cyber market wrote under £100 million ($179 million) in premiums, less than a 10th of the more than £1.1 billion ($1.97 billion) recorded in the country’s pet insurance segment.
“Cyber insurance is a valuable product,” James Dalton, ABI Director of General Insurance Policy, said.
“The [99%] claims acceptance rates speak for themselves and the additional support a business receives, beyond dealing with the pure financial losses is a key attribute of most cyber insurance policies, too often overlooked.”
German insurer Talanx has forecast full-year profit will top €900 million ($1.48 billion) after its first-half result increased 9.4% to €477 million ($787 million).
Gross written premium (GWP) rose 11.2% to €20.9 billion ($34.5 billion), while a program to improve the performance of the industrial fire insurance business was having “the desired effect”, Chairman Torsten Leue said.
The Hanover-based company had previously said it was on track to meet an “ambitious” full-year earnings forecast of about €900 million ($1.48 billion), but the group is now confident of passing the target.
“We are pleased with the way our business has developed in the first half,” Mr Leue said. “We are seeing growth in all our divisions.”
The combined operating ratio deteriorated slightly to 97.5% from 96.7% in the first half, while natural disaster and other losses were higher, but within expectations.
Key losses included the explosion at a refinery in Philadelphia in June, the Queensland floods and late claim notifications for Typhoon Jebi, which hit Japan last September.
Industrial lines GWP rose 20.2% to €3.5 billion ($5.8 billion) mainly due to the January launch of HDI Global Specialty, a joint venture with Hannover Re.
Aspen Insurance has suffered a net loss of $US37.3 million ($55 million) and a near 6% decline in gross written premium over the last six months, compared to the previous corresponding period.
GWP declined to $US1.85 billion ($2.72 billion), from $US1.97 billion ($2.90 billion) the first half of last year. Its loss ratio rose from 58.9% last year to 60.7% in the first six months of this year. Aspen’s net income was $US16.1 million ($23.75 million).
The insurer’s ex-cat accident year loss ratio has improved from 62.5% in the first half of last year to 58.7%.
“While we are seeing rate and terms improving in some classes, particularly where there has been substantial withdrawal of capacity, we will continue to approach a number of the specialty lines cautiously,” CEO Mark Cloutier said.
Insured losses in China from Typhoon Lekima will exceed ¥6 billion ($1.26 billion), modelling firm AIR Worldwide estimates.
On August 10, Lekima struck China’s east coast about 320 kilometres south of Shanghai, bringing torrential rain. It made landfall in Taizhou, Zhejiang, with estimated sustained wind speeds of 181kmh, the equivalent of a Category 3 hurricane on the Saffir-Simpson Scale.
It briefly had a peak intensity of 920 millibars, according to the Japan Meteorological Agency.
Lekima’s path moved slowly north through Zhejiang Province, passing over Shanghai and making a second landfall on the coast of Qingdao in Shangdong Province at tropical storm strength. By August 12, 73 rivers reached or exceeded flood levels. Gales and heavy downpours struck all along Zhejiang, Shandong, and neighbouring provinces as Lekima moved north, triggering landslides and flooding roads, homes, businesses, and cropland.
Damaged roads and interruptions to power and telecommunications were reported all along the storm’s path. In Shangdong, operations at major oil refineries were shut down due to flood damage and lack of road access.
Train, plane, and bus travel were suspended, and ships were recalled to port. Major tourist destinations were closed with the potential for further business interruption as recovery from the storm continues.
Should depreciation be deducted from a business interruption claim as a “saving”? This Analysis of the issue is from Mark Darwin, a Partner at Herbert Smith Freehills and Peter Rink, Willis Towers Watson Head of Asia Pacific, Forensic Accounting and Complex Claims.
After decades of wrangling, the debate on whether a reduction in depreciation represents a potential saving under a business interruption policy has finally been settled.
A legal precedent has now been set in the case of Mobis Parts Australia v XL Insurance, a division of Axa.
The claim centred on the collapse of Mobis’ warehouse during a storm, damaging stock, plant and equipment.
Both parties agreed that Mobis would have ordinarily made provision in its accounts of $1.5 million for depreciation of plant and equipment destroyed, but it didn’t do so during the indemnity period – because of the damage.
In the original trial, the judge followed a previous precedent ruling that depreciation was an expense “payable” out of gross profit. But Mobis appealed, winning a unanimous verdict from the NSW Court of Appeal.
The judges analysed what they called the “true nature and impact” of depreciation on profit and recognised that the industrial special risks (ISR) business interruption policy, which is common in Australia, does not necessarily indemnify “actual loss” but rather contains a formula for the assessment of insured loss.
They ruled that depreciation is not a charge or expense “payable” out of gross profit according to the formula under an ISR policy, and therefore should not be deducted as a saving, even if this means a qualification to the principle of indemnity.
The arguments for and against including the reduction in depreciation as a saving essentially boil down to whether it is the intention of the policy to restore the policyholder to the accounting net profit position that it would have been in had the damage not occurred, or to maintain the policyholder’s cash position.
That is, should the business interruption insurance policy be indemnifying the policyholder for its cash loss or for its accounting loss from the interruption?
What is not in dispute is that including depreciation as a saving will result in the policyholder being in a worse cash position than it would have been in had the damage not occurred.
The difference between the cash and accounting perspectives can be seen in the following example loss scenario:
In the example above, as a result of the insured damage, the policyholder sustained a reduction in earnings before interest, tax, depreciation and amortisation (EBITDA) of $26,000, and a reduction in earnings before interest and tax (EBIT) of $22,000.
EBIT incorporates a reduction in depreciation of $4000. This is the amount that would be payable to the policyholder if the reduction in depreciation represents a saving. So, the loss depends on which accounting concept you consider.
By contrast, the reduction in turnover from the insured damage has resulted in a reduction in cash flow of $26,000 (the same as the reduction in EBITDA). This is the amount that would be payable to the policyholder if the reduction in the depreciation booked in the accounts does not represent a saving.
If depreciation is deducted as a saving in the calculation of the business interruption claim, we can see that the policyholder would not receive compensation for the additional $4000 of cash that it otherwise would have had available during the indemnity period.
In practical terms, when a business is interrupted, it is cash that is of critical importance to the policyholder. Wages, rent, and other overheads are paid out of cash; not accounting profits.
Our view is that compensation based on the loss of cash flow is the most meaningful to policyholders.
The court of appeal’s decision represents not only a win for policyholders but also for the industry.
Insurers will be able to apply a premium that accurately reflects the risk undertaken, while brokers can provide guidance to clients on the true scope of the business interruption policy cover and the sum insured required.
Policyholders can now pay a premium with confidence that the cash flow shortfall in the event of a claim will be recovered in full.