By Jenée Tibshraeny
New Zealand’s largest general insurer is targeting foreign property buyers who are less likely to take out property insurance than traditional kiwi house buyers.
Insurance Australia Group (IAG) is working towards capturing the increasingly large market of migrants or overseas buyers, predominantly purchasing property in Auckland.
IAG, which sells its products through the State, Lumley, NZI and AMI brands, already has around 47% of the New Zealand general insurance market.
Its New Zealand chief executive, Jacki Johnson, has just returned home from a trip through Asia, where she spent time getting a better grasp on consumer behaviour there.
Johnson told interest.co.nz New Zealand is the most highly penetrated property insurance market in the world, with the third highest risk of suffering a geological natural disaster.
However not all migrants have the same view on property insurance as New Zealanders do, with Asian people traditionally spending more on life insurance.
EY research supports this. It reveals that in 2011, New Zealanders spent an amount equivalent to 5.2% of GDP on non-life insurance premiums, and 0.9% of GDP on life insurance premiums.
Those in China on the other hand spent 1.2% of their GDP on non-life, and 1.8% of GDP on life insurance premiums. Indians spent 0.7% of their GDP on non-life insurance premiums, while those in Japan spent 2.2% and Hong Kong 1.4%.
Johnson says there’s a risk the portion of people with property insurance in New Zealand will drop if migrant property buyers don’t understand the need for property insurance.
Staying ahead of the game
Looking at the market more broadly, IAG’s 2015 financial results note the direct insurance market reflects an “increasingly competitive landscape with aggressive new entrants and ongoing direct competitor challenges”.
Johnson recognises the competition IAG's up against from existing insurers, and the likes of Youi and Trade Me Insurance, entering the market with big advertising campaigns.
“I think it was in these [interest.co.nz] studios only two years ago that I said I was quietly confident about getting permission for the Lumley deal going through, through the Commerce Commission, because we will remain a very competitive market” she says.
“Maybe it’s a bit ‘be careful what you wish for’, because then two years later we’ve got a very competitive market.”
She says IAG will keep playing to its own strategy, while staying relevant as customers’ buying behaviour and capital flows change.
Johnson agrees with comments the Ando Insurance CEO and former Lumley CEO, John Lyon, made at the Risk Rendezvous conference in August, about the importance of insurers adding value to their offerings to stay competitive.
Lyon made the argument insurers risk being squeezed out of the market as reinsurers are starting to sell insurance direct and brokers are taking on underwriting capabilities.
Johnson says, “We never rest on our laurels. We don’t say largest market share means that you’re the leading player, unless you invest in the leadership position. By that I mean the amount of capital you have to back yourself.”
Aussie parent helping NZ unit as reinsurance cover runs dry
Johnson says IAG NZ still has money in the bank to pay for the 22% of Canterbury earthquake claims yet to be settled.
She makes this assurance despite the company having to dig into its own pockets to settle most of these claims, as it’s used up the $4 billion of reinsurance cover it had for the major February 2011 quake.
Johnson says IAG NZ is being propped up by the Group.
“As long as our underlying business continues to be strong, you end up getting ongoing support. But I can assure everyone the money is in the bank and we are paying claims and continuing to do so.”
IAG has increased its quake provisions by $150 million over the 2015 financial year.
Johnson won’t provide specifics on whether she expects the company to do so again in the year to come, despite Citi Group analysts suggesting these provisions will need to be extended.
She says over the past year IAG has gained a better understanding of the building standards and geology of the ground, which enables it to get a better sense of costs.
It’s also getting on top of the number of claims it has to deal to.
Johnson isn’t able to provide a more detailed breakdown of how many properties (rather than claims) are yet to have their claims settled.
She says commercial claims, related to building and business interruption, have nearly all been settled. Claims involving shared properties are taking longer to settle.
Johnson says Berkshire Hathaway’s buy into IAG will essentially provide the company with a level of reinsurance protection, as well as give it the backing of a committed shareholder.
In June, Warren Buffett’s Berkshire Hathaway bought a stake in IAG, which sees it take a 20% share in IAG’s insurance business over 10 years.
Proposed changes to EQC expected to drive efficiency and keep reinsurers happy
IAG is backing the changes the government is proposing to make to the Earthquake Commission (EQC) Act.
It’s seeking public feedback on its idea to double the amount it contributes toward paying for homes damaged by natural disasters (earthquakes, volcanoes, tsunamis, landslips and hydro-thermal activity), to $200,000.
Offsetting this benefit to the public slightly, it’s also proposing to scrap EQC’s contents cover.
Johnson says, “We have procurement channels and an ability to streamline claims settlement under contents very very quickly. That’s why we believe that rightfully should sit back with the industry.”
She also supports the government’s proposal for claims to initially be lodged with people’s private insurers, rather than with EQC.
She says part of the reason some claims have taken so long to settle in Christchurch, is because claims had to go to EQC first.
She notes changing the system “will drive some efficiency, rather than double-handling claims”.
“The people who will be most interested will be the reinsurers, who feel they’ve had to pay three, four, five times for the same assessments."
Johnson notes reinsurers have the capital, but it’s a matter of ensuring they remain attracted to New Zealand.
She won’t provide a clear answer on whether the proposed changes will save the insurance sector money, but says: “This all then goes to the price of a policy. We’re trying to work out how you can get all that friction cost out, so you can actually make insurance more affordable.”