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Speaker 1: The information provided in this program is of a general

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Speaker 1: nature and is not intended to be personalized financial advice.

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Speaker 1: We encourage you to seek appropriate advice from a qualified

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Speaker 1: professional to suit your individual circumstances. Insurance in every aspect

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Speaker 1: is getting more expensive, even outpacing general inflation. The head

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Speaker 1: of a transtasment insurance giant explains why.

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Speaker 2: It gives me no pleasure that insurance inflation is sitting

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Speaker 2: above CPI. It's uncomfortable, but it's necessary in terms of

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Speaker 2: having a sustainable insurance market going forward.

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Speaker 1: Tropical cyclone Jasper and Christmas storms were Australia's most catastrophic

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Speaker 1: weather events in the past year, with insurance costs in

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Speaker 1: the billions. While New Zealand is holding its breath to

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Speaker 1: see what comes next after the Anniversary floods and cyclone Gabrielle,

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Speaker 1: the cost of fixing damage from such significant events is

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Speaker 1: now higher, meaning policy premiums are going in the same direction.

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Speaker 1: Insurance inflation rose by fourteen percent in this economy in

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Speaker 1: the year to June. According to Statistics New Zealand. It's

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Speaker 1: one of the biggest contributors to CPI increases, which has

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Speaker 1: been forcing interest rates to stay high. It's also helping

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Speaker 1: boost the bottom lines of the biggest general insurance players IAG, NIB,

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Speaker 1: Suncourt and Tower have all reported recent jumps in their profits,

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Speaker 1: but they're also all grappling with more expensive reinsurance, effectively

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Speaker 1: paying more to ensure their own insurance offerings. Over the

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Speaker 1: past five years, SUNCRP, which owns Vero and AA, had

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Speaker 1: to increase its hazard claims allowance and reinsurance by one

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Speaker 1: billion Australian dollars. In New Zealand alone, its reinsurance costs

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Speaker 1: grew thirty six in the past year after Cyclone Gabrielle

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Speaker 1: and the Auckland floods. Since those events, it's premiums here

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Speaker 1: have risen by seventeen percent on average. Sun Called Group's

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Speaker 1: Australian CEO, Steve Johnston, was in the country last week,

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Speaker 1: so I asked him to explain why it's biggest hikes

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Speaker 1: are happening on this side of the ditch. Well, Steve,

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Speaker 1: thank you so much to doing this, really appreciate it,

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Speaker 1: no trouble. What are you doing in New Zealand.

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Speaker 2: Well, I'm over here for board meetings. So every year

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Speaker 2: we have a series of board committees and board meetings

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Speaker 2: So I've been on a around the world trip as

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Speaker 2: we do this time of year, with talking to investors,

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Speaker 2: talking to reinsurers, talking to some of our suppliers. We're

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Speaker 2: a very exciting point for Sun Corp, having just divested

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Speaker 2: our banks. So here we are in New Zealand for

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Speaker 2: a couple of days.

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Speaker 1: And about to divest your life business in this country.

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Speaker 2: Too, aren't and the life insurance business in New Zealand

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Speaker 2: part of our simplification agenda. So at the end of

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Speaker 2: all of that process will be a what we call

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Speaker 2: a pure play trans Tasman insurance company general insurance company,

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Speaker 2: and that's really exciting.

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Speaker 1: We are definitely going to talk about general insurance and

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Speaker 1: more detail. But I'd love for you to explain for

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Speaker 1: me the different dynamics that you see for the insurance

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Speaker 1: markets on different sides of the ditch. What would you

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Speaker 1: say is kind of the biggest differentiating factor.

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Speaker 2: There's a lot that differentiates this, but there's a lot

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Speaker 2: of similarities that I find. So if I quickly talked

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Speaker 2: to the similarities. Firstly, we all buy out of the

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Speaker 2: same reinsurance markets, and those global reinsurance markets have been

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Speaker 2: significantly dislocated over the past two or three years now.

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Speaker 2: Global reinsurers were happy to put their capital into Australia

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Speaker 2: and New Zealand forever based on the diversification they got

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Speaker 2: for the risks they wrote around the world. Unfortunately, they

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Speaker 2: don't think they did enough modeling of primary and secondary

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Speaker 2: peril and they paid for it. So what we've seen

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Speaker 2: is a reset in both Australia and New Zealand, and

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Speaker 2: that's flowed through from reinsurers to primary insurers and then

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Speaker 2: onto consumers. So it's been a very challenging time for consumers.

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Speaker 2: That's one of the similarities that we have. We also

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Speaker 2: have challenges around the built environment has been built in

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Speaker 2: areas they should never never have been built. In terms

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Speaker 2: of differences, it's not a lot really. I think we

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Speaker 2: offer a different sort of products here in New Zealand

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Speaker 2: than we do in Australia. I think I look at

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Speaker 2: the New Zealand business that we have here and it's

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Speaker 2: fantastically positioned. The Vero business well positioned. We've got a

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Speaker 2: fantastic joint venture arrangement with aa WEE right up and

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Speaker 2: down the vertical of insurance where we do limited amounts

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Speaker 2: of that in Australia, we've got a great corporate partner

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Speaker 2: business and we've got a great via liability business. So

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Speaker 2: I think we are probably better placed in terms of

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Speaker 2: our insurance capability in New Zealand than we are in Australia.

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Speaker 1: I definitely do want to talk to you a lot

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Speaker 1: about reinsurance. Will get there, but just on the physical environments.

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Speaker 1: Who is riskier from an insurance perspective, Australia or New Zealand.

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Speaker 2: Oh look, I think the earthquake risk is always something

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Speaker 2: that you know. That's one paeril that both primary insurers

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Speaker 2: and the insurance market have been able to model pretty effectively.

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Speaker 2: So there's no doubt the shaky asles as they call it,

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Speaker 2: is one of the reasons why New Zealand is a

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Speaker 2: little bit different and why that risk is sort of elevated.

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Speaker 2: Having said that, we've had quite a deal of seismic

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Speaker 2: activity in Australia of the past month Touchwood, that's limited

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Speaker 2: to the sort of levels of magnitude that it's been

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Speaker 2: and when that happens we actually call on New Zealand

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Speaker 2: colleagues to help us because of the experience that you've

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Speaker 2: got in this part of the world.

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Speaker 1: So if I look at your premiums. Then they've increased

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Speaker 1: across all categories. You were one and the same. Almost

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Speaker 1: every insurer that I've spoken to as doing the same thing.

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Speaker 1: Home was up around ten percent, Commercial was up a

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Speaker 1: little bit more, and then in New Zealand it was

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Speaker 1: up by seventeen percent. On average, consumer policies here were

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Speaker 1: up by twenty three percent. Steve, If the risks in

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Speaker 1: your opinion, are relatively similar physically speaking, and reinsurance costs

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Speaker 1: are one and the same, why are we paying so

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Speaker 1: much more on the site? Yeah?

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Speaker 2: Look, I think obviously the events of twenty twenty three

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Speaker 2: in Auckland and the cyclone that flowed after the flooding

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Speaker 2: event was an uninsured, unmodeled risk, and what we saw

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Speaker 2: from the global reinsurers in the immediate aftermath of that

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Speaker 2: is just a pause and reflect on what New Zealand

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Speaker 2: risk was. They were very familiar with earthquake risk and

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Speaker 2: they'd been able to model that and price that effectively,

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Speaker 2: but the flooding risk and the weather events that we

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Speaker 2: had in Auckland really meant that they had to pause

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Speaker 2: and the market was dislocated for six months, and that's

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Speaker 2: sort of very extreme pricing going through. Now we've had

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Speaker 2: to follow that through with pricing back to the consumer.

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Speaker 2: The good news. The good news is that seems to settle,

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Speaker 2: and certainly in our renewal that we just completed on

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Speaker 2: the first of July, we saw a far more constructive

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Speaker 2: approach to New Zealand risk and in the discussions I've

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Speaker 2: had with Global Reinsurance in the last couple of weeks,

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Speaker 2: that's continuing. So it's a better story than it was

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Speaker 2: twelve months ago. But the reason why there's a slightly

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Speaker 2: increased elevation of premium in New Zealand relative to Australia

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Speaker 2: has just been those events in early twenty twenty three.

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Speaker 1: Do you recognize that insurance premiums increasing to the degree

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Speaker 1: that they have, and the contribution that they're making to

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Speaker 1: generalized inflation in this economy, it's keeping interest rates higher,

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Speaker 1: It's one of the biggest contributors to CPI and this economy.

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Speaker 1: Do you recognize that that's kind of making our economy worse?

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Speaker 2: I absolutely do, and you know it gives me no

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Speaker 2: pleasure to have insurance inflation sitting above the consumer price

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Speaker 2: index levels of inflation. Now that always is going to

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Speaker 2: be the case in an environment like this, and it

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Speaker 2: goes back to this global disslocation and reinsurance market that's

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Speaker 2: driven up insurance premiums at a greater rate than underlying inflation. Now,

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Speaker 2: of course we have construction costs and supply chains and

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Speaker 2: motor insurance has been particularly problematic in both Australia and

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Speaker 2: New Zealand. So it gives me no pleasure that insurance

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Speaker 2: inflation is sitting above CPI. It's uncomfortable, but it's necessary

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Speaker 2: in terms of having a sustainable insurance market going forward.

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Speaker 1: So how do you think about that premium price and

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Speaker 1: going forward? Then the increases that we've seen to date,

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Speaker 1: are they playing catch up or do they also cover

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Speaker 1: for some future inflated increase costs?

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Speaker 2: Now, I think we look at input costs annually, so

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Speaker 2: obviously we're dictated by the level of inflation. The costs

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Speaker 2: of repair things like labor supply in repair chains and

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Speaker 2: smash repair centers, and those sorts of things will always

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Speaker 2: flow into it. I think the more that we see

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Speaker 2: stability in the reinsurance markets, the less requirement is for

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Speaker 2: reinsurance the price back to us and therefore the less

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Speaker 2: requirement for us to pass through to the consumers. So

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Speaker 2: I'm hoping that we're going to see insurance inflation and

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Speaker 2: CPI start to get an equilibrium, and that will happen

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Speaker 2: I think over the next twelve to eighteen months.

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Speaker 1: You mentioned in one of your earlier answers that you've

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Speaker 1: just been obviously is talking to European reinsurers. I believe

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Speaker 1: what are they saying, you having to negotiate with them

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Speaker 1: to keep covering this country and Australia.

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Speaker 2: I think that that was probably last year's discussion. You know,

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Speaker 2: there was a concern that I had that they would

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Speaker 2: walk away from New Zealand particularly, and as a sort

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Speaker 2: of purchaser of insurance, we buy insurance for both New

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Speaker 2: Zealand and Australia. So that's a big benefit for New

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Speaker 2: Zealand in the context of us being able to buy

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Speaker 2: a package of reinsurance and a portion it appropriately between

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Speaker 2: the two countries. The good news is that they're significantly

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Speaker 2: more constructive now than they were twelve months ago. I

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Speaker 2: think the good news is that we're able to buy

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Speaker 2: more cover than we were last year, and that's good.

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Speaker 2: We were able to supplement New Zealand through internal reinsurance arrangements,

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Speaker 2: so that's been good historically, but I'm very positive that

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Speaker 2: that constructive approach we saw at the last renewer will

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Speaker 2: continue through the next twelve months.

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Speaker 1: They may have considered walking away from New Zealand. What

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Speaker 1: made you come to that potential conclusion.

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Speaker 2: Oh, this wouldn't be us walking away from Yeah, because

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Speaker 2: they whenever they see a risk that they hadn't modeled,

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Speaker 2: they take a point of pause and reflect or that

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Speaker 2: they price it to a point where it becomes unaffordable.

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Speaker 2: So look, I think it's a sort of a natural

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Speaker 2: reaction to something that they hadn't anticipated, and they hadn't

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Speaker 2: anticipated cyclones in Auckland or flooding events of that magnitude.

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Speaker 2: So when that happens, It's happened in Australia various times

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Speaker 2: as well in Queensland after the floods in twenty eleven,

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Speaker 2: So it's sort of a natural reaction that until they

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Speaker 2: understand something that they either take a very punitive approach

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Speaker 2: to pricing or they step back from the risk. And

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Speaker 2: reinsurance is a demand supply, you know, the more capacity

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Speaker 2: you get, the better the pricing is and the more

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Speaker 2: cover you can buy.

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Speaker 1: So it sounds like you almost have to go over

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Speaker 1: there and talk them off a cliff.

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Speaker 2: Well, not so much this year, but twelve months ago. Yes,

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Speaker 2: we had to continue to let them understand how those events,

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Speaker 2: while they hadn't been modeled precisely, were within the sort

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Speaker 2: of range of things that possibly can happen. And we're

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Speaker 2: all dealing with climate change. There's an imprecision around climate change.

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Speaker 2: We're anticipating, you know, more frequency and severity of large

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Speaker 2: weather events. We think we've modeled it well and we

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Speaker 2: can manage it well.

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Speaker 1: So what kind of conversations have you just had with

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Speaker 1: them in the past few weeks.

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Speaker 2: Benef it's not it's about making sure that you know.

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Speaker 2: What's happened globally is that there's been a transference of

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Speaker 2: risk between the global reinsurers and the primary insurers. So

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Speaker 2: we call it's a very technical point, we call it

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Speaker 2: attachment points. Effectively, you know, like your excess on your

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Speaker 2: home how much we pay versus how much they pay

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Speaker 2: in a big event, and that doubled for us in

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Speaker 2: the past two years. So what that has meant globally

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Speaker 2: is that there's been a similar sort of level of

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Speaker 2: events going on around the world, but the costs have

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Speaker 2: been more borne by the primary insurers as opposed to

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Speaker 2: the reinsurers, and I guess our discussion with them has

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Speaker 2: been around pricing. We think pricing should start to come

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Speaker 2: down on some of the covers that we offer, and

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Speaker 2: we think that there should be availability of what we

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Speaker 2: call aggregate covers or volatility protection covers, so that we

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Speaker 2: can manage the larger volume of smaller events more effectively.

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Speaker 1: How accepting were they of that arguments.

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Speaker 2: Are They're reluctant to accept things at first, blush, But

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Speaker 2: at the end of the day, it's a demand and

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Speaker 2: supply equation. So we're seeing more capacity coming in that

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Speaker 2: creates more competition for programs like some Corps, which is

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Speaker 2: one of the biggest reinsurance programs in the world. And

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Speaker 2: so I think we benefit from, you know, in terms

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Speaker 2: of both price and availability when alternative forms of capital

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Speaker 2: come into that market. As they are now looking.

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Speaker 1: Through your profitability measures, and there was one that stood

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Speaker 1: out to me purely because forig of my ignorance, but

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Speaker 1: I actually didn't know what it meant. The u R,

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Speaker 1: the underlying insurance trading ratio. It seems to me like

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Speaker 1: that's a measure of your margin, kind of like how

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Speaker 1: there's an interest margin for a bank. Yours are sitting

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Speaker 1: at around eleven percent, which is midpoint of the range

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Speaker 1: that you wanted at between ten and twelve. Can you

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Speaker 1: explain to me what that measure is, why it is

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Speaker 1: at eleven percent, and if you're happy with that for again.

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Speaker 2: Yeah, it's one of the anachronisms of insurance. In other words,

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Speaker 2: you know, we create all these underlying metrics which are

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Speaker 2: to normalize our business back to a set of principles.

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Speaker 2: So effectively, what it does is it normalizes, for you know,

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Speaker 2: when weather exceeds or underperforms relative to our allowances. Investment

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Speaker 2: markets are a big part of an insurance company, so

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Speaker 2: it normalizes back to what a normal set of investment

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Speaker 2: market criteria might look like, and we often get releases

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Speaker 2: or strengthening from prior year reserves. It takes all of

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Speaker 2: that noise out and comes up with a sort of

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Speaker 2: margin outcome which then translate to the sort of a

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Speaker 2: turns on capital that we expect to deliver so that

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Speaker 2: we can sustain a private insurance company in the public market.

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Speaker 2: So that's what the measure is. It again sort of

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Speaker 2: normalizes all the noise and gets it back to a

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Speaker 2: metric that people sort of understand and can consistently measure

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Speaker 2: over time. So we have a target of between ten

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Speaker 2: and twelve percent. We're at the midpoint of that range

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Speaker 2: at the moment. Period's gone past. We've been below that

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Speaker 2: as we've sort of started to recover from the reinsurance

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Speaker 2: costs that have gone through. Our target is within that range,

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Speaker 2: and we think it's an appropriate return to keep our

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Speaker 2: investors focused on what we need to do to create

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Speaker 2: a useful public market traded insurance company. But it also

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Speaker 2: provides us with some certainty around how we're going to

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Speaker 2: roll out premium and policies for the future.

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Speaker 1: The reason I ask is because looking at that given

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Speaker 1: it is kind of within your comfort range, within your

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Speaker 1: target range. Right, even though insurance companies like some call

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Speaker 1: we're talking about higher reinsurance costs, higher expenses, your profitability

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Speaker 1: measure is actually looking for good well at.

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Speaker 2: The moment it is. But I mean, i'd make the

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Speaker 2: point and I'm going to go back to an Australian

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Speaker 2: example now around and there'd be similar examples in New Zealand.

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Speaker 2: Our home insurance portfolio in Australia over the past five years,

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Speaker 2: that average the return on capital of five percent. Now

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Speaker 2: that's not a fantastic response when you can actually get

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Speaker 2: a term deposit in Australia that gives you five percent

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Speaker 2: and if it's under two hundred and fifty thousand dollars

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Speaker 2: is guaranteed by the government. So my question to an

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Speaker 2: investor would be, you know, why would you invest in

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Speaker 2: an insurance company if you can get that appropriate level

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Speaker 2: of return in a term deposit. So we need to

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Speaker 2: get returns greater than that to make it viable viable

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Speaker 2: private insurance company. So you know, there's swings and roundabouts,

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Speaker 2: there's ups and downs, there's long dated cycles, short dated cycles,

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Speaker 2: and insurance is very complex. But we think that sort

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Speaker 2: of return is appropriate for what we need to deliver

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Speaker 2: for our shareholders and ultimately that allows us to deliver

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Speaker 2: good products for our customers.

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Speaker 1: And it seems like the only real way to make

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Speaker 1: a return to make money in this industry is too

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Speaker 1: continually high premiums to recover increase costs or is there

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Speaker 1: also a little.

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Speaker 2: Good say look, I think we have to continue to

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Speaker 2: improve the efficiency of our business. So it can't be

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Speaker 2: all just pull a price lever and you know, because

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Speaker 2: we're I mean, we will just lose the confidence of

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Speaker 2: our customers if we do that, So it's all about us.

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Speaker 2: We can be more efficient in the way we manage claims,

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Speaker 2: you know, reducing the duration of claims reduces the cost

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Speaker 2: of claims.

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Speaker 1: We can be.

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Speaker 2: More innovative around the way we offer policies and the

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Speaker 2: products that we offer to our customers. And we've got

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Speaker 2: to make use of things like AI and digital to

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Speaker 2: bring down the costs of serving policies within our business

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Speaker 2: so that we're more efficient and that we can contribute

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Speaker 2: to the returns as opposed to just have price as

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Speaker 2: the only lever.

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Speaker 1: Available to us insurance policy availability. You've mentioned climate change.

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Speaker 1: How are you thinking about ensuring homes that are in

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Speaker 1: low lying areas or on the edge of cliffs in

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Speaker 1: this country because we have built in all of those areas.

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Speaker 1: We've heard from the likes of Tower Insurance to bring

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Speaker 1: up your competitor the publicly said they're moving to risk

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Speaker 1: based pricing and they're out there talking about managed retreat.

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Speaker 1: Are you in the same mind.

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Speaker 2: Yeah, Look, I think we're all moving to risk bace

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Speaker 2: pricing now, so when we talk about averages, that doesn't

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Speaker 2: reflect the fact that some of the people who've been

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Speaker 2: built or bought a home in an area that should

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Speaker 2: never have been allowed to be built in are getting

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Speaker 2: increases well above those averages. And there's an obligation, i think,

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Speaker 2: not only on the government, and we talk a lot

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Speaker 2: about what the government needs to do abound managed retreat

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Speaker 2: and sort of subsidizing and supporting people to move, subsidizing

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Speaker 2: and supporting people improve the resilience of their home, but

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Speaker 2: there's an obligation on the insurers as well. Our policies

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Speaker 2: sort of in some cases are embedded twenty thirty forty

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Speaker 2: years ago, and we've got to contemporize insurance. We've got

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Speaker 2: to make it more of modern in that sense, we've

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Speaker 2: got to try and find ways of keeping people in

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Speaker 2: the insurance market. That means we've got to come up

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Speaker 2: with new products that meet people's needs and provide appropriate

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Speaker 2: levels of cover, even if it's just base cover, so

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Speaker 2: that people don't exit the market entirely and become either

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Speaker 2: uninsured at high risk.

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Speaker 1: It feels like we're looking at that as our future though,

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Speaker 1: right that, given the places in which we have built historically,

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Speaker 1: as you mentioned, the pricing of policies for those areas

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Speaker 1: will become so high that people just won't be able

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Speaker 1: to afford it, so that insurance giants like some court

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Speaker 1: will say, well, we didn't pull out, but rather people

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Speaker 1: just couldn't afford it. Is that where we're hitting well.

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Speaker 2: I think there's the affordability issue as a challenge, particularly

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Speaker 2: in those environments. And what we've got talked about regularly

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Speaker 2: is a four point plan that's improving government infrastructure, stuff

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Speaker 2: that the government can build to make things more resilient.

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Speaker 2: There's various examples of that in Australia, and levy banks

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Speaker 2: are particularly one where you can put a levy bank

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Speaker 2: around a community and reduce the cost of events and

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Speaker 2: bring the insurance premiums down. Subsidizing people to take action

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Speaker 2: in their own homes. For example, in Australia particularly, we

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Speaker 2: can subsidize people to put solar panels on the roof,

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Speaker 2: but we don't subsidize to allow that roof to be

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Speaker 2: battened down so that can handle a category for five

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Speaker 2: cyclone for examples. So some of our subsidy arrangements are wrong.

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Speaker 2: We continue to build in areas that we shouldn't. You know,

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Speaker 2: there's this desire to get more housing in and we're

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Speaker 2: just compounding the problem that we've had in place for

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Speaker 2: the last hundred years. But the other one is taxes

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Speaker 2: and charges. In some areas of Australia, for example, it's

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Speaker 2: similar in New Zealand. Forty percent of a home insurance

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Speaker 2: premium goes in taxes and charges, whether it be service

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Speaker 2: emergency services, levees, stamp duties, goods and services, tax earthquake

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Speaker 2: commission levies. This compounding effect of taxes and charges on

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Speaker 2: insurance premiums is contributing to the affordability challenge. We've got

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Speaker 2: to deal with all of these things, and insurers have

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Speaker 2: got to step in and start to think about how

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Speaker 2: we make our products more contemporary.

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Speaker 1: You're about to become the chairman of the Insurance Council

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Speaker 1: and Australia. Congratulations on that appointment, Steve. They talk about

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Speaker 1: in Australia this thing called the protection gap. It's effectively

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Speaker 1: the unensurable part of the market. Right Swiss re ar

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Speaker 1: insure a price that at UIs twelve billion dollars and

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Speaker 1: the decade to twenty twenty four, do you have any

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Speaker 1: concern about that growing? And especially in New Zealand, given

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Speaker 1: that insurance affordability, or rather unaffordability, is becoming a growing concern.

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Speaker 2: Yeah, I do.

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Speaker 1: I do.

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Speaker 2: I certainly think that there's a subset of our population,

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Speaker 2: both in Australia and New Zealand, whether it's two or

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Speaker 2: three percent, or in some areas it can even be greater,

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Speaker 2: where that protection gap is just widening and it's getting

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Speaker 2: harder and harder for people to afford to get insurance

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Speaker 2: and therefore become either underinsured or non insured. And so

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Speaker 2: I think all of the things that we need to

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Speaker 2: do as an industry need to align with all of

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Speaker 2: the things that governments in both New zealand Australia need

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Speaker 2: to do to improve the resilience of our communities, to

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Speaker 2: mitigate the effects of whether to get the costs of

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Speaker 2: insurance down through taking taxes and charges off and us

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Speaker 2: innovating around new policies. So I think we can all

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Speaker 2: point the finger at someone else, but we've actually got

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Speaker 2: to work together, and that's one of the key things

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Speaker 2: that I'll be bringing into the Insurance Council. I know

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Speaker 2: the insurance industry in New Zealand is similar of similar

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Speaker 2: mind in terms of coordinating our resources better, making sure

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Speaker 2: that we're working collaboratively with government. We've got to step

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Speaker 2: in into the political domain and make sure that we're

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Speaker 2: giving the government solutions as opposed to just sitting back

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Speaker 2: and just letting them do what they need to do.

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Speaker 1: Look forward to seeing it. Thank you so much your time,

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Speaker 1: Steve appreciate it.

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Speaker 2: Thanks Medison, thank you