BATTLE LINES ANDREW CURTIN & SAM PRIMROSE

MERGERS AND ACQUISITIONS IN THE NZ GI MARKET AND THE DECLINE OF AFFORDABLE INSURANCE ICNZ Members 2017

1. AA Insurance Ltd 13. Medical Assurance Society Limited 2. AIG Insurance New Zealand Limited 14. Mitsui Sumitomo Insurance Co Ltd 3. NZ branch of Allianz Australia 15. Munichre New Zealand Service Ltd Insurance Limited 16. Provident Insurance Corporation 4. Berkley Re Australia Ltd 5. CBL Insurance 17. Southern Response 6. Chubb/Combined Insurance 18. Swiss Reinsurance Company Ltd 7. Cigna New Zealand 19. Tokio Marine & Nichido Fire 8. Co-op Insurance NZ Insurance Co., Ltd. 9. General Re 20. Tower Limited 10. Hollard 21. Vero Insurance New Zealand Ltd 11. IAG Insurance 22. Youi New Zealand 12. Lloyd's 23. Zurich New Zealand

Our Members, http://www.icnz.org.nz/about- us/our-members/ New Zealand Insurers by Premium Revenue 2,500,000

2,000,000

1,500,000

1,000,000

500,000

0 Premium Revenue ($000)

Insurer

Companies Office, www.companiesoffice.govt.nz • Alliance Fire Assurance • Victoria Assurance (1864) • Norwich Union (1871) (1851) • Australian Alliance (1866) • National Marine • Northern Assurance • New South Wales Marine Insurance of South (1855) Insurance Company Australia (1872) • Liverpool and London (1866) • South British Fire and (1853) • Auckland Insurance Marine Insurance • New Zealand Insurance Company Company of New Zealand (1859) • Otago Fire and Marine (1872) Insurance Company • National Fire and Marine New Zealand Insurance Building, http://christchurchcitylibraries.com/heritage/photos/disc12/img0089.asp Insurance Company (1873) • Standard Fire and Marine Insurance Company (1874) • Sun Insurance Office (1878) • Colonial Insurance Company (1878) • Guardian Fire and Life Assurance Company (1879) • Manchester Fire Assurance Company (1879) 1850 1860 1870 Taken by Herman John Schmidt circa 24 December 1905. - • 1893 – 27 companies operating in New Zealand. Alexander • 1895 - Council of Fire Underwriters’ Association of New Turnbull Library Zealand • 1903 - Mutual Fire Insurance Act • 1903 - State Fire Insurance Bill

• Union Fire and Marine • China Traders Insurance • State Fire Insurance Insurance Company Company (1891) Office (1905) (1880) • United (1891) • Otago Farmers’ Union • New Zealand Plate Glass • Farmers’ Co-Operative Mutual Fire Insurance Insurance Company Fire and Marine Association (1905) (1884) Association of • Taranaki, Hawkes Bay, Canterbury (1891) Wellington Farmers’ Mutual Insurance Associations (1906) 1880 1890 1900 Standard

• Pearl Assurance Company National Insurance Tower (1914) Company • Wairarapa AA Mutual Insurance Company Sun Sun Alliance (1915) Albion Cornhill Alliance • Eagle Star and British & London Dominions Insurance London Company (1917) Atlas Guardian Royal • Home Insurance Exchange Company (1919) British Traders • Hartford Fire Insurance Otago Monarch Cigna Company (1921) • Medical Assurance Taranaki FMG Society (1921) Wellington • South Island Motor Union Allied Mutual (1926) Insurance Canterbury Farmers • Cohens Insurance Brokers Victoria Mutual (1928) • Halifax Insurance New Zealand South British Insurance Company (1932) United Insurance Company • F.A.M.E (1934)

1920 1950 1980 NZI AMI

Norwich State Union

Lumley

Guardian Royal Sun Alliance Exchange Royal and Sun Vero Royal Alliance

AA Insurance

1990 2000 2017 Affordability in NZ GI Market

Some new entrant and niche insurers have been adopting a strategy of avoiding writing business in areas of high risk and high RI costs.

This gives them a cost advantage for low risk regions, but gives less consumer choice in the higher risk regions which forces people insured in these regions to either stick with their current insurer or potentially having to ‘self insure’ Affordability: Questions to Explore

• Why is insurance affordability an issue for some?

• Is it feasible for insurance to be affordable for everyone?

• Is there a obligation for small insurance companies to be generally affordable?

• Is there a obligation for the large insurance companies to be generally affordable? How does this differ from the small ones? Affordability: Key Assumptions

For insurance to be unaffordable the following needs to be true • There has been a rational decision not to purchase insurance • Price is the driving factor in the decision not to purchase insurance

This excludes • Policyholders being unhappy with the price but still renewing or switching companies • Those who are uninsurable for any reason (fraud, certain loss, etc.) Those Who ‘Need It The Most’ From our definition of affordability we get three main groups who are most at risk of not being able to afford insurance.

Luxury Items Normal Unexpectedly high Low Income Income risk • Covers whole risk • High end items • Post EQ spectrum • Not high end Christchurch • Literally can’t afford income • Level of risk premiums • Potentially previously • Requires very basic servicing large debt underestimated cover • Requires specialist • Risk can cover large cover market segment of geographic region • ‘inertial ignorance’

Non-Pricing Strategy Options

Product Design and Underwriting Rules – Exclusions, Excesses and sub limits keep prices down while still providing cover for a broad range of risks.

Non-conventional product design – micro-insurance, residential/commercial property assurance, temporal flexibility, modularity. The Pricing Spectrum Actuarial Pricing vs. Community Pricing

Community Actuarial Pricing Pricing

• Benefits high risk at expense of low risk • Benefits low risk policy holders at expense of high risk • Less affordable for low income policyholders • Perception of trying to ‘select’ good risks • Cost effective to implement and update • Requires expert modelling • Questions over if it is insurance. Better categorised as social welfare? • Treats low income policy holders on equal footing • Makes sense for government based insurance (EQC) • Private insurance

Actuarial Pricing: Limits and Consequences Actuarial pricing still has a strong element of community pricing in it. This is because modelling involves finding explanatory variables, which puts ‘like risks’ into groups that get treated as the same. There are also the impacts of imperfect information and ‘hidden variables’ which add layers of unknown community pricing.

This means that some segments will be always be subsidizing others, and it will tend to be the lower risk subsidising the higher.

Actuarial pricing is based on risk

• Highlight market segments in need of remediation by council or government • Encourages better allocation of resources (discourages over extending financially) The Responsibility of Small Insurers

Small insurers and new entrant are able to go after certain market segments while assuming (rightly, or wrongly) that the larger insurers will look after the rest of the market. This shifts any question of industry responsibility onto those few companies that make up the majority of the industry.

This in turn improves the affordability for those segments being targeted, making their position justifiable from a internal view point. But reduces affordability for the high risk segments and low risk segments being serviced by the larger insurers.

Entire market Target segment Industry Responsibility

The responsibility that an insurance company has is to their current policyholders so that they can make good on the contract that they sold.

Other pressures to be affordable • Social pressure, can lead to bad publicity if become narrow in their affordability • Regulatory Pressures, for example the ACA in USA. References

1. Our Members, http://www.icnz.org.nz/about-us/our-members/ 6. Henderson, Alan (1995), Competition & Co-operation the Insurance 2. Financial Statements: Council and the general insurance industry in New Zealand 1895-1995, – IAG:https://www.companiesoffice.govt.nz/companies/app/service/service Insurance Council of New Zealand in association with the Historical s/documents/F84E1D1884649A3CE556857BC55301F8 Branch, Dept. of Internal Affairs. – Vero:https://www.companiesoffice.govt.nz/companies/app/service/servic 7. Parry, Gordon (1973), Underwriting adventure a centennial history of es/documents/3D4C2838204A1789A471ED14200DCD04 the National Insurance Company of New Zealand, Limited, National – AA:https://www.companiesoffice.govt.nz/companies/app/service/services Insurance Company of New Zealand. /documents/C7586424E7D21355BB01DF73DBEB19E1 8. Hunt, Graeme (2005), Centenary, 100 years of State Insurance, IAG – QBE:https://www.companiesoffice.govt.nz/companies/app/service/servic New Zealand. es/documents/7B9DD7D7CAE29493607852546BABBDB0 9. Manning, Arthur (1980), Cover Story, the history of the State insurance – Tower:https://www.companiesoffice.govt.nz/companies/app/service/serv office, State insurance. ices/documents/3AB6188E7769CEEEFA6F1AFCF0E09274 – Allianz:https://www.companiesoffice.govt.nz/companies/app/service/serv 10. Standing, Russell A. J. (2005), Pride, passion and parochialism a history ices/documents/9E1F4D642445E5AE9C49B608254731BE of FMG 1905-2005, Dunmore Press. – AIG:https://www.companiesoffice.govt.nz/companies/app/service/service 11. Vennell, C. W. (1972), Risks and rewards, a policy of enterprise 1872- s/documents/FDAAE8CB7751A8C6F979DB03A151BEC8 1972 a centennial history of the South British Insurance Company – Chubb:https://www.companiesoffice.govt.nz/companies/app/service/serv Limited, Wilson and Horton for the Company. ices/documents/15B4D009E7B9B9F685F70BEA2CF99FE5 12. Annual Report 2008/2009, – Zurich:https://www.companiesoffice.govt.nz/companies/app/service/servi https://www.aa.co.nz/assets/about/newsroom/publications/Final- ces/documents/53AA8CA32E51F6B50BD4B0655D98EA0B 2008-09-AR- – MAS:https://www.companiesoffice.govt.nz/companies/app/service/servic PDF.pdf?m=1466990343%22%20class=%22type:%7Bpdf%7D%20size:%7 es/documents/0C16C812D875286DCD77A810BA8EBB48 B855%20KB%7D%20file – Great 13. Our History, https://www.aainsurance.co.nz/about-us/about-our- Lakes:https://www.companiesoffice.govt.nz/companies/app/service/servi ces/documents/1B08F808EF4B7942E548564B25A47F69 company/ – Youi:https://www.companiesoffice.govt.nz/companies/app/service/servic 14. Our History, http://www.nzi.co.nz/about-nzi/pages/about-nzi.aspx es/documents/529C2CD11E597553C138AEC32D173290 15. History, https://www.tower.co.nz/about-us/history. – Civic 16. Te Ara The Encyclopedia of New Zealand, Assurance:https://www.companiesoffice.govt.nz/companies/app/service/ http://www.teara.govt.nz/en/insurance services/documents/85358C86C0244F84D4140BD0FF152CA1

3. New Zealand Insurance Building, http://christchurchcitylibraries.com/heritage/photos/disc12/img0089.a sp 4. Taken by Herman John Schmidt circa 24 December 1905. - Alexander Turnbull Library 5. Population, https://www3.stats.govt.nz/New_Zealand_Official_Yearbooks/1893/NZ OYB_1893.html#id332F530