What are the biggest challenges facing the NZ underwriting market right now?
Given the significant impact we have seen across parts of the country from Cyclone Gabrielle, it is no surprise that one of the biggest challenges facing the domestic insurance market right now is the impact of climate change. The effect of climate change on our weather patterns, and the resultant natural catastrophes, are incredibly significant insurance events.
We’ve experienced a number of major weather events within a matter of weeks, and this has had devastating consequences for our communities and our economy (which was already under pressure). It will certainly have a long-lasting impact on the New Zealand insurance industry.
The insurance industry must maintain an immediate focus on responding to tens of thousands of claims that are now coming though, and on ensuring that we as an industry are delivering on our promises in an effective and compassionate manner. However, there will also be a significant impact on the profitability of the domestic general insurance sector. This will also be seen at a global level, as the global reinsurance market sitting behind our local carriers is hit by an increasing number of climate change-related extreme weather events.
The longer-term challenge for us as an insurance community is how we can continue to provide sustainable solutions for our customers that reflect a realistic picture of what the future risk landscape looks like. The fact is that historic models have, to some degree, gone out the window and so we rapidly need to revise our predictive models to ensure we can more accurately pick future risk exposures.
Beyond climate change driven weather events there are no shortage of other challenges that the industry is going to keep grappling with over the coming period including increased regulatory scrutiny, more complex cyber exposures, talent shortages and digital evolution just to name a few.
Will reinsurance capacity for NZ shrink as a result?
New Zealand reinsurance capacity will almost certainly shrink as a result of Cyclone Gabrielle and the flooding earlier in February. In fact, we are already seeing a major reinsurance crunch. According to a recent report by Howden called “The Great Realignment” - which I highly recommend – we have already seen the biggest reinsurance capital squeeze since 2008 with roughly a 15% reduction in available reinsurance capital since 2021.
On top of that, the recent round of 1st January reinsurance renewals has resulted in some staggering increases, with Global Property (Catastrophe) reinsurance costs increasing 37% on prior. This is the largest increase since 1992.
It is likely that these are long-term structural shifts in the market. Ongoing natural catastrophes such as those experienced recently in NZ will only serve to underpin this hardening cycle.
These factors are going to create significant challenges for local insurance companies, who will need to manage dramatically higher reinsurance costs. This will likely result in insurers taking more risk, and a greater focus coming onto risk selection, breadth of coverage grants, and of course pricing – which in the current market can only go in one direction.
How big a consideration is sustainability and climate change at Delta?
Sustainability and climate change are massive considerations for Delta. One of our key strategic pillars is ESG, which encompasses environmental, social and governance factors. We have an internal team across the three countries in which we operate (NZ, Australia and Singapore), and they are responsible for driving this strategic focus alongside the Boards of our Group and operating companies.
We are a strong believer that we all – both as a company and as individuals – have a role to play in doing our bit to address the climate change. This feeds into other areas, such as Delta’s efforts to manage and reduce its waste. For many of us at Delta, we are facing the same challenge in our personal lives – trying to reduce our household waste. Some of the initiatives that we have in place and are in the process of implementing include reducing the number of waste baskets in our offices to encourage staff to think sustainability, introducing and encouraging the use of re-usable coffee cups for takeaway coffee, waste separation, and recycling.
Delta encourages a hybrid working model, which enables staff to regularly work from home, reduce their commute hours, and lower our environmental impact. We have also implemented carbon offsetting for our corporate travel.
We have hosted several volunteering activities, including a beach clean-up in November of last year, and just last week a volunteering day at Mototapu Island in the Hauraki Gulf. We have another volunteering day planned later this month.
From an insurance perspective we also have an innovative suite of Environmental Impairment policies, which provide an insurance response to enable our customer to fund environmental and pollution clean-up. This insurance has a key role to play in enable private business to remediate any environmental damage that they cause.
You recently won an award for your underwriting policy, which takes ESG concerns into account. Can you explain how ESG informs your underwriting decisions?
Delta’s organisational vision is to “embrace change to make the world a safer place”. To support this ambition, we have taken proactive steps to ensure that we are actively contributing towards driving positive change for the greater good of the industry, the world and humanity.
One critical step that we can take is ensuring that we are supporting the right customers, and importantly that we are not supporting the wrong customer segments, i.e. those who are responsible for negative environmental and social impacts.
We launched an ESG Underwriting Policy in 2021 to support Delta’s strategy to insurance a sustainable and greener future. It is also designed to promote international best practice standards that help ensure that potentially adverse ESG impacts are adequately managed and reduced.
This underwriting policy prohibits Delta from underwriting businesses that are participating in carbon intensive industries or activities, for example, companies involved in the exploration or drilling of oil & gas, coal mining, or thermal coal-related activities.
We’ve also identified a number of socially sensitive industries, which we also avoid because of their potentially negative impact. This includesnuclear energy, palm oil production, animal testing, betting and gambling organisations, and firearms manufacturers, amongst others.
Will ESG become a bigger consideration for underwriters, and how should brokers adapt to this change?
These issues are going to become more pronounced as time goes on. For instance, we’ve seen a massive global uptick in regulatory and shareholder actions against companies and their directors and officers relating to ESG risks. This is a clear indicator of the trend of increased social and environmental expectation on businesses, and in turn their professional advisors, including their insurance brokers.
In my opinion, ESG matters are a critical part of the risk management assessment that brokers undertake. The reality is that many ESG risks are not insurable by nature, but there are steps that can be taken by businesses to manage and reduce their exposures. It is certainly becoming a key risk consideration for product lines such as D&O, and brokers need to be across this.
Of course, some segments such as oil & gas, and certain mining activities, will be increasingly under the spotlight of underwriters. We expect the supply of insurance to those segments to diminish over time.
What changes or improvements would you like to see in the NZ market that would change the sector for the better?
There are a number of things that could be raised here, but the one single thing that stands out to me is our people. The insurance industry is all about people and we are currently facing a talent crisis. This is partly driven by regulatory changes requiring advisers to be appropriately qualified and its impact is being felt across the industry. I’m a firm believer that education and continuous development are critical to ensure the growth and sustainability of professional standards within our industry.
We must also ensure a diversity of long-term career pathways for people working within the industry. Although they do present some immediate challenges that must be overcome in the short term, my perspective is that the regulatory changes are great for the industry in the long term.
One area that the industry, including Delta, needs to focus on collectively is bringing young new talent into the industry, for example through graduate programs . A united focus is needed across the sector ensure we have an strong talent pipeline of smart and dynamic people who are hungry to develop their career within insurance.
There are a host of initiatives that Delta is working on to ensure that we continues to remain an attractive and interesting place to work. A key part of this is is ensuring we are pan equal opportunity employer, and that we maintain a continual focus on key areas such as diversity and inclusion, mental health and wellbeing, and ensuring we have a supportive and encouraging team. This is especially important given bullying continues to be an issue of contention within our industry.
It is one of Delta’s fundamental priorities to provide our junior and senior staff alike with opportunities to grow and progress in their careers, and this in turn fosters and engaged, happy workforce who take pride in their work.
In my opinion, this is what makes Delta so successful.
How important is the tripartite relationship between insurers, brokers and clients, and do you think it will change and evolve over time?
In the intermediated space, this tripartite relationship is sacred. With the increasing impact of digitisation, we are going to see an eventual shift in client needs and how they access insurance solutions. With that said, there will always be a need for high quality advice, particularly for sophisticated clients or clients with complex risk exposures.
Being able to deliver on client needs in the intermediated segment fundamentally hinges on a high level of trust being developed and maintained between clients, brokers and their insurer partners. Without trust, the whole value-chain breaks down. This is no good for anyone, least of all the client.
While the way brokers and insurers interact is changing, for example through digital trading, online portals, and technology-supported claims services, the need for a strong tripartite relationship is unlikely to change.
