Lee Garvey, who has worked for all three major global brokers, was recently appointed as Willis Towers Watson’s head of financial solutions for Australia and New Zealand.
Garvey talks to Covernote about the credit, non-payment insurance, political risk and lenders’ insurance advisory markets, and his predictions for the wider market.
What are the main challenges for insurance brokers in New Zealand at the moment?
Specialist brokers participating in the trade credit space, like Willis Towers Watson, are facing pressure to secure competitive new and renewal terms for clients, from participating insurers.
Covid-19 is still having an impact on the market. Insurers remain quite conservative in their approach and in the way they protect risk commitments to existing policyholders. We have also seen insurers seeking to increase premium rates and imposing more restrictive policy conditions – something which we are working very closely with our clients to address.
You are responsible for Credit and Non-Payment insurance, Political Risk insurance, Commercial Surety, Terrorism and Political Violence, and Lenders Insurance Advisory within the Financial Solutions line of the WTW business. Which of these lines are experiencing the greatest changes in the current market, and why?
Many insurers consider that more insolvencies will eventually come when government support measures are rolled back. As a result, some insurers in the Trade Credit space have stayed away from taking new risks in the industry sectors most affected by the crisis such as air travel, hospitality and the private obligors that have a non-investment grade rating. Instead, they have focused on better-rated entities and sovereign-owned entities.
How has the pandemic and economic downturn affected the Credit and Non-Payment insurance market?
Claims in the Trade Credit and Non-Payment insurance market have increased compared to last year, as we have seen in loss ratios (measuring claims incurred against premiums) reported by the big three insurers.
In their 9M 2020 publications, Euler Hermes, Atradius and Coface reported loss ratios being 15 points higher than in 2019, at around the 60% mark.
To a great extent, this moderate increase has been achieved thanks to the government support measures implemented in various countries to avoid a massive wave of insolvencies, including providing reinsurance to these credit insurers through public schemes.
In Asia Pacific, trade credit insurers have experienced an increase in smaller frequency claims, but the level of large claims remains limited. Coface, for instance, has published a loss ratio of 51% YTD in Asia Pacific – a very healthy level.
As a result, trade credit insurers have remained profitable for most of 2020 in Asia Pacific and globally.
They have managed to maintain healthy top lines by increasing premium rates at renewal to reflect the deteriorating credit environment. And they have withdrawn cover on the weaker portions of their portfolios, with overall exposure now being 10% lower than at the end of 2019. While these cuts have affected clients who rely on credit insurance coverage for managing risks or for financing purposes, some of the reductions were accepted as a reflection of lower overall trade volumes in 2020.
Will general insurance capacity and coverage narrow in the year ahead, and if so, in which lines?
The New Zealand insurance market is open for business and in good health.
The property market has been largely insulated from direct losses due to COVID-19 but insurers are increasing their scrutiny of risks. There is a focus on profitable underwriting because of the global economic uncertainty.
Increasing emphasis is being placed on risk control, safety, contractual risk management, cyber security and governance. Core coverage terms and conditions that have been relatively stable are now also under the spotlight; it’s becoming commonplace for insurers to impose absolute communicable disease exclusions to avoid future debates over unintended cover.
We also see another year of challenging conditions for D&O capacity and rates, as well as reduced capacity and rate increases for larger Cyber placements, as claim frequency and severity continues to rise.
Apart from the Construction sector which faces its own set of challenges, General Liability rates remain stable in NZ compared to the rest of the world where rate increases and tightening of coverage is evident. We were expecting global insurers to push down rate increases to NZ insurers after their latest round of treaty negotiations, however this has not been as evident outside of the Construction sector.
When will the insurance market return to normal in the Pacific, assuming a vaccine puts an end to the year ahead?
Tourism has always been the lifeblood of Pacific Island economies. All of these countries share similar challenges and opportunities and the abrupt end to visits by ships and planes carrying much needed economic input has had an impact. For obvious reasons, credit insurers have taken a conservative stance on credit risks associated with travel and tourism related industries, although guarded support remains across sectors that support local communities such as supermarkets, hardware and food retailing.
A phased approach to resuming international travel in the region is being implemented, but economic activity across the Pacific Islands could remain a challenge for another 12-18 months meaning insurers will continue to remain cautious.
What lessons have you learned during this economic downturn?
While 2020 will be remembered for the pain inflicted on populations by the pandemic, the economic disruption and the challenges to the insurance market, it is very encouraging to see that the credit insurance market has remained resilient and has continued to support clients throughout the crisis.
How do you view the outlook for the year ahead?
Positively, certain industry sectors have weathered the storm reasonably well. The infrastructure and telecommunications sectors for instance, have proven extremely resilient and we hope this will continue for the year ahead.
And finally, some sectors have even emerged stronger, such as e-commerce and data centres. Again, these continue to be well supported by insurers.
