IAG expects the sharpening regulatory climate for Australia’s insurers to add A$30m (US$21m) to its compliance costs, annually and forever.
Speaking after the Royal Commission investigation into Australia’s financial industry made 76 recommendations for change, IAG chief executive Peter Harmer, said: “The investments required to meet the new bar, in terms of risk and compliance, is certainly something we did not foresee three years ago”.
IAG is reining in its A$250m cost savings programme to help pay for the extra compliance costs. That goal therefore becomes A$220m, slightly under 10% of its A$2.5bn cost base.
Harmer said “nothing unexpected that we had not already begun preparing for” arose from commissioner Kenneth Hayne’s final report, published yesterday.
But addressing one of Hayne’s criticisms of non-life insurers, Harmer acknowledged IAG “could have done more, earlier in how [add-on insurance] products were priced and sold”. Hayne has recommended capping commissions on complementary cover.
With federal elections looming and both parties vowing to act on Hayne’s recommendations, Harmer said: “All we want is some degree of certainty around the regulatory environment and policy frameworks. We are agnostic as to whoever is running the country. We tend to survive, irrespective.”
At IAG’s half-year results to December today, Harmer was also forced to address the threat New Zealand’s authorities could act to trim non-life industry profits there.
The December half-year was almost peril-free in New Zealand – in contrast to Australia – producing healthy margins for IAG.
Harmer said: “There is a realisation that we may be seen as overearning there. But if the global industry looked at the last 50 years’ performance [in New Zealand] it would still be in the red. Policyholders and citizens are more aware than most people in the world to the kinds of exposures they face. The regulation we operate under in New Zealand has probably the most conservative capital requirements for insurers in the world.”
The underlying margin – the reported margin adjusted for natural catastrophes, significant reserve releases and credit spread moves – for New Zealand business was 20%, versus 16.2% company-wide.
Chief financial officer Nick Hawkins said: “The returns we are making are commensurate with the risks we take on. With earthquake risk we have also had some bad days there.”
Still, IAG overstepped its six-month total natcat loss budget by A$110m, thanks to Sydney’s damaging hailstorm [https://www.insuranceerm.com/news-comment/sydney-hail-bill-estimated-at-nearly-$500m.html] which cost it A$162m after quota sharing and reinsurance. One year ago it sat A$33m under allowance.
IAG’s half-yearly net profit slipped by 9.3%, year on year, to $A500m, even though gross premiums grew 4.1% to A$5.8bn on the back of rate changes.
However, Harmer reassured that catastrophic flooding in Australia’s north and bushfires in the south [https://www.insuranceerm.com/news-comment/australian-insurers-declare-catastrophe-amid-monsoonal-rains.html] will not lead Australia’s largest non-life player to breach its A$608m full-year natcat loss budget.
IAG hopes to sell its Vietnamese and Indonesian operations by June, having offloaded its Thai unit in the last half. It is “considering options” for Indian and Malaysian joint ventures.