1

Rob Whelan

Chief Executive Officer

2

Breaking through the barriers

3

Barriers to a stronger industry

GI Industry

Consumer Sentiment Perception

Increased Regulation

Costs vs. Affordability

Risk Mitigation

Four main industry pressure points:

4

Costs and Affordability

5

The cost of insurance is increasing by more than the CPI

6

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Dec-2010 Dec-2011

Annual % change in CPI Insurance Costs and Total CPI

Insurance costs Total CPI

Growths in incomes have made basic insurances more affordable across all income quintiles

7

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

1st quintile 2nd quintile 3rd quintile 4th quintile 5th quintile Total

Insurance affordability by income quintile(Building & Contents & MV insurance as a share of

household income)

2003/04

2009/10

8

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Building,Contentsand MV

Contents onlywith MV

Gambling Tobacco andAlcohol

Food and non-alcoholic

beverages

Education Petrol and Publictransport

Selected expenditure items as % of household income

2003/04

2009/10

Despite public perceptions, industry profitability has been weaker than for all companies (less mining)

9

0

20

40

60

80

100

120

140

160

Trends in Industry Profitability (Index, Dec 02 = 100)

Profits before tax, less mining GI Trading results

With the result that industry margins have taken a sharp turn for the worse

10

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

Sep-2003 Sep-2004 Sep-2005 Sep-2006 Sep-2007 Sep-2008 Sep-2009 Sep-2010 Sep-2011

Trading Results as a Percentage of Net Written Premiums(Four Qtr Moving)

A key factor behind profit weakness has been the upwards trends in the combined ratio for the industry

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50%

60%

70%

80%

90%

100%

110%

120%

130%

140%

Total GI Combined Ratio (Direct Insurance)

The past five years have been less benign to the industry with investment income propping up profitability

12

-2000

-1500

-1000

-500

0

500

1000

1500

2000

2500

Dec-0

2

Mar-

03

Jun

-03

Sep

-03

Dec-0

3

Mar-

04

Jun

-04

Sep

-04

Dec-0

4

Mar-

05

Jun

-05

Sep

-05

Dec-0

5

Mar-

06

Jun

-06

Sep

-06

Dec-0

6

Mar-

07

Jun

-07

Sep

-07

Dec-0

7

Mar-

08

Jun

-08

Sep

-08

Dec-0

8

Mar-

09

Jun

-09

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Long Term Industry Financial performance($ millions)

Underwriting result Investment Income Net profit/loss

However, investment income is weakening as underwriting deteriorates

13

-400.0%

-300.0%

-200.0%

-100.0%

0.0%

100.0%

200.0%

300.0%

400.0%

500.0%

Dec-0

2

Mar-

03

Jun

-03

Sep

-03

Dec-0

3

Mar-

04

Jun

-04

Sep

-04

Dec-0

4

Mar-

05

Jun

-05

Sep

-05

Dec-0

5

Mar-

06

Jun

-06

Sep

-06

Dec-0

6

Mar-

07

Jun

-07

Sep

-07

Dec-0

7

Mar-

08

Jun

-08

Sep

-08

Dec-0

8

Mar-

09

Jun

-09

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Source of Net Profit/Loss(Underwriting Result & Investment Income as proportion of Net

Profit/loss)

Underwriting result Investment Income

On the positive side, it could be worse – insurance margins could be those experienced in the UK

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0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

2006 2007 2008 2009 2010 2011

Trading Result/NWP (Australia v UK)

UK

Australia

Costs input accelerating

15

80

130

180

230

280

330

Dec-0

2

Mar-

03

Jun

-03

Sep

-03

Dec-0

3

Mar-

04

Jun

-04

Sep

-04

Dec-0

4

Mar-

05

Jun

-05

Sep

-05

Dec-0

5

Mar-

06

Jun

-06

Sep

-06

Dec-0

6

Mar-

07

Jun

-07

Sep

-07

Dec-0

7

Mar-

08

Jun

-08

Sep

-08

Dec-0

8

Mar-

09

Jun

-09

Sep

-09

Dec-0

9

Mar-

10

Jun

-10

Sep

-10

Dec-1

0

Mar-

11

Jun

-11

Sep

-11

Dec-1

1

Index of Costs per policy and pay rates (March 04 qtr = 100)

Cost per policy Hourly rates of pay Building Materials

Where Government can act: strengthen role of insurance

Recommendation 12.1

State and territory taxes and levies on general insurance constitute a barrier to effective adaptation to climate change. State and territory governments should phase out these taxes and replace them with less distortionary taxes.

Recommendation 12.2

The Australian Government should only proceed with reforms that require all household insurers to offer flood cover if it can be demonstrated that the benefits to the wilder community would exceed the costs. These benefits and costs should be assessed, and any reforms implemented, after barriers to effective climate change adaptation in other policy areas are addressed.

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Where Government can act: strengthen role of insurance

Recommendation 12.3

Governments should not subsidise premiums for household or business property insurance, whether directly or by underwriting risks. This would impose a barrier to effective adaptation to climate change.

Source: Productivity Commission Draft Report: Barrier to Effective Climate Change Adaptation April 2012

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Regulation

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Growing regulatory burden

• Insurance contracts act – unfair contract terms

• LAGIC capital review

• ASIC claims handling – best practice

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Plethora of inquiries added to existing burden

• Queensland Floods Commission of Inquiry

• Natural Disaster Insurance Review

• Productivity Commission – Adaptation

• Victorian Floods

• House of Reps – Claims handling

• House of Reps – Strata title insurance

• Perth bushfires

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Additional regulation from inquiries

High Probability

• Common definition

• Mandatory flood cover

• Key facts statements

21

Additional regulation from inquiries

Low – Medium Probability

• Full replacement cover – home buildings

• Anti-discrimination for:

� Seniors

� Volunteers

� Mental Health

• Increase disclosure of risk pricing and assessment

• Mandatory sanctions for code breaches

22

Regulatory Burden

• Changing nature of disputes:

� Growth in IDR and EDR BAU disputes

� Increased awareness of dispute processes

� Cost penalties for quantum and length of dispute

� FOS a “Quasi Regulator”

23

International trends in regulation

• Systemic risks

� International

� Domestic

• Potential impacts on larger groups

� Reinsurers

� Cost of cover

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Code of Practice – best protection from more regulation

• Self regulation vs. Legal compliance

• Dynamic tool for adaptation vs. Static black letter law

• High level of compliance by industry

• Transparent

• Reputational risk – powerful sanction for non compliance

25

Risk Mitigation

26

Risk mitigation key to sustainable industry

• Growth in catastrophes

• Increasing costs of events

• Urbanisation increasing exposure

• Limited mitigation planning and investment

27

Worst years for catastrophes

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Source: © 2012 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – as at January 2012

Worst years for catastrophes

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Source: © 2012 Münchener Rückversicherungs-Gesellschaft, Geo Risks Research, NatCatSERVICE – as at January 2012

2011 – Worst on recordCyclone Yasi 2011$1,330,000,00091 per cent closed

QLD Floods 2010-11$2,380,000,00089 per cent closed

Melbourne Christmas Day Storm 2011$670,000,00072 per cent closed

VIC Flooding 2011$122,000,00086 per cent closed

Margaret River Bushfires 2011$53,000,00061 per cent closed

Perth Bushfires 2011$35,000,00096 per cent closed

Melbourne Storms Feb 2011$415,000,00088 per cent closed

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Risk mitigation: Good idea but who pays?

• Current federal outlays in mitigation

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

$m $m $m $m $m $m

Disaster mitigation or resilience a

31 24 30 37 34 26

a Specific Purpose Payments made to states for natural disaster mitigation or resilience, plus payments for bushfire mitigation. Source: Treasury

31

“One dollar spent on mitigation can save at

least two dollars in recovery costs”

Risk mitigation: Good idea but who pays?

• State and local councils bear brunt

� Limited resources

• Return on investment of mitigation

expenditure

Robert McClelland, July 27, 2011Then – Attorney General

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Costs of not mitigating risk

• Premiums in high-risk areas accelerate to unaffordable levels

• Reinsurance cover limited and expensive

• Withdrawal of insurers from providing cover

• Tax payer – insurer of last resort

33

Consumer Sentiment

34

Consumer sentiment and industry reputation

• Recent catastrophes and industry response impacted community perceptions

• Political and media scrutiny damaged industry reputation

• Underlying sentiment – we don’t always deliver on our promise

35

Core proposition of insurance is strong

Insurance means I can get on with life knowing assets protected

84%

69%

79%

80%

82%

% Agree

Having insurance gives me peace of mind

General insurance is means formanaging my risk

I take out general insurance to protect my lifestyle

I will renew my insurance cover

36

Source: Insurance Council of Australia; Reflections Research – April 2012

Despite strength some mistrust remains

1.981.79 1.73 1.68 1.64

Healthcare Supermarkets Insurance Mining Banking

Insurance industry is middle of pack on ‘Trusted to do the right thing’

37

Source: Insurance Council of Australia; Reflections Research – April 2012

Community attitudes to industry

Not so much negative as ambivalent

Strong

Moderate

Mild

Ambivalent

Negative

Positive

38

Source: Insurance Council of Australia; Reflections Research – April 2012

Key perceptions driving ambivalence to industry

• Slow to pay claims

• Care more about profits than customers

• Lack compassion for those in difficulty

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Overcoming the barriers

Costs and Affordability • Eliminate punitive and inefficient insurance taxes

• Increase mitigation to reduce risk

• Examine ways of lowering cost inputs – productivity

Regulation • Promote effectiveness of Code of Practice

• Demonstrate market effectiveness e.g. Flood cover

Risk Mitigation • Lobby government to undertake/fund mitigation works

• Demonstrate return on investment

• Educate community on benefits:

- Reduced risk

- Lower premiums

Consumer Sentiment • Provide better more accessible industry information

• Promote better effectiveness of Code

• Educate community on benefits of insurance

40

Thank you

41

This presentation has been prepared for the FSAA National Conference 20-22 May 2012. Opinions put forward herein are not necessarily those of FSAA

and FSAA is not responsible for those opinions.

The information presented at the seminar is of a general nature and a reader of this presentation must seek their own independent advice before using it for

any purpose.

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