Affordability of Insurance

Breakdown of Home Insurance Premiums in NZ. Source: ICNZ

One of the issues facing governments, business and home owners is the affordability of insurance.

There are four main reasons for this.

  1. Investment yields at all-time lows, and so the returns that insurers are making from their investments is much lower than it was before the Global Financial Crisis.
  2. Catastrophe losses have gone up world-wide. If  you went back 10 or more years, catastrophe losses accounted for around 1 -2% of premium income. 5 years ago it moved up to between 3 and 4% now it is more than double that in many jurisdictions.
  3. Operating costs continue to increase. Wages, which will not be helped by the parental leave impost on larger businesses which includes many of the Australian insurers and of course the scaling up of super contributions again in Australia.
  4. High levels of tax. The terrorism levy in Australia, Fire Service Levy (“FSL”) in NSW, New Zealand, and Tasmania, Stamp Duties and GST all add to the cost. Some socially responsible governments, the latest being Victoria have removed FSL.

The Fire Service Levy is in the spot light in New South Wales where we are all waiting for the government to announce what they are going to do with it. It is made worse by the tax on tax on tax. (GST on FSL and Stamp Duty on FSL and GST).

New Zealand surprisingly decided to retain their FSL which goes against the advice of economists and just plain common sense. I support the work ICNZ are doing on this and their website in particular.

Every community deserves well-funded, resourced and trained emergency service. Everyone in the community benefits from the services and we all should contribute fairly, not those that are prudent and or risk averse and insure. The overtaxing of insurance leads to lower insurance, more under insurance and more stress on government and the economy. This is particularly the case in New Zealand after the earthquake losses which ranks as one of the largest insured losses in history causing base insurance premiums to go up. It is not rocket science and I just cannot understand why governments just do not get it.

Again I congratulate the ICNZ for their efforts in getting the message out there and I urge everyone in the New Zealand insurance industry to get behind this issue and get the message out to voters.

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Simply cannot believe this

Source: Mr Tony Gutierrez - AP Photos

A week ago I commented that I love my job because you never stop learning, []. At the other end of the scale you also never stop being amazed.

Adam Matteson of Arch Underwriting at Lloyd’s shared this article with me that states that the Fertiliser/Chemical Company that had the catastrophic explosion in Texas only had only $1 million liability insurance. From what I have seen, the primary carriers [insurers] do only ?provide to what we in Australia and New Zealand what we would consider to be completely inadequate levels of coverage, however Umbrella Cover is readily available and is under-priced. Why on earth would any company, board, or management team run with such a low level of cover when the risk is so high?

This would have to be one of the worst cases of “it will never happen to me!” I have ever seen. Another case of a small business expense moving from a business risk to a personal risk for the board, directors, risk manager/insurance buyer and shareholders. 

Here is the full article:

Texas Plant That Blew Up Carried $1M Liability Policy

By Christopher Sherman May 6, 2013

The Texas fertilizer plant that exploded last month, killing 14 people, injuring more than 200 others and causing tens of millions of dollars in damage to the surrounding area had only $1 million in liability coverage, lawyers said.

Tyler lawyer Randy C. Roberts said he and other attorneys who have filed lawsuits against West Fertilizer’s owners were told that the plant carried only $1 million in liability insurance. Brook Laskey, an attorney hired by the plant’s insurer to represent West Fertilizer Co., confirmed the amount in an email to The Associated Press. According to the Dallas Morning News, which first reported the insurance figure, the amount was confirmed by an attorney for United States Fire Insurance Co. of Morristown, N.J.

“The bottom line is, this lack of insurance coverage is just consistent with the overall lack of responsibility we’ve seen from the fertilizer plant, starting from the fact that from day one they have yet to acknowledge responsibility,” Roberts said.

Roberts said he expects the plant’s owner to ask a judge to divide the $1 million in insurance money among the plaintiffs, several of whom he represents, and then file for bankruptcy.

He said he wasn’t surprised that the plant was carrying such a small policy.

“It’s rare for Texas to require insurance for any kind of hazardous activity,” he said. “We have very little oversight of hazardous activities and even less regulation.”

On April 17, a fire at the West Fertilizer Co. in West, a town 70 miles south of Dallas, was quickly followed by an earth-shaking explosion that left a 90-foot wide crater and damaged homes, schools and nursing home within a 37-block blast zone. Among those killed were 10 emergency responders.

State and federal investigators haven’t determined what caused the blast.

The plant had reported just months before the blast that it had the capacity to store 270 tons of ammonium nitrate, but it was unknown how much was there at the time of the explosion.

Roberts said that even without a conclusive cause, negligence lawsuits can proceed.

“The law allows courts to presume negligence when something happens that would not ordinarily occur but for negligence,” Roberts said. “A fire might be an unavoidable accident, but an explosion of this magnitude resulting from a fire is not an unavoidable accident.”

Lawyers will look for any other assets the company might have and search for other responsible parties, he said.

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Video Podcasts coming soon

At the request of a great many readers, I will be starting to include at least 1 video podcast with each week’s blog offerings.

I did the filming this morning with a guest, Max Salveson and I will have the first of the Podcasts up on this site next week.

I do hope you find them a good training tool, something that may be of benefit to your team and your clients.

Like the blog itself, if you have any areas that you would like discussed please let me know.

Already, why client’s need Business Interruption insurance has been requested and I will address this in our next filming session at the LMI Studios here in Melbourne.

In the meantime I hope you get something out of this week’s postings.

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Brokers ought to be the trusted adviser but are rated so low?

It was with a heavy and disbelieving heart that I read the latest survey results on the way that the public regard insurance brokers as professionals. See–and-the-least-20130502-2iusc.html

There is clearly a disconnect with the public’s perception of insurance brokers and the vast majority of brokers that I deal with who deserve the title of trusted adviser.

Why? There are two key reasons.

  1. Having the right insurance protection is so important when a claim occurs. Price does not enter into it at this point. It is the quality of the coverage, the financial strength rating of the insurer and the claims service.
  2. General Insurance has arguably the most difficult product range in the world. I have been a student of general insurance for over 40 years and I do not know it all. A business owner or financial controller simply does not know what they do not know.

I genuinely believe that the insurance policies that a business owner signs up for are the most important contracts that they enter into in their business life. They are there to protect:

  1. the assets of the business;
  2. the net profit and on-ging business expenses of the business;
  3. the personal liabiltiy of the directors and officers of the organisation;
  4. the investment made by the shareholders;
  5. the mortgage and personal guarantees given to any financier and or landlord;
  6. the jobs and lifestyles of the employees and others that rely on the business for employment; and in some cases
  7. the community in which the business operates.
  8. it can also be the reason for getting out of bed in the morning for many SME business owners

With so much at stake, the area being so complex and most Insureds not knowing what they do not know till it is too late, the importance of the insurance broker cannot be over stated. To me they are as important to the organisation as the lawyer or accountant. (I say this as an accountant myself).

As such everything that the lawyers and accountants are told, should be told to the insurance broker as a trusted adviser so that the risks can be fully understood and through risk management minimised or avoided or if need be transferred from the organisation and or its shareholders and management to an insurer (a good quality insurer that will genuinely protect them).

Without wishing to offend any financial planner, I see the role of the general insurance broker as just as if not more important to the business and it owners, management and staff.

I know that NIBA share this view and this is one of their key initiatives according to their 2012 Annual Report and I applaud the board and the executive on this.

When you look at the Financial Ombudsmen Service’s (“FOS”) statistics it is clear that very few disputes (around 1.6%) reported to FOS involve brokers and when they are, just over half are found in favour of the broker. When you consider the millions of insurance contracts being handled by brokers each year to have less than 200 disputes demonstrates that as professionals they do a great job.

So why the bad image. I think it is tied up with all the bad press that the insurance industry in general has received over the past few years starting with the Brisbane Floods and culminating with the appalling Shonky Award of Choice Magazine. Politicians and the media have had a field day and even today on the news on the way in Prof. Allan Fels was speaking of huge fines on insurers who try and wrought the removal of the Fire Service Levy. As it is most insurers have removed the FSL a full 2 months before the end date. The Victorian Government on the other hand are themselves still charging FSL to overseas insurers writing risks in Victoria.

For some time I have suggested that a proper media campaign is considered. If you compare the way accountants were regarded say 10 years ago to today. On this same list, accountants out rank lawyers. This change in perception of a dull and boring profession occurred in the main due to a quality media campaign run by the CPAs.

The question remains in my mind, is this something that brokers should do in isolation or should brand insurance be improved first by a campaign funded by all facets of the industry?

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New Library Service of General Insurance

Insurance is an extremely complex area which has been the subject of literally thousands of books.

LMI Group has accumulated one of the largest libraries in Australasia on insurance related topics with well over 1,500 titles.

 Sharing the Knowledge

As has always been our approach, we are happy to share our knowledge with the industry and anyone working in general insurance is welcome to use the library, physically housed in our Melbourne office at any time.

A full list of the books contained within the library can be found via this webpage

Borrowing Service

 A borrowing service is available if you are not able to attend our the Melbourne Offices of LMI Group. If it is just a page or two and we are not breaching copyright I am happy to scan a page and email or fax the page to you.

 If research is required or an entire book needs to be posted we reserve the right to pass on the costs to the borrow.

 Please  contact me [using the contact me button at the top of the page] setting out your request.

 Donating Books

 Many of the books that we hold have been kindly donated by companies and or individuals who either had no need for them any longer or no longer had the space to house them.

 If you have text books, tariffs, papers, articles, journals or other publications on general insurance that you no longer require, please contact us and I will arrange collection at my expense. Again please contact me if you have any and I will do the rest.

The books will be put to good use with any duplicates donated to universities or education facilities in Australia or emerging nations.

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Why I love my job – you never stop learning

Antimony Crystal

Yesterday, one of my senior accounting colleagues Angus Stewart and I left the office at 7am and drove up to central Victoria to a mine that extracts gold and antimony. I had never heard of this mineral which does appear on the Periodic table with an atomic number of 51. It symbol is Sb. I should have payed more attention during my high school chemistry class.

The mine has some of the purest in the world and the extracted material is all exported. The largest applications for metallic antimony are as alloying material for lead and tin and for lead antimony plates in lead-acid batteries. Alloying lead and tin with antimony improves the properties of the alloys which are used in solders, bullets, bullet proof vests, and plain bearings.  Antimony compounds are prominent additives for chlorine- and bromine-containing fire retardants found in many commercial and domestic products. An emerging application is the use of antimony in microelectronics.
How many other occupations would allow you to get in an see the opertions, the extraction process and then get in and understand the financial side of the business. Not only was all this necessary to allow Angus and I to provide meaningful advice to the client and their broker as part of a Policy Coverage and Business Interruption review, it exposed me to new information which I always find highly stimulating.
Speaking to Angus on the way back to our office, we both came away having learned something new and with the positive feeling that we were helping to ensure that this business which represented a large investment, not to mention the livelihood for a large workforce would be fully protected against disruption. The Insurer, who actually recommended the review will also be satisfied that the coverage is correct and they are receiving the correct premium for the risk being transferred to them.
When I got back to the office, I went into LMI RiskCoach expecting to have to write up some facts on antimony for future reference for brokers and underwriters but was really impressed to learn from Ian Fry one of our team that an extensive write up was already there.
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Blog Question # 1 on Business Interruption – Difference v Additions Method

I received  a couple of questions relating to Business Interruption including this email from an underwriter:

I have an account due 1/6 that we follow on.

Client is a manufacturer & distributor of industrial chemicals for swimming pools, waste water treatment, cosmetics.

Large client pays in excess of $250,000 before charges on his Property program. Policy renewed last year with conventional Sect 2 cover effected i.e. Gross Profit & seperate Pay-roll.

 During policy period, broker amended Section 2 methodology & cover is as follows: Net Profit $6m, Standing Charges $5.8m + Payroll (4 months) + Additional Increase in Cost of Working and Claims Preparation covers to a total of $12.8m.

I have concerns & have tried to steer broker down a path of consulting with a BI practitioner etc. For the sake of a fee which as a % of total insurance cost would be miniscule.

ISR is based on the difference method. Policy wording has not been altered. By now insuring on a Net Profit basis + standing charges does this marry with ISR Mark IV Modified Wording? Square peg into round hole? Can I have some guidance/commentary on the matter?

Thanking you

Kevin [Surname and email provided]

I responded as follows:

You are right to be concerned that the Policy has not been endorsed to reflect the definition of Gross Profit that has been used to arrive at the Declared Value. The Additions Method as you know was the original way that Gross Profit was calculated under Business Interruption policies. That is Net Profit was defined and then the Insured Standing Charges (those expenses that were to be insured) were listed on the Schedule. This methodology went out of vogue in the late 1960’s early 1970’s following the lead from the United Kingdom where the method of calculating Gross Profit moved to the Difference Method.

The move was made for two primary reasons. The first is that the list of Insured Standing Charges was long and so took more work but more importantly, if one was missed the client/Insured was self insured for that item.

The Difference Method starts with the Turnover of the Business and then deducts those expenses that are not to be insured. These expenses are referred to as Uninsured Working Expenses. The benefit is that typically there are far fewer Uninsured Working Expenses to list compared to Insured Standing Charges and if a Uninsured Working Expense is missed then the Insured is over insured.

The Difference Method is the method defined in the Mark IV Industrial Special Risks (“ISR”) Policy which came out in 1987 and all those that followed. It is also the method used in most of the business pack wordings out in the Australian market including but not limited to Allianz, Calliden, CGU, and QBE. Vero and Zurich stipulate standard Uninsured Working Expenses to simplify or guide the Insured and or Broker.

If done correctly the same answer is arrived at for insurable Gross Profit which ever method is used but the Basis of Settlement for insurable Gross Profit has to reflect the methodology used.

I do not see this problem too often but I have come across it in the past and so drafted an endorsement for the Mark IV ISR which changes the Basis of Settlement to the Additions Method. I attach a copy of this wording along with my coach’s comments for your convenience.




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Blog Question # 2 on Business Interruption – Insuring Net Profit

This is the second question on Business Interruption this week – this time from a broker.

Hi Allan

Query. I have a client who has insured under a CGU business pack policy For NET Profit. Have fully explained and as the Insured is an accountant he should know. 

 As I am about to endorse the policy and put a, general page note, that this is a, net profit, not a Gross Profit, sum insured.

 I have been unable to find a definition (I will use, according to the Insured’s books of accounts, in the general page note).

On this I looked at your book, Business Interruption Insurance and Claims but there is no mention there.

 I know CGU will come back to me, eventually,  and ask. Any idea’s???

Regards Tom [Surname and email provided]

My response was very short and simple:

With a CGU wording you need to record the Uninsured Working Expenses so that the underwriter and in the event of a claim, the loss adjuster and claims handler all know what is the Basis of Settlement and so that co-insurance/average is also calculated correct. If all expenses are to be treated as uninsured then you could just record the Uninsured Working Expenses as “all expenses – that is only net profit is insured”.

This of course only provides a very limited cover, particularly for an office risk where you would expect an accounting practice, assuming this is the occupation, would have no expenses that would be truly variable to sales and therefore I would normally be recommending showing no Uninsured Working Expenses.

With any business, regardless of the occupation, it has to be remembered that most disruptions are only partial or short term in duration and many expenses of the business continue which having been excluded from the sum insured will have to be funded by the Insured.



Tom replied

Thanks Allan, that is exactly what I thought, and needed confirmation on.

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More on that famous case of Donoghue v Stevenson

Back on the 26th May last year, I wrote an article on the landmark case of Donoghue v Stevenson. See

The article was very well received and so to those interested, I thought I would share a paper I have just read by the Right Honourable Lord Hamilton who delivered it as the 2013 MacFadyen Lecture.

I hope you find it an interesting and informative read:

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A great thing for Victorian home and business owners

Today being May 1, 2013 is a great day as most insurers have now reduced the Fire Service Levy (“FSL”) on insurance products to zero. Some have done this earlier while others will still do so till 30 June, but for most Insured’s this unjust tax which ended up being triple taxed is gone. 

I repeat my strong recommendation that this significant saving is not just pocketed, which in view of the Federal Government’s warnings of late, but rather, that you take a few minutes and go through your insurance program to ensure that you are adequately covered. This is more than just ensuring that the sums insured on the building and contents are genuinely enough to replace the assets on a “new for old basis” but check what lesser known covers such as business interruption and management liability you should have.

The thing about insurance is that you do not know what you do not know and that is where a good insurance broker in invaluable.

Even though I had a small part in having this tax removed, I will not be opening up the bubbly just yet. I will wait till 3oth June and then it will only be one glass as we still have to remove the tax in New South Wales, Tasmania and New Zealand.

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