BIS Countdown - Patrick Snowball: A hostile climate

Global insurance industry leaders are facing a ‘perfect storm’ of economic, political and climate issues.

During the past two years, Suncorp has dealt with five of the worst natural hazard events in Australia’s history. Fires, floods, cyclones and hailstorms across the vast continent have cost the industry more than AU$7bn (£4.5bn) in claims and stretched all insurance firms to the limit.

Across the Tasman Sea in New Zealand, four earthquakes since late last year have cost more than NZ$15bn (£7.6bn) — the equivalent of 8% of the national gross domestic product. Reinsurers and insurers, including Suncorp, have met much of this loss.

All of this occurred in the wake of Australia’s recovery from the global financial crisis and the uncertainty created by a federal government that needs the support of Greens and Independents.

It also occurred while my leadership team and I launched a major transformation of Suncorp’s strategy, business model and operations, having joined the business in 2009 after a global search by the group’s board.

Economic uncertainty

Since then, it has been the executive’s role to concurrently manage major organisational change, an unprecedented level of insurance events, as well as economic and political uncertainty under scrutiny from the government, media and wider market. Impressing these three groups is especially important as growing stakeholder confidence will be fundamental to the group’s future success. Confidence will also be a major factor in the ability of insurance businesses in Australia and the UK to deal with the challenges they face too.

When I arrived in Australia, it was clear Suncorp had immediate issues it needed to address, as well as the three longer-term challenges — credibility, confidence and culture. The group had good businesses and highly committed capable people. But, despite that, it had lost credibility with its key stakeholders and they lacked confidence in the group’s ability to obtain the full value from 
its businesses.

Instead of a unified Suncorp group culture, there was a mix of cultures built around individual product brands. At present, Suncorp is only part way through its transformation and there is still much to be done. Yet, it is very encouraging to see signs of growing stakeholder approval for what we are doing.

The Suncorp experience is instructive as the insurance sectors in Australia and the UK are facing common issues, including that perfect storm as the ability of government and industry leaders to manage economic, political and climate issues is in doubt.

The repair of corporate balance sheets, which was a legacy of the global financial crisis, has now given way to the attempted repair of national balance sheets — particularly in Europe, the 
US and the UK, a period that is likely to be both protracted and socially disruptive.

The governments in these countries do not have clear reform mandates or powers either, which is leading to political indecisiveness and a focus on short-term, tactical issues response rather than major reform. It has also meant that responses to climate change matters, such as carbon pricing, are often politically opportunistic rather than well considered and effective.

Given the national economic and social importance of insurance, the industry is being caught up in this economic and political instability as the pervasiveness of financial services means it is high on any economic or regulatory reform agenda. And when communities lose confidence in leadership, they do not distinguish between political and corporate leaders.

Sanguine about the future

In Australia there are two inquiries into flood disasters and related general insurance matters, and during the 
past three years there have been more than six inquiries into banking and financial services — all this in a country considered to have one of the world’s best financial services regulatory systems.

In Europe, Solvency II will have a massive impact — as will the new prudential regulation proposals in the UK — and the Statement of Principles governing flood cover ends in two years, which will require careful renegotiation.

Irrespective of the region, the common issues are insurance affordability, accessibility and capacity. These are critical for the sustainability of our businesses — and they are also politically and 
socially contentious.

Despite their breadth and seriousness I remain sanguine about the future of my company and the wider industry. Faced with unsettled stakeholders and extremely challenging operating environments, it should not be forgotten that the government, industry and business leaders have similar needs.

The first is to distinguish between immediate priorities — what has to be done now to stabilise conditions — and longer-term challenges that must be met to bring about meaningful change. There needs to be a clear and consistently communicated narrative of where you are taking your organisation, as well as the strategy and business model to get you there.

Sanguine about the future

Firms need to attack policy and process complexity. Most importantly, they need to be consistent and relentless in executing strategy. For the insurance industry, our key challenge is to convince govern-
ment, customers and community that we are not the problem — but a key part of the solution.

That is not to suggest we are without blame. We cannot bemoan government or regulator intrusion when the profit and customer service performance of our businesses has often fallen so clearly short of the expected mark. But if we can demonstrate that we are running value-adding, sustainable businesses, then we are better placed to lead broad economic and social reform. The unpalatable alternative is to be a victim of that reform.

Patrick Snowball will be speaking at the British Insurance Summit 2011.