Emerging risks priced high

The insurance industry doesn't like uncertainty, so prices accordingly for emerging risks, Cam McLisky, from Berkshire Hathaway Specialty Insurance, told the NZILA annual conference in Christchurch, NZ.

"We don't have historical data for emerging risks, but the insurance industry is good at adapting. Insurance solutions may be expensive now but, once we get data over time, prices will come down," he said.

Mr McLisky was a panellist in a session on emerging risks in the NZ market.

NZ Brokers CEO Jo Mason agreed the industry was good at adapting, despite current models for emerging risks being inadequate. She said the industry must move faster, but "don't underestimate the younger generation; they are used to change".

Mr McLisky said technology was helping the industry and a lot of resources were going into modelling emerging risks, which would be beneficial.

Sydney-based Gen Re senior claims executive Nick Zambetti said autonomous vehicles (AVs) were part of the "new territory" of emerging risks and queried liability for AVs. "Are car makers open to liability for motor vehicle crashes?"

He said some manufacturers had assumed full liability but would still have subrogation rights against other ‘drivers' or manufacturers. Panel moderator Marcus Pearson, Marsh's country head for NZ and Fiji, said AVs were likely "a long way off" in NZ because the road infrastructure was not ready.

Ms Mason said she was "extremely concerned" about risk-based pricing, saying premiums were skyrocketing and consequently more government "interference" was likely. In personal lines, she queried how far the industry could go with granular risk pricing. There was a possibility some locations would become uninsurable because of premium unaffordability.

Mr McLisky said that was so in personal lines and there was room for a government role, but in the "commercial space" risk-based pricing was "tough but fair".

Mr Zambetti cited post-cyclone Qld floods, after which there was "a lot of political fallout" because exclusions varied, prompting government intervention. "The [Federal] Government stepped in with standard definitions. Insurers provided flood cover with a choice of yes or no." If a flood-prone policyholder elected cover, it was priced accordingly.

Mr Pearson moved to market fluctuations after natural catastrophes. After the Canterbury quakes of 2010 and 2011, capacity "flooded back but after Kaikoura [14 February 2016 quake] it was withdrawn. What's the difference?"

Mr McLisky said market forces were responsible. "Prices go up and down, but there's a fundamental shift into [better] modelling and therefore prices have gone up. Insurers look at volatility. The big change is that insurers understand the science better and have more data. Kaikoura provided new knowledge. The event was not unexpected, but there was more damage than expected."

Mr McLisky said hollow-core concrete flooring was one reason the event's cost went beyond expectations, because it caused more buildings to be damaged. Consequently there would be "no sudden drop, prices will stay higher, for now".

Mr Pearson said it was 300 years since the last Alpine Fault eruption and there was a 70% chance of a magnitude 8 or more quake in the next 50 years. The Alpine Fault runs almost the entire length of NZ's South Island on the boundary between the Pacific and Indo-Australian plates.

Mr McLiskey agreed and said Berkshire Hathaway took that into account in its modelling. "The insurance industry must get the price right."

However, few other places with the same risk level got the amount of coverage NZ achieved. "We must price earthquake on the expectation that a bad year will be really bad." There had been some "knee-jerk reaction, but prices will be high for some time".

Mr Zambetti said some insurers' price policies had been unrealistic, for example, offering total replacement cover with no caps. Ms Mason agreed, naming an insurer that had "dropped the ball" by failing to "keep up with the square metre costs of rebuilds", particularly when damage was widespread. Policies had since been modified.

She also said the insurers needed "a good PR company" because private insurers did "an amazing job". The post-Kaikoura quake response showed the industry had "learn a tremendous amount".

Mr Pearson asked how difficult it was to price and profit from cyber risk coverage. Mr McLisky said "no one knows how to properly price it". He warned of systemic risk. "Every policy could be affected." Business interruption (BI) was a "core coverage and there's a lot of uncertainty about wordings. Do we include reputational BI? How do we price it?"

Mr Zambetti outlined a range of emerging risks with cladding and other defective building products.

• Cladding: Initially leaks had been identified as an issue but flammable cores had come to the fore since the Grenfell Tower fire in London in 2017 and the Lacrosse building fire in Melbourne in 2014. In NZ, there had been no major fires, but no definitive regulatory or insurer action either.

• Leaky, mouldy buildings: Proving the connection between personal injury and mould had been difficult.

• Structured steel imported from Asia: Brittle steel can fracture, eg steel to be used on bridges for NZ’s $450 million Huntly Bypass on a major highway. {NZ’s Transport Agency said it had identified “sub-standard steel used in the early stages of the construction of piles” for the Huntly Bypass.) Mr Zambetti also cited a NZ construction site where steel piles failed under a pile driver. “But what if they hadn’t failed until later?” He suggested steel was tested for some large projects only, “but what about smaller projects?” Certificates from countries of origin, mainly China, India and Vietnam, were unreliable.

• Plasterboard: Low-grade fly ash was in some products, which emitted gases and corroded metal. The US clean-up cost was estimated at $US15 billion.

• Asbestos was in some building products, eg plasterboard and roof panels.

• Nickel sulphide in strengthened glass had caused exploding panels on high-rise buildings, particularly when exposed to direct sunlight and large temperature variations. He cited glass balconies that collapsed in Wellington, NZ, windows in Melbourne apartments, and windows that popped out at Sydney’s Barangaroo site in August 2017 when winds were only 60-70kph.

• Braided water hoses, popular in the last 15 years in kitchens and bathrooms to replace copper pipes, would eventually burst. Australian insurers have estimated the claims cost at $A500 million to $A750 million a year.

• Lead in drinking water: Brass tap fittings, common in the UK, Australia and NZ, can leach lead into water. The World Health Organisation has said no lead level is safe. Mr Zambetti suggest potential litigation was likely in Australia.

Mr Pearson moved the panel to D&O class actions and the Australian Law Reform Commission's inquiry into third party funding and securities class actions.

Mr McLisky said the Australian market was "out of control". Actuaries said side C coverage needed a 300% increase and rates were starting to catch up. "Side C was intended to stop disputes over defence costs but has become a standalone cover," he said. Australian legislation made it easier to take actions against corporations. Mr McLisky warned there was potential contagion for dual Australian and NZ listed companies. "The legal circumstances are different in NZ, but not tested." Litigation funding was starting to gain momentum in NZ, but not for securities class actions. "D&O prices are low in NZ but the environment is heating up. Dual listed companies are a real risk," he said.