At Australia’s largest general insurer Insurance Australia Group (IAG), scientists and engineers keep a closer eye than most on the weather. Set up in 2004 under CEO Mike Hawker AM FAICD and the late chair James Strong AO FAICD, IAG’s natural perils unit monitors shifts in weather patterns, and pores over detailed climate models and scenario analysis, sharing its research to inform building codes and disaster responses. Insurers are handy to watch for early signals of change because they deal with long-term risk that can run into billions, and can see the financial and social impact on communities.
Fifteen years, three CEOs and three chairs on, IAG’s knowledge on the financial, social and environmental impact in this area runs deep. Current chair Elizabeth Bryan AM FAICD describes how this has helped inform a mindset shift on the company’s purpose. Beyond transferring risk and paying claims, IAG says its purpose is to “to make your world a safer place”.
IAG has more than 11,500 employees and underwrites almost $12b of premiums a year across brands including NRMA Insurance, CGU, SGIO, WFI and Swann Insurance (Australia) and NZI, State, AMI and Lumley (New Zealand). At the close of FY2018, it had about 8.5 million customers and more than 674,000 shareholders. IAG also has interests in general insurance joint ventures in Malaysia and India.
An economist and former fund manager who joined the IAG board in 2014 and became chair in 2016, Bryan is blunt about the world we find ourselves in and the role of directors, even more so than in her bracing keynote speech at the 2017 Australian Governance Summit.
“I don’t think you can overestimate the importance of the conversation taking place in Australia right now,” says Bryan. “It’s really about the future of our business community and its relationship with all its constituents.
“There has been a shift in expectations and in the way people think about the role of business and it’s very fundamental... Directors are going to have to work in the weeds and in the details to get things right. We’ve lived in an environment where the management of companies was driven down to almost a single point of success, which was about the return to shareholders. The change point we are at now, and the world we are moving into, is not simple.
“A raft of social issues is coming onto the playing field for companies. You can’t say, ‘That’s not our problem, we’re here to make money for our shareholders.’ People are saying, ‘You’re here to pay your dues to all your stakeholders.’”
Bryan was struck by the blunt warning from the Reserve Bank of Australia (RBA) deputy governor Guy Debelle on the trend changes to the economy as a result of climate (see p44). She says this is not a time to be debating whether climate change is real. The issue is significant and urgent; the community is uneasy and each business needs to get clear on consequences and actions.
“Any trend change is very important for companies,” she says. “What we have now is our leading institutional players starting to play their role and pick up their responsibilities. For the community, to have the RBA come into an issue with its economic lens and research capabilities and start to help us see the various ways it will affect our economy is a good thing.”
In December 2012, IAG became a founding member of the Australian Business Roundtable for Disaster Resilience and Safer Communities after an unprecedented number of floods, storms and bushfires.
Along with Australian Red Cross, Investa Property Group, Munich Re, Optus and Westpac, the roundtable works with governments and other stakeholders on research, public policy and investment to support the capacity for communities and businesses to better withstand natural disasters. The company also partners with the United Nations, 100 Resilient Cities and Resilient New Zealand.
The roundtable’s 2016 report, The Economic Cost of the Social Impact of Natural Disasters, found the true cost of natural disasters was at least 50 per cent greater than previous estimates when social impact costs were factored in — the total cost of natural disasters in Australia exceeding $9b in 2015, or 0.6 per cent of GDP.
In 2018, IAG released its first climate action scorecard that details objectives with activities, three-year timeline and direct accountability to senior executives.
“We have seen an increase in the frequency of severe weather events that are affecting increasingly greater numbers of people and we know climate change impacts will increase even further,” IAG CEO Peter Harmer told the October AGM. “Our modelling shows that in a warmer world, we can expect cyclones to travel further south, generating even greater devastation through strong winds and torrential rainfall.”
“In this scenario, there are a further 3.5 million people who could be exposed to significant loss of property and to personal danger. As an insurer, not only do we see the financial impact on communities, but also the social impact. And we believe we have an obligation to do something about this.”
As if to underscore the risks, in March, the Insurance Council of Australia released a list of the 20 most flood-prone electorates in Australia: 16 in Queensland and four in NSW.
"In hindsight we could have acted earlier. That was a real wake-up call for us."
Bryan notes business provides essential services and runs supply chains that touch on people’s welfare all around the world.
“Having been given that special role in society, people are saying to us, ‘OK, but you need to give back some more.’ People no longer think companies can have a different value system to community values,” she says. “Community values are about trust and doing the right thing. They are simple concepts, but the [banking] Royal Commission was about people who didn’t reflect those values. If people suddenly find the institutions they’ve got to deal with are not living or sharing the values that underpin our communities, then they get very angry about it. The community has had it in spades.”
The Royal Commission came right into IAG’s backyard with the case of add-on insurance sold by its subsidiary, Swann Insurance, through car and motorbike dealers during the general insurance public hearings last September.
“In hindsight, we could have acted earlier,” says Bryan. “That was a real wake-up call for us. It was a small part of our business, not a big deal with our shareholders. But if we were in the same situation, we wouldn’t let things run on while we tried to find an industry solution.”
Hayne forced IAG to hold up a mirror, says Bryan, noting that the scarring year of hearings became an opportunity for board and management to learn. IAG is in the process of offering $39m in refunds to 67,960 customers and Swann has ceased distributing the products.
Bryan says the final report of the banking Royal Commission was explicit about the duty business owes to customers and the community. “That is a very useful call to arms. The way [Kenneth Hayne] has written that report and the way he’s couched it in value and moral terms is interesting. That’s where we need to start.”
IAG has worked through its products and services and reflected on how to deal with vulnerable customers, says Bryan. It has also worked to improve the data coming through management on customer complaints. Bryan says an important lesson on the customer data boards receive is to get underneath averages or generalised data. ”You need to go down into the tail of the distribution to find there are spots that are significant to your customer,” she says.
IAG has a consumer advisory board and an ethics committee, with meetings chaired by the CEO, which Bryan attends and other directors are invited to. “It challenges us on how we think about social issues and the trade-offs we have to make as a commercial organisation,” she says.
Bryan says IAG has incorporated the lessons into a set of product design principles it uses to evaluate whether new and existing products will meet customer needs and offer fair value.
IAG is also coming to grips with the seismic changes coming through job automation and artificial intelligence as a founding partner of the Gradient Institute. Gradient’s mission is to progress the research, design, development and adoption of ethical AI systems.
Bryan says this is a tough time and an increasingly tough job for directors. “We will still have to deliver to shareholders, but it has to be something that builds long-term value for shareholders; you have to be a company people want to do business with. It’s more complex.”
She says while it can be complicated for directors and boards to become aware of the issues, the key is to be open to responding, to focus on what the organisation does next, then clarify your role. “There’s no point being defensive and wanting to wish them away,” she says.
Bryan is concerned about increasing regulatory reach and its impact on boards. She argues the corporation laws don’t need to change to respond. “It’s all in there. You don’t need to rethink directors’ duties, you don’t need to change the Corporations Act. Everyone’s going to debate this, but you don’t actually need to do anything but accept the mind shift and get on with it.”
She says this environment does challenge management and the information flows to the board. “You’ve always got a lot more things you’d like to do in a company than you can. The art of management is picking your priorities and resourcing properly to do it. If the resources are a constraint, you have to readjust your priorities.
“Boards are tough businesses at the moment; the board agenda is a bit fraught,” says Bryan. “You need to make time for the bigger discussions.
“For a board to be able to deal with the large amount of regulatory and due diligence information that must come to it, the information must be analysed and presented by the management team so that the insights are readily evident to board members.
“It is the quality of this work that will determine how effective a board is in this area. Each board meeting must be able to encompass this due diligence function of the board as well as spend time on operational and strategic matters.”
Bryan’s comments also raise the question: currently, who would want to be a director? She agrees directors’ skills are being challenged.
“Any aspiring directors will need experience, time, skills, strong values and excellent influencing skills. They also need courage to take on the job, be able to make judgements and to be able to speak out. It’s a new and much less forgiving environment.”
“It is now a tough job. The issues are harder, they don’t have clear answers, they are not easy to solve. You can not go far enough or you can go too far. The expectations are greater — some are valid, some are not.”
With the extra workload, more directors are asking, “I’m having to work a lot harder, should we pay directors more?” Bryan’s answer is a blunt “no”. However, she says business will also need to counter government and regulators dumping more regulations and liabilities on them, which they can’t realistically hope to be able to meet.
So is she up for it? “Yes I am, and a large proportion of the director community is. It’s [also] a fantastic time to be a director. You have to seriously understand what you’re trying to do. You have to get with the change. It’s a dangerous environment if you get things wrong. But it’s a wonderful opportunity to be part of something that’s changing for the better.”
”I don’t think we can overestimate the importance of the conversation taking place in Australia right now.”
Bryan says every organisation needs to decide for itself how it responds. Organisations will have to be clear on their purpose.
“You focus where you’ve got real expertise,” says Bryan. “You’ve got to find what works for you and your company and where you can really contribute.”
Boards will also have to draw the line and be firm on what is not their job. “You can’t assume companies are responsible for everything. You have to ask, ‘How does my business model work? What are the things that impact community around that business model? What can I do that makes my business even better and helps people?’ That’s why we’ve come to safety. In mitigating risk, we have huge data, huge experience, and we need to bring all that to bear.”
Insurance is a key part of social infrastructure and, given the rising risk, it needs to work to make sure its products are accessible and affordable. “If you don’t have insurance, you don’t have a foundation where business or consumers are secure and confident to invest,” says Bryan.
IAG has recognised its role in society extends beyond transferring risk and paying claims; that it has to work with the community to understand, reduce and avoid risk, and to build resilience and preparedness. The result, it says, is better outcomes for the community and means fewer claims and lower costs for the business. It’s what Bryan calls “the virtuous circle”.
The IAG board has undergone substantial renewal since 2015. In November 2015, Peter Harmer replaced CEO Mike Wilkins, then in March 2016 Bryan took over from the chair of seven years, Brian Schwartz AM. IAG directors include Jonathan Nicholson and Tom Pockett MAICD, appointed in 2015; Duncan Boyle FAICD and Dr Helen Nugent AO (December 2016); and Michelle Tredenick FAICD and Sheila McGregor (March 2018). Hugh Fletcher, former chair of New Zealand Insurance, joined in 2007.
”You don’t need to rethink directors’ duties... you don’t actually need to do anything but accept the mind shift and get on with it.”
When things go wrong
During the banking Royal Commission, IAG subsidiary Swann Insurance was one of a number of insurers whose conduct came under scrutiny.
IAG’s Swann Insurance subsidiary was one of 11 insurance case studies named in the final report of the banking Royal Commission. Commissioner Hayne outlined how its conduct fell below community standards and expectations.
Between 2008 and 2018, Swann sold approximately 846,000 policies through car dealerships, received approximately $1.07b in premiums and paid out about 10 per cent of that amount in claims.
The insurance products were added on to the purchase of a car or motorcycle and at its peak, Swann had approximately 3000 authorised representatives selling its products in Australia.
According to the Royal Commission, IAG was aware from late 2013 that the Australian Securities and Investments Commission (ASIC) had concerns with add-on insurance products and had understood since 2015 that ASIC’s concerns related to product design and sales practices. In 2016, ASIC released three reports, into the industry finding that the add-on insurance was expensive, of poor value, and provided consumers with little or no benefit.
In the witness stand, Ben Bessell, IAG’s executive general manager of business distribution, accepted that, at least between 2013 and January 2017, Swann did not have in place adequate risk management systems, particularly in light of the failure of authorised representatives to actively report breaches of the National Credit Code.
By mid-2015, IAG was individually engaging with ASIC on the issue through the Insurance Council of Australia. Bessell said that during this period, the industry had generally acknowledged commission structures were either inappropriate or not financially competitive for product providers, but that no-one was prepared to move first in reducing commissions. He accepted Swann viewed the dealers, not the end consumer, as its customers.
The Commissioner found that Swann may have engaged in misconduct by breaching its obligation to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly.
The Commissioner found Swann may have engaged in misconduct by breaching the obligation in section 912A(1)(a) of the Corporations Act 2001 (in a number of distinct ways), the obligation in section 912A(1)(ca) of the Corporations Act, the obligation in section 912A(1)(aa) and the obligation in section 145 of the National Credit Code. In its written submissions, IAG resisted any finding of misconduct.
The Royal Commission found Swann’s remuneration and incentive arrangements and culture contributed to the misconduct. “Swann’s focus was profit and the maintenance of market share. Those were the goals pursued in the design of its remuneration and incentive arrangements, the prioritisation of the interests of motor dealers ahead of customers, and the failure to design systems that properly supervised the work of the authorised representatives,” the Royal Commission said.