The Perfect Storm
Commercial property and construction… what on earth(quake) is going on?
The New Zealand insurance market is dynamic to say the least. We are a small nation that contributes little to the global (re)insurance premium pools, yet we carry more than our share of natural disaster losses. This in part explains our short, sharp insurance cycle (two to five years) between what we deem soft (low cost) and hard (increased cost) insurance market conditions.
We have experienced many hard market cycles, which have traditionally been dictated by increased premium rates, imposed higher excesses for certain perils and changes to insurer appetite (their willingness to allocate capital to certain risk types). The current hard cycle feels different to others and the analogy ‘The Perfect Storm’ comes to mind, when considering the additional factors affecting the cost of asset insurance in this hard market cycle.
In past hard market cycles, the reaction has been knee jerk, in most recent times it was the catastrophic losses presented to the market following the Christchurch (and subsequent) Earthquakes in 2010-2012. The losses sustained to the (re)insurance markets were in excess of $60bn with some long tail reinstatement issues still being dealt with in Christchurch – 10 years later. This hard market, we are of course seeing the rate, excess, insurer appetite applications as would be expected however there are other factors that are having quite a material impact on the cost of insurance for commercial and residential property owners / developers.
Socio economic conditions – ram raids, theft, burglary rates are the highest NZ has seen for over 20 years. Previously not accounted for by insurers but now on the radar and further changes will be made, likely to excesses and premiums.
Interest rates – OCR increase from .25% in October 2021 to 2.5% current at time of writing in 2022, with additional increases expected. Cost of funding premium (monthly payments) have increased in line with high interest rates.
Cost of reinsurance for New Zealand based property risks has increased. Global flood losses have reached US20bn in 2021 alone. Climate change and changing weather patterns dictate that this peril will continue to worsen – driving rate increases and costs of insurance. Australia no longer able to purchase flood insurance in certain areas (flood prone planes). New Zealand is not quite there yet, however in 2022 alone, floods and heavy weather events have cost the NZ industry in excess of NZ0.5BN, with trending data expecting this type of loss to continue to worsen.
Insurance valuations (reinstatement) are increasingly up. Long Burroughs has always pushed hard for our clients to maintain the upkeep of their insurance valuations to remove the risk of under insurance and the application of average to insured losses – at a minimum of every two years. Regardless of this, we are seeing a very large jump (one client 43% increase over last valuation two years previous) in the reinstatement values being presented by valuers on commercial building stock across the country. On average, the increases are between 10-20% which has a material effect on the cost of insurance.
Rate increases are an expected lever, and have been slowly on the rise for the past 24 months. This year however we are seeing sharper increases, especially where there have been re-occurring claims of the same nature i.e. multiple water damage claims on the same building over 12 months. 5-10% increases expected on buildings with minor/no claims and up to 20% premium rate increases for buildings with claims.
The cost of construction is another factor that contributes to the costs of insurance. It is well documented that construction costs in 2021 increased by ~10% with the same expected in 2022. This has an impact on the cost of reinstatement and is driving increased claims costs. Furthermore, the ability to get contractors to site quickly to remediate damage is causing increased business interruption losses. All of this contributes to insurer premium/loss rations and performance indicators, and drives premium rate reviews at a local level. Combined with with global reinsurance cost increases for natural disaster / catastrophe related losses, we are seeing an unusually high increase in premium rates.
Adding to the pressure on commercial building owners and the OPEX presented to tenants, is council rate increases. Combined with valuation increases, premium rate increases, cost of funding premium (interest rates) and the local/global (re)insurance view on New Zealand property risks, we expect that premium rates will not level out just yet and that this hard premium cycle we are currently in will continue for another two to three years, longer if we continue to suffer the effects of adverse weather patterns and the socio economic conditions driving high crime and interest rates in this country.
Lastly, a new and unfamiliar implication being felt across the insurance market is the ‘working from home’ requirement following the lockdowns of 2021/22 in New Zealand. A large number of insurers have maintained the working from home eligibility for their employees or, in some cases, offshore parent companies continue to require it in some form. Turnaround times and general ‘commerciality’ is at an all time low, a sentiment of “take or leave it” is being felt and not helping the overall insurance transaction and renewal results being felt by clients in NZ. In summary – there are a lot of implications that are driving premium costs which are not directly caused by the insurance market. This is the first time for many years that outside factors are adding to the cost of insurance and it is difficult for building owners and thus, tenants, to weather the effect these factors have on OPEX.
The low-down on getting back in the air
Business travellers are back, filling up the redeye flights.
But what’s changed since you last sipped on a 6:00am airport coffee and are you protected for it?
We’ve all seen those photos across social media this winter. Friends and family escaping to warmer climates, or reuniting with family overseas. It seems that private travel is well and truly back on track! So, it’s no wonder then that New Zealand businesses are also starting to consider returning to the skies. And business travel is not only taking off in NZ, but all over the world, reconnecting industries on a global scale.
As the world continues to re-open up for Kiwis, we turn to travel insurance to help protect us. But like many of the things we thought we knew, travel insurance is not what it was. So what does the cover look like for businesses wanting to travel within New Zealand, or head overseas?
How did insurers first respond to COVID-19?
The COVID-19 pandemic caused a relatively abrupt change to the travel insurance industry, particularly for businesses with corporate travel policies.
Initially, travel insurers became extremely cautious, relying on local Government guidance and advice from the World Health Organisation (WHO). This was unsurprising given that insurers were already paying substantial overseas medical costs due to hospitalisation requirements of people infected with the virus.
In March 2020, insurers responded to the situation with strict COVID-19 exclusions for those still wanting to travel. From an insurance perspective, COVID-19 infection was now deemed a ‘foreseen circumstance’ and insurers introduced timeframes for when cover would be afforded to travellers. Those with trips already booked, would be covered as per the usual terms of the policy wording they signed up for, however, those booking trips after certain cut off dates would no longer be eligible for any insurance cover relating to COVID-19 infection or disruption due to isolation requirements.
At this time, WHO formally declared COVID-19 a pandemic. Shortly afterwards, New Zealand (as well as other countries) issued border closures, travel bans and/or travel warnings prohibiting or restricting travel.
Ongoing changes to travel advice and border restrictions only further complicated matters. But now, 18-24 months later – insurers were finally ready and willing to reduce some of these strict conditions and return to the insurance scene.
How have things changed since 2019?
Travel concerns have relaxed in conjunction with the easing of Government enforced COVID-19 restrictions and Alert Levels. Insurers have returned to providing a certain level of cover for claims relating to this pandemic and the cover availability is there, but there are still coverage considerations to be aware of before planning a return to business travel.
Some insurers favour having a standard pandemics or infectious disease exclusion in their Policy Wording, which excludes any cover related to the virus. They then provide an intricate write back wording, allowing some limited cover for certain kinds of COVID-19-related events. Other insurers prefer to remain silent on the matter in their Policy Wordings, but rather, apply a COVID-19 specific endorsement or exclusion to explicitly outline what circumstances are excluded, and what are included.
It can be difficult to navigate these insurer changes but there are some key themes to look out for no matter which provider you choose.
TIP: Look out for pandemic or infectious disease sections of a Policy Wording and/or review any COVID-19 separate endorsements applied to the cover, which may not be included in the wording itself.
What COVID-19 events are covered?
While there are differences in limits and conditions between policies, almost all insurers have a similar stance on what they deem an ‘unforeseeable event’, which can trigger a claim response, and what they deem a ‘foreseeable event’, which cannot.
This is still open to interpretation and each insurer will differ, but it demonstrates the importance of understanding what COVID-19-related events can and can’t be covered.
Unforeseeable | As it stands currently, most insurers, but not all, will deem a traveller (and/or their travelling companion) contracting COVID-19 prior to, or during their trip as ‘unforeseeable’ and some level of cover can be afforded.
Foreseeable | In contrast, most insurers then deem a ‘foreseeable’ event as travellers (and/or their travelling companion) who do not contract COVID-19 but still have their travel disrupted because of COVID-19 related isolation/quarantine requirements, or border/country closures etc.
Understanding the differences between these is important.
On this basis, it usually means travel cover is only available if a traveller or travelling companion contracts Covid-19 prior to, or during, travel.
Catching COVID-19 – what travel costs can be claimed?
Corporate Travel Policies will not provide cover for all costs incurred due to catching COVID-19 on your travels. There are still limitations on certain policy sections and looking out for pandemic/infectious disease exclusions and understanding any COVID-19 exclusions is important.
Medical/evacuation costs | Increased awareness of symptoms associated with the less threatening variants transmitted today has allowed for most insurers to continue providing cover for COVID-19 medical related costs. With many infected people simply able to isolate and recover at home, insurers seem to be more comfortable with quantifying potential medical costs associated with infection.
Although included by most insurers, there may still be variances on the level of cover provided under this section.
Loss of deposits/cancellations | Cancellation costs, change of flight charges, additional accommodation, all these types of costs are included in corporate travel policies as standard, however, for COVID-19-related losses, these are typically excluded.
It could be considered ‘foreseeable’ that travel plans may be disrupted by COVID-19 related circumstances and on that basis, the cover is generally excluded. That being said, some insurers do allow for an inclusion of limited cover whereby some of these costs can be included in a claim, but it isn’t always a given.
These types of costs can be significant, depending on the type, length and quality of the trip being taken. The insurance response for such losses is an important consideration before heading overseas.
Vaccinations | Several vaccine mandates remain in place throughout New Zealand, but this is not necessarily the case worldwide, with an ever-increasing number of countries welcoming all travellers. While New Zealand citizens no longer need to provide proof of vaccination before coming home, some insurers are not prepared to provide cover for the potential medical costs associated with unvaccinated travellers.
Not many insurers take this stance, but there are some that go further to include up-to-date boosters and timeframe requirements in their exclusion. It pays to keep an eye out for these exclusions, if you are travelling without all your jabs, or it has been a while since your last.
There are still plenty of insurers who do not have any vaccination requirements.
Who is now covered?
Corporate travel insurers have reduced the breadth of an insured person definition. Historically, directors and most employees could be covered under a Corporate Travel policy for any type of travel, such as:
- Business travel
- Business travel with incidental leisure travel included, and
- Pure leisure travel
This is no longer the case.
As a result of COVID-19, insurers have become strict on the true intention of the Corporate Travel Policy, which at the heart of it, is intended to only cover business travel.
In most cases, Directors and Executives of a business and their partners/dependent children will continue to benefit from the policy responding to all three types of travel with no changes. However, any other employee or staff member will not; with most policies only covering them purely for business-related travel. Some insurers may provide cover for their incidental leisure travel if it is taken either side of a business trip, but for the most part, leisure travel is excluded for an employee.
This is a significant shift to the definition of an insured person for most corporate travel policies and whilst historically insurers were lenient with the type of travel being taken under their watch, this is now an extremely strict stance and most are unwilling to budge.
There are still options out there. A few insurers are still offering leisure travel cover to employees and others do offer the cover in exchange for increased premiums. It pays to investigate your options if this cover is important to you and your business.
Be prepared, do some research, talk to Long Burroughs.
Travel has changed. There is more paperwork to read, more documents to complete and insurance has definitely got trickier. It’s easy to assume that travel insurance will cover all financial loss incurred by COVID-19, but this isn’t the case.
Be prepared. Arrange travel insurance in advance, well before you or staff members head overseas.
And always do your homework. Understand the conditions of your airline and accommodation bookings so you know the cancellations timeframes and refund/credit policy should your plans change. Find out how the policy you have in place currently responds to COVID-19 losses so you can be prepared, prior to planning any trips.
Ask questions and get advice. We can help you figure out your travel requirements and advise on which policy may be most beneficial for your business.
“She’ll be right”
Cyber crime and the “she’ll be right” Kiwi attitude
Cyber crime is not a new phenomenon. It can no longer be considered an emerging risk and the focus of these disruptions has shifted from large global corporations like Sony, Citibank or Saudi Armaco, to smaller organisations. It does not discriminate and knows no geographical boundaries. As individuals, business owners or Directors, we are none of us immune – so it begs the question, why is the uptake of cyber insurance in this country so poor?
There has been a distinct move towards targeting smaller businesses for financial gain, using a number of smart tools in order to do so. The smaller the business, the more effective the crime, as often, the business does not have the governance in place to identify and halt an illegal transaction until after it has happened.
The two biggest cyber crimes we have seen this year at Long Burroughs both involved very small businesses paying large invoices, supposedly to well-known third parties. All seemed well, until those third parties contacted the business chasing settlement of the invoices – at which point the businesses realised something was wrong. Weeks had passed by, and the funds were long gone.
“Invoice hacking” or “redirection” is the hardest form of cyber crime to detect and has the highest strike rate of success. The two aforementioned businesses had less than five employees and under $1,000,000 in annual turnover. The owners managed debit control themselves and in the absence of multi-factor sign off, the funds were paid to an alternative account. Unknown to the business owners, their emails had been hacked, real invoices secured, accounts amended, and re-sent to the business owner.
By the time the business owners realised the issue, time had passed – they had no recourse from their bank, the funds could not be saved or returned, and they still had the issue of the outstanding debts to third parties.
Both businesses had been made aware of cyber exposures and options presented to provide this cover. The premium for doing so was under $1,500 a year per business and would have provided indemnity for both losses – over $200,000 in losses in total, both material figures to these small businesses.
Despite stories like this, in New Zealand, the uptake of this cover is extremely low. Insurers have tried to incentivise uptake by offering low cost/stripped back cyber cover options to assist small businesses by being able to afford the purchase, with limited results. The issue seems to be one of attitude. The underlying New Zealand motto of “she’ll be right” combined with the misconception that small businesses are not the target, is a dangerous combination.
Cyber Liability policies offer much wider protection than just invoice hacking, covering losses arising from first and third party breaches such as, phishing scams, network lockout/interruption, data breaches and malware attacks.
Global surveys of Directors confirms cyber security as a top five concern, right alongside massive global issues such as climate change and inflation. The risk is real, and while difficult to quantify, can have a huge impact on businesses, regardless of size.
A Change of Pace
Long Burroughs and Auckland Insurance joined forces back in 2017.
A perfect partnership, with the commercial and corporate expertise of Long Burroughs, paired with the experience and established platform of Auckland Insurance.
Now, nearly 20 years since Harvey and Chris Kerr founded Auckland Insurance, and after 5 years of flourishing alongside Long Burroughs, Chris will be stepping back from the day-to-day running of the business, handing over to the Long Burroughs team.
What a journey it’s been.
Harvey and Chris Kerr start Auckland Insurance.
Harvey hustled, Chris stitched it all together and the business grew.
Harvey was called up to the big wine tasting in the sky.
GOOD FIT, GOOD TIMING
Chris continued the business, in partnership with Geoff Long and David Burroughs of Long Burroughs Ltd.
Auckland Insurance flourished alongside Long Burroughs. The team, the service offering, the Parnel office, expanded.
JOB DONE, WHAT’S NEXT?
Chris is now stepping back from Auckland Insurance, leaving the business and the clients she’s worked with in good hands.
Chris remains a member of the Long Burroughs team and will still be working with us from time to time, as she phases out of a full-time role, moving into an advisory, and assistance capacity.
This is an exciting time for Chris and a wonderful moment to talk to her about the experiences of 20 plus years in the insurance industry.
What are you most looking forward to in your next chapter?
Playing more bridge.
What is your favourite memory of the Auckland Insurance journey?
Gosh, it is hard to choose only one! Maybe being a finalist (twice) in the IANZ broker of the year. And when we finally got big enough to bring on another employee (Geoff) – that was quite a milestone at the time. Then there’s joining forces with LB and moving the office out of home and into Parnell.
What has been the biggest industry change you’ve witnessed in the last 20 + years?
The growth of technology which has helped hugely with the day-to-day business. For instance, we used to do all the scheme renewals by post. Then moved to doing it all by email, and now the whole process is automated.
What is the most interesting or obscure insurance claim you have seen or heard about?
The client had a warehouse and used it to store property from time to time. On the proposal he had noted that he sometimes worked on cars in the yard. The underwriter missed this and when a fire claim was lodged (started in the yard) the insurer initially declined it, but when the proposal was brought to their attention, they had to honour it. That’s why I always insist on having a proposal completed!
What is your favourite insurance policy and why?
Professional Indemnity, because I have been dealing with this for many years, and know the most about it.
What advice would you give to someone starting in the industry today?
Embrace technology, work hard and always put the client first. Hopefully by doing this you can enjoy all the dealings you have.
What is your farewell message?
It is with satisfaction and pride that I leave Auckland Insurance. From scrambling to fulfill Harvey’s well-meaning promises in the office at our family home, to seeing the company take root in Parnell and thriving as part of Long Burroughs, I have loved my job.
I have also loved working with my clients, some whom I’ve known for over 20 years. To see you all work so hard to grow your businesses, dealing with the struggles we all face in business from time to time, and finding success, has been an honour.
I thank you all for your support over the years and wish you all the best as I begin the next chapter of my life: working part-time, travelling, playing bridge, and spoiling my grandchildren.