Withstanding disaster - Suncorp profile

Suncorp has faced severe operational and financial challenges in the wake of the Queensland floods and other natural disasters in Australasia during the past year. Group chief risk officer Robert Stribling explains how centralised operational procedures and prudent risk management have enabled the company to weather the storm. Wietske Blees reports

There is no doubt that 2010-11 is shaping up to be an expensive financial year for insurers across Australia and New Zealand. In January alone, cyclones and storms across Queensland and Victoria caused an estimated A$2.75 billion ($1.7 billion) in damages, according to the Insurance Council of Australia. February's 6.3 magnitude earthquake near Christchurch could end up costing as much as NZ$16 billion ($7.8 billion). Add to this the various smaller floods and bushfires that have plagued Australia during the lead-up to the summer and it is clear insurers are facing a hefty bill.

Suncorp Insurance, a unit of Suncorp with a 40% share of the Australian market for home and contents insurance and an automatic flood cover policy, is no stranger to the devastating impact of these catastrophes. Yet, conversely, it is also one of the few insurers still willing to take on new policies, including automatic flood cover.

"Between the floods in Queensland and Victoria, the earthquakes in Christchurch and cyclone Yasi, it would be fair to say this year is shaping up to be quite extreme," says Suncorp's group chief risk officer, Robert Stribling, whose role includes overseeing the embedded risk functions at the company's general insurance, life insurance and banking divisions. Stribling, who took on his role in January 2010, could not have picked a more challenging year to move into insurance after more than 30 years as a risk manager at a raft of banks around the world - including, most recently, the role of chief risk officer for National Australia Bank.

At present, the group is handling in excess of 100,000 claims across Australia alone - a heavy task, not least due to the emotional impact of the disasters. "There is a lot more to risk managing catastrophes than simply dealing with the financial impact of these events," says Stribling, who splits his time between Sydney and Suncorp's headquarters in Brisbane. "You're dealing with people who have lost absolutely everything and, aside from the emotional impact on your staff and customers, there is also a significant level of brand risk if you don't respond with utmost timeliness and care."

For that reason, Suncorp has set up a mobile response unit, which is ready to be deployed within hours of a catastrophe and acts as a first port of call for affected policyholders. "It's a bit like organising a military operation. In fact, when cyclone Yasi hit, we were one of the first companies there, providing people with short-term financing, emergency accommodation and advice on insurance-related 
matters," says Stribling, adding that, from a brand management perspective, the unit was worth its weight in gold.

Once the immediate necessities have been covered, the claims start rolling in. To minimise the risk of any particular catastrophe limiting the group's ability to process claims, Suncorp has moved towards centralised pricing and claims processes in one company-wide system. That decision proved particularly useful during the Queensland floods when its Brisbane and Toowoomba call centres had to be evacuated.

"We have invested a significant amount over the course of the past 12 months to move all of our different brands onto one common claims-processing and pricing engine, so that staff across the country are using one universal system," says Stribling. "In the event of a crisis, it is crucial to have the flexibility to redirect phone calls and operations to an area where staff are not impacted."

Reinsurance essential
When facing substantial insured liabilities from disasters, reinsurance is essential in enabling Suncorp to shed its risk. The company is not yet able to provide a full figure for the costs incurred as a result of the various disasters. But, as of February 23, the estimated gross cost of the Queensland and Victorian floods, Cyclone Yasi and the Melbourne storms was more than A$1 billion.

In addition, various flood and storm events between September and December resulted in A$318 million worth of claims, which was A$182 million more than the A$230 million that Suncorp had set aside for natural hazards during the first half of the financial year. To offset this, as of January, the company had received approximately A$1.5 billion in reinsurance coverage - a level that Stribling says demonstrates the effectiveness of Suncorp's reinsurance programme.

"We reassess our reinsurance coverage on an annual basis, taking into consideration a great variety of models - including dynamic financial analysis and long-term historical data analysis - to work out our optimum reinsurance coverage. Throughout the year, we can complement this coverage by purchasing additional reinsurance as and when this is required," says Stribling, who adds that the level of complexity inherent in reinsurance frameworks is quite similar to that of structured derivatives.
"On the banking side, I focused on structured derivatives in the dealing room and, having made the move to insurance, I have to say there are a lot of similarities with derivatives risk management, at least where different dimensions and layers of complexity are concerned," he says.

For this financial year, Suncorp opted for a maximum retention exposure of A$200 million per declared catastrophic event, mitigated further by aggregate policy cover that provided the group with more coverage for claims events costing more than A$10 million. "We have a fairly strong appetite for risk but, like most insurance companies, we purchase reinsurance up to levels we are unlikely to ever need," says Stribling. "Of course, we prefer to see catastrophe-light years, but it is a fact of nature that these events occur and that is the nature of insurance. From a financial perspective, we are certainly not hyperventilating," he says.

While Suncorp appears to have its risks covered, the onus is now on the global reinsurance firms to foot a very expensive bill. In 2010, floods across Australia resulted in approximately A$3.1 billion in insured losses, according to data from Swiss Re. The reinsurer's preliminary estimates on March 2 suggested the total insured loss for the insurance industry for the latest earthquake in New Zealand would be in the range of $6-12 billion, with its own claims at approximately $800 million before tax. Add to that the impact of the Tohoku earthquake that struck Japan on March 11 and it is clear the cost of reinsurance could increase substantially next year, a fact of which Stribling is aware.

"We're not necessarily looking to change our reinsurance parameters as a result of this year's peak level of catastrophes. It is a fact of nature that some years are heavier than others as nature tends to move in cycles. However, each year, we consider a wide range of different treaty structures. While we do not yet know how the recent events will impact the costs of reinsurance, given the number of claims filed this year, it would not be unreasonable to expect some sort of corresponding move in reinsurance rates," says Stribling. "That's a cost that will need to be reflected in the rates we charge to our policyholders because, at the end of the day, premiums need to cover the costs of reinsurance."

While under any other circumstances that might pose a risk to their competitive advantage, Suncorp's automatic flood cover policy appears to set it aside from competitors, particularly in Queensland, where many other companies have left the flood cover business or provide cover against only selective types of floods.
"There have been plenty of stories of people who thought they had flood cover and realised that, for whatever reason, their insurance companies would not pay out. The majority of our personal insurance brands automatically cover against all types of floods - whether they are riverine, flash or storm floods - and we continue to do so, regardless of the geography or likelihood of flood," says Stribling.

In this respect, Suncorp's ability to continue to offer flood coverage is a result of extensive investment made during the past four years into the development of its own proprietary flood mapping, well ahead of ongoing industry debate about the development of such a plan at governmental level.

Accurate flood mapping is an essential component in correctly pricing flood risk, because of the extremely localised nature of this risk. To accurately price a policy, premiums must be calculated at a more detailed level than by postcode or even street. Suncorp's pricing engine has the risk nailed down to the individual property address, allowing the firm to put a price on any type of policy regardless of the geographical location. "Instead of waiting for the government to sponsor this initiative, Suncorp took the decision to step up and obtain its own flood-mapping data," says Stribling. "Since then, we have made a huge investment in understanding the topography of the country, and we have built this knowledge into our pricing engine."

Stribling says Suncorp is one of few insurers prepared to offer new flood insurance in Queensland. "We can do that because our pricing engine is able to price risk down to an address level," he says. Stribling adds that this pricing capability helps Suncorp in its negotiations with reinsurance companies, "because it provides them with the assurance that our policies more accurately reflect risk".

"Of course, if someone chooses to live on a flat piece of land close to a river that is prone to flooding, the premium would be expensive, but the cover is there if he or she wants it and, from our perspective, it is simply a matter of good risk management," he says.

This investment has also been beneficial to the group's banking subsidiary. "Many customers who carry their home mortgage with Suncorp Bank also purchase Suncorp home insurance. The automatic inclusion of flood cover on these policies has directly benefitted the bank in that fewer borrowers are likely to default on their mortgage, because any major flood damage is more likely to be insured," says Stribling.

Suncorp was also able to work closely with its sister insurance company to map data on its mortgage book and develop what it believes is a more accurate ‘flood adjustment' to collective provisions - A$25 million for the core banking book and A$10 million for the non-core banking book.

"We are not aware of any other competitor that can do this as effectively," Stribling says. "I see this as an example of how we constantly search for ways to leverage the power of the group to better manage risk, while always striving to de-risk the organisation through simplification, alignment of systems, and structuring the businesses in a way that creates transparency and clarity."