Tower profit turnaround from targeting low-risk Auckland

Wednesday, 20 November 2019

Tower increased policyholder numbers in less earthquake-prone places like Auckland and Taranaki, and shed customers in higher-risk areas.

House, contents and car insurer Tower has reported a 9.1 per cent rise in premiums collected from customers.

The insurer told investors on the NZX sharemarket that contributed to an after-tax profit of $16.8 million in the 12 months to the end of September, which was a huge turnaround from a loss of $6.3m the previous year.

'18 months ago we led the way with risk-based pricing and removing cross-subsidisation between low and high-risk customers, said Richard Harding chief executive of Tower Limited.

Chief executive Richard Harding said the rise in premiums collected was partly a result of the move to risk-based pricing for house insurance, which saw some Tower customers with earthquake-prone homes given the choice of paying higher premiums or finding a new insurer, while policyholders with less at-risk homes paid lower premiums.

The shift saw the Tower increase policyholder numbers in less earthquake-prone places like Auckland and Taranaki, and shed customers in higher-risk areas.

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It also resulted in a drop in the number of 'extreme risk' policies it had in places like Wellington.

'Our claims costs excluding large events has decreased to 48.4 per cent, a 3.9 percent reduction from 52.3 per cent in 2018 which demonstrates the strength of our underwriting,' Harding said.

'18 months ago we led the way with risk-based pricing and removing cross-subsidisation between low and high-risk customers,' he said.

'Risk based pricing has resulted in the growth of our portfolio in Auckland while also reducing our exposure to high-risk areas by 16 per cent. Our fairer approach to pricing has also allowed us to grow our exposure by 4 per cent in the larger, low risk areas like Auckland, Hamilton and Taranaki.'

'The growth we have achieved is the result of offering customers simpler insurance at a fair price. Through this approach we are starting to realise the potential that exists in the Tower brand,' Harding said.

Tower presented this slide to investors showing house insurance claims falling, partly as a result of introducing 'simpler', 'improved' products.

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Tower had also been winning a lot of new business.

'We have added over 17,000 risks to our core New Zealand portfolio over the past year. This level of growth is expected to increase now that we have completed the delivery of our new IT platform,' he said.

Harding believed the risk-based pricing had been attracting customers with homes at low-risk of being damaged in earthquakes, as well as the insurer having simplified its policies to make them easier for customers to understand.

It had also reduced the number of claims made.

'This relentless focus on underwriting excellence has helped us shift our portfolio to a more balanced mix and improve claim frequency,' Harding said.

'This is particularly noticeable in our NZ house product with sustained improvements in claims frequency over the past four years, a result of clear products and benefits for customers,' he said.

Tower was closing many older policies by 'migrating' existing customers onto new policies.

It appeared customers on at least one of those newer products were able to make claims in fewer situations.

'Our new, simpler products have contributed to a reduction in NZ Contents claim frequency,' Harding said.

'While our result is pleasing and we have delivered significant improvements, we remain focussed on refining our products and pricing approach to ensure we continue addressing claims costs,' he said.

'Moving around 350,000 customers to a core set of 12 products will deliver significant benefits to our customers and efficiencies in our business,' said Harding.

Digital sales were rising fast, and now made up more than half of new sales.

'Our efforts to become a digital insurer continue to pay dividends, with 51 per cent of new business coming through our digital channels in September 2019, which increased to 53 per cent in October. This compares to less than 10 per cent during 2016.'

Harding was optimistic about the coming year, which would see Tower take over the insurance business of South African insurer Youi, which exited the market after struggling to recover from a sales scandal in which some customers had policies issued to them even when they had never agreed to having them.

But it could also see a massive lawsuit begin against EQC, the government-run earthquake insurance scheme.

Tower said it was owed $69.9m by EQC, and it was confident the money would be paid.

'Tower is currently engaged with EQC in an alternative dispute resolution process in regards to Building recovery, however, it is more likely that the dispute will proceed to litigation, which may cause the timing of the recovery to be delayed and may not result in full recovery,' it told investors.