Delivered to CEDA in April 2001
There are a number of important things that need to be said about the insurance business.
And there are a number of equally important things to be said about the company I have chaired through the vital period of its transformation, indeed its metamorphosis, into a listed company.
Insurance is one of those critical pursuits that perform a very useful purpose in our society. At base, insurance is about people – their lives, their livelihoods, their businesses, their security, their stability. Insurance companies do things that matter. And I like that.
The NRMA Insurance Group, as Australia 's largest general insurer, is at the forefront of all this. I feel a sense of pride in having been part of the team that took the company to this leadership position in such a short time.
We've been through a massive and successful demutualisation. Then through the critical phase of making the insurance company and the motoring association independent of each other. Then listing the insurance company. Not to mention paying our first dividend.
When, on Sunday, I announced I was stepping down as Chairman of the insurance company, I was triggering the next phase of this continuing process of corporate transition.
First the evolution of one organisation into two separate entities. Then the progression of common leadership into separate leadership.
The NRMA Insurance Group Ltd (NIGL is its rather twee acronym) and the NRMA (the Association) are now, for all intents and purposes, distinct organisations, with their own objectives, direction and strategies. Both are doing well. It is in their best interests that they pursue their own goals.
There can now be a new Chairman of NIGL, of which I will remain a director for the time being.
But it is in my other and continuing role as the President of the NRMA that I will focusing my primary attention.
But I don't want to dwell on myself today – you can read all that in the newspapers. I really want to embrace a number of important topics in this one short speech.
My canvass will be relatively wide – encompassing the salient elements of the NRMA story, a brief history of insurance, the issue of corporate governance and, finally, some comments on industry trends.
The NRMA was established 81 years ago, in 1920.
Three years later the Association had the excellent idea of putting three men on three motorcycles to deliver what was picturesquely termed “mechanical first aid” to stranded motorists. These conveyances darted hither and thither through the Sydney suburbs establishing an immediate public acceptance and an acclaim that extends to this day.
A couple of years later, in 1926, the NRMA introduced car insurance. Soon after, it became a separate mutual company.
We've been in the business a long time.
The NRMA Group expanded into home insurance in 1970 and later into travel and life insurance and financial planning.
By then, the Group comprised two interlocking mutual companies – each owned by its members – and it was proving to be an outstanding success in these endeavours.
The aspiration was to provide accessible, reliable insurance and to be a terrific motoring organisation, with road service at its core.
The NRMA's advocacy of issues affecting motorists became celebrated and the organisation became an icon in its home state of NSW and, indeed throughout Australia .
It developed a special relationship with its motoring customers, most of whom were also its members. There was a sense of customer ownership and involvement such as few companies experience.
This had manifest and massive benefits. But it also had some drawbacks. For example, like in many community-based groups, conflict sometimes surfaced. It could get robust. The Hatfields and McCoys, Australian style - without shotguns.
But the organisation continued to grow. To a point where the dual mutual structure was becoming an encumbrance. An attempt to demutualise failed, amidst acrimony, in the mid-1990s. The service tradition of road service seemed not to square off with the corporate aspiration of insurance. But the dissonance between the two sides did not go away, and the idea that the members should be able to realise the Group's value in a more tangible form had been liberated.
Eventually, a group of people, including myself, grew to believe that the motoring part of the organisation could and should remain a mutual while the commercial insurance part should transition into a listed public company.
So this is what we worked towards and, with the support of our members, we achieved.
So, last August the eighth, the NRMA Insurance Group listed on the Australian Stock Exchange.
As I mentioned earlier, in the 8 months since, NIGL has moved through one of the most profound transitions experienced by any organisation in Australia .
Upon listing, it instantly became a Top 30 company by market capitalisation.
It has the largest market share in Australian general insurance. It is the leader in property and casualty. It has 6.8 million policies in force. It is accelerating its national operations and has expanded into New Zealand and (more modestly) into Thailand and China .
It is owned by 1.7 million Australians – including hundreds of thousands of people who had never previously owned shares. 80% of our shareholders are ordinary Australians who were (and usually still are) members of the National Roads and Motorists Association itself.
It is an Australian success story.
The NRMA itself remains an icon.
It may not be so important to the corporate world, but it has been – and will continue to be - an essential part of many people's lives.
Only last week, the NRMA reverted to its historic name – the National Roads and Motorists' Association Limited, which invokes the essence of what it is all about – being an association, being a mutual, working for its two million members.
It is Australia 's largest mutual, and Australia 's leading motoring organisation. It is also a major institutional shareholder in NIGL.
We have recently completed a 10-year vision document.
And within a few months, we will complete a three-year plan that fits within this vision.
I much look forward to working with Chief Executive Rob Carter and his team in ensuring the NRMA fulfils its goal of being the world's best motoring organisation.
I said earlier that the insurance business useful and important. It is also interesting.
The central principle of insurance goes back thousands of years. And this is the principle of building reserves for the future and laying off one risk against another.
It goes back to the Biblical story of Joseph storing grain during the seven good years in anticipation of the seven years of famine that followed.
The ancient Babylonians' laws included an early model of credit insurance. The Romans had burial societies, which provided age pensions, disability insurance and burial expenses for wage earners, the military and, yes, slaves.
In the Middle Ages, the guilds had a system for insuring property against fire and theft.
By the 14 th century, the industry had well and truly evolved – and, with it, a somewhat mixed reputation.
In 1380, a hardened Tuscan merchant wrote of this emergent industry –
“For when they insure it is sweet to them to take the monies. But when disaster comes, it is otherwise, and each man draws his rump back and strives not to pay.”
Those of you who have had dealings with NIGL know that not only do we promptly pay up on our obligations but we do so with good cheer.
People buy their insurance to be helped when they need help – and that's precisely when the help must be provided.
I have enjoyed working in a business which is of profound importance both to commerce and to ordinary Australians.
(I hasten to add that I have enjoyed, been pleased to be involved – whatever the term - despite the occasional contretemps with my friends in the media some of which are quite contra and make me feel just a little temps, because it matters.)
Those of us in business, as my friends in CEDA know only too well, live and work in volatile times.
The annual report of the Insurance Council shows that there are about 160 general insurers in Australia paying more than $30 million in claims every working day.
That's a very competitive, high energy, high cash flow scenario. The stakes are high, the penalties for failure are high.
I think, as leaders in our respective fields, we accept that we live in demanding times where success is demanded over relatively short cycles.
It would be remiss of me not to reflect on the shock waves generated by HIH Insurance calling upon the liquidator. It is high corporate drama – but it also impacts upon the lives of ordinary people who do not deserve such outcomes and who are left uncertain, in doubt and sometimes in jeopardy.
We in insurance, or any other business, who forget that ultimately we exist as part of a richly inter-woven social fabric - not merely to practice commerce for its own sake – will make terrible errors of judgement and cause immense personal tragedy.
I am also mindful that, last week, more than 1000 HIH employees lost their jobs. I feel for those people as I feel for the customers and shareholders.
No – we in business have a great responsibility that goes beyond corporate and media politics, that goes beyond game playing. Unfortunately, it is events such as the HIH collapse that puts the true issues in perspective.
I was pleased that the NRMA Insurance Group was able to take on the existing policies of the HIH workers' compensation portfolio. There will be work for some 560 former HIH employees in this area.
Let me now turn to the not unrelated matter of corporate governance. Corporate governance, simply defined, is the system by which companies are directed and controlled. If management is about running businesses, then governance is about seeing that they run properly. All companies need governing as well as managing.
The President of the World Bank, Australia 's Jim Wolfensohn, has predicted that – “The proper governance of companies will become as crucial to the world economy as the proper governing of countries”.
It is quite wrong to view corporate governance as part of a cumbersome bureaucratic process - it is more like a guardian angel. Good corporate governance ensures that business practice cuts the mustard and lives up to the expectations of society.
Good corporate governance needs an effective body of people – and in particular the non-executive Board - who commit themselves to responsible governance - separate and independent of management. And that Board's leadership must be accountable and deliver results. It must be honest and diligent, responsible and representative, and conscious of its obligations.
Good governance must recognise and protect the rights of members and stakeholders – whether internal or external.
The governance and management must also act according to the mandate granted to the organisation by its founders and by society, taking seriously a wider responsibility to enhance sustainable prosperity.
And finally, there must be an environment so that employees can contribute fully in conducting the business, improving the business and solving its problems.
A combination of good corporate governance, good business practice and transparency will allow NIGL to enjoy the confidence of our shareholders and our other stakeholders. We are conscious that 80% of our shareholders are ordinary Australians who were members of one or both of the old NRMA mutuals and that one of our major institutional shareholders is the National Roads and Motorists' Association itself.
So, like most entities, NIGL has a committee structure which is designed to supplement Board activity and to supervise management performance.
And I firmly believe that Board members have the responsibility to oversee management, to ensure the best-possible performance and decision-making processes. The shareholders expect nothing less.
At NIGL, we have put in place:
- A Board Committee, to review and make recommendations on the appropriate structure and composition of the various subsidiary boards and committees, and help ensure appropriate supervision of our subsidiaries and our geographically-dispersed operations.
- An Audit Committee to ensure, among other things, that our reporting is correct.
- A Compliance Committee, which ensures, among other things, that we abide by disclosure laws relating to the reporting of price sensitive information.
- And a Remuneration Committee, that reviews management remuneration and succession.
An innovation that the NIGL Board feels is particularly important is what we call Working Groups - which cover the four “business streams” - short tail business, long tail business, financial services, investments - and also the function, sales and marketing.
Two non-executive directors are assigned to each working group, and as chairman I've had a roving brief - and could participate in each working group's deliberations.
The working groups are an essential part of the Board's monitoring of our complex operations.
Having two non-executive directors assigned to each of these working groups - where they periodically meet with key management of each business stream - ensures that there are at least two non-executive directors who are full bottle on major initiatives and strategies for each business stream. Where appropriate, they can mentor key executives.
I emphasise this structure does not “manage” the company - the management does that - but it does help ensure that NIGL's operations are properly supervised by its board.
So, as we see it, corporate governance must be fundamentally concerned with balancing economic and social dynamics and, as far as possible, aligning the interests of individuals, corporations and society – and we do this at NIGL through a variety of means.
While simply stated, this is a complex and difficult goal and we are all going to fall short in reaching it often. But it is there to aspire to.
CURRENT INDUSTRY TRENDS
Research by the Insurance Council of Australia shows that as many as one third of Australian households have no insurance at all. That is two million households. And of the two-thirds which have insurance, nearly half are seriously underinsured.
One in five small businesses have no insurance to protect their assets and liabilities. Four in five have no insurance for loss of profits in the event of fire or some other property destruction.
The effects of under-insurance in the community are significant and real. They are felt when governments pay huge sums in relief in times of natural disaster, the economic impacts as businesses fail with no safety net and the loss of tax revenue as these businesses fail.
Clearly, one of the challenges facing the industry is to underpin the integrity of the commercial fabric by ensuring that risk is effectively planned for and managed.
The insurance marketplace is diversifying – not with universal happiness, I regret to say. The areas of diversity – globally and in Australia – which will require innovative product response include an aging population, increased inequality in household income, social fragmentation and the rise of small businesses and self-employment.
Not only will products need diversification, so too will distribution channels in order to capture a wider range of customers.
At NIGL we will invest around $100 million on e-commerce initiatives over the next few years. Initially we will concentrate on business-to-business opportunities. But by 2004, we aim to handle 15 - 20% of all policyholder transactions on-line.
NIGL's NATIONAL VISION
I want to conclude these remarks by reflecting briefly on the NRMA Insurance Group's vision. While we have forayed offshore, our business strategy sees us positioned as a dynamic player in the national insurance and financial services market.
We are proud to be a truly national enterprise. The days when 90 percent of our premium income came from NSW using the NRMA brand are well and truly over. That is now closer to 50 percent.
We are in South Australia with SGIC, in Western Australia with SGIO and in Victoria with the RACV. One of the key and growing parts of our business – NRMA Health Insurance launched nationally just over a year ago – operates out of South Australia . This fund now covers 170,000 people throughout Australia .
On top of marketing our own NRMA insurance products we also manufacture, or customise, products for other organisations such as motoring associations, financial institutions and vehicle manufacturers. For example the Royal Automobile Club of Victoria brands and distributes products manufactured by our 70% owned subsidiary Insurance Manufacturers of Australia Pty Ltd.
We are developing a strategy to enable us to leverage off the two million policy holders (with 6.8 million policies) who hold general insurance with us and are satisfied customers.
There are great growth opportunities in financial services, possibly delivered by acquisition or alliance. Our expansion in this area will decrease our risk profile and broaden the opportunities available to the company.
Greater participation in the relatively stable sector of financial services will balance our more volatile insurance business. This is something that the market wants and that we want.
We plan that by June this year 20% of our existing insurance customers will have added a building society, superannuation or risk product to their NIGL general insurance products.
NIGL has four main priorities for the medium term future:
- To grow geographically and optimise the distribution of our own insurance products.
- To diversify the business so it encompasses a range of compatible and successful financial services products.
- To customise, or manufacture, insurance products for other non-insurance entities to distribute – under their own brands if they wish.
- And to pursue efficiencies which are consistent with our goals of providing trusted service to our customers and being a good employer.
We have announced our first dividend.
We have also just announced that, this month, NIGL will embark on an offmarket share buy-back. This is one of a number of capital management initiatives which will help create a more efficient balance sheet with the aim of improving the return on equity and earnings per share in the future, and returning some of the company's surplus capital to shareholders.
NIGL is offering to buy-back up to 10 percent of the capital on issue at demutualisation and all shareholders are being given an equal opportunity to participate at the same price.
These are the same shareholders – the Mums and Dads – who received an average of $2,000 in shares upon demutualisation. Hundreds of thousands of first-time shareholders.
These are all achievements to be proud of. They're the results of hard work by Board members and employees alike. We wanted to ensure that the strategic focus of the company was our top priority and that long-term shareholder value remained our paramount goal.
As I said at the beginning of this speech, it is now time for the caravan to move on.
While NIGL and the NRMA have many strategic interests in common, ultimately they are separate organisations with goals and quite discrete interests.
It has been my view that they should be chaired by different people; this will now happen. As I mentioned, I am standing down as NIGL chairman to concentrate more of my efforts on the presidency of the NRMA.
NIGL will move on under its new leadership.
And the Association will move on. There will be other refinements to enable both organisations to better pursue their distinct corporate interests.
For example, ultimately, neither will have common directors. The NIGL Board has pursued an energetic growth strategy since it was listed last August and this will obviously continue under the new chairman. The Association will remain as an icon amongst mutuals. Two companies. One history.
Turbulence and achievement. It really is quite a story.
Thanks for being with me today.