Don BoredWalk checks his insurance policies.

At least one insurer understands that issues management is as
much about seeing issues before they erupt rather than fighting a
rearguard action ala James Hardie.

So it was nice of the
chaps up at the AMP to cut $40 million in fees from some of the
retirement products its currently managing for some 800,00 customers.

Why
they did it now is a little hard to understand, but perhaps the release
of a nice interim profit, the first for sometime, probably triggered an
attack on conscience, didn’t it?

Well, perhaps. But having
been through some tough times in the past year or so with criticism
about a lack of performance, a plunging share price, the divorce from
the British operations, and of course all those loverly retention
bonuses(around $35 million) for key employees, sorry senior executives
like CEO Andrew Mohl, the AMP probably though it was only right that
the long suffering investors be helped in some way.

But
it’s not coming from the AMP’s own bank account.No cost
savings(whatever they are) and ‘screwing’ other fund managers in the
various platform products and lowering their management fees.(http://www.ampgroup.com/2column/0,2445,CH4796%5FSI3,00.html)

And
of course the limited version of super choice arriving next year had
nothing to do with it, did it?But that’s where the issues management
comes in. Fees on investment products is already a hot issue. So far
more noise and not much sense despite the attempts of the Federal
Government, the industry, ASIC and any number of commentators.

But
the AMP’s action in announcing ‘good news’ for customers after its good
interim result is probably clever given the rising tide of unease about
insurers earnings and fees on investment products.

The AMP is not a general insurer as such these days. Its a fund manager.

But
looking at the way QBE’s earnings exploded in the first half, reported
today, and the way the industry leader, IAG, is expected to reveal well
over $700 million in net earnings tomorrow, there’s an issue there
that’s slowly filtering through to a customer base still upset at
paying more for all classes of insurance since the collapse of HIH in
early 2001, and the World Trade bombings and their impact on world
insurance markets.

Rates for all classes have risen sharply
to restore capacity and get rid of the silly price cutting and defence
of market share. In many cases the premiums have risen to where they
should be for a health and viable insurance industry.

Profit
has become the mantra but the pendulum has swung too far in favour of
shareholders as QBE and the IAG earnings tomorrow will show.

As
Chanticleer remarked in the Australian Financial Review on Tuesday
consumers who are not shareholders are becoming angy.”What’s good for
shareholders is not always good for the company in the long term” he
remarked in a commentary headed ” Insurers must brace for a fight.”

And
when the QBE interim is looked at you find a company that is in peak
financial condition in both its balance sheet and in its insurance
operations.Shareholders and not only benefitting from a higher share
price ( above $12.50).

No dangers or hidden disasters. Not even Hurricane Charley last weekend.

The
most important measure for an insurer is the combined ratio, the
percentage of claims and costs and dividends of premium income.

The
Australian general insurance operation saw its combined operating ratio
slide to 90.4% from 96.2% as gross earned premium rose 10 per cent to
$899 million.

The combined operating ratio is used by
insurance companies to relate premium income to claims, administration
and dividend expenses. A ratio of 90.4% per cent like QBE Australia
means the company has achieved a 9.6% per cent underwriting profit.

Similar
improvements were reported from Asia, Euorpe and Lloyds businesses,
while investment income fell to $120 million from $189 million

QBE
reported an insurance profit before tax for the six months rose 58 per
cent to $409 million, which is very nice considering the impact of
currencies like the US and Australian dollars and sterling on the
company’s businesses and income flows.

A more begnign
currency environment like 2003 would have seen a significant
imporvement on that 58% jump in pre tax insurance earnings as 75% of
premium income originates overseas.

QBE’s insurance profit
was 13.1% of net earned premium, up from just over 8%, a sure sign of
the dramatic improvement in the financial strength of the company.(http://www.qbe.com/Version_2/html/group/QBE_group_entry.html)

With
IAG’s earnings estimated to exceed $740 million and be the largest of
any Australian general insurer, the industry, led by IAG CEO, Michael
Hawker, has to start looking at consumers, who are voters.

The
ALP has already started sniffing round the issue and if the industry
doesn’t start following the AMP’s lead(and admittedly its in a
different sector these days), it could find itself subjected to more
regulations.

The insurance industry only had to look at the
way James Hardie has completely mishandled its asbestos liabilities to
understand that if it doesn’t tread lightlywith customers over the next
year or so, the strong profits and high share prices will become a
liability and not what they really are, an indicator of the industry’s
strong health.

There’s a supicion amongst some in
government and in legal circles that the industry oversold the poor
mouth and ‘we’ll all be rooned’ story in the wake of HIH and September
11.

Now might be the time to start cutting premiums.

Bell Potter