Barwon Insurance Case Study

Barwon Insurance Ltd

Results Analysis and Market Comparison

October 2008

EXECUTIVE SUMMARY

Barwon achieved substantial premium growth and an underwriting profit of $5,247m. Investment income of $7.240m was on par with the industry. However, a review of the Barwon 2008 results indicates that the portfolio requires immediate attention in order for Barwon to continue to operate and in order that the U/W profit achieved, is at least, on par with the industry.

This statement may appear overly dramatic however with shareholder funds of $12,097,600 and a minimum capital requirement of $12,105,500, Barwon needs to address how to meet the APRA capital requirement immediately. Aside from the capital issue the underwriting profit of Barwon needs to be improved as the 5% return on earned premium is well short of the industry average.

The following is a summary of areas that should be reviewed in order to address the concerns mentioned.

Recommendations for improvement in portfolio

1. Review the minimum premium

2. Reduce commission levels

3. Increase advertising costs

4. Review IBNR and IBNER calculations

5. Review the purchase of proportional reinsurance

6. Sell down the property portfolio and invest in Tier 1 capital investments.

These recommendations have been discussed more fully within the report.

1. INRODUCTION

Prior to 30 June 2008 Barwon operated in a non competitive market comprising 4 Insurer's with 25% market share each. This non competitive market was opened up to competition in 2008. Over the past 12 months Barwon has been implementing a variety of strategies to increase market share and profitability to the group this report aims to highlight the effectiveness of the strategies, where possible compare the strategies to our competitors and recommend any corrective action necessary to improve results.

The Motor Vehicle Market

Barwon has three major competitors in the market, these companies are, Burwood Mutual, Geelong Group and Yarra Insurance all have adopted a different strategy to underwriting motor vehicle insurance. The table below shows a comparison the respective gross written premium (GWP) and policy count between 2007 and 2008.

$,000's

Premium 2007 Premium 2008 % change Policy Count 2008 Policy Count 2007 % change

Barwon 97,500 126,750 30% 75,000 97,500 30%

Burwood 97,500 118,000 21% 75,000 73,750 -2%

Geelong 97,500 129,375 33% 75,000 112,500 50%

Yarra 97,500 137,250 41% 75,000 76,250 2%

All Insurers

390,000

511,375

31%

300,000

360,000

20%

On first blush the numbers indicate that Barwon has done well in comparison to the market, both premium and policy count has increased by 30%. The proportion of policy holders has increased in excess of the market growth with only Geelong Group out striping Barwon's growth.

By reviewing the 2007 strategy we can get a better understanding of how the 2008 growth was achieved and also better understand why future recommendations regarding 2009 growth need to be implemented. The strategies will be looked at under the 4 basic components, premium, commissions credits terms and advertising expense. A summary of how the market responded in these areas is below followed by an interpretation of the strategy on actual results.

a. Premium rates;- The 2007 average premium was $1,500 per policy Barwon reduced this by 13.3% to $1,300. Geelong group was more competitive and reduced premiums by 23.3% to $1,150. Burwood and Yarra increased premiums from 2007 averages. It is believed that this is the major reason for the positive growth in 2008 policy counts. This strategy also produced Barwon with the third largest premium pool relative to the market.

b. Commission rates;- The average market commission paid to brokers in 2007 was 10% as part of the competitive strategy this rate was increased by 150% to 25%. This was a much higher increase than any of our competitors. As for our competitors it is understood that Burwood left commission stable at the 2007 rate of 10%, Geelong reduce the commission paid to brokers by 50% to 5% and Yarra also maintain the 2007 rate of 10%.

c. Credit terms:- To compensate for the reduced premiums and higher commissions the credit terms available to Barwon brokers was reduced from 90 days to 45 days. Again, the market applied different terms in the spirit of competition. Burwood reduced credit terms slightly, Geelong maintained terms at 90 days and Yarra provided better terms and extended them to 110 days

d. Advertising;- Information recovered from the market indicates that Barwon had the smallest advertising budget of the market competitors. Barwon spent $850,000 on advertising. This equated to 18% of the market advertising spend of $4.875M. Burwood, Geelong and Yarra spent $1.1M, $1.3m and $1.6M respectively.

Market Share

Even though the business is transacted through brokers and agents it seems the end policyholder has a large say where there business was placed. Lower premiums coupled with consumer market awareness from advertising appear to outweigh the coercion brokers might apply in order that the brokers receive a higher commission on a transaction. This trend can be seen in the comparison of market results, especially when looking at the results of Yarra and Burwood in isolation, both companies raised premiums from the previous year and advertised heavily.

Barwon faired well in terms of gaining market share by policy count and premium but the Geelong Group strategy produced the highest market share and was the most effect strategy by policy count. Their strategy produced for Geelong a 33% increase in the share of GWP and 55% increase in the number of policy