Cloudy with a chance of severe change, is an apt description of the forecast for the Australian insurance industry today.
 

There are four reasons why there is turbulence ahead, and to better understand, one needs to examine the insurance “weather patterns” over the past 10 years.
 

In 2000, Australians could choose from a number of companies if they wanted to insure their homes and cars. However, as a result of the rationalization and corporate activity in the industry, the consumer’s choice has been drastically reduced.
 

Over the past 10 years, we have seen changes that would make the average punters, let alone the insurance market watcher’s heads spin - NRMA acquired CGU, FAI was bought by HIH, only for HIH to fall over, Royal Sun Alliance morphed into Promina and was then bought by Suncorp, QBE swallowed QBE Mercantile Mutual, CGU bought Fortis and was then gobbled up by NRMA, AMP bought GIO and both were subsequently sold to Suncorp.
 

To clarify the confusion, we have been left with two insurance groups, Suncorp and IAG, which, between them, provide insurance to three out of every four Australian households.
 

This insurance duopoly has not only resulted in expensive insurance for consumers but excellent margins for the insurers, particularly in the area of personal insurance. The lack of competition is best reflected in the stock market prices of these companies and their PE ratios, which are 50% higher than similar companies in markets like the US.
 

While the investment community recognises the lack of competition in Australian insurance, it is the consumer who is paying the premium.
 

But over the past few years, four distinct high-pressure systems have been building in the local insurance market.
 

The first is the “challengers”. This includes brands such as Real Insurance, Budget Direct, Youi and Progressive Direct each of which is well funded with successful and savvy operators from overseas markets. They have all established a local presence and will become, in time, a strong threat to the Majors.

These companies are innovative and in many instances offer better prices. They are selective, supported by excellent underwriting, they are flexible, agile and have attracted teams with a hunger to succeed and a challenger spirit.
 

The second high-pressure system is the “aggregator”. which offer a compelling consumer proposition: They shop for the consumer. As a consumer, you enter your information once and they give you a basket of premiums and product comparisons.
 

In the UK, four of the largest insurance advertisers are Aggregators. The Aggregator high-pressure system has reached Australian shores and is displaying all the characteristics of a potentially disruptive force to the industry, as we know it.
 

The third high-pressure system is the “retailer”. Retailers such as Coles, Woolworths, Myer, Australia Post and others have massive consumer footprints, they are tried and trusted brands, and they have rich databases and the firepower to be serious challengers.
 

On the face of it, there is not much the insurers can do to stop the Retailers. One only need look at the UK where Tesco and the Post Office are now major players in the insurance industry. In South Africa, the Edgars group (similar to Myer) and our holding company, Hollard has a joint client base of over 5 million clients.

The fourth high-pressure system is Pay As You Drive (PAYD) car insurance. Traditional car insurance relies on low mileage drivers subsidising high mileage drivers. If you don’t drive a lot, you pay for the accidents of your high mileage neighbours. PAYD is a difficult innovation for existing insurance companies to follow because of this subsidy system.
 

But it’s not all stormy weather for the Majors- these are strong, trusted brands with large client bases and plenty of cash. There is no way they are giving up without a fight. To this end, they have already launched their own challenger brands, IAG launched The Buzz and Suncorp launched Bingle, to compete with the new challenger brands.
 

The insurance majors refuse to support the Aggregators which means that Aggregators like InfoChoice can only list challenger brand prices. Notwithstanding, the Aggregators are gathering momentum and they offer a great consumer proposition.
 

Australia is in the middle of an exciting contest to secure the heart and minds of the insuring public.
 

I have no doubt that one or more of the challengers will succeed, maybe even wildly, and in the process they will take significant market share from the Majors. The company that can offer the best, most innovative and value-driven products and the one that can genuinely deliver ‘wow’ levels of service will win.
 

While for the majors the insurance weather forecast has turned gloomy, for the consumer the forecast is for lengthy periods of sunshine.