At the start of 2018 I was honoured to become Group Chief Executive Officer and to commence an accelerated reshaping of the company’s strategic focus to create a stronger and simpler QBE. My appointment came at a challenging time with the Group recording an underwriting loss in 2017 due largely to the unprecedented severity of weather-related catastrophes, coupled with a material decline in the performance of our Asia Pacific and Latin American Operations.
Over the last four months I have worked with my Group Executive Committee colleagues to put together a program of work that I am confident will simplify the Group, improve performance and reduce volatility. While the program certainly draws on elements that were successful in the turnaround of Australian & New Zealand Operations, it has been designed for the needs of QBE overall.
The key elements of the program are as follows:
While QBE has a number of strongly performing businesses in major insurance markets, our portfolio remains diverse both in terms of geography and product mix. There is scope to simplify the business to ensure we operate only in markets and products where we have a competitive advantage and can deliver profitable growth. Following a strategic review of our footprint in Latin America, we have decided to exit the region in order to focus on our core markets and to improve the quality and consistency of our results.
The basics of insurance – underwriting, pricing and claims – need to be performed at a consistently high standard in every market in which we operate and across every product we underwrite. We do have areas of expertise and strength in parts of our business and our objective is to consistently deliver excellence in these core areas across the Group. I am confident that with a relentless commitment to getting the basics right, improvements in the quality and predictability of our earnings will naturally follow.
Drive performance improvement
The same rigorous approach we employed in Australian & New Zealand Operations to assess the quality of all parts of that business will be implemented across the Group. This will involve regular reviews of discrete business “cells” to identify strengths and weaknesses, develop strategies and specific plans for performance improvement and make decisions about the overall structure of our portfolio.
Cost and efficiency
We have delivered significant cost reductions in recent years, but there is more to be done. The simplification of our portfolio will facilitate some cost reduction as will the ability to leverage savings from the investment in better tools and systems for our staff.
Further reposition North American Operations
To deliver on QBE’s potential we need North American Operations to perform at a similar level to European Operations and Australian & New Zealand Operations, both of which delivered 2017 results consistent with their market-leading positions. In recent months we have conducted a detailed review of the North American business, including an assessment of its capabilities across the Brilliant Basics areas of pricing, underwriting and claims, along with a review of its strategic focus to identify the market segments in which we have the capabilities to grow profitably. We see significant opportunities to further transform and refocus the business to improve underwriting results.
Improving the performance of Asia Pacific Operations is a high priority for 2018. QBE has had a presence in some Asian markets for more than 100 years and the region is important to us. While the division reported an unsatisfactory combined ratio of 115.3% in 2017, approximately half of the underwriting loss relates to issues in the Hong Kong workers’ compensation business. Improved pricing and risk selection in a number of key portfolios will now be a focus as we work towards a more acceptable performance.
Sound progress has been made in institutionalising a customer-centric approach in recent years; however, there is scope to leverage existing strengths to form closer client relationships. Better co-operation across QBE will be key to our success, building upon existing industry vertical and practice group structures to develop better systems for identifying new customers and to identify opportunities for providing clients with better outcomes.
Developments in technology and data science will have enormous ramifications for the insurance industry in the coming years and at QBE we know we need to innovate faster than ever before. In 2017 we made significant progress in building our internal data science capability and forming our first two partnerships with technology start-ups that have developed solutions directly relevant to our business, both involving the application of artificial intelligence. We have only just started this journey and QBE’s commitment to innovation will increase in 2018 and beyond.
Our technology roadmap will be aligned to support the Brilliant Basics initiative with a focus on enhancing our systems to support the use of complex pricing models, improve risk selection and increase the use of data throughout our underwriting processes. In addition to Brilliant Basics enablement, we will be increasing the use of digital solutions and automation to deliver efficiencies, along with improvements in platform stability and upgrades to our cyber security capability.
Talent and culture
We are embedding a culture that mirrors and supports our objectives for QBE. To drive the right behaviours across the Group, a new set of values will be introduced that place greater emphasis on diversity and being customer-led, technically excellent, collaborative, accountable, energetic and decisive.
In closing, I am confident that the program of work we have established to meaningfully transform our business has sound foundations and I look forward to reporting to you on our progress as we set out to deliver better outcomes for our stakeholders.
Group Chief Executive Officer
Outlook for 2018
Following an extended period of declining premium rates, particularly in European Operations and to a lesser degree North American Operations, we welcome the modest improvement in premium pricing now occurring as a result of the recent catastrophe activity.
Although we expect the market to remain competitive, we are observing low to mid‑single digit premium rate increases across our European Operations and anticipate low single digit premium rate increases in our North American Operations. Pricing is expected to remain firm in Australian & New Zealand Operations, albeit increasingly targeted towards poorer performing classes of business, particularly commercial property. We expect market conditions to remain challenging in Asia, particularly in Hong Kong and Singapore; however, we will sacrifice top-line to drive appropriate premium rate increases across our Asia Pacific portfolio.
The Group is targeting a combined operating ratio range of 95.0–97.5%. This assumes more normal catastrophe experience (within the tolerances allowed for by the Group’s aggregate reinsurance protection) coupled with a targeted improvement in the attritional claims ratio reflecting premium rate increases, global implementation of the cell performance review discipline and specific remediation initiatives, particularly in Asia Pacific and North American Operations.
Although we are targeting additional operational cost efficiencies, the Group’s underwriting expense ratio is expected to remain broadly stable in 2018 due to a likely further reduction in fee income and planned investment in growth and other strategic initiatives.
We are targeting a net investment return of around 2.5–3.0% reflecting an expectation that our fixed income portfolio will deliver slightly above its current running yield of around 2% and growth assets will generate overall returns of around 7%.
Combined operating ratio:
- Assumes risk-free rates as at 31 December 2017.
- Includes the results of operations in Latin America which will be presented as discontinued operations in the 2018 statement of comprehensive income.