Natural disasters decimate insurance sector profits: KPMG survey

Natural disasters decimate insurance sector profits

Five natural disasters cost the insurance industry $3.6bn in the year to 30 June 2015, a sum almost equal to the entire annual profit of Australian general insurers, KPMG research has shown.

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KPMG’s General Insurance Industry Review showed that the natural catastrophes, combined with continued competitive pressures on premium rates, resulted in the overall profit of Australian general insurers falling by 23.6 percent to just $3,735 million, compared with the previous 12 month’s 5-year high of $4,982m. The industry’s insurance margin also fell sharply to 13.6 percent from 18.2 percent.

As a result of the catastrophes, which included Cyclone Marcia, heavy storms in NSW and South East Queensland, hailstorms in Sydney and Brisbane, and bushfires in South Australia, the industry loss ratio increased to 67.2 percent from the 5-year low of 61.6 percent in 2014.

Gross written premiums remained flat at $32,478 million, reflecting the strong competition faced by insurers throughout the year. Net written premiums edged up by 2.2 percent as insurers continued to reap the benefits of lower reinsurance costs, the result of increased capacity in global reinsurance markets.

However, these pressures were offset to some extent by improving investment returns. The past 12 months saw insurers revisit their investment strategies and venture into alternative assets as they continued to operate in a low interest rate environment in Australia and globally.

Insurers also demonstrated their ability to maintain cost discipline. The industry expense ratio stayed at 26.3 percent in 2015. This is despite limited premium growth and a highly competitive market in which insurers are continuing to fight to maintain market share.

Scott Guse, KPMG Insurance Partner, said: “This has been a very challenging year for Australian  insurers. Natural disasters hammered the industry, while continued competitive pressures on premium rates resulted in negligible growth in gross written premiums.”

“There are at least some positive findings, however. Investment returns improved, while on costs, the industry expense ratio remained steady at 26.3 percent in 2015. Additionally, a number of insurers who in recent years invested in transformation and cost optimisation projects are now beginning to see the benefits of implementing new systems and streamlining processes.”

He added: “We do not see competitive pressures diminishing in 2016, so insurers will have to ensure underwriting discipline is maintained in order to protect future earnings and avoid acquiring poor quality portfolios, simply to achieve short-term, top-line growth. The industry continues to see strong growth in challenger brands, non-traditional market entrants and low-cost online insurers. These challenger brands persist in taking market share from the incumbents, and they continue to outpace industry growth, albeit off a smaller base.”

The report revealed that investment income allocated to insurance funds improved by 20.4 percent to $1,969 million from $1,634 million in the prior year, despite market volatility in late 2015. The overall increase reflects the willingness of insurers to re-enter the growth and alternative asset markets to support their operations. However, insurers still maintained investment portfolios dominated by government and corporate bonds, even in a low interest rate environment, demonstrating their restraint in chasing returns versus ensuring asset quality.

Risks and opportunities

In the report, KPMG identified 10 risks and opportunities for insurance companies:

  • Increasing competition – the insurance industry has experienced more than its fair share, led by challenger brands, aggregator websites and white label products.
  • Fintech – insurers are especially vulnerable to disruption as they have fewer touch points with their customers than other industries and are hence more price sensitive. Insurers have been slow to embrace financial technology (fintech).
  • Other technological advances – such as driverless cars will impact the industry.
  • Telematics – used by global insurers, telematics can instantly tell where and how a policyholder drives. This could transform insurers’ existing claims management functions.
  • Social media – insurers have been slow to embrace this for customer engagement and to respond to reputation-damaging issues.
  • Big data – few insurers are currently realising the potential of big data. One obvious example is integrating social media data with claims data to identify fraudulent claims.
  • Machine learning – insurers are not viewed as early adopters of machine learning, the use of algorithms that use historical data to predict current or future outcomes.
  • Cyber insurance – huge opportunities exist here due to soaring cyber-attacks but only a small number of Australian insurers currently offer protection.
  • Conduct risk – regulators including ASIC have moved on from post-GFC focus on solvency standards and are now monitoring risks of customer detriment due to poor culture in financial institutions. 
  • Dealing with global factors – the interconnectedness of the global economy means Australian insurers are  affected by external issues such as an increase in US interest rates or Chinese debt problems.

Further information

Ian Welch

Senior Communications Manager, KPMG Australia

Mobile: +61 400 818 891

iwelch@kpmg.com.au

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