The insurance industry's profits rose 18 percent to $4,058 million in 2016, recovering from a low point of 2015, KPMG's General Insurance Industry Review shows.
KPMG's report however highlights that this headline performance is not as strong as it first appears. Whilst 2015/16 experienced a substantial number of weather events, there was nothing of the scale and magnitude of the 5 natural catastrophes – such as the 2014/15 Brisbane and Sydney storms –which significantly impacted the previous year's results.
Further, the year saw the bottom line benefit of higher than expected releases from claim provisions due to a low inflationary environment.
The culmination of these events contributed to the industry loss ratio improving to 66 percent from 68.6 percent in 2015.
Scott Guse KPMG Insurance Partner, said: "While the headline result appears quite strong, it must be remembered that this is coming off the back of a horrendous figure last year. There are also some one-off events which contribute to this years figures - once you take them out, the result is probably 'average' at best."
Gross written premiums only increased by 2.5 percent to $40,953 million, reflecting the pressures on the industry, particularly in relation to soft commercial pricing. Price increases were however observed in most personal lines classes although the market continues to be competitive.
Net earned premiums decreased by 6 percent as the industry reinsurance spend increased, predominantly as a result of IAG's quota share arrangement with Berkshire Hathaway. In total, industry reinsurance costs were up 35 percent to $12,800 million.
Insurers have continued their ability to maintain cost discipline. The industry expense ratio decreased marginally in 2016 to 25.7 percent. It remains to be seen whether insurers can continue to find cost savings whilst also investing in innovation and new products to support growth.
Scott Guse said: "This has been another challenging year for Australian insurers, though there are positive trends emerging. In 2015/16, continued focus on cost savings and marginal growth in gross written premiums combined with a lower frequency of natural catastrophes to give the insurance industry a positive uplift in results."
"Moving forward, opportunities for top line growth exist for those insurers that capitalise on innovative products and technologies. Keeping ahead of the curve and meeting the constantly changing needs of customers is now a reality and those not prepared to keep up with the change in pace will likely fall behind."
He added: "Whilst the development of innovative products and solutions for customers will aid top line growth, insurers must continue to focus on their core operations, particularly as it relates to ongoing expense management, with insurers continuing to leverage global lower cost services, automation and rationalisation of processes. The quantum of ongoing savings which can be achieved remains to be seen."
The report revealed that investment income fell slightly, to $1,670 million from $1,758 million in the prior year. The low interest rate environment continued to limit the returns achieved. "Whilst some Insurers are reviewing their investment strategies, to diversify portfolios where possible to maximise returns, we expect the majority will still maintain a very conservative portfolio" he said.
In the report, KPMG identified 10 emerging trends for insurance companies:
1. InsurTech – Insurers are looking for new technologies to improve their customer experiences, deliver innovative products and services and transform their business models. This poses a great opportunity for tech startups and insurers to collaborate.
2. New Payments Platform – With the first market release of the New Payments Platform (NPP) project in late 2017, Australia is about to see a significant change to the payments landscape through the introduction of a ubiquitous real time payments capability. It will provide Insurers with the ability to transact real time 24/7/365.
3. Blockchain – Will enable new business models and potential improvements in core business processes within industry and regulatory regimes despite significant challenges (privacy laws, regulatory approval / requirements, etc.) that need to be overcome before blockchain technologies can be widely used in the insurance sector.
4. Driverless cars – All major automakers have driverless car development programs, and many automakers already have cars on the road with advanced driver assist technology. The challenge now will be shifting liability from human to manufacturer.
5. Telematics – telematics can instantaneously tell an insurer where and how a policyholder drives. Telematics will eventually become the norm for the Australian motor vehicle insurance industry, and the benefits – especially price - will be too hard to ignore.
6. Cyber insurance – A more sophisticated approach is needed. Policy wordings are complex, contain various exclusions, and at present large scale risk transfer to insurers is not happening.
7. Big data – Few Insurers are capitalising on the potential benefits data analytics can provide. Leveraging data will assist insurers in understanding the customer and their risks better.
8. Sustainability – Unprecedented collective action to 'create the world we want' should see insurers step up. The role of the insurance industry is prominently and explicitly articulated in the Sendai Framework for Disaster Risk Reduction (2015 - 2030), the Paris Agreement on Climate Change, establishment of the Global Insurance Development Forum and re-invigoration of the United Nations Principles of Sustainable Insurance.
9. Conduct and culture – Customers continue to feel a sense of mistrust with the general insurers and examples of customer detriment continue to emerge. With increasing focus from ASIC, the media and consumers, it is clear that doing nothing is not an option.
10. New Accounting Standard IFRS 4 – We are getting close. If the IASB (International Accounting Standards Board) has their way, they will release IFRS 4 as an Accounting Standard this Christmas.
Senior Communications Manager, KPMG
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