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GI Barometer: confirming the upturn

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Doubts about a sustained upturn in the commercial insurance market can be largely cast aside based on the picture painted in this year’s JP Morgan Taylor Fry General Insurance Barometer.

Premium rate increases are coming through and further gains are on the way as the local market outpaces global momentum, according to the most upbeat barometer in recent years.

The gains are not before time in commercial classes, where insurers have endured an extended period of soft pricing before a recovery started to take hold last financial year.

“It is on the back of some pretty awful trends, so it is getting back to where it should be on the commercial side,” JP Morgan Insurance Analyst Siddharth Parameswaran told “There is definitely a change.”

Overall commercial rates are expected to rise 5-6% in this financial year and next, according to participants surveyed in the report, and the gains should assist underlying profitability.

Fire and industrial special risks (ISR), which has plenty of ground of make up, is tipped to rise 8% this year after gaining 5% the previous year and slumping 10% in 2015.

The directors’ and officers’ class remains a problem area, with claims inflation rising to 7% last year from 5% as class actions drive adverse trends. Premiums grew 13% last year and are expected to increase 21% this year.

“The affordability of the directors’ and officers’ class is a concern, particularly as litigation actions continue to be brought against companies,” Taylor Fry Principal and Senior Actuary Kevin Gomes said.

The commercial combined operating ratio deteriorated to 103% last year from 101%, but improvements are anticipated in the key classes of fire and ISR, plus commercial motor.

On the domestic side, short-tail premiums grew about 4% last year, with similar rises continuing as insurers try to catch up with inflation. There is caution about chasing higher increases in personal lines, with major players concerned about losing market share.

“The insurers are being a little bit more measured in how they are trying to track back towards target profitability, basically because they are still worried about competition,” Mr Parameswaran said.

The impact from the recent jump in global natural catastrophe losses, estimated at $US135 billion ($168.14 billion) last calendar year, has so far proved muted because plenty of capacity remains in the market. In Australia catastrophe claims were also above the 10-year trailing average.

“Insurance capital in the world was at all-time highs, and the catastrophe losses would only have made a modest dent on that position,” the report says.

“As such, we think there will be some turn upwards in the cycle, but it will be concentrated in lines of consistently poor profitability and those that took a big hit [last year].”

From a wider economic perspective, a stronger growth environment could slightly improve prospects for Australian insurers and possibly mean economy-led upward pressure on rates, according to the report.

That scenario contrasts with the weak prospects that have prevailed since the global financial crisis of 2008-09. Australia, the US, Europe and the UK all showed growth last year, with the local market a relative outperformer compared with other developed economies.

Nevertheless, low interest rates in Australia in recent years have allowed the release of reserves that are no longer needed, particularly in compulsory third party, liability and professional indemnity, with the financial statement impact helping to support reported profits.

Raiding of the “hollow logs” is set to become more difficult as the reserves are drawn down.

“That capacity has really reduced, so we could see more volatile numbers going forward from here,” Mr Parameswaran said. In some cases, insurers may also look to rebuild reserves.

Each year the report asks participants about key issues confronting the industry. This edition sees 80% of underwriters express concern over regulatory changes and compliance. Other issues are competition, rates and capacity, technology and cyber risk, and changing customer expectations.

In the broking community, staffing issues such as training, retention and experience are cited by 60% of brokers, down from 83% a year earlier. A similar percentage nominate pricing and profitability, while other concerns include technology and underwriting standards.

The barometer also includes an assessment of the cyber market in Australia, observing “no noticeable boom” before breach notification laws take effect this month, but tipping a landmark year for the emerging sector.

“We expect the claims landscape to change significantly over the next year, providing opportunities to insurers that are able to accurately assess risk and opening further entry points to those that are willing to offer competitive prices to make inroads into the market,” it says.

The industry may face a range of challenges, including from regulation, technology and competition.

But the overall picture is a good one, and after a prolonged period of depressed markets and some daunting challenges ahead, it’s news worth celebrating.