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Profits up, but tech challenges looming

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The latest KPMG General Insurance Industry Review presents a buoyant picture, with profitability on the rise as rates increase, while the industry has also seen cost benefits from technological change.

The report says industry profit ended the financial year up 25% to $4.85 billion, while the combined operating ratio decreased to 88.3% from 92.2%.

Gross written premium increased 5%, while the overall improved performance delivered an underlying insurance margin of 16.1%, up from 13.6% a year earlier.

That is still below levels around 18% in 2012 and 2013, but Australian Prudential Regulation Authority data shows premiums have continued to strengthen this financial year, and the industry is well placed for a further profit recovery.

“I still see there is a bit of gas in the tank, so insurers can improve their profitability in future years to get up to those recent highs we had five, six years ago,” KPMG partner Scott Guse told

Risks to the outlook include whether insurers can maintain pricing discipline and ensure growth is not eroded through short-term market-share competitive forces, according to the report.

On the claims and expenses side, insurers gained some relief in the past year because catastrophes such as Cyclone Debbie were large enough to trigger reinsurance recoveries.

“There hasn’t been a lot of storms or weather events that have fallen just below that reinsurance level, where the insurance companies have had to wear the entire costs themselves,” Mr Guse said.

“I have described it as death by a thousand cuts in previous years, where you have one little storm after another and they all add up.”

The high-risk season for natural catastrophes is still ahead for this year, of course.

The expense ratio decreased to 24.8% last financial year, after hovering near 26% in the past four years, with a shift in distribution channels providing a key driver as technological change accelerates.

At the business and large-scale corporate end, brokers remain the preferred channel, but distribution for retail car, home and travel products is increasingly shifting to mobile, digital or online options, and away from call centres or branch-based alternatives.

“Customers are becoming more comfortable researching and then purchasing their general insurance products on their mobile phones, while on the train or bus going to work or even while they are waiting for their daily coffee,” KPMG Insurance Sector Leader David Kells says.

“While this trend is producing more cost-effective distribution platforms for insurers, it does highlight the need for insurers to make sure their mobile websites are easy to use and tailored for a mobile device.”

Mobile searches related to travel insurance jumped 28% from a year earlier, while for car and home the increase was 26%.

Mr Kells says maintaining cost discipline will likely see some insurers focus on greater automation, with advanced intelligence and robotics, while others continue with offshoring and outsourcing efforts.

More widely, the report notes insurers will need to further explore the potential of technological advances and embrace the opportunities it offers to continue their momentum.

In a list of 10 emerging trends, it names insurtech, digital, blockchain, artificial intelligence, cyber and data analytics in the top six positions. Technological changes and disruption also feed into the seventh-ranked emerging trend, identified as the need to become more customer-centric.

“The reality is that customers, investors and employees demand innovation,” KPMG says. “Indeed, they expect it, not only from technology providers and device manufacturers, but also from insurance organisations.”

The report says Australia is increasingly seen as an attractive place to test customer-focused technologies and the current insurtech buzzword is “partnering”.

A recent survey of more than 100 insurance CEOs, conducted by KPMG International, also found more than one-quarter of respondents see automation – a key step towards robotics – as the answer to managing skills gaps.

Other emerging trends rounding out the top 10 are risk mitigation, the start of new accounting standard IFRS 17 and requirements to manage conduct and mis-selling risks.

“Conduct, culture and customer experience should be thought of as the three legs of a tripod,” KPMG says. “Many established players are so focused on managing conduct risk that it proves a struggle to fix issues relating to culture or customer experience.”

In summary, KPMG sees better times ahead for the industry with the hardening of the insurance price cycle, but a caveat that emerging trends around technology and disruption will determine its longer-term future.