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Vital signs: Finity check-up points to recovery

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Finity Consulting’s latest “health check” on general insurance adds to an improving prognosis for the industry after years of weak premium growth and subdued investment returns.

Last financial year proved “reasonably good” and rate hardening through the June half suggests stronger margins will follow, its Optima report finds.

“You still have some of the upside from that rate hardening to come through, and I guess we are hoping the trend for rates to go up in the classes where they need to will continue,” Finity Principal Andy Cohen tells

“Looking forward, we see some modest expansion of margins.”

The findings follow more positive commentary from companies reporting on the six months and year to June 30. Australian Prudential Regulation Authority industry statistics also point to earnings gains.

Finity says the industry’s reported insurance margin was 14% last year, with the return on equity (ROE) at the same level. The underlying margin was about 10%, taking into account reserve releases.

Premium growth was 4%, double the low of 2% in the previous two years, while the net loss ratio was three points lower at 66%, net of reinsurance, despite the impact of Cyclone Debbie.

Finity notes rates haven’t “exactly powered forwards”, while low inflation has also contributed to reserve releases from long-tail classes, providing a prop to profitability.

Nevertheless, improving market signs are good news for Australia’s largest domestic insurers, which are undergoing internal changes amid technological disruption and pressure to lift efficiency.

Suncorp has overhauled its leadership team as it accelerates a $100 million investment in its marketplace strategy, and IAG is restructuring its Australian businesses to create one united division. QBE is seeking someone to take leadership of the Australia and New Zealand business from Pat Regan, who moves into the Group CEO role in January.

Mr Cohen says insurers have shown more appetite for rates increases in areas such as business packages – though rises may have fallen short of ambitions – and the trend is positive for margins this year and beyond.

They will also likely benefit from a continuing soft reinsurance market, with plenty of global capital available despite the impact of this year’s active Atlantic hurricane season.

Finity says business packages will record small rate increases in coming years, including a 4% rise for the current year, but a combined operating ratio of 103% remains short of the 96% needed to deliver a target 15% ROE.

The corporate property market appeared to turn last year and premium gains of 10% are expected, although it remains loss-making.

Rates for standalone liability are expected to remain flat, with profitability at or just above target, while professional indemnity premiums are forecast to gain 1-3%. Directors’ and officers’ premiums are forecast to rise 10-20%, building on recent gains of 10%, with the class continuing to underperform.

Private motor rate rises were largely absorbed by claims inflation last year, but a slight improvement in the class is expected as premiums rise 6%. “While insurers are acting to restore profitability with further rate increases, the outlook for private motor remains challenging,” Finity says.

Householders’ premiums are forecast to rise 4%, with weather costs a big unknown that can “make or break” profitability, particularly with an above-average bushfire season predicted this summer.

Compulsory third party premiums are likely to decline 10% amid changes to NSW benefits under the Motor Accident Injury Act.

“Claims frequency continues to be impacted by the activities of claim farmers,” Finity says.

“While in NSW this has been partially reversed through new limits of plaintiff legal cost recovery for smaller claims and a police crackdown on fraud, in Queensland we have seen a 10% increase in frequency in the past year.”

The report highlights broad industry risks that may curb premium growth for insurers.

“These are low economic growth, low economic inflation, affordability issues, surplus market capacity and the relative lack of domestic growth opportunities.”

Nevertheless, there is a more positive tone in the report compared with the previous few years.

“Green shoots were quite apparent in the first half of this calendar year, but many segments do need rate rises,” Mr Cohen says.