Home / Analysis / Cycle holds course, but uncertain terrain awaits
19 November 2018
Australian insurers have received an upbeat assessment in KPMG’s annual review of the industry, with profits still rising and the sector well placed to handle fallout from the Hayne royal commission.
But KPMG also notes insurers cannot afford to divert their attention from long-term issues and innovation challenges that face the industry globally.
Earnings growth slowed to 4% last financial year after a previous 25% jump, while market hardening has continued, excluding the impact of compulsory third party reforms. The insurance margin improved to 16.2% after falling as low as 11.3% a few years ago.
There is still ground to be made before profitability returns to levels seen before the industry’s recent nadir, but KPMG’s assessment is that the cycle is positive and has yet to reach its peak.
“It is very hard to predict when that cycle will turn and that comes down to profitability and the competitive nature of the industry participants,” KPMG Insurance Partner Scott Guse told insuranceNEWS.com.au.
“I think we are still on the upswing and competition will not come into it to erode those profits in the short term.”
Hayne royal commission impacts remain uncertain, with the industry bracing for fallout from regulatory measures that may be imposed and changes already in train.
Major banks have announced large financial provisions for royal commission remediation and rectification costs, but the same hasn’t applied in insurance and it remains to be seen what issues will be highlighted when the final report is released in February.
“We may see some scrambling by insurers to see what sort of work and effort is required to remediate and rectify these issues,” Mr Guse said.
“It will certainly have an impact on costs, but insurers are implementing a whole raft of cost-efficiency initiatives that will largely, I would hope, offset the costs of the increased regulation.”
He says major players are already seeing the benefits of programs such as digitisation of customer communications, optimisation of sales and service programs, and redesigning of claims processes.
KPMG Global Head of Insurance Laura Hay says the royal commission’s focus on consumers reflects pressures insurers are experiencing in international markets.
“While outside Australia they may not have the triggering event of the intense scrutiny the Australian market is feeling, there is certainly a trend towards trying to become more customer-centric,” she told insuranceNEWS.com.au.
KPMG’s report highlights trends including digital technology, insurtech, artificial intelligence and robotics, and the Internet of Things, which all affect efforts to better serve customers. Blockchain developments also make the list, and are being most actively pursued by reinsurers.
Australia seems to lag in the insurtech arena compared with markets such as the US, UK, Israel and Singapore, while insurance overall has not moved as quickly as some other financial sectors.
Other KPMG work highlights global insurance’s rising interest in partnerships as the industry seeks avenues to build expertise and opportunities.
Ms Hay says when there is a spike in regulatory and government activity, work in other areas typically tends to slow, but she says Australian insurers are continuing to look ahead.
“There is no doubt there is a distraction,” she said. “But it is clear to me that, in addition to the challenges they are facing that are very current, they have a focus on transformation and thinking about the future.”
Major insurers have so far fended off the competitive impact of comparison websites, which have a particularly strong presence in the UK. They have argued in various reviews that a focus on price means consumers may not buy the most suitable policies.
Ms Hay says insurtechs are becoming more active in the aggregator sector overseas, and they could become more of a local factor.
“Insurtechs are often early indicators of where the market is going and there are more insurtechs pointed at aggregators than any other area of insurtech.
“While Australia has kept them at bay, it is a global trend, so we will have to see how the Australian market responds and whether that is going to put pressure on the market.”
KPMG says the past year has been “very positive” for general insurers, continuing the profitability trend of the past four years, but it cautions against a steady-as-it-goes approach.
“Insurers can no longer do ‘more of the same’ and expect to succeed,” it says. “Customers, investors and employees demand innovation from insurance organisations.”