RBA: Aussie insurers in relatively rude health
Bloodied but unbowed: that’s the short version of the Reserve Bank’s review of the local general insurance industry.
Its Financial Stability Review September 2008 reveals some heartening news in that no local insurer is likely to follow the AIG parent deep into the financial mire.
In fact, the report shows the combined Australian general insurance industry is in quite good health, all things considered. The RBA reports solid profit over the 2007/08 financial year, recording an aggregate pre-tax return on equity of around 15%.
Though this was lower than the previous few years, it is in line with the average over the past decade.
Investment income was around 25% lower than the previous year, reflecting more difficult conditions in financial markets.
But the ace up the sleeve for Australian insurers is their relatively conservative investment mix, with around 70% of assets invested in fixed-income securities and only a small proportion invested in the kind of equities that have buried less-astute investors.
Head of KPMG’s insurance group Brian Greig told insuranceNEWS.com.au Australian general insurers are generally well-insulated from the crisis.
“Australian general insurers have had little or no exposure to collateralised debt obligation investments, and little exposure to directors’ and officers’ and errors and omissions exposures for sub-prime matters,” he said.
“The Australian general insurance industry is well capitalised post the HIH collapse and APRA reforms, which are ongoing.”
The RBA agrees, noting that Australia’s largest general insurers have not reported any direct exposure to US subprime risk through their investment portfolios.
That’s not to say insurers aren’t in any pain. Aggregate claims increased by 17% in the previous year compared with an average annual rise of 2% over the previous three years. That was hardly offset by growth in industry net premium revenue which was broadly flat in line with previous years, with growth around 3%.
Though there is plenty of talk of rate rises, particularly in personal lines, any actual increase will do little more than partly offset the effect on total premiums. Premium rates in competitive commercial line classes are continuing to reduce.
All told, the industry’s net underwriting result was weaker than it has been for a number of years. The combined ratio increased eight percentage points to 92%, the highest level since 2002.
Despite the bloodletting, the fundamentals remain sound, the RBA says. When investment markets return to full health, expect all the major Australian players to be well-placed to capitalise on the opportunities.
The aggregate capital position of the general insurance industry remains sound, with insurers holding capital of around twice the regulatory minimum as at March 2008.
That was further strengthened by APRA’s recent tweaks to the prudential framework, with strict regulatory capital charge rules for foreign recoveries introduced on July 1.
Ratings agencies also continue to hold a favourable view of the Australian general insurance industry. The four largest insurers retain ratings of A+ or higher by Standard & Poor’s, despite IAG being chalked down to AA- in May. The ratings agency maintains a stable outlook on all these insurers.
The RBA notes that while share prices have fallen on average by 25% this is mainly due to storm-related profit warnings. Expect investors to get excited again when claims drop back beyond the recent surge.
Behind the insurers stands a global reinsurance industry that is also in general good health. Reinsurance companies typically continue to report solid profits and ratings agencies aren’t in any rush to slash and burn their favourable positions on this corner of the industry.
The AIG situation in the US hasn’t done the insurance industry’s image any favours in these uncertain times, but it provides no realistic insight into the market locally.
Its Financial Stability Review September 2008 reveals some heartening news in that no local insurer is likely to follow the AIG parent deep into the financial mire.
In fact, the report shows the combined Australian general insurance industry is in quite good health, all things considered. The RBA reports solid profit over the 2007/08 financial year, recording an aggregate pre-tax return on equity of around 15%.
Though this was lower than the previous few years, it is in line with the average over the past decade.
Investment income was around 25% lower than the previous year, reflecting more difficult conditions in financial markets.
But the ace up the sleeve for Australian insurers is their relatively conservative investment mix, with around 70% of assets invested in fixed-income securities and only a small proportion invested in the kind of equities that have buried less-astute investors.
Head of KPMG’s insurance group Brian Greig told insuranceNEWS.com.au Australian general insurers are generally well-insulated from the crisis.
“Australian general insurers have had little or no exposure to collateralised debt obligation investments, and little exposure to directors’ and officers’ and errors and omissions exposures for sub-prime matters,” he said.
“The Australian general insurance industry is well capitalised post the HIH collapse and APRA reforms, which are ongoing.”
The RBA agrees, noting that Australia’s largest general insurers have not reported any direct exposure to US subprime risk through their investment portfolios.
That’s not to say insurers aren’t in any pain. Aggregate claims increased by 17% in the previous year compared with an average annual rise of 2% over the previous three years. That was hardly offset by growth in industry net premium revenue which was broadly flat in line with previous years, with growth around 3%.
Though there is plenty of talk of rate rises, particularly in personal lines, any actual increase will do little more than partly offset the effect on total premiums. Premium rates in competitive commercial line classes are continuing to reduce.
All told, the industry’s net underwriting result was weaker than it has been for a number of years. The combined ratio increased eight percentage points to 92%, the highest level since 2002.
Despite the bloodletting, the fundamentals remain sound, the RBA says. When investment markets return to full health, expect all the major Australian players to be well-placed to capitalise on the opportunities.
The aggregate capital position of the general insurance industry remains sound, with insurers holding capital of around twice the regulatory minimum as at March 2008.
That was further strengthened by APRA’s recent tweaks to the prudential framework, with strict regulatory capital charge rules for foreign recoveries introduced on July 1.
Ratings agencies also continue to hold a favourable view of the Australian general insurance industry. The four largest insurers retain ratings of A+ or higher by Standard & Poor’s, despite IAG being chalked down to AA- in May. The ratings agency maintains a stable outlook on all these insurers.
The RBA notes that while share prices have fallen on average by 25% this is mainly due to storm-related profit warnings. Expect investors to get excited again when claims drop back beyond the recent surge.
Behind the insurers stands a global reinsurance industry that is also in general good health. Reinsurance companies typically continue to report solid profits and ratings agencies aren’t in any rush to slash and burn their favourable positions on this corner of the industry.
The AIG situation in the US hasn’t done the insurance industry’s image any favours in these uncertain times, but it provides no realistic insight into the market locally.