Australian insurers’ profitability in the last financial year was the worst for two decades, a new report has found.

Actuarial firm Finity’s annual state-of-the-industry Optima report, published today, found natural perils events, COVID-19, and plummeting investment returns saw industry return on equity (ROE) fall to 4%, down from 13% in the previous 12 months.

Finity Principal and lead author of the report Andy Cohen told insuranceNEWS.com.au that the hard market – and corresponding pressures on insurance purchasers – would continue as insurers look to improve profitability.

“You’ve got to go back a long way to find an ROE of 4%,” he said. “You’ve got to go back a long way to find something that bad.

“We really have fallen off a cliff a little bit – perhaps not surprisingly given bushfires [and other catastrophes], combined with COVID in the fourth quarter.”

The report shows gross earned premium growth of 5%, reported loss ratio deterioration of 2%, a 1% increase in the expense ratio and a significant reduction in investment returns.

“The industry’s investment returns were almost $2 billion (or 60%) less than in FY19,” Mr Cohen said.

“This removed three points from the insurance trading result (ITR) and 8 points from the ROE.”

The impact of COVID-19 and associated recession has not yet come to the fore, he says.

“Impacts baked into insurers’ balance sheets at 30 June 2020 were relatively modest. But there is surely more to come through as the length and depth of the recession and the impacts on insurers’ premium and claims lines become clearer.

“No doubt, there will be some ‘winners’ and ‘losers’ emerging from the other side based on each insurer’s respective business mix, distribution channels, strategy, customer service and response, level of digitisation sophistication and agility in these challenging times.”

Looking to FY21, Finity forecasts a 6% insurance margin and 7% ROE.

“This is a slight bounce-back from the low point of 4% ROE in FY20, but it still sits below target profitability levels,” Finity says.

“With investment returns set to remain at the very low levels seen in FY20 (less than 2%), underwriting margins would need to lift significantly if a return to target profitability is to be achieved going forward.”

Premium growth is expected to suffer a COVID-19 induced slowdown as the recession limits business activity, the report says.

“On a more positive note expenses are stable, underlying loss ratios have improved slightly and reserve releases should support an overall improvement in profitability.”

Major losses from the La Nina weather system could undermine the forecast, however.