The industry has performed well despite a challenging environment, posting a net profit after tax of $3.6 billion in the last financial year, actuarial firm Finity says in its annual Optima report released today.

Finity says the profit is a strong increase from the average level of about $500 million reported annually between fiscal years 2019/20 and 2021/22.

A turnaround in investment returns and continuation of strong double-digit rate increases helped ease claims inflation and other cost pressures.

“The strong industry reported profitability is a remarkable result given ongoing challenges, on multiple fronts, in the operating environment,” Finity Principal and Optima lead author Andy Cohen said.

The $3.6 billion profit is the equivalent of a 14% return on equity (ROE) and marks a “very strong” bounce back to a level of profitability that is finally within the target range, ending a three-year period of sub-5% returns.

“Last year it was investment headwinds on all fronts that drove poor performance, with the industry making its first investment loss of over $2 billion in at least 20 years,” the report says.

“This year it was a complete reversal of fortunes…turning to investment returns, the story really starts to get more positive.”

Finity says the investment performance accounted for a +8 point or $3.1 billion swing in the insurance trading result (ITR) margin. As a result the ITR margin for FY2022/23 – the fiscal year covered by the latest Optima report released today – improved seven percentage points to 10%.

Top line growth – as measured by gross earned premium – surged 12.5% to about $56 billion, better than the 10% rise achieved a year earlier as the industry continued to push through significant price increases in response to claims inflation and higher reinsurance costs.

“As we also saw in FY22, a lot of this rate growth was a response to strong and persistent claims inflation in personal lines and commercial property classes and higher reinsurance costs,” the report says.

“Hence it did little to assist underlying margins in these classes, although in some other classes margin growth was achieved.”

Looking ahead, Finity expects premium rates to continue rising strongly in this financial year as the industry seeks to protect and/or improve margins. Gross earned premium is projected to grow 11%.

“Most of these increases will be required to counter ongoing strong claims cost inflation, which would otherwise be eroding margins in many classes,” the report says.

“Reinsurance rates are forecast to continue to increase (adding pressure to the net loss ratio), although we expect this to be offset by insurers accepting higher deductibles.”

Finity projects the industry will achieve a ROE of 13% this financial year and net profit of about $4.1 billion, citing support from higher capital holdings that reflect growth in premiums as well as further improvements to capital adequacy.

Click here to access the Finity report.