Australian property and casualty insurers will probably moderate premium rate increases through to next year as inflationary pressures ease, while profitability should remain strong, S&P Global Ratings says.

Lower natural hazard losses, easing claims inflation and slowing reinsurance price increases should assist profitability this year.

“Underlying returns will also benefit from enhanced risk-based pricing, continued efficiency initiatives across operations and claims management, well-structured reinsurance arrangements and higher running yields on investment portfolios,” the ratings agency says in a report.

The underlying return on equity, which removes unrealised investment gains or losses, is expected to stabilise at about 12%, roughly in line with last year.

Property and casualty insurers have lifted premiums to offset claims inflation and rising reinsurance prices in the past couple of years, resulting in rates rising much more quickly than broader inflation and wage growth, S&P says.

“The response came with a downside ... It magnified affordability constraints for customers. Adjustments to sums insured and excesses have been levers utilised to soften premium rate rises for consumers.”  

Affordability should improve as inflation normalises, the report says.

Uncertainty on future claims will remain given catastrophe impacts, but S&P says sound risk management coupled with supportive reinsurance programs will help moderate the impact of large losses over the short to medium term.

Insurance Council of Australia data shows 40 declared catastrophes with initial losses totalling about $28 billion in the 10 years to December 31 2023 – about twice the loss total in the previous decade, when 54 catastrophes were declared.

“Although the increase in frequency of events appears to have moderated, the severity of these events has significantly increased,” S&P says.

In the past seven years reinsurance costs have risen about 44%, consuming most of the growth in gross earned premium, which was 64% higher. Insurer earnings have also been hit as reinsurance recoveries increased only 18% over the period.

“Insurers have been managing their exposure by increasingly applying risk-based pricing, adjusting appetite for particular insurance risks and increasingly sharing risk retention with the policyholders.”

The report, titled Australian Insurance Sector Trends: A Return to Underwriting Fundamentals, also includes the life, health and mortgage sectors.

Mortgage insurer profitability is expected to remain strong despite subdued demand, with claims expected to rise modestly from a low base.

“This partly reflects savings buffers held, proactive management of properties by their owners, and continued housing shortages that underpin house prices,” S&P says. “We also expect no material risks from the cohort of borrowers who moved from fixed-rate to [higher] variable-rate mortgages over the past year, with mortgage delinquency rates remaining low.”

S&P says life insurer bottom-line profitability looks set to improve this year and next, reflecting some post-covid reserve releases, higher investment yields and the unwinding of unrealised bond losses, but underwriting constraints won’t disappear.

Distribution problems are impeding potential for new sales and retention, and claims frequency may stay high after an increase led largely by individual disability income protection.

“This could continue, generated by mental health issues or from industries with difficult workplace conditions.”

S&P has stable outlooks on 79% of the Australian insurers it rates and expects the creditworthiness of companies to remain strong for at least the next 12-18 months.

From Insurance News magazine: Assistant Treasurer Stephen Jones explains why he won’t play “populist politics” on affordability