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S&P predicts 'good, solid return' from industry

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Australia’s property and casualty (P&C) insurers are still expected to produce “a good solid return” despite the economic fallout from COVID-19 and a raft of other pressing challenges facing the industry, according to S&P Global Ratings.

The ratings agency says the industry, led by major players IAG, Suncorp and QBE, has demonstrated it has a “sophisticated” underwriting framework in place to take on risks without severely impacting margins even during difficult times.

“The underwriting earnings will be sound,” Credit Analyst Craig Bennett told today. “We expect the industry as a whole to be able to provide a good, solid return to their investors in terms of the equity side.

“The product pricing is supportive of the risk being undertaken and for there to be enough margins to pay the investors.”

In its latest global outlook for the industry, S&P describes the Australian P&C sector as “low risk”. This means the environment is intensively competitive with some segments producing reasonable returns, leading to increased competition.

Mr Bennett says this is especially true for the personal lines market.

“There are more players in personal lines. It has been quite an attractive segment, the home and contents and motor businesses,” Mr Bennett said.

But he says the margins for personal lines products are under more pressure at the moment from the recession than commercial lines.

“There is limited capacity to put higher pricing through because of the economic situation that we’re in so we do see pressure on the property and casualty personal lines insurers particularly for the next year,” Mr Bennett said.

Insurers have had more success pushing through with rate increases for commercial products, especially for the ones that are aimed at non-SME clients. SMEs, like their personal lines counterparts, have been more affected by the economic recession, Mr Bennett said.

Looking ahead, Mr Bennett says the increased frequency of natural catastrophes, which climate studies have predicted will become more severe, will pressure future underwriting profits. The 2019/20 natural disaster season has cost insurers nearly $6 billion, the worst on record.

But he notes that Australian insurers have addressed their natural perils exposure by strengthening their reinsurance programs.