Insurers must find different ways to drive productivity, with poor performance testing the patience of investors, Insurance Council of Australia President and Wesfarmers Insurance MD Rob Scott told an industry forum in Melbourne last week.

He says analysts are questioning the defensive characteristics of investing in insurers, and whether the returns justify the risks.

“We cannot ignore this since we rely on the capital markets to fund our businesses,” he said.

“Delivering consistent and sustainable profitability will reduce our cost of capital, which will lead to lower premium rates for our clients.”

He says reinsurers are also demanding an improved return on capital after making a substantial contribution to recent natural disaster claims.

Mr Scott said insurer profitability has been poor in recent years, with the financial returns from the listed insurers lagging well behind the broader stock market.

Total shareholder returns from the listed insurers have lagged the ASX200 by over 30% over five years, over 40% over three years and about 13% over two years.

“The performance of unlisted insurers has also been below market,” he said.

Mr Scott says insurers are now looking at new ways to improve efficiency and reduce costs, given slow economic growth and low interest rates globally.

“This is particularly the case in the intermediated market where premium rate increases have been more challenging to achieve and profit margins have been under pressure for some time.”

Mr Scott described the restructuring, redundancies and offshoring that have been announced recently as part of the industry move to improve the bottom line and drive more sustainable returns.

He says Wesfarmers Insurance sees potential for significant earnings growth from improvements in the business and as natural peril experience normalises.

Emphasising the value of the industry’s human capital and the importance of attracting talented staff, Mr Scott says the company’s increased investment in people development has served it well over the past year.

Wesfarmers has introduced a charter outlining its purpose, vision and values and all group leaders have 20% of their bonus linked to their performance relative to the charter.

He says the industry needs to do a better job educating the public and policymakers about how it operates, and comments that insurers should pay all claims regardless of cover attest to ignorance.

“I’m not sure that [the Australian Prudential Regulation Authority] would be supportive of insurers paying claims regardless of the policy,” he said.

“While these comments make us all very angry and disillusioned, we need to take some responsibility to help make insurance more accessible and to improve understanding.”