The general insurance industry is likely to see an increase in merger and acquisition (M&A) activities in the next 24 months, according to a new report from KPMG.

It says insurers post-COVID are looking to acquire businesses that will provide additional growth opportunities, synergies and cost optimisation.

There may also be interest from foreign insurance players as they have often been keen on the local market, where the products are mature.

Australia being a comparatively smaller market also offers an opportunity for foreign insurers to test new products as well as achieve geographical diversity to reduce risk.

KPMG predicts next year could be equally as challenging for the industry as the past year, which has seen its profit collapsed by almost 50% to a near 10-year low of $2.3 billion.

Uncertainty over the outcome of the industry’s challenge against the NSW Court of Appeal decision that ruled business interruption (BI) pandemic exclusions citing the now repealed Quarantine Act are not valid is not the only test facing the industry in 2021.

The industry must contend with persistent weak investment returns, a situation that is not going to improve in the foreseeable future as interest rates remain at near-zero levels, the result of aggressive efforts from central banks to haul the global economy out of the coronavirus recession.

Other pressing tasks include the raft of Hayne royal commission reform measures that will be introduced in the coming months, such as the extension of unfair contract terms to insurance contracts and moves to regulate claims handling as a financial service.

The industry also must brace for more severe and frequent weather events as climate change takes hold, increasing insurers’ exposure to natural perils such as floods and bushfires.

“This has been a very difficult year for the industry, with natural catastrophes, significantly unfavourable investment results due to volatile markets, and a spike in reinsurance costs,” KPMG Insurance Lead Partner David Kells said.

“And the situation has become more challenging with the recent court ruling on business interruption losses due to COVID-19 not being excluded under the Quarantine Act. If the judgment survives the proposed court appeal, this will have significant implications for many insurers.”

KPMG Insurance Partner Scott Guse says the potential impact of the BI claims court fight on insurers is reflected by the $750 million capital-raising undertaken by IAG.

“You’ve seen one major insurer go out and do a capital-raise to fight off a potential cost,” he told insuranceNEWS.com.au. “It’s an area where the insurance companies don’t have a lot of reinsurance protection, unlike the catastrophic weather events.

“Something like this hasn’t happened…so any exposure they get is really going to have to be borne by the insurance companies and not by reinsurers.”

But he says the industry remains well capitalised. “It’s not going to go broke or anything like that, but there may need to be some further capital raising and certainly significant provisions, depending on how court judgments go.”

Click here for the KPMG General Insurance Industry Review 2020 report.