The worst investment market conditions in more than a decade have put the insurance industry in a position of double jeopardy. Despite higher premiums, some insurers are still falling short of profitability because the equity markets are in the doldrums. The logical answer is even higher premiums, but how much more can the market bear?

Analysts are saying that those insurers who rely heavily on equity market revenue will be the hardest hit. And there’s already evidence of that.

AMP will announce its full-year results on Friday, and some analysts are expecting to be disappointed. And IAG CEO Michael Hawker said recently that despite a good underwriting result, the No 1 general insurer expects a full-year loss of up to $40 million “due to the worst performance from investment markets in 14 years”. 

Tony Jackson, insurance analyst with Macquarie Bank, agrees that the underlying business profitability of most insurers is “excellent. But they will still face losses because of their exposure to investment markets.”

Mr Jackson says if investment returns remain poor, insurance prices will keep rising. “I think in terms of insurance market pricing, you’ll continue to get rate increases until they stabilise. But if investment returns remain poor, insurers will be under pressure to generate returns and will put rates up further.”   

The other concern, according to another leading analyst who declined to be named, is that if capital levels fall too low, insurers won’t be able to cover their regulatory requirements. This will force them to take “corrective action” to ease capital pressure and this again could be in the form of another round of premium increases.

“Since insurers have two ways of making profits – through premiums and/or by investing in equity markets – if one side is under pressure they usually turn to the other.”

He said companies like QBE and Suncorp have so far withstood equity market volatility partly because they are benefiting from recent premium increases and because they generate a smaller proportion of revenue from the equity market.

Peter Caldwell, Chairman of Deloitte Touche Tohmatsu’s National Insurance Industry Group, says that underwriting risks are now overshadowed by investment risks. “There will be dire consequences if the two collide,” he said.

He noted a recent comment by financial writer Robert Gottliebsen that market history shows the property market collapses about 6-18 months after a big sharemarket fall, even though it may initially rise short-term as money shifts out of shares into property.

“Thus there are few hiding places,” Mr Caldwell said. “The aggravating factor is the belief held by many international financial experts that investment markets are likely to remain subdued for a decade or more.”

So what does it all mean? “Australia’s general insurance market will be more dependent on underwriting profits than ever before,” Mr Caldwell said. “Premiums will remain high and could go higher.”