General Insurance sector profits fall by 12 percent in 2019

Gross written premiums rose by 5 percent to $44.8bn in the 12 months to 30 June 2019. This growth was largely rate-driven, as the industry continues to combat the rising cost of claims, and would have been even higher but for the impact of reforms to the Compulsory Third Party (CTP) schemes in NSW and QLD. Net earned premiums rose by 4.5 percent to $32.3bn.

David Kells, KPMG Head of Insurance, said: “This year has illustrated the cyclical nature of insurance. The previous two years were relatively kind in terms of claims, but this year saw a less favourable claims experience for insurers, while lower than expected reserve releases added to the decline in profits. For the last five years, gross written premiums have risen and the market continues to harden, so we expect further price increases in the year ahead in both personal and commercial fields. But with record amounts being paid out in claims, the importance and value of insurance to Australian consumers and businesses should be acknowledged.”

• The industry’s loss ratio (claims cost) worsened in 2018/19 to 68 percent (up 5 percent). This was primarily caused by higher natural catastrophe costs and lower prior period reserve releases out of CTP portfolios. Natural hazard costs were driven by significant weather events including the hailstorms across Sydney, Central Coast and South-East Queensland in December 2018 and the Townsville floods in January/February 2019. These claims have, however, been largely offset by higher reinsurance recoveries.
• The expense ratio improved, dropping to 24 percent from 25 percent, showing continuing cost discipline from insurers. This improvement comes despite higher regulatory costs and demonstrates the realised net benefits from optimisation programs through automation and more ‘cost effective’ distribution channels. The impact of these factors contributed to a lower industry insurance result of $4.4bn (from $5bn) – and the insurance margin, a key metric in the sector, fell noticeably to 13.6 percent, from 16.3 percent.
• Investment income allocated to insurance funds was $2.02bn, up from $1.12bn in 2017/18 due to the market impact of unrealised gains as a result of the decrease in risk-free rates and narrowing credit spreads. With ongoing low returns due to current interest rates and generally conservative investment portfolios, some insurers have looked to diversify investment portfolios.
• The industry’s capital coverage at 30 June 2019 for direct insurers was 1.79 times the APRA prescribed capital amount. This compares to 1.82 times at 30 June 2018.

KPMG’s report notes that, in a challenging year for the industry, there were significant operational improvements by some of the leading players, which has helped to reduce costs.

• Suncorp reported net benefits for its Insurance function of $235 million from its Business Improvement Program. This focused on digitising the customer experience, optimising sales and service channels, enhanced end-to-end insurance renewal and direct debit SMS notifications and re-designing claims supply chain processes to drive efficiencies.
• IAG’s optimisation program (which is due to be complete by FY20) reported a net reduction in gross operating costs (excluding commission and levies) of around $90m through the consolidation of all their claims onto a single Claim platform and the transition of partnering activities to BAU.

Scott Guse, KPMG Insurance Partner, said: “Insurers are expected to finalise their optimisation programs with further incremental improvements from optimisation initiatives expected in FY20 to realise their targets. But costs of claims continues to rise – in areas like motor insurance, the higher sophistication of vehicles, with computerised systems, means repair costs are much higher than years ago.”

“The drop in the insurance margin in 2019 was a concern, so the dual focus on reducing costs while upgrading digital capabilities – to automate businesses and improve product offerings and enhance the customer experience – will have to be redoubled. Customers now expect an immediate personalised service at the click of a button from buying a policy to making a claim. But the industry is stepping up to the challenge and recent KPMG global research showed several insurers in the top ten ratings for excellent customer experience in Australia.”

Climate change is another topical issue, with 2018 following 2017 as extremely high years for global climate-related insurance losses.

Scott Guse said: “The insurance industry was one of the first to start adapting meaningfully to climate change, by including climate science in their risk models, and considering climate risk in their investment portfolios. Climate change is the new normal for insurers.”

The KPMG report also includes findings from Google, which show that the trend among consumers to research insurance products via multiple devices, often on the move, continues. Searches for ‘best car insurance’ or ‘best house insurance’ have steadily increased from 2016-19. Online video via Youtube is increasing in popularity in the research of insurance and other financial services products.

1. Digital
2. Insurtech
3. Blockchain
4. AI and Robotics
5. Customer centricity
6. Climate change
7. Cyber Security
8. IFRS 17
9. Regulatory agenda
10. Investment returns – low interest rates