Gross written premiums were slightly down at $4.27bn in the 12 months to 30 June 2018, although this was largely driven by the one-off impact of regulatory changes to Compulsory Third Party (CTP) in NSW, which became effective on 1 December 2017. Net earned premiums rose by 2 percent to $30.8bn.

Scott Guse, KPMG Insurance Partner said: “While the industry’s headline profit growth figure appears modest, it must be remembered that this was on the back of an exceptionally strong performance last year. To maintain that level rather than falling back is actually a very creditable showing. Favourable net perils experience and higher than expected reserve releases contributed to this result, which reinforces our view that the sector is on a cyclical upswing.”

• Whilst headline Gross written premiums (GWP) decreased by 1 percent to $42.7bn, this was mostly due to the NSW CTP change which has led to lower premiums for customers and an expected improvement to the claims experience. Going forward, this is expected to lead to reduced margins for insurers, although combined with reduced volatility.
• The loss ratio (claims cost) has further improved by 0.8 percent, now down to 62.7 percent. This is due to the relative increase in net earned premiums outweighing the rise in net incurred claims of 1 percent. Whilst gross incurred claims have decreased by 6 percent, on account of benign catastrophe claims experience and higher reserve/risk margin releases, there has also been a reduction in reinsurance and non-reinsurance recoveries revenue since 2017.
• The expense ratio also improved, with a 0.2 percent drop from last year, reflecting continued strong cost discipline while the insurance margin rose by 0.2 percent to 16.2 percent.
• Investment income allocated to insurance funds was $1.2bn down from $1.3bn in 2016/17 on the back of the continued depressed interest rate environment and conservative investment portfolios. With these ongoing low returns, some insurers have looked to diversify investment portfolios
• The industry’s capital coverage at 30 June 2018 for direct insurers was 1.82 times the APRA- prescribed capital amount.

Scott Guse added: “The major players are now seeing the benefits of some important programs - digitalisation of customer communications and interactions; optimisation of sales and service programs; and redesigning of claims processes. All this, combined with a strong focus on costs, has led to a rise in the insurance margin, which is a key metric in the sector.

“Technological advances globally continue at pace – although there is still room for improvement and we observe varied levels of progress by the established Australian insurers. The use of technology is critical for insurers; not only to enhance digital capabilities and to automate businesses, but also to improve product offerings and enhance the customer experience. “

The industry’s strong performance has occurred with a backdrop of increasing regulatory scrutiny, with the some insurers appearing in front of the Royal Commission, and its final report due in February will include conclusions from those hearings.

Scott Guse commented: “Significant findings have already been reported in relation to other industries which will apply to the insurance sector, and 2019 looks set to herald ongoing regulatory challenges. But it is not just the Royal Commission – insurers must also continue to embed operational changes arising from changes to statutory schemes including NSW CTP and NSW Workers Compensation, whilst also focusing on the implementation of the long awaited global accounting standard, IFRS 17 Insurance Contracts.”

In the report, KPMG identified 10 emerging trends for insurance companies:

Technology

1. Digital: The challenge is to maintain competitiveness with traditional models, while also embracing a ‘digital-first’ approach. Offerings in this area are quite different; they are more on-demand, episodic and usage-based; utilise cloud-based insurance-as-a-service modular components from a variety of providers as needed to deliver outcomes; and are highly automated end-to-end through the entire value chain.

2. Insurtech: Almost every incumbent insurance firm in Australia of any reasonable size has some form of collaboration initiative underway with InsurTechs in recent years. But while “collaboration” is the dominant theme of the Australian insurtech sector, at a global level ecosystem builders are emerging, gaining real momentum and could potentially influence the incumbent insurance domain in the long term.

3. Blockchain: While this is rapidly gaining traction in the broader financial world as a seemingly hack-proof method of ordering and verifying transactions in a distributed ledger via a network of computers, insurers have ground to make up. The most common insurance use-cases today are around customer on-boarding and fraud analytics of claims. Looking ahead, there are opportunities to use Blockchain across all insurance lines of business for documents and transactions that play a pivotal role in business processes, such as inspections, policies, claims, medical reports and settlements. Blockchain could also accelerate the use of peer-to-peer insurance and other emerging insurance business models.

4. Artificial Intelligence and Robotics: The automation maturity varies considerably across the General Insurance industry, driven by funding constraints, business size and complexity. Some insurers are still at the start of their journey, while others are quite advanced with automation technologies used across various aspects of their business. The more advanced insurers have started experimenting with automation of complex processes, for example: pricing, reserving or customer management. In order to automate complex processes insurers look towards more sophisticated automation solutions broadly referred to as Intelligent Automation. The automation of these processes is expected to generate better and more informed decisions and also increase the focus of a highly skilled workforce on value creating activities.

5. Internet of Things: The IoT network connectivity includes platforms that can be mined for masses of information by insurers, allowing them to fine-tune highly personalised insurance products delivered on demand and in the context of a specific risk. The assessments of risk will be more accurate, leading to dynamic pricing models. IoT enables and accelerates the shift from transactional risk protection insurance products to relationship risk prevention services. From a reactive posture to an interventionist proactive posture. But IoT also poses a threat to incumbent insurers as insurance will be more easily ‘bundled’ into other services delivered by the IoT dominant provider (i.e. ‘invisible insurance’). The future of many insurance products, enabled through connectivity and IoT, is destined to be increasingly invisible.

Regulatory / Products / Trends:

6. Climate Change: Insurers must assess how climate-related impacts may affect their loss ratios and underwriting practices and then act to manage these risks. Insurers can also examine their investments and how they contribute to or could mitigate climate change. Carbon footprinting is the most commonly reported technique used for investment portfolio risk analysis. Ceasing to underwrite thermal coal and other fossil fuel based assets appears to be an increasing trend. Also among leading insurers a number are increasing their investments in low carbon options such as, renewable energy or green bonds.

7. Directors and Officers Insurance: The profitability of D&O has been poor recently, although net results have been better with favourable reinsurance protection being in place over these periods. In the recent June 2018 reinsurance renewal period reinsurers significantly increased prices for D&O insurance coverage. This increase largely emanating from recent class actions in Australia and the potential for new claims to arise from the Royal Commission. The impact of this will see continued upward pressure on premiums for D&O policies in the Australian market.

8. IFRS 17: This forthcoming standard represents the biggest change in insurance accounting in 20 years: commencing 1 January 2021 it will give users of financial information a whole new perspective on insurers’ financial statements. A KPMG survey in September 2018 showed Australian insurers were slightly behind global counterparts in preparation for the new standard.

9. Royal Commission: The report due in February will have far-reaching implications for the whole financial services sector including insurance, in areas such as culture, structure, remuneration and governance.

10. Outsourcing and Managed Services: Remaining relevant in the insurance market will require a clear Service Delivery Strategy. Leveraging external expertise from providers who have the ability to enter into partnerships with their clients will allow insurers to focus on future direction whilst drawing on their strengths and investments on their core capabilities. Key trends emerging across Financial Services that insurers will be able to leverage for growth include:

• service delivery strategies – that determine if partners will be used to deliver services;
• supply chain risk management by thoroughly understanding all partners; and
• managing costs by avoiding leakage with data-driven insights.

Ian Welch
KPMG Communications
T: 02 9335 7765 / 0400 818 891
E: iwelch@kpmg.com.au