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General Insurance sector profits halved in 2020: KPMG report

General Insurance sector profits halved in 2020

The insurance sector’s profits were slashed by almost 50 percent to $2.3bn in the 12 months to 30 June 2020, KPMG Australia’s annual General Insurance Industry Review, released today, shows.

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Major factors behind the slump included severe natural hazards events, such as the catastrophic bushfires in Queensland, NSW and Victoria and severe storm activity (hail, rain and flooding) across the Eastern states between November and February.

The decimation of Investment income – down 91 percent on the previous year to just $268m – was another significant problem, with investment markets volatile due to the COVID-19 pandemic and a continued reduction in interest and yield curves.

One bright spot was the increase in gross written premiums by 4.76 percent to $47bn, the growth in GWP being driven by positive volumes and rate increases mainly in the classes of motor and home. But the insurance margin – the industry’s key metric – fell to its lowest level in seven years.

David Kells, KPMG Insurance Lead Partner, said: “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. 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 judgement survives the proposed court appeal, this will have significant implications for many insurers.”

The outbreak of the COVID-19 pandemic during the year had a notable impact on insurers’ activities, the report finds. Prior to the lockdown restrictions, new business volumes and retention rates were higher than in 2019. Whilst most insurers saw a favourable impact from reduced motor and home claims due to the COVID-19 restrictions, this was offset by:

  • lower GWP as a result of less new business
  • increased claims provisions (travel, landlord and business interruption) and risk margins to address the COVID-19 uncertainty
  • increased one-off expenses associated with implementing business continuity plans and remote working arrangements and bringing certain functions back onshore, and
  •  the introduction of various customer initiatives.

Scott Guse, KPMG Insurance Partner, said: “Insurers responded well to the drop in income for many of their customers during the pandemic. Customer initiatives offered included premium waivers or discounts; deferral of premium payments for small businesses experiencing financial hardship; maintenance of full cover on small business premises who were required to close for no additional premium; reduced payment days to suppliers; and waiving administration or cancellation fees for people experiencing financial hardship.”

Detailed findings in the report

  • Gross written premiums (GWP) increased by 4.76 percent to $47bn. This growth in GWP was driven by positive volumes and rate increases mainly in the classes of motor and home, but was offset by reduced commercial GWP arising from portfolio exits and lower CTP GWP due to ongoing rate reduction impacts from scheme changes and competitive pricing in NSW and SA. This overall increase in GWP shows the market is continuing to incorporate price increases to cover the expected future increased costs of claims.
  • The loss ratio (claims cost) continued to worsen in 2019/20 up 2.7 percent to 70.7 percent. This increase can be attributed to extensive natural catastrophe claims costs and prior period reserve movements. Natural hazard claims for the year included the catastrophic bushfires in Queensland, NSW and Victoria and severe storm activity (hail, rain and flooding) across the Eastern states between November and February (refer table below). These claims costs were partially offset by higher reinsurance recoveries and ongoing reserve releases however not to the full extent.
  • The expense ratio worsened by 1.4 percent, from 24 percent to 25.4 percent. Higher operating costs were incurred as a result of increasing technology, regulatory and compliance costs and one-off COVID-19 related expenses, partially offset by cost optimisation benefits from programs completed by insurers during the year
  • Investment income was down a very significant 91.3 percent from $3.1bn in 2018/19 to just $268m. This was due to the lower investment returns arising from the mark-to-mark impacts of volatile investment markets off the back of the COVID-19 pandemic and a continued reduction in interest and yield curves. 
  • The impact of these factors contributed to a lower industry insurance result of $2.3bn (prior year $4.4bn) and a historically low insurance margin of 6.8 percent. 
  • The industry’s capital coverage at 30 June 2020 for direct insurers was reduced to 1.69 times the APRA prescribed capital amount. This compares to 1.79 times at 30 June 2019 but while down on prior years, it is still a very strong position for the industry to be in.

David Kells concluded: “Looking ahead, in addition to the outcome in respect of business interruption, the current environment remains uncertain for insurers as a result of the COVID-19 pandemic and the further impacts that could arise. Insurers are forecasting continued growth in natural hazard events, while higher regulatory and compliance costs are expected to continue as insurers implement operational changes in response to the Royal Commission’s recommendations. They should also be preparing for the implementation of the global accounting standard, IFRS 17 Insurance Contracts, which will have a significant impact on their balance sheets and P&L accounts.”

In the report, KPMG identified ten key trends which will impact Australian insurance companies in both the short and long term, several of which are technology-related:

  1. Regulatory & compliance transformation
  2. Simplification & cost optimisation
  3. Changing customer expectations
  4. Pricing & risk optimisations
  5. Technology modernisation
  6. Distribution & channel optimisation
  7. Insurtech
  8. Mergers & Acquisitions
  9. IFRS 17
  10. Climate change

For further information

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

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