With profits up in the insurance industry digital disrupters key to ongoing success

Scott Guse, ASPAC Head, Insurance Accounting
Scott Guse, Partner, ASPAC Head, Insurance Accounting
David Kells, National Sector Leader, Insurance
David Kells, National Sector Leader, Insurance

Australia’s general insurance sector is on the rise after a difficult last couple of years.

After the nadir of 2015, when a set of serious storms battered the sector’s finances, 2016 saw a tentative improvement.

But this year’s results, according to KPMG’s annual General Insurance Industry Review, are much better – profits up to $4.8bn, with an underlying insurance margin (overall insurance profitability) of 16.1 percent. Premiums are also up by 5 percent, to $43bn, while claim costs and operating expenses down from 2016.

The only cloud in an otherwise sunny outlook was a fall in investment income, on the back of a low interest rate environment and conservative investment portfolios.

Automation, AI and data analytics continue to disrupt

Insurtech – the standout market force influencing the sector over the past two years – will continue to disrupt the traditional players with digital, AI and further harnessing of data analytics all key to the future prosperity of the insurance industry.

We foresee some insurers focusing on greater automation onshore with Artificial Intelligence (AI) and robotics, whilst others continue with ongoing offshoring and outsourcing efforts.

While expense ratios have declined in recent years, the industry’s investment in new product offerings, technology and a focus on client experience means further cost reductions will be harder to secure in the short term.

An example of where AI has started to make a difference is evident from the work Google has done globally with AXA. Using AI through machine learning and data analysis, AXA has been able to predict with 78 percent accuracy those motor vehicle policy holders that will be involved in a claim exceeding $10,000.

This sort of technology will further enhance an insurer’s ability to appropriately price a specific insurance policy.

Google has also reported a significant increase in ‘queries’ through mobile devices over the past 12 months. Customers are now more comfortable researching and then purchasing their general insurance products on their mobile phones, on the bus to work or even while they are waiting for their daily coffee.

Whilst this trend is producing more cost effective distribution platforms for insurers, they have to ensure their mobile websites are easy to use and tailored for a mobile device.

But this year’s figures are undoubtedly encouraging. And with a much clearer customer focus now taking hold among insurers, the future is brighter than could have been predicted in 2015.

Pressure continues on premiums

In recent years, the competitive environment has put pressure on premiums with only marginal increases experienced. But the average growth written premiums (GWS) quarterly growth rate for 2016/17 was 1.2 percent. This reflects the highest percentage growth we have seen for some time.

Importantly, the strong growth in GWS was largely rate-driven; a clear sign the market is starting to harden. Net earned premiums increased by 6 percent, reflecting the premium rate increase.

The loss ratio (claims cost) also improved, down 2.5 percent to 63.5 percent. Despite 2017 seeing a higher frequency of natural catastrophes than in 2016 – primarily driven by Cyclone Debbie – total incurred gross claims were largely offset by higher reinsurance recoveries.

Ongoing reserve releases from prior year claim provisions, reflecting the low inflation environment, also played a part.

Keeping a tight hold on costs

This year’s positive results should be seen in context. The underlying insurance margin (overall insurance profitability) of 16 percent is still below the results achieved by the industry in 2012, 2013 and 2014 – so there is still a way to go.

We are clearly seeing tight cost discipline from Australian insurers – a further 1.4 percent decrease in the expense ratio to 24.8 percent builds on last year’s improvement. Whilst this is partly due to pricing increases, the move to more cost effective distribution channels has been a key driver in reducing this ratio. It is essential that insurers maintain their pricing discipline and do not risk eroding their growth by aiming for short-term market share expansion. .

The progressive move away from a call centre/branch distribution network for general insurance retail products (i.e. car, home and travel products) to a distribution platform that is mobile, digital or online based is a significant contributor here.

The industry’s capital coverage is also strong – at 30 June 2017 for direct insurers this was 1.86 times the APRA prescribed capital amount. This compares to 1.74 times at 30 June 2016.

But before anyone starts getting too carried away, the 22 percent fall in investment income allocated to insurance funds – to $1,3bn from $1.7bn in 2015/16 is disappointing. It will no doubt see renewed focus on diversification of investment portfolios to maximise future returns.

But all in all, the future looks bright.

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