Climate events one of the largest concerns for the insurance industry

If you feel as though you’ve spent most of this past summer inside hiding from wild weather you’re not alone. Beyond the awful scenes in Queensland and NSW, the weather has been raining on the parade of many industries across the east coast.

Insurers are in the thick of this. The Insurance Council of Australia has given early cost estimates of $2.32bn for the current floods, which will hit insurers’ results hard in 2022.

Insurance is cyclical by nature. While the 2020 figures were impacted heavily by the bushfires, the 2021 results – which KPMG’s new annual review of the general insurance industry details – showed a significant bounce-back in profit margins from the depths of 2020.

In 2021, our report shows a 281 percent increase in profits on the previous year, primarily driven by a 11 percent jump in Gross Written Premiums. The overall profits of $3,486M were welcomed by the industry after the bare $915M recorded in 2020. The lack of significant weather events were key to this.

But context is important. While the 2021 upturn is positive, levels still remain below those recorded in 2017 to 2019 and the QLD/NSW weather events will cast a shadow on future profits rebounding further.

Another key reason why profits did not return to levels seen between 2017 and 2019 was a significant fall in investment returns. A 64 percent decrease from 2020 saw investment income fall to just $510M, representing a major downturn in fortunes for many insurers.

Going forward, however, we expect that climate events will represent one of the largest concerns for the industry. There is an abundance of evidence that these events are becoming both more regular and more severe and their effects will have wide ranging impacts on insurance. For instance, there are deep concerns that some areas will become ‘uninsurable’ due to the likelihood of exposure to natural disasters.

In this respect, it is disappointing that spending on preventative measures remains so low, around 3c of every $1 spent on disaster management, as they represent the most cost-effective way of reducing the burden on all parties.

The growing importance of ESG for companies and stakeholders will likely have knock-on effects beyond premium costs and the risk of underinsurance. Legislative changes around policy writing and reporting are expected, particularly given APRA’s decision to focus on the sustainability of insurance products for long-term consumer benefit.

Addressing key stakeholder concerns, inside and outside of your business, through establishing strong and detailed reporting structures for ESG metrics will become vital, so getting a head-start by reviewing current practices now would be wise.

Beyond this, we expect digitisation and a focus on Insurtech to be key trends emerging over the next few years. Beyond the customer experience benefits of improved digital offerings, the collection and analysis of data will be increasingly important in assessing and responding to natural disasters in a timely and effective manner.

Likewise, Insurtech products that enable better modelling and output of flexible services to market should both lower costs associated with time spent calculating potential impacts and allow insurers more room to manoeuvre when writing policies in areas with higher risk profiles.

The move to digitisation should also help to address declining investment income through simplification of offerings and procedures. Cost optimisation is key, particularly as a mechanism to buffer against added unpredictability and rising claims. Consolidation is also an option, and we expect to see more mergers and acquisitions sought throughout this year and 2023.

Overall, the insurance industry, despite some positive progress in 2021, remains burdened with mounting costs and threats to ongoing profitability. While our research highlights a few key areas of concern, there are still steps which can be taken to navigate the sector through what has been a challenging period back to a place of healthy margins.

Acting early to address climate events, especially through increased funding to preventative measures, as well as embracing digitisation and simplification are all achievable objectives for the industry which will have strong impacts now and into the future.

Read the full report.


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