Riders on the storm: the state of the insurance industry
Insurance is, by its very nature, an unpredictable business. And this year’s figures prove that all too clearly.
KPMG’s General Insurance Industry Review reveals that five natural disasters – Cyclone Marcia, heavy storms in NSW and South East Queensland, hailstorms in Sydney and Brisbane, and bushfires in South Australia – cost the insurance industry $3.6bn in the year to 30 June 2015. This sum almost equaled the entire annual profit of Australian general insurers.
While last year insurers enjoyed a five-year high profit of $4.982bn, this year that fell 23.6 percent to just $3.735bn. Reinsurance protected general insurers from the full brunt of the losses but not enough to prevent key industry measures declining. The industry’s insurance margin fell sharply to 13.6 percent from 18.2 percent while the industry loss ratio increased to 67.2 percent from the five-year low of 61.6 percent in 2014.
It should be pointed out that not all the decline can be attributed to nature – continued competitive pressures on premium rates also played its part.
Gross written premiums remained flat at $32,478m, reflecting the strong competition faced by insurers throughout the year. Net written premiums edged up by 2.2 percent as insurers continued to reap the benefits of lower reinsurance costs, the result of increased capacity in global reinsurance markets.
So is there any good news? To a degree, the pressures were offset by improving investment returns. The past 12 months saw insurers revisit their investment strategies and venture into alternative assets as they continued to operate in a low interest rate environment in Australia and globally.
Insurers also demonstrated their ability to maintain cost discipline. The industry expense ratio stayed at 26.3 percent in 2015. This is despite limited premium growth and a highly competitive market in which insurers are continuing to fight to maintain market share.
Additionally, a number of insurers who in recent years invested in transformation and cost optimisation projects are now beginning to see the benefits of implementing new systems and streamlining processes.
So what do we see happening in 2016? Certainly no decline in competitive pressures. The industry continues to see strong growth in challenger brands, non-traditional market entrants and low-cost online insurers. These challenger brands persist in taking market share from the incumbents, and they continue to outpace industry growth, albeit off a smaller base.
In the report, KPMG have identified 10 risks and opportunities for insurance companies:
Increasing competition – the insurance industry has experienced more than its fair share, led by challenger brands, aggregator websites and white label products
Fintech – insurers are especially vulnerable to disruption as they have fewer touch points with their customers than other industries and are hence more price sensitive. Insurers have been slow to embrace financial technology (fintech)
Other technological advances – such as driverless cars will impact the industry
Telematics – used by global insurers, telematics can instantly tell where and how a policyholder drives. This could transform insurers’ existing claims management functions
Social media – insurers have been slow to embrace this for customer engagement and to respond to reputation-damaging issues
Big data – few insurers are currently realising the potential of big data. One obvious example is integrating social media data with claims data to identify fraudulent claims
Machine learning – insurers are not viewed as early adopters of machine learning, the use of algorithms that use historical data to predict current or future outcomes
Cyber insurance – huge opportunities exist here due to soaring cyber-attacks but only a small number of Ausralian insurers currently offer protection
Conduct risk – regulators including ASIC have moved on from post-GFC focus on solvency standards and are now monitoring risks of customer detriment due to poor culture in financial institutions.
Dealing with global factors – the interconnectedness of the global economy means Australian insurers are affected by external issues such as an increase in US interest rates or Chinese debt problems
A dominant theme in that list is digital technology. Customers, investors and employees are demanding innovation and the blunt truth is that insurance industry is currently not responding as well as other industries, such as banking. New entrants, technologies and business models are emerging at an increasingly rapid pace, requiring the insurance industry to respond with more agility, flexibility and speed than it has shown until now.
This year has shown that the industry cannot reply on Mother Nature being kind. A real focus on all the controllable factors is even more important to insurers than to other industries.
Read the whole report: General insurance industry review 2015: Responding to a challenging environment.