After a tough year, insurers hopeful
Last year proved a tough one for insurers as higher claims costs associated with elevated levels of catastrophe and falling yields impacted reported profits according to the latest JP Morgan Deloitte General Insurance Industry Survey, published this month.
Sharp losses were incurred in the 2011 financial year across property classes for all underwriters in commercial lines, personal lines and in particular reinsurers.
“These results reflect the accumulated losses from weather related events in late 2010 and early 2011 – namely the floods and Cyclone Yasi in Queensland and the Victorian floods,” said Siddharth Parameswaran, JP Morgan’s senior insurance analyst.
“2011 was a challenging year for insurers primarily due to these catastrophes, with the rate increases delivered insufficient to offset the higher claim trends related to these events,” he said. (See chart: Gross insurance losses in Australia)
In addition, Parameswaran said on a macro level “things look okay apart from one issue, which is a very large fall in asset yields.”
He pointed to the fact that government bond yields have fallen about 1.7 per cent over a three year period since 30 June 2011 and stressed the key macro economic worries for the insurance industry should be that yields are falling.
Overall the Australian industry combined ratio – the incurred losses plus expenses divided by earned premium – reported by survey respondents deteriorated one per cent in 2011 to 98 per cent, compared with 2010.
Parameswaran added that there were also considerable reserve releases evident in workers’ compensation, compulsory third party, and in particular public and product liability aiding results.
“Survey participants expect the commercial lines combined ratios to sharply rebound by 11 per cent, largely through normalising catastrophe costs and reduction in overall expense ratios which had crept out in the 2011 results.
They also predict a five per cent improvement in personal lines combined ratios,” Alexander said.
Although the industry is optimistic about improvements to profitability trends overall for the next couple of years, it should be noted that its forecasts have historically fallen short of the actual results. The 2010 survey revealed the industry forecast a 95 per cent combined ratio, however the actual combined ratio was 98 per cent.
Premium rates
Deloitte actuarial partner, Elaine Collins said that premium rates in 2011 were mixed. “The increases in personal lines rates by five per cent were driven primarily by event and natural peril activity in householders’ and NSW Compulsory Third Party (CTP) classes. Many participants noted higher reinsurance costs and the proposed changes around expansion of flood cover as primary causes,” she said.
The mixed rate rises continued the trends seen in 2009 and 2010 with the industry trying to restore profitability in householders after several years of poor results. “This was helped further by increases in deductibles in many classes,” Collins added.
“Commercial classes showed increases in property rates by more than seven per cent, although other classes remained soft.
“However looking forward, the survey respondents expect to see the strong premium rate increases continue into 2012 in personal lines and were hopeful of increases again in commercial property, with expectations suggesting other classes remain competitive,” she said.
Claims trends
Claims trends in personal lines in 2011 were affected adversely by above average natural peril activity. “Frequency trends excluding the peril claims were broadly in check in all classes other than directors’ and officers’ [insurance], although liability showed some signs of above average inflation,” Parameswaran said.
“Despite the positive outlook for the industry we note that 2012 may be another year for increased natural peril, and storm events given the expected continuing La Nina weather pattern,” he said. “La Nina episodes are typically associated with rainfall and cyclone activity at above average levels on the east coast of Australia. There is an 80 per cent chance that cyclones will occur more than average in the La Nina period of the current 2011-12 summer.”
“Adverse weather trends can also impact loss ratios in short tail classes including fire and ISR and home insurance in particular,” he added. “However, a weak La Nina episode may not necessarily be associated with significantly higher insured losses.”
Among the issues confronting underwriters, the top two were the regulatory burden and staffing issues.
“The Australian Prudential Regulation Authority’s (APRA) capital standards for life and general insurance capital (LAGIC) reforms that are due to be implemented by the industry from 1 January 2013 will be a major reason for these results,” said Deloitte insurance leader, Stuart Alexander.
“The LAGIC capital changes include stricter requirements for capital planning and management for the industry, along with the need to make capital projections for at least three years,”
Alexander said. “In addition to the quality of capital required, risk management and capital management practices for the industry will need to reviewed and in many cases overhauled with the potential for a supervisory adjustment. In addition, there is a requirement for more transparency, reporting and disclosure.
“APRA will require organisations to have an internal capital adequacy assessment process (ICAAP) in place,” he said. “This ICAAP plan and subsequent reporting against it, will add a burden to the industry in terms of people and skills, as well as a cost,” he added.
- Categories
- Insurance
- Tags:
- JP Morgan Deloitte General Insurance Industry Survey
- Author:
- AB+F , online@financialpublications.com.au
- Article Posted:
- February 15, 2012
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