The current premium rate hardening in Australia's commercial insurance market is expected to continue into 2019, particularly in short-tail lines such as property, says Swiss Re Institute. Commercial premium growth is estimated at 6% next year, after a forecast 7.4% increase this year.
In a report titled “The Australian commercial insurance market”, Swiss Re Institute also forecasts solid economic growth of 2.6% next year, which will support demand for insurance.
By line of business, the report says that premium growth in the motor and property lines is expected to be mainly rate driven. Financial lines will face capacity constraints and higher premium rates due to rising class actions.
Marsh’s latest global insurance market report indicates that on average, commercial insurance rates rose by 13.7% year-on-year in the second quarter of 2018, after an 11.6%-gain in the first quarter, the highest among all regions globally. The increase was most notable in the small- and medium-sized enterprise (SME) segment. The stronger rates pushed premiums up 11.9% in the first half of 2018, after a 4.3%-increase in 2017.
Australia’s commercial insurance market is the 10th largest in the world. Total segment premiums were $10bn in 2017. Despite its size and ranking, surveys indicate still significant scope for strengthening of the business sector risk management discipline in Australia. Disruption to operations is one of the key risks facing business today and an area where many Australian firms, particularly SMEs, are underinsured.
Swiss Re Institute sees this trend increasing in the face of disruptive technology. Cyber risk is becoming an increasing area of interruption concern. Digital connectivity, increased use of data and proliferation of sensor technologies in production facilities mean higher exposures to cyber threats.
Concern about business interruption (BI) among risk managers has also risen as a result of globalisation. Most multinationals and even mid-sized firms have agreements with a number of input and service providers across the world, and thus more supply-chain vulnerabilities. Survey findings show that 36% of Australia’s top 2000 companies have investments overseas, on average in 4.2 foreign markets. Another survey shows that overall, close to 90% of Australia’s SMEs have no BI cover of any sort. This represents a significant exposure weakness, given that collectively SMEs account for about 57% of the value of national industry and services sector output.
There is also rising interest in parametric insurance products. In Swiss Re Institute's view, non-physical damage business interruption (NDBI) is the next step in the evolution of solutions for exposures that have been difficult to insure.
Over time, the nature of insurable property risks has broadened from traditional property damage (ie, buildings and machinery) to BI and contingent business interruption. Innovative NDBI insurance solutions can further expand the scope of insurability by helping improve the efficiency of risk transfer, and also reduce earnings and cash flow volatility. For instance, the renewable energy sector, which is highly capital intensive with significant property and operational risks, stands out as a new technology that requires innovative insurance solutions.