S&P Global Ratings expects solid underwriting results and associated returns across Australia's P&C insurance industry in 2019, reflecting recent rate hardening across many lines.
Insurers' underlying operating performances for the year to 30 June 2018 (FY2018), benefited from rate hardening, lower claims ratios, and sound expense management. Underwriting results improved and returns have passed the strong level last seen in 2014. Momentum is also on the uptick, with a robust annualised insurance margin recorded for the past six months, notes the international rating agency in a report entitled, “Recovery Position: Australia's P/C Insurers Have The Means To Strengthen Defences”.
S&P said, “We anticipate that insurers will use some of the strong returns from personal lines to enhance operational efficiencies, defend market positions, and refine risk-based pricing capabilities. Headwinds include slower volume growth, claims inflation, and more recently the adverse issues highlighted as part of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. On balance, we maintain our stable outlook for the sector.”
Premiums and rates will rise
For 2018 and 2019, S&P expects rates to continue to rise moderately for motor classes and home and contents (H&C) insurance classes and rate hardening to be selective across commercial lines. Further rate increases for personal lines are likely to recognise the growing frequency and severity of claims (including claims inflation). Competition in commercial segments will likely limit the extent of rate hardening.
Higher insurance margins also capture the earn-through of prior pricing changes flowing into financials in FY2018, which were stronger than S&P anticipated. Direct gross earned premiums (GEP) increased by about 5.7% in that year from about 3.1% in FY2017. On an underlying basis, direct GEP excludes inward reinsurance, fire services levy, mortgage insurance, and compulsory third party (CTP) premiums.
In S&P's view, H&C and domestic motor lines of business (H&C in particular) will continue to drive the industry's profits. On a headline basis, aggregate premium growth was, however, steady at about 4.2% for the year to 30 June 2018, and affected by premium rate changes in CTP motor insurance. The aggregate CTP premiums were lessened by state-based regulatory revisions in New South Wales, in particular with total CTP for motor declining about 7% in FY2018.
The Royal Commission has brought to light concerns and deficiencies that may be prevalent across the broader finance and insurance industry, and in particular, more specific to some P/C insurers. Some of these issues are historical, others more recent. For P/C insurers, the concerns largely revolve around compliance, misconduct, and expected duty of care.
S&P said, “We view the Australian P/C insurer's reputation as tarnished. While the Commission's final findings are not yet known, they will likely result in a range of actions including changes to products, processes, and procedures. Measures will also likely strengthen company and industry controls, and consequently raise operating costs. Higher costs will probably depend on the extent of remedial requirements, the imposition of penalties, and/or fines."
The report also said, "Some lines and subsegments of lines do not appear to have sustainable returns, including small-to-midsized commercial lines. The ability to apply risk-based pricing in the context of claims experience and assessed risk attributes has proven difficult in the context of highly competitive market conditions. Consequently, we only expect incremental and selective rate hardening.”