S&P Global Ratings expects solid head-line growth in gross written premiums of about 6% per year for P&C insurers across personal and commercial lines in Australia.
In a report released earlier this week, entitled "Insurance Industry And Country Risk Assessment: Australia Property/Casualty", S&P Global Ratings analyst Mr Craig Bennett, said, "This growth reflects higher pricing for risk including catastrophes and claims inflation supplemented by moderate unit growth off the back of continued modest GDP growth.
He said, "Our evaluation of Australia's P&C insurance sector incorporates the historic strong operating performance across personal and commercial lines. We consider this sector to be mature, well developed, and advanced in terms of pricing and risk controls."
As of 31 March 2022, Australia had 92 licensed insurers, compared with 115 five years ago. Participants include some of the largest global P&C insurers, instilling a highly competitive operating environment that is supported by global reinsurers.
Mr Bennett said, "Local insurers have been particularly effective in managing large claims and exposure to natural peril and catastrophe events through reinsurance, and we expect heightened pressure on reinsurance rates and cover over the next three years."
S&P Global Ratings assesses as low risk the industry and country risk in the property/casualty insurance sector of Australia (unsolicited ratings: AAA/Stable/A-1+).
Mr Bennett, said, "This assessment is the second-lowest risk on our scale and reflects the very low country risk as well as the low Australia P&C sector risks."
S&P's industry risk assessment for Australia P&C insurers incorporates recent headwinds across catastrophes, reinsurance costs, claims inflation, and investment losses from higher interest rates. That said, the global credit rating agency expects the industry's underlying strong earnings to benefit from sound underwriting controls, solid reinsurance capacity, and higher premium rates.
While the frequency of catastrophes has declined in recent years—the intensity and damage bill has near doubled from a decade ago. From 31 December 2012 to 31 March 2022, Australia had about 40 declared catastrophes with original losses of about A$24bn ($16.6bn). This compares with about 50 catastrophes in the prior 10 years, but the original losses were almost half at less than A$13bn (inflation adjusted). The catastrophe intensity has heightened in recent years, most notably the February 2022 South East Queensland and New South Wales floods that caused extreme and unprecedented losses.
The impact on the insurance industry of these catastrophes has been tempered by sound earnings from other lines. Higher premium rates were passed on to policyholders, and excess claims were shared with reinsurers.
Mr Bennett said, "We expect primary P&C insurers to experience continued upward pressure on reinsurance prices for property lines in particular, and across aggregate excess of loss protection covers. Higher reinsurance prices are seen in markets other than Australia too."
The COVID-19 pandemic and related market volatility has also hit Australia. The lingering impacts of the pandemic have increased the cost of repairs through supply chain delays and added costs, while state-government-imposed quarantine and distancing requirements have reduced the availability of labour. These factors are also contributing to broader inflationary pressures across the economy. Heightened market volatility with various strains of the coronavirus are also hampering economic growth and pushing up inflation – the latter affecting interest rate expectations. Some claims are also yet to be resolved—these relate to business interruption and specifically whether this was to be captured and covered by policies.
Mr Bennett said, "We expect real GDP growth in Australia to moderate toward 4.0% in calendar 2022 (from 4.7% for 2021), reflecting higher interest rates as the central bank seeks to curb the increase in inflation (forecast to rise to 3.9%, from 2.8% for 2021). Government fiscal stimulus packages and an accommodative monetary stance supported economic growth in calendar 2021, supporting economic activity and consumer confidence and the economy rebounded post the COVID-related shutdowns. The higher interest rates should curb inflationary pressures but will hamper growth."