Australia:Insurer profitability collapses to 20-year low

The COVID-19 pandemic along with natural peril events and global financial markets have had significant impacts on the profitability of the Australian insurance industry.

According to actuarial firm Finity’s annual Optima report 2020, insurers posted gross earned premium growth of 5% in FY20, reported loss ratio deterioration of 2%, 1% increase in the expense ratio and a significant reduction in investment returns.  

These factors resulted in a major drop in profitability in FY20, with the industry reporting ROE of just 4%. This was almost 10 points lower than FY19 and the worst ROE performance in nearly two decades. According to Finity principal and the lead author of the report Andy Cohen, a significant driver of the industry’s poor performance were the tumultuous financial markets at the end of FY20.

Remarking on COVID-19 and the recessionary impacts on the industry he said, “Impacts baked into insurers’ balance sheets at 30 June were relatively modest. But there is surely more to come through as the length and depth of the recession and the impacts on insurers’ premium and claims lines become clearer. “No doubt, there will be some ‘winners’ and ‘losers’ emerging from the other side based on each insurer’s respective business mix, distribution channels, strategy, customer service and response, level of digitisation sophistication and agility in these challenging times.”

The report also noted that premium growth in the Australian insurance sector is expected to suffer a COVID-19-induced slowdown as the recessionary environment limits business activity and brings some insurance products like travel insurance almost to a complete halt. On a more positive note, expenses are stable, underlying loss ratios have improved slightly and reserve releases should support an overall improvement in profitability.

Looking at FY21, Finity forecasts a 6% insurance margin and 7% ROE. This is a slight bounce-back from the low point of 4% ROE in FY20, but it still sits below target profitability levels. 

With investment returns set to remain at the very low levels seen in FY20 (less than 2%), underwriting margins would need to lift significantly if a return to target profitability is to be achieved going forward.

Source: Asia Insurance Review