Insurance premiums to rise: Report

Expect insurance premiums to rise as insurers seek to make up margin shortfalls, warns a report from KPMG on the general insurance market. However, new distribution channels such as Australia Post, Coles, Virgin Money and The Buzz may provide robust competition in the car and household sectors.

The economic crisis and natural disasters brought pressure on insurer’s earnings, in particular extreme weather events such as the Victorian bushfires and the Queensland floods.

“The general insurance industry by design is, however, a resilient business,” said the head of KPMG’s Insurance Sector, Brian Greig.

Underwriting surplus fell 76.0% to $463 million (2008: $1,926 million) as insurers continued to experience high natural peril and attritional claims costs together with a 425 basis point fall in interest rates.

As a result the insurers’ profit after tax was $3,197 million, slightly less than the previous year (2008: $3,210 million). Key profitability measures were lower with return on assets at 3.1% (2008: 3.4%) and return on equity at 13.8% (2008: 15.6%).

The rise in gross written premium of 4.3% to $35,197 million was driven by premium rate increases with insurers focused on pricing for risk, as opposed to pricing for volume.

For the insurers’ Australian operations, last year’s underwriting surplus of $938 million fell to an underwriting loss of $609 million. Insurance profit, after taking into account positive investment returns, fell 12.5% to $2,169 million (2008: $2,479 million). Results were once again overshadowed by the cost of severe weather events, estimated to have cost the industry $1.7 billion, as reinsurers bore the brunt of the increased claims cost.

Premium rates rose with gross written premium from the insurers’ Australian operations increasing 6.4% to $22,193 million (2008: $20,860 million). “The focus of insurers is on risk management including sound underwriting principles. Concern over the impact of the weakened economy has led to a heightened emphasis on risk management globally and here in Australia,” Greig says.

With weather patterns changing from wet (La Ni?a) to dry (El Ni?o) insurers can expect their claims profile to change as weather related events move from storms and floods to bushfires.

“Overall, the Australian insurance industry has performed well and local insurers have stuck to their core insurance businesses,” Greig says.

Insurers however will need to make up the margin shortfall from increased claims costs and lower investment returns: “We can expect to see higher premiums as insurers seek to manage increased claims costs and lower investment returns, and new distribution channels such as The Buzz, Virgin Money, Australia Post and Coles may provide robust competition in the car and householder sectors,” he says.