General insurers: change or die

Poor e-commerce, low innovation and extreme events are just a few of the hurdles the insurance industry has to overcome in the next few years. By IBISWorld’s JASON BAKER.

Warning: The general insurance industry is in the decline phase of its life cycle, with revenue growth for the industry continuing to be low over the next five years, averaging just 1.2% a year to reach $41.6 billion in 2012.

The reason for this stark prognosis is multi-faceted: revenue growth has been, and will continue to be, below GDP and there has been little product innovation in the industry in recent years, with insurance products beginning to resemble price-driven commodities.

Industry revenue has grown from $35.36 billion in the 2002 financial year to an estimated $39.2 billion in 2007 – an annual growth rate of just 2.1%.

However, in the same period, the industry’s gross product, or value added, grew by an average of 33% a year. This growth does not, however, mean the industry has dramatically increased its profitability in that period. Rather it is a reflection of the industry’s recovery form the fallout of the September 11 terrorist attacks on the United States in 2001 (see chart).

Extreme events force rethink

IBISWorld has identified climate change as one of the greatest challenges facing the general insurance industry in the next few years.

A timely reminder of this challenge was the record US hurricane season in 2005, as well as the impact of tropical cyclone Larry in Queensland last year.

Until quite recently, trends in the insurance industry were driven predominantly by socio-economic factors, such as population growth, population concentration and rising amounts of increasingly valuable assets in areas prone to storm and flood risk.

These factors focus on loss severity, but more recent evidence suggests an increase in the frequency of extreme events. Insurers and reinsurers need to financially assess the impact of a higher frequency of extreme events, the impact of climate change and what it signifies for extreme weather as well as average weather conditions.

Recent experiences have forced a rethink around the modelling techniques used to monitor the severity and frequency of extreme events as well as the accumulative risk insurers are exposed to.

The industry will also need to increase its utilisation of electronic distribution channels in order to increase its operational and cost efficiency. Personal general insurance is perceived as being ideally suited to internet delivery.

Australian insurers lag

Some industry analysts have suggested that the insurance industry in Australia is behind other finance-based industries in developing e-commerce solutions. It has been suggested that industry participants are vulnerable to foreign and more dot-com savvy companies, especially in an environment that is becoming increasingly competitive and globalised.

Further, banks continue to increase their market share in the area of general insurance. As a result it is expected that the industry participants will become more customer-focused rather than product-focused, as companies pursue ways to secure relationships with their customers. Multiple item discounts and loyalty programs are ways that some companies may establish a multiple product relationship with their customers.

Greater concentration

The maturity of the general insurance industry is likely to lead to a greater level of concentration in the years to come. Currently industry concentration is rated as medium.

However there is significant dominance by the industry’s larger participants, with the top four insurers accounting for 41% of the industry’s gross premium income, and the top 10 companies accounting for 57%.

Concentration levels have been steadily increasing over the past five years. Since 2002, the number of industry participants has shrunk from 168 to 148 at present.

IBISWorld forecasts that in the next few years, the top five industry participants will be largely responsible for further concentration in the industry. They are expected to achieve this increase of market share through merger and acquisition activity and the competitive pursuit of market share.

The top five participants in the Australian general insurance industry are: the Insurance Australia Group, which owns NRMA and CGU; the Promina Group, which owns AAMI and the Australian Pensioners Insurance Agency; Allianz; Suncorp-Metway, which owns AMP and GIO; and QBE.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au