On the Radar: analysing insurance, class-by-class

Actuarial consultant Taylor Fry has released the annual Radar report, its “class-by-class” insights for insurers.

Taylor Fry says by drawing on Australian Prudential Regulation Authority (APRA) data, combined with “deep industry know-how and experience”, it is able to “unpick” each line of business.

It’s mostly good news, despite the wave of natural catastrophe claims, with every line except householders making a profit.

But those profits are less substantial than the industry would want them to be, and there’s a range of challenges coming over the horizon.

We’ve picked out the key findings in some of the main classes.

Domestic motor

FY22 was challenging, with domestic motor insurers facing major losses from east coast floods and an inflationary environment.

But insurers delivered strong gross written premium (GWP) growth – up 8% to counter these pressures (an average 4% premium rise and 4% increase in risks written).

Competition continues to intensify with challenger brands making inroads, and established insurers need to continue innovating on product and price.

While severe weather is likely to continue to have an impact, loss ratios should also be boosted by working from home becoming entrenched.

Insurers are exposed to supply chain issues as vehicles and parts become increasingly expensive.

Commercial motor

Commercial motor managed to remain profitable despite claims costs rising due to supply chain issues.

GWP increased 12%, thanks partly to an 8% rise in average premium, but cost pressures are expected to continue with increased use of technology in vehicles, and labour and production shortages impacting the cost of repairs and wait times for customers.

Householders

Taylor Fry says more frequent and costly natural disasters “threaten the ongoing viability of householders insurance”, especially in flood prone regions.

Multiple floods and high repair costs made FY22 a loss-making year for insurers, despite a 6% increase in average premiums. Combined ratios remain above 100% for the third year in a row.

The report notes the introduction of the Federal Government’s Cyclone Reinsurance Pool, but says this is “only one part of the solution”.

Other areas that need consideration include: reducing taxes on insurance, mitigation for existing properties, cross subsidisation between low and high risk homes, and improving building standards and planning.

Ongoing collaboration between all parties is required, the report says, to keep insurance available and affordable.

“Insurers are asking themselves, can I continue to offer household insurance in its current form and if so, at what price?”

Commercial property

Underwriting results have improved over the past 12-18 months but concerns remain regarding the profitability of this class.

While the combined ratio has been below 100% for six quarters, reported net loss ratios benefited from reserve releases, and there were significant reinsurance recoveries from natural peril events.

Over a longer period, commercial property has delivered negative insurance margins with an average combined ratio above 100% over the past seven years.

Insurers responded to high natural peril claims and uncertainty over Covid-19 business interruption losses by increasing premiums by an average of 16%.

Travel

Travel insurance has returned to “sustainable profitability” despite a range of “teething problems” as it ramps back up after covid.

Many staff left the industry during border closures, leaving a shortage of claims managers in particular which is “creating a potential logjam” and putting additional pressure on the staff that remain.

Taylor Fry says that long queues at airports, cancelled flights, and lost bags increase the potential for complaints.

But covid impacts on journeys should lessen as the pandemic becomes “endemic”, and real opportunities will open up for travel insurers that successfully weather the storm.

Professional indemnity and directors’ and officers’

Premium growth is outstripping claims growth, leading to improved underwriting profits which could see increased appetite from insurers.

However, Taylor Fry expects insurers to remain selective, given concerns with particular sectors.

And some of the government reforms that led to a drop in the number of class actions could be wound back.

Cyber remains an issue as attacks become more sophisticated and challenges with definitions mean silent cyber continues to be a concern.

Click here for the full Radar report.