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Finity sees the industry bouncing back

October 16, 2018

Premium rises and low catastrophe costs have helped improve insurance margins and equity returns in a bounce-back year for insurers, Finity Consulting says in its annual Optima report on the industry.

But the actuarial and analytics consultancy warns there are some “headwinds” on the horizon, including actions stemming from the Hayne royal commission.

For the moment, however, the report shows there’s plenty for the industry to cheer about after several years in the economic doldrums. The insurance margin rose two percentage points to 16% last financial year and return on equity (ROE) reached 15% for the first time since 2014.

“Rate increases, particularly in private motor, assisted the top line while benign weather and low cat activity improved the claims line for a number of classes,” Finity Principal Andy Cohen said.

“Prior year reserve releases in long-tail classes were yet again very strong, with CTP alone contributing another $1 billion to the bottom line.”

Private motor, which accounts for a quarter of net premium, also benefited from reduced claims inflation, with the class almost returning to target profitability, he says.

Finity expects the overall market will continue to harden and profitability will remain sound, although a little below target.

In the current financial year, reported profitability is expected to contract slightly but remain in double digits, while margins and ROE are expected to stay in the 10-15% range for the next three years.

“Although the outlook for overall industry profitability is good, headwinds to watch out for are numerous,” Mr Cohen said.

These include reduced scope for reserve releases, Hayne royal commission regulatory impacts, the return of strong claims inflation and class actions. Investment returns also remain at very low levels.

The main tailwind for the current financial year is the continued hardening of the commercial market, but significant multi-year rate rises are needed to bring short-tail classes back into the black.

Finity says underlying profitability improved last year to a greater extent than the reported figures. 

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