Brokers ‘seem oblivious’ to a class of business that is giving Australian insurers its biggest headache, an industry leader has said.
Speaking on the launch of the Taylor Fry Radar 2016: Insights for insurance leaders
, Taylor Fry partner, Kevin Gomes, told Insurance Business
that CTP in New South Wales and commercial property are the biggest issues facing insurers.
“They are both causing headaches for insurers but, out of those two, the one we would rate as the bigger industry issue is the commercial property and very poor profitability on that,” Gomes said.
“The reason for that is that many insurers are writing commercial property whereas there is only a few that are now writing CTP in New South Wales. CTP is more of a quarantined issue but commercial property is a headache because of the profitability is very low.”
The Radar 2016
is useful to brokers as Gomes said that “there may be some misconceptions from the broking community on how profitable certain classes of business are,” particularly in the commercial property space.
“The best example of that is the commercial property class which is really going through one of the poorest periods in as long as we’ve been measuring it, commercial property has never had a worse return on capital than it currently is at the moment but brokers seem oblivious to this,” Gomes continued.
“We do a survey of brokers, which is not mentioned in the Radar but we do it as part of the Barometer product that we do with JP Morgan, and we ask brokers which class of business they feel is the most profitable or the best for underwriters to write and commercial property was nominated by them as number one which really is quite different.
“The underwriters recognise that, at the moment, it is a very poor class of business for them to write so there is a big dichotomy there.”
Gomes said that the difference between brokers and underwriters in the commercial property space is no fault of the brokers as underwriters continue to write business despite the conditions.
“You actually can’t blame brokers entirely for this dichotomy because the truth is that underwriters, even though they recognise the poor profitability of the class, they haven’t really stopped trying to write it.
“Competitive conditions are still very strong in commercial property but it might benefit brokers to know that this is the actual profit of that class of business.
“I can’t help but feel it would help them to know that just in terms of what the outlook needs to be from here for rate movements so they can manage that issue in terms of their clients.”
Gomes noted that Taylor Fry will be watching commercial property rates carefully over the coming year as the cycle could remain soft until 2017.
“The commercial classes, and in particular commercial property, have had quite reasonable rate decreases over the last few years and the outlook is for more to continue in 2016,” Gomes said.
“But we think the outcome should turn, or at least stabilise, in 2017 onwards so that’s what insurers seem to be saying to us. We still see at the moment very high capacity to write commercial classes of business and whilst that capacity is there it is really hard to see the soft rate market turning around.”
Gomes noted that the current market conditions rank as some of the worst in the past 40 years as insurers may be forced to reassess their businesses on the back of low profitability.
“When we look at the profitability on the commercial insurance side, this is probably some of some of the worst conditions that we would say there has been in the last 40 years in terms of the profitability and return on capital, “Gomes continued.
What’s making it even worse is the low returns on investment yields.
“I think the appetite for, if the profitability is as poor as we’ve seen and the outlook for profitability is as a poor as what we are led to believe, then I think insurers will have to reassess their view on if they want to write those commercial classes and commercial property in particular.”
To access the full Radar 2016, visit the Taylor Fry website.