The insurance industry has experienced a 12% drop in its profits to $4.4 billion in 2019, partly driven by higher claims due to natural hazards, including East Coast weather events in summer 2018/19, according to KPMG Australia’s annual General Insurance Industry Review.
In the 12 months to June 30, net earned premiums were up 4.5% to $32.3 billion; while gross written premiums rose by 5% to $44.8 billion – growth that was largely rate-driven and would have been higher but for the impact of reforms to the compulsory third-party schemes in NSW and QLD, KPMG said.
“This year has illustrated the cyclical nature of insurance,” said David Kells, KPMG head of insurance. “The previous two years were relatively kind in terms of claims, but this year saw a less favourable claims experience for insurers, while lower-than-expected reserve releases added to the decline in profits. For the last five years, gross written premiums have risen, and the market continues to harden, so we expect further price increases in the year ahead in both personal and commercial fields. But with record amounts being paid out in claims, the importance and value of insurance to Australian consumers and businesses should be acknowledged.”
KPMG noted that some major insurers, including Suncorp and IAG, have implemented significant operational improvements, through automation and more “cost effective” distribution channels, which have helped them reduce costs in a challenging year for the industry. This contributed to the improvement in the expense ratio, dropping to 24% from 25%, despite higher regulatory costs. The insurance margin, however, fell noticeably to 13.6%, from 16.3%.
“Insurers are expected to finalise their optimisation programs with further incremental improvements from optimisation initiatives expected in FY20 to realise their targets,” said Scott Guse, KPMG insurance partner. “But costs of claims continue to rise – in areas like motor insurance, the higher sophistication of vehicles, with computerised systems, means repair costs are much higher than years ago. The drop in the insurance margin in 2019 was a concern, so the dual focus on reducing costs while upgrading digital capabilities – to automate businesses and improve product offerings and enhance the customer experience – will have to be redoubled.”