A wobbly balancing act

Premiums are continuing to rise, profits are returning. So are concerns about the affordability of insurance

By Bernice Han

This time last year insurers were pushing through some of the steepest premium increases seen in more than a decade, forced by losses from the record-breaking floods of 2022 and increasingly startling levels of inflation.

Those rate hikes, backed by a focus on pursuing margins over volume growth, have proved effective. Major insurers IAG, Suncorp and QBE – the three local listed companies that are by default a gauge of the industry’s financial health – posted strong numbers at the latest earnings season.

IAG made an insurance profit of $614 million for the six months to December, up 75.4% from a year earlier. Suncorp achieved a 51.8% rise in first-half general insurance profit after tax to $510 million. QBE, which reported its full-year earnings, said its insurance operating profit rose to $US796 million from $US614 million in 2022.

Allianz, the third-largest player in the industry thanks to its acquisition of Westpac’s general insurance arm in 2021, suffered a 48.8% drop in full-year operating profit to €213 million (about $353 million) from 2022.

The German-owned insurer says adverse development of 2022 catastrophe claims – specifically the floods in December that year, along with inflationary pressures on the home and motor portfolios that drove up average claims costs – were a drag on earnings.

KPMG Insurance Partner Scott Guse says he sees a lot more positives from the results season.

“Profitability is improving, but there’s still a long way to go before insurers make decent returns on a large number of their portfolios,” he told Insurance News.

“Everything seems to be heading in the right direction for insurers. They’re still getting sizable price increases through [and] inflation is tapering off. You should start to see profitability get better in future years as these price increases make their way through and inflation starts to stabilise even more.”

Actuary Scott Duncan, a Principal at consultancy Taylor Fry, says the industry’s pricing approach has been “disciplined”.

“We have seen a shift away from chasing volume growth towards prioritising profitability. We’ve seen that play out in the last six months in particular.”

But the industry is not in a celebratory mood just yet. IAG, Suncorp and QBE indicated at their earnings briefings in February that the inflation dragon is not completely tamed, which means further premium rises – albeit at a slower pace – are still necessary,

And as the inflation battle continues, a new challenge has grown up beside rising premiums: affordability. Spiralling costs for just about everything, especially groceries, utilities and home loans, have caused a backlash against corporate Australia. Insurers have not been spared from criticism, especially from politicians and consumer groups.

“The growth in the price of goods and services has outpaced the growth in wages.”

“The market is flagging further premium increases, and it’s worth calling out [that] the industry incurred four straight years of underwriting losses in home insurance,” Mr Duncan says. “Affordability is a hot topic in home insurance.”

He says most Australians are doing it tough at the moment. “The growth in the price of goods and services has outpaced the growth in wages, which puts pressure on household budgets. Insurance premiums do respond to what’s going on in the broader economy.

“Affordability and availability pressures are going to be front of mind for quite some time. There’s no quick fix.”

KPMG’s Mr Guse says there were fewer catastrophes in the past 12 months, which should ease pressure on householders’ premiums, but the segment still has some way to go before it stops being a loss-maker.

“Do I think premium prices will drop? No, they won’t, because at the moment, insurers are not making sufficient returns, especially on their home and motor lines,” Mr Guse says.

“They need to continue to put prices through and reduce costs. Both sides of the equation need to stack up and improve before [insurers] get a decent return on their investments. I’d say you’ve got at least another 12 months of continuous price increases.”

Suncorp Chief Executive Steve Johnston, who spoke at length about insurance affordability during his company’s earnings call, acknowledged the past several months have been “challenging” for customers as they dealt with cost-of-living pressures and devastating weather events.

He expects gross written premium growth in the low to mid-teens for this financial year as Suncorp responds to increased input costs, including from reinsurance, natural hazards and supply chain inflation.

The price adjustments have helped address inflationary pressures, but Suncorp expects premiums to keep going up in the near future. Chief Financial Officer Jeremy Robson says written premium is now running ahead of cost of policy, but “that hasn’t always been the case and there’s a catch-up element to this… [it] needs to come through to get margins back to where we want it”.

Mr Johnston doesn’t see affordability as something that can be resolved quickly – and certainly not by any one party. For insurers, natural hazard costs have gone up substantially over the years, which has led to higher operating expenses, especially for catastrophe reinsurance programs. At the same time, claims costs have also increased.

“We have seen a shift away from chasing volume growth.”
Scott Duncan, Taylor Fry

In the last five financial years to 2022-23, Mr Johnston says Suncorp’s aggregate gross natural hazard costs came to about $10 billion, which has an impact on catastrophe allowances and reinsurance costs. And in the past two years, the dollar value cost per policy for home and motor have gone up because of “elevated” inflation.

“Put simply the impacts of climate change, a reassessment of Australia and New Zealand risk by global insurers, the planning mistakes of the past and now inflation have converged to put the upward pressure on insurance pricing we are currently experiencing,” Mr Johnston says.

At IAG, the price increases have led to a 12.5% rise in first-half gross written premium to $7.94 billion. But it has come at a cost. New business volume growth stumbled, although retention levels remained strong, at around 90%.

Direct Insurance Australia, IAG’s personal lines division, recorded net growth of only around 21,000 new customers in the July-December period.

“Essentially, our volumes are pretty flat,” Chief Executive Nick Hawkins says of the personal lines market. “I would describe it as a very tough environment. We know there are all sorts of challenges with affordability.”

A recently released report on the state of the industry by consultancy PwC says the industry is confronted with a raft of challenges such as cyber and substantial losses from natural perils, while having to also remain profitable.

“This balancing act is notoriously hard,” it says.