Insurers are not done with the hard market as the industry tries to stay on top of inflation

By Bernice Han

The economic clouds are shifting, but for Australian general insurers the turbulence of the past few years has placed the inflation dragon front and centre.

The air had barely cleared from the 2019/20 Black Summer bushfires when the covid pandemic broke out in March 2020, leading to economy-wide supply chain pressures that have only become more acute for the industry after last year’s catastrophic floods.

Led by IAG and Suncorp, the insurers have delivered strong headline earnings on the back of hefty premium increases in response to rising operating costs in the year to June 30.

A timely recovery in investment income helped too, lifting the industry’s net profit after tax fivefold to $4.6 billion for the 12 months to June 30 from a year earlier. Australian Prudential Regulation Authority (APRA) data also shows investment income rebounding to $3 billion from a year-earlier $2.8 billion deficit.

The industry still made an underwriting profit, about $5.7 billion, but in the prior 12-month period the insurers made more: $6.08 billion. APRA says the 6% decline in underwriting earnings was caused by a significant rise in net incurred claims as reinsurance revenue fell across almost all lines of business.

Net incurred claims blew out to $30.3 billion from $26.1 billion while reinsurance recoveries revenue declined to $10.37 billion from $16.17 billion.

Scott Collings, the Managing Director at actuarial and insurance consultancy Finity, says insurers have made “strong premium rate increases across the board but are still chasing the tail with inflation because it keeps staying ahead of them”.

“In many cases it’s double-digit increases, particularly in home and motor,” he tells Insurance News. “The industry has made solid progress but they’re fighting an uphill battle against inflation.”

KPMG Partner Scott Guse says the weaker underwriting results “are a little surprising” given all the rate increases that have been pushed through.

He says the continuing deficit for home insurance is “concerning”. The industry’s home underwriting loss worsened slightly to $205 million from $199 million.

“Home is 20% of the industry’s premium, so it needs to be a profitable portfolio for insurers to thrive,” Mr Guse tells Insurance News. “Hopefully the weather cycle that we are heading into will help return the sector to profitability.”

Even if Mother Nature is kinder than expected, the insurers have warned that more rate increases are necessary because they are expecting to pay more for catastrophe reinsurance programs. The cause: changes in global climate patterns leading to more frequent and destructive weather events. Reinsurers continued to jack up prices for Australian clients this year after 2022’s run of La Nina-linked flood catastrophes.

IAG Chief Executive Nick Hawkins says the group’s reinsurance cost has gone up substantially over the past six to seven years. Around 13% of every dollar of premium collected in 2016 went towards covering reinsurance and perils allowance. And for this financial year it should be around 20%.

“I expect to see this continuing trend of increasing costs of reinsurance and perils as part of how we’re running our business,” Mr Hawkins told an earnings call after IAG released its full-year results.

Net profit after tax more than doubled to $832 million from $347 million, benefitting also from a post-tax business interruption release of $392 million.

Insurance profit rose 37% to $803 million, and gross written premium (GWP) gained 10.6% to $14.7 billion. However underwriting profit weakened to $532 million from $824 million.

IAG also paid out about $10.2 billion in claims, up 20% from a year earlier. Its net claims expense worsened to $5.86 billion from $5.21 billion, and reinsurance expense also increased, to $5.51 billion from $5.06 billion.

Net perils claims cost reached nearly $1.21 billion, exceeding IAG’s allowance of $909 million. While Australia had a relatively benign 12 months, New Zealand’s twin summer disasters – the Auckland flooding event in January and Cyclone Gabrielle in February – led to net costs of $284 million.

“In New Zealand we had two enormous events that are well beyond any of our expectations in January and February,” Mr Hawkins said. “Reinsurers are paying a lot more attention to New Zealand because of the significant events that have occurred and that will be reflected in pricing.”

For this financial year IAG has increased its overall natural perils allowance by $238 million or 26% to $1.147 billion.

Suncorp’s full-year earnings rose, but the insurer also felt the sting of elevated natural catastrophe claims.

Group net profit after tax increased 68.6% to $1.14 billion and net profit at its Insurance Australia division more than quadrupled to $755 million, while gross written premium gained 10.6% to $10.2 billion on rate rises.

The improved GWP reflected targeted price increases required to address material rises in reinsurance and natural hazard costs and economy-wide inflation.

But Suncorp still busted through its group natural allowance of $1.16 billion by $97 million as the third straight La Nina weather pattern being experienced across Australia and New Zealand led to 15 separate weather events and around 130,000 natural hazard claims.

For this financial year the group raised its natural hazard allowance to $1.36 billion to reflect the increased retention arising from its reinsurance program changes and the inflationary claims environment.

Changes to the reinsurance program include raising the maximum event retention to $350 million for a first large event from $250 million in the previous financial year.

“Global reinsurance markets remain in a hardening cycle, reflecting adverse global natural hazard experience, inflationary pressures and a reassessment of Australia and New Zealand underwriting risks,” Suncorp Group Chief Executive Steve Johnston said during an earnings presentation.

“We are seeing a once-in-a-generation reset of risks from global reinsurers, we’ve seen it over the past two or three years. These factors impact the cost of reinsurance, the degree of risk retention which we’ve seen this year, and ultimately the price of insurance products to consumers.”

Mr Collings says IAG and Suncorp have been forced to take higher retentions or pay even more for reinsurance.

“It’s a reflection of how expensive the reinsurance is,” Mr Collings says. “So they are right in the sense that premium rates for reinsurance are not going to come down in the near future.

“The amount insurers have to pay for reinsurance protection has risen a lot in the past couple of years and was continuing to rise for the latest June 30 renewals.”

QBE Chief Executive Andrew Horton says there’s been a step-change in reinsurance markets in  regards to pricing and retention levels, and the company is assessing its exposures as it seeks to reduce volatility in a changing environment.

“We’re retaining a much larger chunk of any catastrophe loss before it goes into the reinsurance program than we did,” he told Insurance News. “To manage that we needed to look at the insurance exposure we’re taking onto our balance sheet.”

The Sydney-based international insurer reported its first-half results. It has a smaller presence in Australia but that has not spared QBE from the devastating impacts of natural catastrophes in the United States, where it has significant operations.

Its insurance operating result in the June half fell to $US95 million from $US375 million a year earlier, but group net profit after tax rose to $US400 million from $US48 million, lifted by investment returns and a 13% rise in GWP to $US12.8 billion.

But catastrophe costs worsened, taking up 9.3% of net insurance revenue compared with 2.8% a year earlier due to a high frequency and severity of convective storms in the US and also the record flooding in New Zealand over the period.

QBE says convective storm losses in the US have fallen on insurers rather than reinsurers, given levels at which they are willing to step in, while this year North Island catastrophes have changed reinsurer views on New Zealand risks.

Allianz, the third largest insurer in Australia by gross written premium, is not listed here, but a spokesperson says the business recovered in the 2022/23 year with a $432 million profit from a $24 million loss, as reported in the APRA statistics.

For commercial reasons the insurer can’t comment on its premium increase, but the spokesperson confirms pricing is in line with the broader industry. Like its rivals, Allianz too sees no end to the cycle of hardening rates as cost pressures persist.

“Premiums will continue to be impacted into 2024 by the events and conditions of recent years,” the Allianz spokesperson tells Insurance News, adding the insurer’s “natural catastrophe claims payouts have over the past 18 months been similarly significant, commensurate with our market share.”

The recent floods have forced it to rethink its optional home flood cover offering, which has been available since 2012.

The insurer made temporary accommodation payments while hydrology reports were being prepared for flood-affected customers who have chosen not to take out flood cover.

These customers made no premium contribution to their flood-related payments, the spokesperson says. “The events of last year have called into question the sustainability of maintaining such a model for optional flood cover.”

Looking ahead, KPMG’s Mr Guse says insurers will continue to raise premiums because of higher reinsurance costs, inflationary pressures on claim costs and, to a lesser extent, supply chain impacts.

“To think we will not have further premium increases is wrong.

“We will still have increases but they will not be as big as what we’ve seen in the past 12 months.”