After four years of losses, the turnaround for householders insurance is in sight. And it’s not a false dawn, Finity’s Optima says

By Bernice Han

Savage losses in the householders segment over the past few years will turn around as early as this financial year. That’s critically important to the Australian general insurance industry, because after private motor, no other classes of business – commercial lines included – generate as much premium.

Finity Principal Andy Cohen says that in normal times rising premiums would have meant better earnings for insurers.

But the past few years have been anything but normal. The industry has had to weather supply disruptions caused by the 2020 covid pandemic, which affected production and deliveries of all types of building materials globally.

Then record floods came in February/March last year, and the succession of La Nina-linked inundations that followed throughout 2022 added to the demand for materials.

“When you see double-digit premium increases, you think that has to be good,” Mr Cohen tells Insurance News. “But a lot of it has gone into absorbing cost pressures.”

Finity’s annual stocktake of the industry says things have likely turned a corner for householders.

While the challenges that have strained the householders segment have not completely gone away, the scale of the pressure from inflation and shortages has started to recede. This should result in the segment registering its first underwriting profit since 2018/19.

“We think it is turning around and improving,” Mr Cohen says. “You’re going to see a lot more of the earn-through from premium increases.”

But there’s a catch. Raising premiums to offset losses also strains the budgets of already-strained households. The Optima report warns that affordability poses the “greatest generational challenge” facing the householders class.

And that’s because the range of unfavourable macro-influences is vast. Finity sees slower economic growth in a high interest rate environment and the complex and interconnected nature of the underlying drivers like the growing frequency of climate-caused weather events, will continue to threaten affordability.

There is also the growing legacy problem of existing houses located in areas that are already or will become more expensive for owners to acquire home cover, which will further worsen the already significant social and insurance problem.

“In response to more unaffordable insurance, customers are taking on larger excesses, under-insuring or not insuring at all, leaving an increasing number without adequate insurance cover,” the Optima report says.

The report includes Finity’s analysis of personal and commercial lines, based on Australian Prudential Regulation Authority published data. (See second story)

Finity says the property reinsurance landscape will remain difficult for the industry for quite some time. Reinsurance spending as a percentage of gross earned premium fell from 2021/22 levels but in dollar terms, the amount actually went up.

The industry spent an additional $1.4 billion in the past financial year, 11% more than previously. It marked the third consecutive year of double-digit growth in dollar spend. In many cases the extra spend was also accompanied by reduced coverage and higher retentions.

“We still think it’s a hard market for reinsurance,” Mr Cohen says. “There are some signs of easing but it’s still a tough one for insurers.

“In dollar terms insurers are spending more on reinsurance, they’re probably not getting the best cover because they’ve been trying to save money by taking higher retentions.”

Reinsurers are charging more because of significant catastrophe events in Australia over the past few years. Finity says reinsurance costs and retentions for property classes increased sharply in 2021/22, and similar trends continued into the past financial year.

There are some signs that pricing and terms and conditions have begun to ease, says Finity. This is due to capacity returning to the market and also the effect of the cyclone reinsurance pool, which has been in operation for more than a year.

But this is where the good news for property reinsurance probably ends.

Reinsurers are expected to keep raising their rates, and insurers will likely agree to higher deductibles to defray some of the resulting higher costs.

“To the extent that coverage reduced or retentions were lifted, this will lead to increased earnings volatility and also have both capital and pricing implications,” the Optima report says.

“Looking forward, catastrophe losses at an individual account level will be a key factor at future renewals.”

Across personal and commercial lines, the industry has much to be cheerful about.
While householders lost money in the last financial year, every other line researched by Optima was profitable, and most had ROEs of more than 15%, which exceeded the 10-15% target range.

Travel performed best, coming off low bases from the pandemic as borders reopened. Gross written premium (GWP) reached a record $1.5 billion, surpassing 2018/19’s $1.2 billion by 25%. Finity says the GWP surge also reflects rising premiums as insurers revamped products to include Covid-19 coverage.

All in, the industry recorded a net profit after-tax of $3.6 billion. This is a sharp increase from the average level of about $500 million reported annually between fiscal years 2019/20 and 2021/22.

A turnaround in investment returns and continuation of strong double-digit rate increases helped ease claims inflation and other cost pressures.

The $3.6 billion profit is the equivalent of a 14% ROE and marks a “very strong” bounce back to a level of profitability that is finally within the target range, ending a three-year period of sub-5% returns.

A turnaround in investment returns and continuation of strong double-digit rate increases helped ease claims inflation and other cost pressures.

Industry investment returns rebounded from a year-earlier $2.1 billion loss to a $2.4 billion profit.

“Investment is a big part of FY23’s story. The turnaround from an investment loss to an investment profit has been a major contributor to the industry’s strong reported ROE for FY23,” says Mr Cohen.

Top line growth – as measured by gross earned premium – surged 12.5% to about $56 billion, better than the 10% rise achieved a year earlier as the industry continued to push through significant price increases in response to claims inflation and higher reinsurance costs.

Finity expects premium rates to continue rising strongly in this financial year as the industry seeks to protect and/or improve margins. Gross earned premium is projected to grow 11%.

“I think the industry is proving its resilience in the face of challenges,” Mr Cohen says. “There is no end of challenges and there’s always something. But the industry finds a way to survive and thrive.”