2013 J.P. Morgan – Taylor Fry General Insurance Barometer

The outlook for the Australian economy in 2014 appears reasonable, but is less favourable than recent years when compared against international markets.

Australian insurers are facing growth constraints driven by increasing competition, claims pressures, an expected slowdown in premium rates and macroeconomic factors despite reporting improved profitability in 2013, according to the 2013 J.P. Morgan and Taylor Fry General Insurance Barometer.

The Barometer is a collaboration between J.P. Morgan and Taylor Fry, and is based on a detailed survey of the majority of the underwriters, reinsurers and brokers active in the Australian general insurance industry. The survey has been running for 21 years, and includes both actual historical results and forecasts for the future. It also includes a survey of the key issues affecting the market.

Whilst the full report is only available to the survey participants, we have summarised the key issues and trends here.

MACROECONOMIC BACKGROUND

The outlook for the Australian economy in 2014 appears reasonable, but is less favourable than recent years when compared against international markets. For Australian insurers this means weaker growth prospects than previously. Low investment yields used to support claims also continue to be a concern and a risk to returns particularly for long tail products.

COMBINED RATIO TRENDS

The 2013 financial year showed an overall improvement in combined ratios for the industry as a whole and particularly in commercial insurance lines.

For personal insurance, the combined ratio in 2013 remained stable at 89%. In commercial insurance the combined ratio improved to 90% in 2013, from 98% in 2012. Both personal and commercial insurance were supported by improved loss ratios and more favourable bond yields in 2013 compared to 2012. Commercial insurance combined ratios were significantly better in 2013, primarily due to the impact of previous rate increases, no adverse hits from interest rate movements and greater reserve releases than in 2012. This was offset partially by an increase in natural peril activity to trend levels.

The current shift to more neutral near term weather conditions forecast by the Bureau of Meteorology would normally benefit insurers’ catastrophe cost trends. Nevertheless, overall industry profitability is expected to deteriorate slightly in the coming years in part driven by the expected slowing down of premium rate increases.

Looking forward, the industry is forecasting a slight deterioration to combined ratio trends overall for the next couple of years, though they are still expected to be reasonably profitable.

Industry actual combined ratios

Financial Year

2011

2012

2013

Personal Insurance

Motor

93

95

91

Home

107

83

89

CTP (NSW)

106

92

91

CTP (QLD)

70

87

74

Total Personal

98

89

89

Commercial Insurance

Fire & ISR

134

90

95

Motor

91

99

90

Public & Product Liability

86

110

88

Workers Compensation (WA)

94

92

78

Workers Compensation (TAS, NT & ACT)

104

103

104

Professional Indemnity

98

92

85

Directors & Officers

85

102

80

Total Commercial

106

98

90

Total

98

98

87

Industry actual premium rate movements

Financial Year

2011

2012

2013

Personal Insurance

Motor

2

3

4

Home

10

15

12

CTP (NSW)

8

4

8

CTP (QLD)

-6

2

4

Total Personal

5

9

8

Commercial Insurance

Fire & ISR

7

9

-2

Motor

4

6

4

Public & Product Liability

-1

1

-2

Workers Compensation (WA)

-4

4

3

Workers Compensation (TAS, NT & ACT)

2

8

1

Professional indemnity

1

1

-2

Directors & Officers

0

2

-1

Total Commercial

3

5

-1

PREMIUM RATE TRENDS

The Barometer revealed mixed premium rates in 2013, with rates expected to come under more pressure in 2014. The industry showed strong rate increases in personal insurance of 8%, driven predominantly by householders, while for commercial insurance rates in 2013 were significantly worse than the 5% forecast in 2012 (-1% in aggregate).

The outlook for premium rates is much weaker for 2014. The industry is forecasting a slowing in rate increases in domestic lines and flat rates for commercial lines.

ISSUES CONFRONTING THE INDUSTRY

The Barometer found 69% of underwriters in the survey identified the increasing regulatory burden as a key concern. This was followed by concerns over the competitive environment (38% of respondents) and staff engagement and retention (33% of respondents). This last factor may be driven by the increasing impact of outsourcing on the market.

For insurance brokers, participants indicated retaining staff as a key issue (57% of respondents), followed by the issue of an excessively competitive rates environment and natural perils activity impacting on capacity in the market (43% of respondents).

REINSURERS

Reinsurance participants experienced an unexpected drop in premium rates during 2013, with the exception of the Property Proportional category, driven by new capacity entering the market, as well as benign catastrophe claims experience during the year.

There appears to be significant pressure in this segment. The abundance of capacity and competition were identified by reinsurers as the greatest issues confronting the industry, in addition to regulatory concerns, with APRA’s increased focus on board review of catastrophe modelling, as well as the capacity of insurers to meet multiple catastrophe losses leading to increased demand for reinsurance protection.

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