2011: a tough year for insurers - with strong improvement forecast for 2012DOWNLOAD
31 January 2012: The 2011 financial year was a tough year for insurers as higher claims costs associated with elevated levels of catastrophe impacted reported profits according to the 19th annual J.P. Morgan Deloitte General Insurance Industry Survey released today. The joint survey reveals that sharp losses were incurred in the 2011 financial year across property classes for all underwriters in commercial lines, personal lines and in particular reinsurers.
“These results reflect the accumulated losses from weather related events in late 2010 and early 2011 – namely the floods and Cyclone Yasi in Queensland and the Victorian floods,” said J.P. Morgan senior insurance analyst, Siddharth Parameswaran. “2011 was a challenging year for insurers primarily due to these catastrophes, with the rate increases delivered insufficient to offset the higher claim trends related to these events,” he said.
Overall the Australian industry combined ratio reported by survey respondents deteriorated one per cent in 2011 to 98% compared with 2010. Mr Parameswaran added that there were also considerable reserve releases evident in workers’ compensation, compulsory third party, and in particular public and product liability aiding results.
“Commercial classes covered in the survey showed greater profit deterioration reporting a weighted average combined ratio of 106%, up from 92% in 2010. The combined ratio for straight domestic lines was 98%, up from 95% in 2010,” said Mr Parameswaran.
“However the survey respondents are pretty upbeat about the forecast,” said Deloitte Insurance leader, Stuart Alexander. “Looking forward, the industry anticipates the overall combined ratio will improve very strongly to 89% in 2012.
“Survey participants expect the commercial lines combined ratios to sharply rebound by 11%, largely through normalising catastrophe costs and reduction in overall expense ratios which had crept out in the 2011 results. They also predict a five per cent improvement in personal lines combined ratios,” Mr Alexander said. Although the industry is optimistic about improvements to profitability trends overall for the next couple of years, it should be noted that its forecasts have historically fallen short of the actual results. The 2010 survey revealed the industry forecast a 95% combined ratio, however the actual combined ratio was 98%.
Deloitte Actuarial partner, Elaine Collins said that premium rates in 2011 were mixed. “The increases in personal lines rates by five per cent were driven primarily by event and natural peril activity in householders’ and NSW Compulsory Third Party (CTP) classes. Many participants noted higher reinsurance costs and the proposed changes around expansion of flood cover as primary causes,” she said.
The mixed rate rises continued the trends seen in 2009 and 2010 with the industry trying to restore profitability in householders after several years of poor results. “This was helped further by increases in deductibles in many classes,” Ms Collins added.
“Commercial classes showed increases in property rates by more than seven per cent, although other classes remained soft.
“However looking forward, the survey respondents expect to see the strong premium rate increases continue into 2012 in personal lines and were hopeful of increases again in commercial property, with expectations suggesting other classes remain competitive,” she said.
Claims trends in personal lines in 2011 were affected adversely by above average natural peril activity. “Frequency trends excluding the peril claims were broadly in check in all classes other than Directors’ and Officers’, although Liability showed some signs of above average inflation,” Mr Parameswaran said.
“Despite the positive outlook for the industry we note that 2012 may be another year for increased natural peril, and storm events given the expected continuing La Nina weather pattern,” he said. “La Nina episodes are typically associated with rainfall and cyclone activity at above average levels on the east coast of Australia. There is an 80% chance that cyclones will occur more than average in the La Nina period of the current 2011/12 summer.”
“Adverse weather trends can also impact loss ratios in short tail classes including Fire/ISR and Home insurance in particular,” he added. “However, a weak La Nina episode may not necessarily be associated with significantly higher insured losses.”
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