Insurance profits collapse in 2009 but more stable outlook for 2010 expectedDOWNLOAD
The 2009 financial year was a bad one for reported insurance profits according to the 17th consecutive annual J.P. Morgan Deloitte General Insurance Industry Survey released today. The industry combined ratio reported by the survey respondents was up 7% to 101% from the previous year and worse than the forecast of 96%.
“Falling industry profits were due to increased claims and catastrophe activity, as well as increased competition, with adverse discount rate movements,” said J.P. Morgan senior insurance research analyst, Siddharth Parameswaran. “The trends were worse for personal and domestic lines, which had a combined ratio of 102%, although commercial lines were more stable at 95%,” he said.
“Premium rates increased in 2009 in almost all classes, except for workers compensation, in response to the profit collapse,” explained Elaine Collins, Deloitte actuarial partner and joint coordinator of the survey. “Personal lines showed the strongest increase, at eight per cent overall, which was driven by householders and CTP increases.
“The increases in commercial classes were more moderate - about four per cent in total - with the greatest increases at the small and medium enterprise end,” she said.
Ms Collins explained that the rise in personal lines premiums was the industry’s attempt to restore profitability following large claims activity (above allowances) sustained during the last two to three years.
Mr Parameswaran added, “The more moderate increases in rates in the commercial markets reflect some financial discipline in the industry, which was willing to respond to the impact of the financial crisis and reduced reserve releases before they were reflected in significant losses.”
The survey shows respondents expect to see the strong premium rate increases of 2009 continuing into 2010.
“This is a real turn in the cycle since there have been premium decreases in a majority of classes for a number of years. We do believe however that this will be tempered by increased competition in personal lines, and a continued weakness in the global commercial insurance rates cycle,” said Mr Parameswaran.
The industry forecast combined ratios to improve to 95% in 2010, driven by sharp improvements in ratios in personal lines, coupled with flat trends in commercial lines. “Participants expressed most concern with the CTP and workers compensation classes (combined ratios of 100% or higher in 2009). Reserve releases in those classes are reducing, and in workers compensation, premium rates have continued to fall,” Ms. Collins said.
There was some concern amongst participants about superimposed inflation emerging in CTP (11% inflation in total), workers’ compensation and professional indemnity, Ms Collins pointed out. And there were also considerable reserve releases evident in long tail lines, with this trend masking some of the reported results in CTP and workers compensation, in particular.
“Superimposed inflation trends in liability classes appear limited at the moment, however, claim trends in motor have been impacted by the low AU$ leading to increased inflation,” she said.
Mr Parameswaran added that in the catastrophe category, the bushfires in 2009 hurt claim trends in home and Fire / ISR.
Economic outlook a concern for some
A number of respondents indicated risks on the economic outlook as a cause for concern.
“Generally speaking, fraudulent claims and litigation increase during weak economic conditions,” Ms Collins said. “This can have an impact on professional indemnity, directors and officers, workers compensation and commercial property claims.”
Mr. Parameswaran said, “Although no doubt the concerns here are less than feared in March 2009, we still doubt whether the full impact of losses, in particular for directors and officers, have been factored into 2009 combined ratios.
“Yields are still lower than in 2008 and, as such, running investment yields are likely to be somewhat depressed relative to their long-run levels. The recent global financial crisis so far has proved more benign than most commentators (including J.P. Morgan as a house) were expecting,” said Mr Parameswaran.
“The impact of a co-ordinated series of fiscal stimulus measures and monetary policy injections through very low interest rates appears to have been very effective at averting what many thought would be a protracted downturn.
“Last year when we said that we believed general insurance companies were largely better placed than life insurers and banks to deal with the crisis, we were particularly concerned about long tail lines’ margins being affected by the dual impacts of reduced investment income and increased claims costs.”
To read the full press release and the report, download the attachments below.