2010 a better year for insurers, mixed trends expected in 2011DOWNLOAD
31 January 2011: The 2010 financial year was a better year for reported insurance profits according to the 18th consecutive annual J.P. Morgan Deloitte General Insurance Industry Survey released today. The Australian industry combined ratio reported by the survey respondents improved by 4% to 97% from 2009, not quite reaching the industry forecast of 95%.
“The survey shows a restoration in industry combined ratios in 2010 although insurers were affected by significant catastrophe activity, slowing reserve releases and mixed trends in premium rates,” said J.P. Morgan senior insurance research analyst, Siddharth Parameswaran.
“It was a year of two markets, with the trends more favourable for commercial lines, which had a combined ratio of 92%, compared to 95% for personal and domestic lines. This was an improvement on 2009, which was a bad year for the industry, with its reported profits adversely affected by the global financial crisis,” he said.
“The 2010 year was mixed one for premium rates,” said Elaine Collins, Deloitte actuarial partner and joint coordinator of the survey. “Rates in personal lines overall increased by eight percent, driven by Householders and Compulsory Third Party (CTP), continuing the 2009 trend where rates also went up eight percent in response to weather events and increasing claim costs.
“The industry is trying to restore profitability in these lines given the above average claims for the past three years,” she explained. “Although the industry noted that superimposed inflation in the CTP classes appears generally under control, NSW CTP was singled out for concern due to increasing frequency from increased coverage and new settlement procedures.
“Looking forward, the survey respondents expect to see personal lines premium rates continue to increase into 2011,” Ms Collins said. “In particular, rates for Householders were forecast by the industry to increase by eight percent in 2011 after an increase of 11% in 2010, owing in some part to the Melbourne and Perth storms. But this was before the impact of the Christchurch earthquake and the Queensland floods. It is a struggle for underwriters to incorporate appropriate allowances for large, infrequent events in their underlying pricing,” Ms Collins said.
Premium rates in the commercial classes on the other hand were unable to sustain the forecast increases, with the industry facing a one percent decline in premiums last year, versus a forecast increase of six percent for the year.
“The biggest reductions were seen at the top end of the market, while small to medium sized enterprises (SMEs) were relatively flat,” Mr Parameswaran said.
Outlook for 2011 and beyond
The survey shows respondents expect the ‘two-speed’ market of premium rates in 2010 continuing into 2011, with rate increases in domestic lines and soft trends in commercial insurance anticipated.
“Insurers expect rates in commercial lines for most classes to decline. We believe that competitive pressures and excess capital from overseas and changes in distribution platforms in the broker space will continue to pressure rates in the commercial classes into 2012,” Mr Parameswaran said.
“The continuing premium rates pressure in liability, professional indemnity and director's and offices is of most concern. These classes have been significant positive contributors to overall industry profitability in the past,” he added. “That said, inflation and frequency trends appear to be broadly in check for most classes.”
“Overall respondents were broadly optimistic this year about the outlook for the year ahead and the possible positive impact of continued economic growth for insurance companies,” he said.
“However we also anticipate 2011 to be another year of extreme natural events given the La Nina pattern and resultant wet weather we have seen recently in Queensland, New South Wales and Victoria,” Mr Parameswaran added.
Figure 1: Combined ratio trends time-series (actual vs. expected from preceding survey)
Source: 2010 and prior General Insurance Surveys.
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