Downturn for general insurance

It has been predicted that the general insurance industry will experience a significant downturn, with high margins across the industry expected to fall to record lows for this decade.

Pendulum, Finity Consulting and Deutsche Bank’s annual review of the Australian general insurance sector, has produced less-than-encouraging assessments of the industry’s profit outlook.

The report predicts that the profitability of insurers will reduce from ITR margins of 17-18% to as low as 12-13% and maintain this level of return over the next three years.

The report says that although the industry has been thriving from premium increases combined with a period of low claims costs, low profit margins paired with a low-yield outlook will leave insurers “swimming against a strong tide”.

It is expected that the next few years will produce a severe decline in profitability due to a stall in premium increases as a result of strong competition.

The report states that it is competition that’s starting to hurt big insurers: “The major insurers are unable to raise premium rates without running the risk of losing market share. The aggregate total value of insurable assets, such as cars and homes, is static.”

In response to the low-growth environment, report author and Finity Consulting Principal Andrew Cohen suggests that insurers start focusing on customers, claims costs and expenses.

“How to reduce expenses, that is the challenge. It’s not only expenses, but also reducing claims cost without alienating the customer,” Cohen says.

“If you are going to manage your claims line and your expense line down, you have to keep the customer right in the middle of the process so that you don’t loose them along the way.”

Cohen says that policyholders are more likely than ever to shop for lower premiums.

“Customers have become less loyal to insurers and brands, and have a high propensity to shop,” he says.

“Anything that looks to pull the levers on expenses and claims has to keep the customer firmly in the middle and that is not easy.”

“But we don’t think it’s impossible to do it successfully, with the right tools and processes,” Cohen adds.

NIBA CEO Dallas Booth says that both insurers and brokers will need to adapt in order to come out ahead after the low.

“Everyone is going to have to get used to this challenging environment for the next couple of years,” Booth says.

“Lower premiums for insurers can also mean lower commissions for brokers.  The challenge for brokers will be to make use of lower premiums to suggest better, more comprehensive cover for their clients, and to ensure that their own operations are as efficient as possible.”