“Buckle up and get ready for a rough year” – that was the message from a panel of international insurance heavyweights at a Sydney forum last week.
To launch this year’s Pacific Insurance Market Report, Marsh gathered a quintet of leading figures to discuss the challenges in the insurance market faces over the coming 12 months.
The report showed that although profitability was higher than at any time since the global financial crisis, rate reductions were being seen in all industry segments, with the reductions most pronounced for larger risks.
Marsh Asia-Pacific Managing Director and Head of Placement John Donnelly said the amount of capital in the market meant brokers were facing a rough future.
“The intensity of the competition that we’re seeing at the moment is quite remarkable,” he says.
“That intensity is not just between individual carriers in this market but it’s between geographies. There’s no doubt that Europe went to sleep and lots of major Australian account business that was placed in Europe came back to Australia and that’s because the European underwriters were very slow to follow the market down.
“Australia went much quicker but the Europeans have recognised the error of their ways and they want that business back.”
UBS insurance analyst James Coghill says many insurers have been resisting discounting their rates too much but pressure would mount.
“Insurance 101 tells us you should always be optimising your insurance margins, not chasing growth but insurance companies are faced with a tough couple of years because they will have to press hard on that rate lever to stimulate growth,” he says.
“You can’t stand in front of your board and say we’re going to shrink ourselves to greatness. No board signs off on a strategy that has no growth in it. The insurers are under pressure to grow and that does put a lot of pressure on rates.
“Profitability is really good at the moment and if there is no growth they need to invest some of that profitability into stimulating growth, and they do that by lowering prices for the buyers of insurance.”
Coghill says he doesn’t believe there is much space left for insurers to grow via mergers and acquisitions.
“There is already a very consolidated market,” he says.
“I don’t think the ACCC will tolerate another big merger in the personal lines space, although you could still some consolidation in the lower end of commercial.”
However, AIG Australia CEO Noel Condon says it is not all about growth, for AIG at least.
“In Australia we had growth three years ago of 2%. Two years ago we had 8% and last year we grew 9%,” he says.
“If we don’t grow in Australia, it’s not the end of the world. We’re watching our margin and our return on our capital.
“There is a lot of competition and it’s going to be good for clients – there’s no doubt about that. It’s going to be tough for brokers to navigate and live with that.”