General insurance industry turns the corner

Finity Consulting’s state of the industry annual publication, Optima, has revealed FY18 was a ‘bounce back’ year for the General Insurance industry, with the reported industry insurance margin (or insurance trading result) being reported as 16 per cent, which is 2 per cent higher than in FY17.

In terms of Return on Equity (ROE), the industry hit that magic 15 per cent target for the first time since 2014. According to Andy Cohen, Finity Principal, the industry upturn has been due to a combination of factors, “Rate increases, particularly in Private Motor, assisted the top line while benign weather and low cat activity improved the claims line for a number of classes. In Private Motor, which accounts for one quarter of industry net premium, insurers seem to have put the brakes on the strong claims inflation seen in recent years – coupled with the rate increases achieved, this class has almost returned to target profitability.”

“Last but not least, prior year reserve releases in long tail classes were yet again very strong, with CTP alone contributing another $1 billion to the bottom line,” he said. Looking beyond 2018, the report predicts the market will continue to harden and profitability for the industry is estimated to remain sound albeit a little below target – with margins and ROEs in the 10 to 15 per cent range for the next three years.

“It’s not all plain sailing. Interestingly while we have seen rate increases come through in Commercial Lines, the Combined Operating Ratio in 2018 for this group of classes has not moved since 2017, and remains stubbornly stuck at 95 per cent. Additional rate increases are needed in a number of Commercial Lines classes if ROE targets are to be met”

“Although, the outlook for overall industry profitability is good, headwinds to watch out for are numerous – and include reduced scope for reserve releases, regulatory impacts from the Royal Commission, the return of strong claims inflation and class actions,” added  Cohen.

As well as providing an overview of recent and prospective industry performance, Optima2018 also looks at the increasingly complex regulatory landscape insurers are facing and discusses an approach insurers might use to price for climate change..