The general insurance industry rebounded strongly during FY2023, recording a profit of $4.6 billion – the highest in almost a decade, with a healthy return on capital of 14.2% according to the latest Taylor Fry Radar Report.
But beneath the robust figures, affordability, impacted by inflation and climate risk, is the number one issue striking the heart of everyday life for millions of Australians, and raising sustainability concerns for insurers.
The report identifies construction, motor parts and travel especially as key drivers of claims cost inflation for property, motor and travel insurers. It outlines several critical steps for insurers, including: being alert to an increase in the number of vulnerable customers; focusing on customer retention strategies; and considering the potential for increased fraud and claim-exaggeration activity.
The strong overall industry result is nuanced, supported by a sharp improvement in investment returns, with investment income of $3 billion, compared to a $2.8 billion loss last year. But how long will this last and at what level? A decline in consumer and business confidence, high levels of inflation and recessionary talks point to a volatile year for investment markets.
Customer experience is another area of heightened focus in the report, with the long-awaited Financial Accountability Regime Bill 2023 passing on 5 September. Under the new legislation, all directors and some senior executives in financial industries will be personally accountable for a range of new and expanded prudential and conduct-related compliance requirements.
The motor insurance part of the report says the following.
Insurers are increasingly investing in the use of machine learning and artificial intelligence in areas including pricing and claims management. While this presents opportunities for insurers to establish a competitive advantage, a changing regulatory environment coupled with recent failures to meet pricing promises highlight the need for stronger governance of these systems.
Transparency and fairness will also need to be front of mind to ensure regulatory, legislative and community standards continue to be met.
Changes in claims mix add complexity to pricing, as relying on past experience may not be appropriate for setting future rates. Changes in driving behaviour following the pandemic have contributed to a reduction in the frequency of minor collisions and a consequential increase in average severity. With uncertainty as to where driving behaviours will ultimately land, insurers will need to take care when rate setting to ensure frequency and severity trends in the data are reflective of future experience.
Claims inflation has had similar volatility over recent years, though repair costs and after-market vehicle values are now reducing from their peak, due to the easing of global supply chain bottlenecks. This is affecting pricing decisions in terms of risk relativities and the overall price, as insurers seek to understand the drivers of recent movements.
Cost-of-living pressures may drive increased churn in the coming year. While premiums grew by 14% during FY23, the tightening of the economy is creating a market where customers may be turning their attention back to prices and historically loyal customer segments may prove to be less so in the face of tighter household budgets.