Finity (a leading independent actuarial and analytics consulting firm) has revealed the clear impacts that COVID-19, natural perils events and global financial markets have had on the profitability of the Australian insurance industry, according to their annual state of the industry report, Optima.  

Key findings in Optima showed gross earned premium growth of 5% in FY20, reported loss ratio deterioration of 2%, a 1% increase in the expense ratio and a significant reduction in investment returns.  These factors resulted in a major fall in profitability in FY20, with the industry reporting ROE of just 4%. This was almost 10 points lower than in FY19 and the worst ROE performance in almost two decades.

According to Andy Cohen, Finity Principal and lead author, a key driver of the industry’s poor performance were the tumultuous financial markets at the end of FY20. “The industry’s investment returns were almost $2 billion (or 60%) less than in FY19. This removed 3 points from the ITR and 8 points from the ROE,” Andy Cohen explained.

Remarking on COVID-19 and the recessionary impacts on the industry, he added, “Impacts baked into insurers’ balance sheets at 30 June 2020 were relatively modest. But there is surely more to come through as the length and depth of the recession and the impacts on insurers’ premium and claims lines become clearer.” 

 “No doubt, there will be some ‘winners’ and ‘losers’ emerging from the other side based on each insurer’s respective business mix, distribution channels, strategy, customer service and response, level of digitisation sophistication and agility in these challenging times.”

Looking to FY21, Finity forecasts a 6% insurance margin and 7% ROE. This is a slight bounce-back from the low point of 4% ROE in FY20, but it still sits below target profitability levels. With investment returns set to remain at the very low levels seen in FY20 (less than 2%), underwriting margins would need to lift significantly if a return to target profitability is to be achieved going forward. 

Key assumptions underlying this forecast are a return to an average level of catastrophe losses and higher reserve releases (unchanged for CTP but improving in other classes such as Liability).  Risks to this forecast include higher than average weather losses (e.g. the uncertain impact of La Nina), the potential for adverse court decisions in relation to pandemic-related business interruption claims and the ability for insurers to push premium rate increases through in a deteriorating economic environment.


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