The Australian insurance industry is in good health, but is set to face significant challenges in the coming years as it deals with regulation at home and moves into new markets, according to PricewaterhouseCoopers.
In recent years, several Australian insurers have taken stakes in insurers in both India and China and while these new markets offer opportunities in terms of a potentially large new client base, there are many hurdles to clear.
“They [Chinese and Indian insurers] have promised a lot and returned little,”said Richard Deutsch, insurance and investment leader at PwC. The concentrated Australian market is forcing firms to look beyond Australia.
“The key to future success for insurers will be identifying and acquiring strategic growth targets to further develop and diversify their earnings base as well as to sustain long-term growth.”
PwC also fed ongoing speculation regarding the progress of the Australian insurance cycle. Some pundits believe a slight reduction in premiums in some classes is evidence that competitive pressures have forced the cycle to peak. Others refute this view, saying that changes post HIH have shored up the industry and created a new cyclical ascendancy.
However, the premium easing could also be attributed to the impact of unregulated foreign insurers. While the jury is out on their exact impact, there is speculation that offshore insurers are pricing risk in a potentially unsustainable way, or do not have the required experience to properly price risk in the Australian environment.
The industry is also facing the double challenge of improving its reputation in the eyes of clients and carrying out internal work related to regulatory and capital issues. While the industry and its regulators have a grip on the appropriate level of capital to be maintained for regulatory purposes, they face issues regarding how to deal with excess capital. Moreover, the APRA’s recently released Stage II general insurance reforms and the transition to International Financial Reporting Standards are also causing internal issues.
“It will be a challenge for insurance companies to keep their eye on the customer and the business with so much inwardly-focused activity to manage,”said Deutsch.