Australian insurers may have recently snared yet another record profit result, but harder times are ahead, according to analysis of their performance.
This reporting season saw collective operating profit after tax of $3.5 billion, up 3.1 per cent on the previous year. Gross written premium, meanwhile, increased by 3.5 per cent to $26 billion while underwriting profit rose by 26 per cent to $2.2 billion.
Insurers also continued to deliver strong returns to shareholders, with return on equity (ROE) hitting 22.9 per cent. But, according to KPMG’s chair of financial services Dr Andries Terblanche, this year’s results are the first for some time to display a wider diversity, with intense competition causing some participants to post reduced underwriting results.
The increasing competition has also seen the market soften, particularly in commercial classes, KPMG said.
However, the industry is in a strong position, according to the firm’s 2005/06 insurance market survey.
“With all listed Australian insurers reporting provisioning adequacy levels of 90 per cent or higher, the industry continues to be one of the most solvent and well provisioned markets in the world,” Terblanche said.
“The industry is now strongly capitalised and for the first time in Australia, is at the point where it is increasingly focusing on customer service against a background of high solvency.”
Client focus will become a key differentiator as competition intensifies.
“For the next few years, the quest for growth will be an interesting thing to watch,” Terblanche said. “The space for growth is diminishing to whoever can provide the service.” Overseas expansion and acquisition could also be potential options for further growth. “It’s not inconceivable that more domestic insurers will start looking for potential overseas acquisitions to keep the top line moving in that sense,” he said. “In terms of solvency and capital adequacy, the industry as a whole is better placed than before to do that.”
Terblanchhe added that “the chronic level of underinsurance” in Australia is a potential growth area. “There is…a large pool of untapped premium income in terms of under-insurance,” he said. “If accessed, it could both build revenue for the insurers and better protect customers’ assets.”
Insurance industry figures, meanwhile, said issues beyond Australia could be a key influence on domestic insurers.
“The impact of global change on the Australian market should never be underestimated,” said Bruce Watters, CEO of AIG Australia. “Offshore catastrophes, Hurricane Katrina for example, can lead to capacity shortages which in turn can lead to a re-thinking on the deployment of capital. This can mean that even if Australia experiences favorable claims activity, the costs of accessing that capital (or capacity) can still increase.”
Global warming and climate change are also issues, he added. “It will be extremely interesting to see the long-term effects of global warming,” Watters said. “Climate change and natural catastrophes on society and subsequently the on insurance industry. That is, such global related changes and events will have considerable impact on how much capital will be invested in the insurance industry in the years to come and it will only be those insurers that have substantial financial strength and security that can literally ‘weather the storm’.”
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