The general insurance industry in Australia has undergone a paradigm shift in regulation and operating dynamics over the last decade. The growth of the industry has been greatly helped by both an expanding economy and population level that have grown from 15.6 million in 1985 to 22.1 million in 2011. The brokers remain the largest medium for distribution for commercial insurance whereas the personal line segment like homeowners insurance or motor vehicle insurance, etc are heavily influenced through online system directly by customers.
As on 30 June 2012, there were 124 licensed insurers in Australia, of which 112 were direct insurers and 12 were reinsurers. The industry is characterised by large concentration of top corporates. These large companies often write their business through multiple brands and licensed insurers within their umbrella group.
The large listed general insurers are heavily weighted towards personal line segment over commercial lines in terms of premium volume. The top five insurers write almost 85% of the market premium in personal line segment.
Snapshots of market result
Australian Insurance Market 2012
Analysis of the result
The increase in net earned premium during the year 2012 was due to increase in short-tail business in terms of Householders insurance, Industrial Special Risk (ISR), and some portion of Inward reinsurance business.
Although the claims ratio during 2012 was lower than that of 2011, the high claims ratio during 2011 was due to a series of natural catastrophes including Queensland floods. By contrast, however, the claims on householders insurance and ISR policies were much lower, almost down by 50% during 2012. The lower gross incurred claim ratio was impacted by reduction in previous years claim provision as a result of reduction in the discount rate due to falling government bond yields.
The claims on long-tail class of business such as third party motor vehicles, public and product liability, professional indemnity etc. were increased because the long-tail class of businesses were less reinsured than short-tail property class generating lower reinsurance recoveries that impacted the overall claims ratio in that class of business.
The industry underwriting result during the period ended June 30, 2012 was a surplus of A$0.5 billion, down from A$1.1 billion for the previous year. The lower underwriting result was mainly due to the higher net incurred claims during the year ended 30 June 2012. By contrast, the investment income for the industry was up by 16.1 per cent in 2012, from A$4.7 billion in 2011 to A$5.4 billion during 2012. This was primarily due to the reduction in interest rate yields which resulted in unrealised gains on interest rate investments.
Australian insurance market is heavily influenced by natural catastrophe losses but was substantially mitigated by extensive reinsurance coverage. The total property and casualty damage over the past decade has been valued at over A$12 billion. The tropical cyclones and hailstorms together are responsible for approximately 37% of total number of weather related events contributing over 60% towards insurance losses. This is once again mainly due to large concentration of properties in coastal cities and towns.
Capital Prudence & Solvency Margin
Insurance industry by default is capital intensive. Capital component is therefore a vital part for the industry to remain viable and hence remains under constant vigilance by the regulatory authorities. Following table will highlight the efficiency of capital management in the Australian insurance market relative to solvency margin over the period from 2005 to 2012.
The solvency coverage is measured in terms of risk-based capital. The average capital coverage of the industry in terms of “times of minimum APRA capital requirement” is significantly above the permissible limit although currently the solvency margin is in a dwindling stage (reduction from 194% in 2009 to 179% in 2012) which is due mainly to increased frequency of natural catastrophe.
The Australian general insurance industry has witnessed a significant change over the last 25 years. As reported in KPMG Survey of 2011,”it has evolved into a robust, competitive industry that is focussed on achieving both appropriate returns for the shareholders balanced with security and customer service for the policy holders”.
The financial position of the general insurance industry in Australia continues to be sound, despite the adverse impact of series of natural disasters. The future of the industry is very promising due to strength of local currency and strong GDP growth. The balance of power is shifting towards customer. Advancement in software technologies and hardware mainframe is transforming “big data” into actionable insights. There is a continuous change in adopting sophisticated risk modelling and application of new types of risk transfer mechanism that help in addressing the increasing severity and frequency of catastrophic events.
In the international political platform, there is an evidence of increased harmonisation, standardisation and globalisation of the insurance market that provides a fuel for growth within the sector.
The writer is a Ph.D, FII, ANZIIF (Fellow) CIP. He is the former underwriter of GIO Re Sydney Australia and is now the Director of International Business, Kaden Boriss, an international law firm with offices in Sydney Canberra Singapore and New Delhi.