The FINANCIAL -- The insurance industry's profits rose by 25 percent to $4.8bn in 2017, and now seems set for a sustained upswing, KPMG's General Insurance Industry Review shows.
Premiums were up, while claim costs and operating expenses were down from 2016. The only cloud in an otherwise sunny outlook was a fall in investment income.
Scott Guse, KPMG Partner and ASPAC Head of IFRS Insurance, said: “Overall this has been a very positive year for the general insurers, and we believe it signifies the start of a long awaited upswing in the insurance cycle.
“Gross written premiums (GWP) increased by 5 percent to $43bn. The growth in premiums was largely rate-driven – a clear sign that the market is starting to harden.
“In recent years, the competitive environment has put pressure on premiums with only marginal increases experienced. This however is the first year in quite some time that we have seen this sort of growth.”
Net earned premiums increased by 6 percent reflecting the premium rate increase. Reinsurance spend in 2016/17 remained flat with the higher base set in 2015/16.
The loss ratio (claims cost) has improved in 2016/17 to 63.5 percent (down 2.5 percent). Whilst total incurred gross claims were impacted by a higher frequency of natural catastrophes than in 2016, primarily driven by Cyclone Debbie, these claims were however largely offset by higher reinsurance recoveries and ongoing reserve releases from prior year claim provisions reflecting the low inflation environment.
The cost discipline of insurers is continuing with a further 1.4 percent decrease in the expense ratio to 24.8 percent. Whilst this improvement is in part due to the pricing increases pushed through by insurers, the move to more cost effective distribution channels has been a key driver in reducing this ratio.
The combined impact of all these factors contributed to an industry insurance result of $4.8bn million and an insurance margin of 16.1 percent.
Investment income allocated to insurance funds was $1.3bn, down from $1.7bn in 2015/16, on the back of a low interest rate environment and conservative investment portfolios. The 22 percent reduction largely reflects the market impact of unrealised gains and losses at 30 June 2017. With these low returns, diversification of investment portfolios to maximise future returns will continue to be a focus.
The industry’s capital coverage at 30 June 2017 for direct insurers was 1.86 times the APRA prescribed capital amount. This compares to 1.74 times at 30 June 2016.
Scott Guse added: “The average GWP quarterly growth rate for 2016/17 was 1.2 percent – this reflects the highest percentage growth we have seen in recent years and as this growth is largely rate-driven it demonstrates that the market has started to harden.
“In our view this hardening is well overdue and has certainly been a key driver in delivering the positive industry results. That being said, whilst the results for the year are positive the underlying insurance margin (overall insurance profitability) of 16 percent is still below the results achieved by the industry in 2012, 2013 and 2014, so there is still a way to go.
KPMG believes it essential that insurers maintain their pricing discipline and do not risk eroding their growth by aiming for short-term market share expansion. Automation has a crucial role to play.
David Kells, KPMG Insurance sector leader, said: “Maintaining cost disciplines will likely see some insurers focus on greater automation onshore with Advanced Intelligence (AI) and robotics whilst others continue with ongoing offshoring and outsourcing efforts. We have seen expense ratios continuing to decline in recent years, but with the investment in new product offerings, technology and a focus on client experience, further cost reductions will be harder to secure in the short term.
An example of where AI has started to make a difference is evident from the work Google has done globally with AXA. Using AI through machine learning and data analysis (referred to as the TensorFlow machine learning framework), AXA has been able to predict with 78 percent accuracy, those motor vehicle policy holders that will be involved in a claim exceeding $10,000. This sort of technology will further enhance an insurers’ ability to appropriately price a specific insurance policy.”
KPMG believes the progressive move away from a call centre/branch distribution network for general insurance retail products (i.e. car, home and travel products) to a distribution platform that is mobile, digital or online based is a significant contributor to the 1.4 percent reduction in expense ratio.
David Kells added: “Google has reported a significant increase in ‘queries’ through mobile devices over the past 12 months. Customers are becoming more comfortable researching and then purchasing their general insurance products on their mobile phones, while on the train or bus going to work or even while they are waiting for their daily coffee. Whilst this trend is producing more cost effective distribution platforms for insurers, it does however highlight the need for insurers to make sure their mobile websites are easy to use and tailored for a mobile device.”
Emerging Trends for the General Insurance Industry
In the report, KPMG identified 10 emerging trends for insurance companies:
Insurtech – over the next 2 years, the standout market force influencing the transformation of Australia’s insurance industry is disruptive innovation. Some insurtech companies will look to compete with traditional insurers, others will look to collaborate.
Digital – Technology has the potential to fundamentally change not only the way that consumers perceive and interact with their insurers, but also the role of insurance in everyday life.
Blockchain – distributed ledgers are emerging capabilities that hold significant potential, and the key to successful application of this technology will be the ability of industry participants to foster buy-in and trust from stakeholders.
Artificial Intelligence – in a recent survey of more than 100 insurance CEOs by KPMG International, more than a quarter saw automation – a key step towards robotics – as the answer to managing their current skills gaps and adding significant value. 15 percent said they planned to put ‘significant’ investment towards cognitive computing, machine learning and AI over the next 3 years.
Cyber – The total cyber-insurance business currently amounts to US$2 billion, whereas the total cost of security breaches to the global economy amounts to a whopping US$445 billion. This will lead insurers to continually grow their cyber insurance offerings.
Data analytics – insurers have unrivalled access to a great deal of information about their customers Harnessing this data is key to competing in the market and exploiting the opportunities new technology brings. On-demand insurance might be convenient and appealing at the point of use, but premium rates will need to be higher.
Customer focus – Insurers are continuing to focus on becoming more customer-centric as a way to drive growth and increase value. In Australia, we have seen an increased focus on this recently – in August 2017, Allianz announced the appointment of a Chief Market Manager in order to make customer experience the top priority for all their actions. In July 2017, QBE appointed a Chief Customer Officer in an effort to make the company more customer-focused. Suncorp and IAG did this in 2015/16.
Risk Mitigation – catastrophic weather events have cost the Australian insurance industry tens of billions of dollars in recent years. In In response to this need, some insurers have also started to invest in developing programs to support initiatives to make insurance more affordable.
IFRS 17 – May 2017 saw the most significant accounting change since Margin on Services was introduced in 1995 for life insurance. The standard brings in different ways of valuing insurance contracts and assets. The amount of time and capital insurers will need to invest in their systems, processes and controls in order to prepare and implement the new standard will reflect this.
Conduct and mis-selling – Australian insurers have seen themselves making front page news through issues of claims handling, mis-selling and providing products to customers that provide little or no benefits. Yet conduct risk is seldom the sole cause of problems. Poor culture within an organisation and a strategic failure to put the customer at the heart of the business have a comparable capacity to undermine. Strategies for the 3C’s – conduct, culture and customer must be addressed in parallel.