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Industry challenges highlighted as IAG resets

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IAG jumped out the gates early to deliver preliminary full-year financial results last week and in doing so has offered a window into some of the issues that the industry is dealing with as insurance affordability and availability concerns show few signs of easing.

Liability claim costs, the rising impact of natural disasters and the repercussions from the COVID-19 pandemic for insurers were among the themes at the earnings briefing.

Nick Hawkins, delivering his first full-year results since becoming CEO in November, says adverse claim development across a number of long-tail classes has particularly affected the intermediated business.

The company has strengthened reserves in liability classes, professional risks and workers’ compensation while pointing to systemic national issues.

Average claim size is increasing, particularly related to “bodily-injury” claims and IAG says adverse trends appear to be driven by an environment where mixed economic conditions have enhanced focus on personal injury compensation.

Mr Hawkins says the firm is increasing pricing and assuming increased average claims costs are “the new world” looking ahead, with the issues being reflected in insurance cost issues for businesses and in discussions around affordability.

“This is not just an IAG issue, we are seeing average claims costs of bodily injury type claims going up across Australia,” he said.

The impact of Australia’s natural disaster vulnerabilities is also reflected in the results, following a period that has seen insurers grappling with costs that have exceeded allowance.

IAG reported net natural claim costs of $742 million for the past financial year, following June 16 guidance after the Victorian floods of $720 million to $743 million, topping the full-year allowance of $658 million. Industry-declared catastrophes in the second half also included the March flooding in NSW and Queensland and Cyclone Seroja in WA.

In the 2020 financial year, which included the Black Summer bushfires and major hailstorms, IAG reported perils of $904 million, well over a $641 million allowance as Australian insurers grappled with heavy losses from one of the worst catastrophe years on record.

In guidance for this financial year, IAG has assumed around an extra $100 million for natural perils, bumping up the allowance, post quota share, to $765 million.

“We know we have been playing catch-up on perils, us and the industry, and we have used this as a bit of an opportunity to make a step-change up,” Mr Hawkins told the briefing.

An update was also given on the COVID-19 pandemic and business interruption cover, an issue that has loomed over the industry since early last year.

IAG in the first-half made a provision of $1.15 billion for business interruption claims related to the pandemic, and has left the figure unchanged in its full-year result.

The first industry test case on outdated wordings citing the Quarantine Act went against insurers while the second case on other questions starts at the end of next month. Insurers have argued policies are not meant to cover pandemics, but are still waiting to see how much they are on the hook for claims, before wordings and exclusions were tightened.

IAG says it has only received just over 700 claims so far, with the final number depending on the second test case outcomes.

In relation to the Quarantine Act issue, wordings were changed as policies fell due, with the tail-end impact from that process set to linger for another couple of months for IAG.

Mr Hawkins says the latest state lockdowns in response to the Delta variant outbreaks won’t require additional provisioning.

“Any impact from the current lockdown is included within the existing business interruption provision that we put in place in November last year,” Mr Hawkins said. “We don’t believe there will be any additional cost from the tail from business interruption over and above the provision we have already booked.”

IAG says it’s been a challenging year for both the company and the industry. Issues such as claims experience trends in certain classes, natural catastrophe exposures and lingering repercussions from COVID-19 show insurers still have plenty on their plates looking ahead.