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Industry set for challenging year after 50% profit drop: KPMG

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Next year could be just as tough for the general insurance industry, which has seen its profit crashed by almost 50% to a near 10-year low of $2.3 billion, KPMG says in a new report today.

Uncertainty over the outcome of the industry’s challenge against the NSW Court of Appeal decision that ruled business interruption (BI) pandemic exclusions citing the now repealed Quarantine Act are not valid is not the only test facing the industry in 2021.

The industry must contend with persistent weak investment returns, a situation that is not going to improve in the foreseeable future as interest rates remain at near-zero levels, the result of aggressive efforts from central banks to haul the global economy out of the coronavirus recession.

Other pressing tasks include the raft of Hayne royal commission reform measures that will be introduced in the coming months, such as the extension of unfair contract terms to insurance contracts and moves to regulate claims handling as a financial service.

The industry also has to brace for more severe and frequent weather events as climate change takes hold, increasing insurers’ exposure to natural perils such as floods and bushfires. The 2019/20 natural disaster season was the worst on record for the industry, with insured losses of nearly $6 billion.

“This has been a very difficult year for the industry, with natural catastrophes, significantly unfavourable investment results due to volatile markets, and a spike in reinsurance costs,” KPMG Insurance Lead Partner David Kells said.

“And the situation has become more challenging with the recent court ruling on business interruption losses due to COVID-19 not being excluded under the Quarantine Act. If the judgment survives the proposed court appeal, this will have significant implications for many insurers.”

He says in addition to the outcome in respect of the BI appeal, the current environment remains uncertain for insurers as a result of the COVID-19 pandemic and the further impacts that could arise.

KPMG Insurance Partner Scott Guse says the potential impact of the BI claims court fight on insurers is reflected by the $750 million capital raising exercise undertaken by IAG.

“You’ve seen one major insurer go out and do a capital raise to fight off a potential cost,” he told, referring to IAG. “It’s an area where the insurance companies don’t have a lot of reinsurance protection unlike the catastrophic weather events where they do from past experience.

“Something like this hasn’t happened… so any exposure they get is really going to have to be borne by the insurance companies and not by reinsurers.”

But he says the industry remains well capitalised. “So it’s not going to go broke or anything like that but there may need to be some further capital raising and certainly significant provisions depending on how the court judgment goes.”

The KPMG General Insurance Industry Review 2020 report says the sector posted a 48.3% decline in net profit to $2.3 billion in the year to June 30, citing data from the Australian Prudential Regulation Authority.

The loss ratio worsened to 70.7% from 68% a year earlier and investment income sank 91.3% to $268 million.

Click here for the report.