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Insurers' performance slips 'from bad to worse': Optima report

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The COVID-19 pandemic has delayed an expected recovery in Australian general insurers’ profitability with performance going backwards in the past financial year, the annual Finity Optima report says.

The insurance margin declined to 0.2% as the industry barely broke even, dropping from 2.6% in the previous 12 months, while the return on equity (ROE) fell to 2% from 3% in a slide “from bad to worse”, lead author Andy Cohen said today.

Finity sees a brighter outlook this financial year, but metrics are still likely to remain below target levels and pandemic repercussions remain uncertain following the recent significant impacts on business lines and supply chain costs.

“One thing that is unknown, or a wildcard, is the economic trajectory and changes that may come about as a result of changes in ways of doing business and the way we are working,” Mr Cohen tells “And against that backdrop there are expectations of inflationary pressures that may come through.”

The net loss ratio deteriorated 2% last year due to significant strengthening of COVID-19 business interruption loss provisions, with the industry still awaiting final outcomes of a second test case.

Finity MD and report co-author Scott Collings says margins this year are set to rebound by about 5 points, assuming no repeat of the reserve strengthening.

“The industry will continue to watch the progress of the second COVID BI test case through the appeal process with interest,” he said. “If ‘Test Case 2’ outcomes are upheld, then potentially an even stronger rebound might be expected.”

Gross earned premium growth was just above 5% last year, which was similar to the previous period, but Finity says if figures are normalised for the loss of 80% of the industry’s travel premium, earned premium growth was a “surprisingly solid” 7.5%.

The market is still strengthening in most personal and commercial lines, but much of the increase is in response to claims inflation in property classes, exacerbated by COVID-related supply chain pressures.

Mr Cohen says the hard market is past its peak but may still continue into at least next financial year, with rate gains to combat inflationary pressures not necessarily expanding insurer margins.

Significant reserve releases, which have provided a tailwind in previous years, look to be a thing of the past, while on the investment side lower returns are set to remain with record low interest rates.

Overall gross earned premium growth is expected to reach 6% in fiscal 2022, with private and commercial motor the standouts in terms of return on equity levels, while other lines remain below the 10-15% ROE target range.

Finity says “putting it all together” and on the basis of Australia experiencing an average weather year, forecasts for fiscal 2022 are for an overall ITR margin of 5.7% and an ROE of 7.2%.