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Catastrophes will hurt property profitability

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Bushfires and hailstorms during summer are set to have a significant impact on the profitability of domestic and commercial property classes this year, JP Morgan and Taylor Fry say.

Estimates released with the annual General Insurance Barometer show there could be a 15% impact on combined operating ratios for the classes, before reinsurance recoveries, while for motor there could be a 3% impact.

Premiums are expected to rise due to the catastrophes, but increases in domestic classes may be limited by competitive pressures as IAG and Suncorp seek to boost volumes, JP Morgan Insurance Analyst Siddharth Parameswaran said.

“The pressures are strongest in commercial because we have significant underperformance in property classes,” he told a briefing in Sydney last week. “This is just another bad event for a class that has been unprofitable for many years.”

The Barometer is mainly based on a survey of underwriters, insurers and brokers, which for the current edition took place last year before the bushfire catastrophe escalated.

Overall personal lines’ combined operating ratio dropped from 90% to 83% from 2016 to last year, and had been forecast at 84% for this year. The householder class was expected to remain steady at 91%.

For commercial, the combined operating ratio was forecast to post a modest improvement to 100% this year from 102% in the previous period, with some improvement in most classes. Fire and industrial special risks was expected to improve to 109% from 111%.

Mr Parameswaran says insurers have been able to offset natural catastrophe financial result impacts in the past with the release of claims reserves built up from over-estimations.

“That situation in our view has completely changed,” he said. “They are running out of those logs now to a large degree.”

Survey respondents rank climate change and natural perils as the top industry issues this year. Other issues highlighted are customer expectations, technology and cyber, and the claims environment and emerging risks.