Home / Local / Finity reports insurer profitability ‘falling off a cliff’
2 November 2020
Australian insurers’ profitability has collapsed to a 20-year low, primarily as a result of falling investment returns but aided and abetted by a spate of catastrophe claims and COVID-19 disruption.
Actuarial firm Finity’s annual Optima report finds industry return on equity (ROE) dropped to 4% in the last financial year, down from 13% in the previous 12 months.
“You’ve got to go back a long way to find an ROE of 4%,” Finity Principal and lead author of the report Andy Cohen told insuranceNEWS.com.au.
“You’ve got to go back a long way to find something that bad. We really have fallen off a cliff a little bit.”
The report shows gross earned premium growth of 5%, reported loss ratio deterioration of 2%, a 1% increase in the expense ratio and a significant reduction in investment returns.
“The industry’s investment returns were almost $2 billion (or 60%) less than in FY19,” Mr Cohen said.
“This removed three points from the insurance trading result (ITR) and eight points from the ROE.”
Looking to FY21, Finity forecasts a 6% insurance margin and 7% ROE.
“This is a slight bounce-back from the low point of 4% ROE in FY20, but it still sits below target profitability levels,” Finity says.
“With investment returns set to remain at the very low levels seen in FY20 (less than 2%), underwriting margins would need to lift significantly if a return to target profitability is to be achieved going forward.”