Brought to you by:

Optima flags industry growth but headwinds present challenges 

Claims inflation remains a significant challenge for the industry, which also must brace for potential fallouts from the uncertain economic landscape, according to a new Finity report. 

The actuarial firm predicts gross earned premium will grow 10.7% in this financial year after rising 12.5% to about $56 billion in the prior 12-month period. 

The $3.6 billion profit for last financial year is the equivalent of a 14% return on equity (ROE) and marks a “very strong” bounce back to a level of profitability that is finally within the target range, ending a three-year period of sub-5% returns. 

“On the surface, the strong premium growth rate in FY23 appears extremely positive for industry margins,” Finity says in its annual Optima report. 

“However, most of this growth was driven by rate hardening in both short and long tail business rather than underlying system growth; and premium rate rises have largely been in response to inflationary pressures and the hardening reinsurance market. 

“This means that the industry’s recent growth has not really been driving corresponding margin growth. High inflation has been a feature of the industry for a couple of years now, with pressure continuing to mount for many insurers, albeit with some early signs of relief finally on the horizon.” 

Finity says economic conditions will provide headwinds to real premium growth, with a weaker economy and cost of living pressures leading to a decline in consumer demand and lower overall system growth. 

In the personal lines space, already significant affordability challenges – exacerbated by recent year premium rate increases in response to inflationary and reinsurance cost pressures – will become even greater. 

Finity says the outcome is higher levels of under or non-insurance for consumers and a growing protection gap. 

“A greater degree of shopping around and price competition should be expected as consumers seek to reduce spending, as well as a move to higher excess levels.” 

For the commercial lines space, exposure growth will be constrained, particularly for liability and financial lines classes. 

“This will be driven by slower economic activity leading to lower sales and turnover, a reduction in new businesses and higher exits of existing businesses from the system,” Finity says. 

“Some sectors, such as construction and retail, may be more materially impacted than others.”