Home / Local / Pandemic to constrain industry premium growth: S&P
29 June 2020
The Australia general insurance industry is expected to suffer a two-percentage point drop in premium growth for the year to December because of the virus pandemic disruption, S&P Global Ratings says in a report released today.
Economic chaos caused by the pandemic means overall property and casualty (P&C) premium will increase about 3.5% this year, down from 5.5% a year earlier and 5.8% from the most recent 12-month period to March 31 – days after the economy went into full lockdown mode.
“Australian operating conditions have been affected by the COVID-19 pandemic and related market volatility,” S&P says. “Australia's P&C insurers have principally been affected by market volatility while business performance has been affected by quarantine and distancing requirements.”
The credit ratings agency’s base case estimates suggest the P&C industry will produce a return of equity of about 5% this year, about half that of the 10% expected for the medium term.
Return on equity for the year to March was about 7.5%, below the last five years’ average of above 11%.
“Historic underlying returns have benefited from improved risk-based pricing, premium rate increases, and well-structured reinsurance arrangements,” S&P says. “Continued efficiency initiatives across operations and claims management have moderated the impact of claims inflation, particularly in some short-tail personal lines/
S&P says natural perils and catastrophes have strained the sector’s most recent performances.
“Australia’s P&C insurers are predominantly exposed to domestic natural disaster events, although some insurers have insurance exposure to global events. Domestic natural perils contribute to earnings volatility through higher gross claims, with recent events spanning flooding, bushfire, severe weather and storms and low loss earthquake.
“We expect effective risk management and appropriately structured reinsurance arrangements to moderate the impact of future large claims and catastrophic events.”
Despite the current pressure from the pandemic and exposure to natural perils, S&P has maintained its “low risk” score for the sector, citing its strong prudential frameworks, solid profitability, established distribution platforms and incumbents’ strong brands.