Insurers' Days Of Raking It In Are Ending
Sydney Morning Herald
Friday December 8, 2006
THE golden age of profitability for local insurers is coming to an end as competitors, attracted to the Australian market's high earnings, put pressure on the cost of premiums and cause rates to fall, a survey of the industry's prospects has revealed.
Insurers have enjoyed average returns on equity of 23 per cent in the past year, according to the JP Morgan Deloitte 2006 report. But with the cycle of better income and profits that turned in the industry's favour in 2002 now showing signs of deterioration, the prospects for the industry's combined bottom line can only head in one direction - down.Nonetheless, profits would be coming off a very high base and even if the return on equity fell to 15 per cent during the cyclical downturn this would still be a very good outcome for insurers, given that the 25-year average for the sector is just 8 per cent.Shane Fitzgerald, senior insurance analyst at JP Morgan and joint author of the 2006 report, described the current levels of profitability as "extremely high" but warned that intense competition, particularly from overseas insurers, would limit revenue growth and, as a result, put pressure on margins.This was especially apparent in the commercial insurance market but was also evident in the personal sector, mainly motor and home insurance, where local companies were chasing growth to hang on to their market shares. This, in turn, was leading to cuts in premiums with some companies reporting reductions of 20 per cent or more.Companies were also adopting different approaches to existing and new business, keeping up rates on renewal policies while dropping prices to attract customers away from their rivals. According to figures provided by the insurers themselves, rates in every class of business based on renewals to June this year declined, either in real terms or when adjusted for inflation.
© 2006 Sydney Morning Herald