Insurers Heading For Tougher Times, Report Says
The Age
Friday December 8, 2006
THE golden age of profitability for insurance companies is ending as competitors, attracted to Australia because of its high earnings, put pressure on premiums and cause rates to fall, a survey shows.
Insurers enjoyed average returns on equity of 23 per cent over the past 12 months, the JPMorgan Deloitte 2006 report shows. But with the cycle of better income and profits that turned in the industry's favour in 2002 now showing signs of deterioration, prospects for the industry's combined bottom line can head in one direction only - 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, given that the 25-year average for the sector is 8 per cent. Shane Fitzgerald, JPMorgan senior insurance analyst and joint author of the 2006 report, described present profitability as "extremely high". He warned that intense competition, particularly from overseas insurers, would limit growth and, as a result, put pressure on margins. This is becoming especially apparent in the commercial insurance market.But it is also evident in the personal sector - mainly motor and home insurance - where local companies are chasing growth to keep market share. This, in turn, is leading to cuts in premiums, with some companies reporting reductions of 20 per cent or more in some rates. Companies were also adopting different approaches to existing and new business, keeping up rates on renewal policies while dropping prices to lure customers from rival insurers. According to figures provided by insurers, rates fell in every class of business based on renewals to June this year, either in real terms or when adjusted for inflation. "The current levels of profitability are not sustainable and the high level of competition is proof of this," said Mr Fitzgerald. The report also revealed that companies were beginning to hold profits into their reserves. This money will be released in coming years to flatten out the cycle of lower earnings. There is an expectation that the cycle will bottom in a year to 18 months, with a rise in premiums expected in 2008. Mr Fitzgerald and co-author Paul Franks, of Deloitte, said the industry had missed its past four annual forecasts.
© 2006 The Age