Australia's insurance industry saw profits halve in 2020

13 January 2021 Consultancy.com.au
Profile

Bushfires, storms, floods and a global pandemic have combined to give Australia’s insurance sector one of its worst years on record. KPMG presents the year’s key figures in a new report.

KPMG measured the performance for 12 months ending June 2020, and the numbers are dire across key metrics. The loss ratio jumped beyond 70% ­– a near 3% increase from last year. Factors at play here include a boom in claims around natural catastrophes and hazards, mostly relating to bushfires, hailstorms and flooding.

Then there is all that relates to Covid-19. For insurance companies, the pandemic brought a host of new technological, regulatory and compliance costs on the back end, bumping the expense ratio up by more than 1%. At the front end, earnings have been taking a hit from all directions, with profits dropping by nearly 50% to reach $2.3 billion – compared to more than $4 billion last year.

Australia insurance industry: 2020 snapshot

Much of this has to do with a flailing economy. For one, spending is at an all time low, cutting down new business for insurers. To top this off, job and income losses are leading to rent defaults, travel disruptions and business interruption – all of which have driven claims through the roof and added to the ballooning loss ratio. In the backdrop, Insurers are also facing a spike in one-off expenses, relating to business continuity plans, remote working and onshoring.

The most devastating blow from the recession has been on investment income for insurance companies – staggeringly down by more than 90%. In income terms, this translates into a drop from more than $3 billion in 2018/19 to less than $270 billion this year. Volatility and income crunch are the two key factors at play here.

And it doesn’t stop there. According to KPMG Australia partner Scott Guse, insurers have been taking on an extra financial burden amid all this – helping struggling clients. “Insurers responded well to the drop in income for many of their customers during the pandemic.”

“Customer initiatives offered included premium waivers or discounts; deferral of premium poayments for small businesses experiencing financial hardship; maintenance of full cover on small business premises who were required to close for no additional premium:reduced payment days to suppliers; and waiving administration or cancellation fees for people experiencing financial hardship.”

No doubt, this added up to a substantial cost burden for insurers, compounding myriad other financial damages. Insurance margins – what KPMG describes as “the industry’s key metric” – fell short of 7% for 2019/2020 in Australia, marking a seven-year low. The outlook is far from promising.

That being said, there is a silver lining in KPMG’s analysis. Lockdown and restrictions on travel have limited home and auto insurance claims – leading to “positive volumes and rate increases” according to the report. While these have not been enough to offset the negatives of 2020, it has kept gross written premiums (GWPs) on an upward trajectory of nearly 544%. For the year, GWPs in Australia stood at $47 billion.

What lies ahead

Insurance Lead Partner at KPMG Australia David Kells puts the turbulent year in context of ongoing struggles, future expectations, and anticipated transformations in Australia’s insurance industry. “Looking ahead, in addition to the outcome in respect of business interruption, the current environment remains uncertain for insurers as a result of the Covid-19 pandemic and the further impacts that could arise.”

“Insurers are forecasting continued growth in natural hazard events, while higher regulatory and compliance costs are expected to continue as insurers implement operational changes in response to the Royal Commission’s recommendations. They should also be preparing for the implementation of the global accounting standard, IFRS 17 Insurance Contracts, which will have a significant impact on their balance sheets and profit & loss accounts.”