No relief in sight for general insurers

Australia's general insurers face another tough year, with the pattern of increasingly frequent severe weather events likely to continue, ongoing volatility in the investment markets cutting investment revenue, and competitive pressure restricting insurers' ability to increase premiums.

Releasing KPMG's annual insurance survey yesterday, insurance group head Brian Greig said insurers would have to focus on operational efficiency, pricing strategies and customer retention to produce earnings growth in the year ahead.

Net profit for the 13 insurers in the survey fell 20 per cent from $4 billion in 2006/07 to $3.2 billion in 2007/08 (the figures are drawn from a mix of December year and June year reporting periods).

Gross written premium of $33.6 billion was up 10 per cent on the previous year. That rate of growth slowed from 13 per cent the year before.

The average return on equity for companies in the survey was 15.7 per cent, down from 20 per cent last year.

There were several loss makers in the group, including IAG, which lost $226 million (following write-downs on offshore investments), RACQ Insurance, which lost $6 million in the six months to June, and, surprisingly, Comminsure, which lost $18 million. Commonwealth Bank reported a profit for Comminsure, on a cash (and perhaps management reporting) basis last month. However, statutory financials provided to KPMG show a loss.

Greig said: "The dual occurrence of severe weather events, coupled with unstable investment markets has impacted the sector."

According to KPMG there were eight severe weather events in Australia and New Zealand during the 2007/08 year, with an estimated cost to the industry of $1.15 billion.

Greig said the industry had moved to reduce its exposure to such events by buying more reinsurance. "The major insurers have reduced their maximum event retention from around $200 million to closer to $100 million. Reinsurance rates have been attractive."

He said insurers had been able to increase premium rates in some but not all classes of business. In personal lines premiums have gone up by five to 15 per cent.

"In commercial lines there is still competitive pressure on rates. There is some evidence of hardening in commercial motor and SME but in other areas it is still competitive. Industry sentiment is that we are coming off the bottom but pricing is still below target returns."