General Insurance profits up on last year, but big challenges ahead

Ongoing uncertainty in the world – from the health of our planet, people and economies to the security and privacy of our data – touches every aspect of our lives. This includes the world of general insurance, as it navigates its responsibility to protect against evolving risks. For actuaries, staying abreast of the evolving issues will be critical in our role as independent trusted advisers in this fast-changing environment.

The impacts of the past year for the insurance market are mixed and wide ranging, with some classes of business faring better than others. Motor insurance, for example, has seen continued positive effects, with restrictions on movement and a shift towards working from home leading to fewer cars on the road and consequently fewer collision claims. Workers compensation, on the other hand, is experiencing risk of increasing mental health claims, while all lines are facing significant consumer-focused insurer obligations. These require insurers to increase transparency and accountability towards improving customer outcomes, including less complexity in policy documentation and clearer terms.

Add to this the shockwaves of the recent IPCC climate report, cybersecurity concerns for directors and officers and the urgency of affordability in householder insurance as premiums continue to rise yet the class remains unprofitable – and it’s clear that the challenges are complex. Rising to them will require depth, insight and agile thinking.

COVID-19 business interruption uncertainty

While general insurers rebounded from a disappointing FY20, with the overall net profit after tax in FY21 up by 17.6%, they continue to be significantly affected by COVID-19. Increased business interruption provisions, brought on by an adverse ruling in the first test case, triggered a spike in commercial property claims at the end of FY2020 – and is the reason for the colossal 277% combined ratio for this class in the December 2020 quarter. Business interruption continues to be high on insurers minds – especially with the second test case to be decided in September 2021.

COVID-19 has had a mixed impact across classes. At one extreme, ongoing border closures and lockdowns continue to have positive effects in motor insurance, with fewer cars on the road and consequently fewer collision claims, leading to motor insurers experiencing one of their most profitable years on record (combined ratios of 85% for domestic motor and 87% for commercial motor). At the other extreme, travel insurers seem to be just hanging on, with total revenue over the year less than 10% of that in the years pre-COVID and facing the challenge of retaining enough key expertise to hit the ground running when travel resumes. Looking forward, these COVID-19 impacts may reduce as vaccination take-up rates improve and lockdown restrictions are eased.

Affordability hit hard by natural catastrophes

Affordability for householders’ insurance is a major concern, with premium rates continuing to increase year-on-year including a 6% increase over FY21 – yet the class remains unprofitable. The FY21 combined ratio was 103%, up from 101% in FY20. RADAR highlights several large natural catastrophe events impacting property insurers during FY2021, including Queensland hailstorms ($940 million industry loss), Hunter Valley and mid-north coast floods ($650 million loss), and tropical cyclone Seroja ($273 million loss).

In response, a reinsurance pool will start in July 2022, covering cyclone and flood-related damage in Northern Australia, backed by a $10 billion government guarantee. At this stage, it’s unclear how the pool will operate, but industry and community consultation is underway to help achieve clarity, finesse pool design, reduce risky behaviour and direct policy towards improved outcomes for all. Given the role that many actuaries play in advising insurers on insurance pricing, including allowances for natural disasters, actuaries are well placed to contribute to this significant initiative.

Government developments in climate change

On climate change, RADAR points to the latest assessment report from the Intergovernmental Panel on Climate Change, released in August 2021. The report caused alarm around the world in its finding that climate change and its impacts on extreme weather events were accelerating, in particular, more severe and southward-shifting tropical cyclones, more intense rainfall and flooding, and hotter conditions leading to increased bushfire risk.

This will exacerbate the pressures on commercial property, where profit trends are still poor, despite FY21 being a ‘better’ year than FY20 (when we had the December bushfires and January hailstorms) in terms of catastrophic events. We can see that in 8 out of the past 12 quarters, combined ratios exceeded 100%, yet despite these pressures, premium rates appear to have flattened over FY21. Looking ahead to the next few months, there is some reprieve with the El Niño–Southern Oscillation (ENSO) outlook neutral, meaning there’s no strong indication that El Niño or La Niña will develop in coming months.

Industry leaders are working with government towards easing some of these challenges. In May, the government launched the National Recovery and Resilience Agency, which allocates $600 million in funding to strengthen communities against these kinds of climate-related natural disasters, and insurers are eagerly awaiting the results of these efforts.

Psychological pressures in workers compensation

In workers compensation, COVID-19 has had a significant impact – despite the number of risks written reducing by 5% in FY21, GWP increased by 22% due to a 28% increase in average premium. With COVID-19 impacting some industries and employers more than others, this has led to a change in industry mix and an increase in average premiums.

Throughout the pandemic, mental health has increasingly taken centre stage, and general insurance is no exception. Workers are at increased risk of psychological claims, with the additional pressure created by changes in work demands, restrictions on movement and working from home. Primary mental injuries have increased in some publicly underwritten states, with potential to be a future cost pressure also for privately underwritten states.

Raft of regulations underway

Lastly, RADAR shows FY21 was an important year for insurers implementing new consumer regulations, especially in addressing conduct and disclosure obligations that keep consumers front of mind.

D&O in particular is a changing landscape, as company officers come to grips with complex, fast-changing risks, such as cybersecurity, as well as the pandemic and climate change. On the flipside, while class actions have adversely impacted D&O claims over several years, recent temporary COVID-related continuous disclosure relief and litigation funding reforms may help stem the growth in class actions in future. Across the Professional Indemnity class, the significant premium increases over recent years (FY20 +32%, FY21 +10%), combined with less attractive terms (excesses, exclusions, reduced coverage), have led several large corporates to consider self-insurance or captives for their PI/D&O covers.

Making a difference has never seemed so critical as it does now for actuaries. Every which way we turn, there are myriad issues where through informed considered advice, our skills and expertise could really offer much value to business, government and, ultimately, society.

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