COVID-19 impact on GI industry continues, but brighter days ahead: Optima report

The ongoing business disruption caused by COVID-19 has delayed the expected profit recovery for the Australian General Insurance industry, according to Finity’s annual state of the industry report, Optima.

Launched on Thursday 21 October, the fourteenth edition of Optima outlined the GI industry’s FY21 insurance margin barely broke even at 0.2%, dropping from 2.6% in the previous 12 months.

“Looking at ROE (return on equity), the industry went from bad to worse in FY21 – ROE was only 2%, down from an already poor 3% in FY20, and was the lowest in two decades,” Andy Cohen, the lead author of Optima, said at the paper’s official launch event.

A 2% deterioration in the industry’s net loss ratio was the key driver. This was due to significant strengthening of the COVID-19 business interruption loss provisions (+5 points), offset to some extent by a return to average catastrophe claims (-2 points) and a favourable discount rate impact (-1 point).

Despite the drop off, Finity’s Managing Director and Optima co-author, Scott Collings, noted that profit margins can recover in the wake of COVID-19.

“FY21 profitability was dominated by COVID19 business interruption reserve strengthening. Assuming no repeat of this in FY22, margins are set to rebound by around 5 points,” Scott said.

“The industry will continue to watch the progress of the second COVID BI test case through the appeal process with interest, and if ‘Test Case 2’ outcomes are upheld, then potentially an even stronger rebound might be expected,” he added.

Furthermore, the report states that beyond COVID-19 business interruption, rate increases in most classes will be just enough to offset persistent claims inflation and, together with a slightly lower expense rate, this will provide further margin expansion of a little over 1%. Significant reserve releases look to be a thing of the past while on the investment side, lower returns are here to stay with record low interest rates.

Putting it all together, and on the basis of Australia experiencing an ‘average weather’ year, Finity forecasts for FY22 are for a 5.5 point rebound in profitability to an ITR margin of 5.7%, and an ROE of 7.2%.