S&P Global Ratings has projected resilience among Australia’s insurers despite facing headwinds from elevated inflation, high interest rates, and increased reinsurance costs. In their latest report titled “Australian Insurance Sector Trends: A Return To Underwriting Fundamentals,” S&P Global Ratings highlighted that premium rate hikes have effectively countered pressures from claims inflation across most sectors, except for mortgage insurance. They anticipate continued earnings improvement driven by these rate increases, which are expected to offset reinsurance rate pressures along with investments in technology, cyber defence, and regulatory compliance.
The report also noted that robust investment returns are likely to bolster profitability for Australian insurers over the next 12-18 months. S&P Global Ratings expects underlying profitability to stabilize at a solid level through 2024 and 2025, maintaining stable creditworthiness for insurers.
Looking ahead, as inflation normalizes, insurers are expected to moderate premium rate hikes in 2024 and 2025. This adjustment is seen as beneficial for the sector, aligning premium increases more closely with broader inflation and wage growth, thus addressing affordability concerns for customers. Adjustments to sums insured and excesses have also softened the impact of premium hikes.
Australia’s supportive and stable economic environment, backed by effective public policy measures, has been crucial in mitigating external shocks and fostering sustained profitable growth in the insurance sector. High-quality regulation and oversight, while adding strain to operating expenses, ensure broad stability across the industry.
Property & Casualty Sector Outlook
The property and casualty (P&C) insurance sector in Australia is expected to experience moderated premium rate increases and strong profitability until 2025. The underlying return on equity is projected to stabilize around 12%, similar to levels observed in 2023. Factors contributing to this outlook include lower natural hazard losses, easing claims inflation, and slowing reinsurance price increases anticipated for 2024. Enhanced risk-based pricing, operational efficiencies, robust reinsurance structures, and higher investment yields are also anticipated to support profitability.
Despite significant rises in reinsurance costs, with P&C reinsurance costs increasing by approximately 44% over seven years, insurers have managed exposure through risk-based pricing adjustments and sharing risk retention with policyholders. Strong risk management practices and supportive reinsurance programs are expected to mitigate large losses in the short to medium term. Capital adequacy remains a key strength, with P&C insurers maintaining ample buffers above regulatory requirements to absorb earnings volatility and cover losses under extreme stress scenarios.
Life & Health Sector Insights
In the life insurance sector, modest premium growth of around 3% is forecasted for 2024 and 2025. The sector benefits from robust demand for life-risk and income protection products, supported by high per capita income and tax efficiency benefits. Challenges such as outdated product designs, lack of innovation, and access to affordable advice are being addressed through reforms in underwriting and product offerings, as well as preventive health and wellness initiatives.
Profitability in the life insurance sector is expected to improve, driven by post-COVID reserve releases, higher investment yields, and unwinding of unrealized bond losses over the next two years. However, distribution challenges, rising claims frequency, cost-of-living pressures, and unemployment pose potential drags on profitability. Capital adequacy remains strong, with significant buffers above regulatory requirements and access to offshore insurance group resources.
Health Insurance Sector Overview
Health insurers are expected to benefit from taxation incentives, ongoing health concerns post-pandemic, an ageing population, and steady population growth. Profitability in 2024 is projected to remain robust, supported by claims growth and investment returns despite challenges from affordability issues, medical inflation, and shifts towards out-of-hospital and virtual care. Capital adequacy is anticipated to stay strong, with insurers poised to meet new regulatory requirements without the need for additional equity, potentially accessing debt capital markets if required.
Mortgage Insurance Sector Update
The mortgage insurance sector is expected to see modest premium growth aligned with increased market activity despite weak demand. Profitability remains strong, supported by modestly rising claims and structural improvements in underwriting practices alongside stronger borrower liquidity buffers. Capital adequacy for mortgage insurers is projected to remain robust, maintaining strong buffers
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