Rising Claims Wipe Out Profits for Australian Insurers Despite Stronger Investment Returns
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The Australian Prudential Regulation Authority (APRA) has released an industry update that revealed general insurers faced a $100 million underwriting loss in the first quarter of the year.
This was a significant drop from their earnings of $1.6 billion in the preceding quarter.
The primary reason for this loss is the increase in gross incurred claims, which rose 40.6% from $10.2 billion to $14.4 billion in the December quarter.
Impact of Gross Incurred Claims:
The $100 million underwriting loss can primarily be attributed to gross incurred claims costs, according to APRA. The sharp rise in claims costs has led to a significant reduction in the industry's net profit, down 18% to $1.1 billion from $1.3 billion in the December quarter. Gross earned premium also decreased by 0.4% to $16.4 billion.
Despite this, there was a notable increase in investment income, rising 107% from $1 billion to $2.1 billion. For the last twelve-month period to March, the industry saw an underwriting profit of $5.3 billion as compared to the preceding year. At the same time, the gross earned premium rose by 9.4% to $64.4 billion. The net profit also tripled to $3.7 billion from $1.3 billion.
Reasons Behind Insurance Industry’s Performance:
The rise in net profits of the Australian insurance industry can be attributed to many factors. Nearly all classes of businesses recorded premium increases. These were substantial increases compared to the prior year and were driven by stronger underwriting results and a recovery in investment income. Also, investment income recovered to $2 billion after experiencing a loss of $900 million in the previous year. It is worth noting that the increase in investment income was driven by an increase in interest income and unrealised gains from interest-bearing investments.
Despite the overall increase in profits, KPMG insurance partner, Scott Guse, says the March quarter numbers are "not surprising”. There are many weather-related events during that period such as smaller floods, storms, etc., leading to underwriting losses. For instance, quarter one of 2021 saw a significant number of specific events impacting the industry. However, Guse added that the insurance industry should increase its prices to cover the reinsurance costs going up, which is causing concern.
The Australian insurance industry’s insolvency profitability margin is in question due to issues highlighted by the APRA report. Due to the increasing costs and a declining margin, most insurers need an overhaul in their business models. The industry needs to focus on reducing excessive costs and improving operational efficiencies to maintain profitability, starting with a risk management evaluation that considers operational, technological, or strategic risks that drive the claims costs upward.
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Incontestability Clause: A provision in a life insurance policy that prevents the insurer from voiding coverage due to a misstatement by the insured after a certain period.
