March 2011 - Natural disaster losses spark policy wording debates
It has been a tumultuous start to the year with natural disasters, or natural peril events, affecting most states and territories of Australia.
The majority are climate related. If you did not attend a seminar presented by Tim Hardy (see page 8), I urge you to read his paper. I am grateful to Tim for agreeing to present his insights to members across Australia. As he said, whether you are a climate change believer or a sceptic, you have to deal with natural disasters and the losses arising from them.
My deepest sympathies go to all those affected by the catastrophes.
The natural disasters have brought to a head some issues concerning policy wordings and, no doubt, the industry will see interesting developments over the next 12 months.
Queensland barrister Ron Ashton has completed the Geoff Masel memorial lecture series (see page 1). Unfortunately, he got caught in Darwin during the cyclone and was unable to return home for a week.
I thank Ron for giving up his time to present the series across Australia. It has been well received by the membership. The presentation will be available online soon.
Mixed trends forecast
The 18th annual JP Morgan-Deloitte General Insurance Industry survey shows the 2010 financial year was a better year for insurer profits, but mixed trends are forecast for 2011.
Representatives from 18 insurers, 10 brokers and six reinsurers took part in the survey.
It showed rate increases in 2010 helped restore combined ratios (the ratio of losses and expenses to earned premium). A combined ratio of less than 100% indicates underwriting profitability, while anything over 100% indicates an underwriting loss.
The survey showed the combined ratio in 2010 averaged 97%, an improvement from 101% in 2009. However, that was worse than the 95% forecast. Ratios were affected by significant catastrophe activity, slowing reserve releases and mixed trends in premium rates.
The insurance industry had predicted continued rate increases in 2010 in domestic and commercial lines. However, the momentum in premium rates was not carried across both markets. In 2010, domestic lines showed quite strong increases of 8%, the same as 2009, while commercial lines showed rate reductions of 1%, compared to a 6% forecast increase.
The personal lines rate increases were driven by householder and CTP premium increases but claims trends were affected adversely by above-average natural peril activity.
The survey showed respondents expected a "two-speed" premium rate market in 2010 continuing into 2011, with rate increases in domestic lines and soft trends in commercial insurance.
It predicted competitive pressures and excess capital from overseas. Changes in distribution platforms in the broker space would continue to pressure rates in commercial classes into 2012.
Overall, respondents were optimistic about the 2011 outlook and the positive impact of continued economic growth for insurers. However, 2011 was anticipated to be another year of extreme natural events, given the wet weather seen in Queensland, New South Wales and Victoria.
Deloitte actuarial partner and joint survey coordinator Elaine Collins said given flooding affected more people on an annual basis than any other form of natural disaster, the fact flood insurance was not readily available in many areas of the globe, including Australia, remained a vexed issue.
JP Morgan senior insurance research analyst Siddharth Parameswaran said flood was arguably the most difficult natural peril for insurers to cover, given the relatively high frequency of floods in obviously identifiable areas.
From an insurer's perspective, in terms of premium rating, flooding was extremely localised, which meant premium differentiation needed to be conducted at a more granular level than postcode or street. It needed to be conducted at individual property address level.
Top five areas of concern for underwriters:
- Increased competition
- Climate change and weather events
- APRA capital standards
- Staffing issues
- Distribution channel changes
Top five areas of concern for brokers:
- Staffing issues (for example, training, retention, experience)
- Excess competition and capacity
- Distribution (for example, direct marketing, internet)
- Natural perils and climate change
- Need for premiums to increase
Top five areas of concern for reinsurers:
- Natural catastrophe event losses and climate change
- APRA regulatory changes
- Talent shortage
- Investment returns
- Underwriting profitability/GFC issues