March 2007 - Market still in good shape
Competition in the insurance market is still causing premiums to drop, while insurer profitability has continued to rise. It’s a good position to be in but, as we know from past experience, the cyclic nature of insurance means it can’t last forever.
Brokers surveyed by the National Insurance Brokers’ Association (NIBA) after the December 2006 renewals reported a slowing in rate reductions, dropping 1% to 9%, compared to 10% to 19% reductions in the June 2006 renewals. NIBA CEO Noel Pettersen says the results suggest insurers are becoming more disciplined in their pricing.
The Australian Prudential Regulation Authority reported in its latest Half Yearly General Insurance Bulletin that insurers’ gross premium revenue (GPR) was $28.2 billion for the year to June 30, 2006, up $900 million on the previous year. Direct insurers reported $26.3 billion GPR, 93.3% of the total, and reinsurers reported $1.9 billion (6.7%).
APRA member John Trowbridge said the capital position for regulated insurers remained strong and, in terms of risk-based capital measures, the industry’s capital coverage was 2.36 times the minimum capital requirement.
In five years, the industry’s net loss ratio has dropped from 83% to 59% and return on equity (ROE) has risen from 8.8% to 23.3%.
JP Morgan analyst Shane Fitzgerald, commenting late last year on the new JP Morgan-Deloitte Insurance Industry Survey, said there were still high profits to be made and excess capital in the marketplace, which meant price cutting would continue for a while.
But he also warned that some insurers reporting bumper results had boosted profits by releasing reserves. He foresaw a period of declining profitability, with ROE dropping below 15%, before coming back up to a more sustainable 15%.
Whatever happens in the insurance cycle this year, the focus for insurance lawyers is likely to be on policy wordings and regulatory reforms still to come.
Due in part to continuing prosecutions of former HIH and FAI insurance executives there has been, in particular, greater awareness of the need for appropriate directors & officers’ liability cover.
Regulators have turned the spotlight on policy wordings to ensure simplicity and clarity for consumers. Simplicity is also being sought by Federal Treasury in its Corporate & Financial Services review.
AILA branches are again planning exciting, relevant events to keep members informed on industry issues for the coming year.
Get in early to register for the AILA-NZILA combined conference in Christchurch, New Zealand, on September 19-21, 2007. Preparations are in progress and more information will be released soon.