26 May Finity Market Report – May 2020

Finity Insurance Market Report – May 2020

We are pleased to share with you the third edition of the Finity Insurance Market Report, which has been produced exclusively for the Steadfast broker network by Finity Consulting.

This report provides an update on the Australian insurance market with insight into current capacity and pricing conditions. The report also dives deep into COVID-19 and how businesses and insurers are responding, whilst also addressing other topical issues, such as the impact of the recent bushfires and climate change on the insurance market.

We hope this will assist you in understanding the insurance market outlook and in particular future expectations with regards to pricing.

Finity’s Key Messages:

COVID-19 is expected to have a wide range of impacts on the whole general insurance market. The situation is constantly evolving, and the ultimate impact is extremely uncertain. In this report we incorporate our understanding of events to mid-April 2020 and provide our view on the possible future impact for the general insurance industry.

In the immediate term, we expect there to be some reductions in exposure and therefore premium variations, particularly for the SME market. New working arrangements, changing methods of service delivery and creation of new products will mean businesses risk profiles and therefore insurance needs will also change. However, the network reports an increase in demand for cyber, trade credit and a focus on insurance protection and premium funding. Contrary to the GFC, transport is booming and fleets rather than diminishing are being expanded. Brokers are crucial in the implementing of these changes and guiding clients through this period.

We don’t expect large rate increases for SMEs in the near term, as insurers have pulled back on their rate increases previously targeted and capacity changes. At this stage, there is still significant uncertainty around how premium and claims will play out.

Adding to the challenges for the industry were the recent summer bushfires. Whilst we do not expect these events to trigger industry-wide increases in pricing, locations exposed to natural perils may expect increases. However, the long-term trends of a warming climate present longer-term premium rate pressures. Existing affordability issues will be exacerbated given the recent impacts of COVID-19.

Insurance Class Commentary

Property
• The hard market continues as insurers focus on improving profitability, even at the cost of market share. Recent catastrophes have put greater focus on this, and COVID-19 has not changed insurers strategy for large rate increases.
• Strong rate increases are required to cover costs, so expect rate changes to vary depending on factors such as the exposure to natural perils, occupation type or individual account performance.
• Large corporates, high hazard risks and natural peril exposed locations have had difficulty finding cover.
• Recent rate increases is bringing this class towards target profitability. However further rate increases are still needed by insurers to cover significant costs of catastrophe and excess of loss reinsurance.

Further to Finity’s Report, Gordon Bell,  Chief Operating Officer, focused on the Strata Industry . “The strata insurance sector has managed some testing times, with natural disasters earlier this year and the economic impact of COVID-19”.

Gordon added, “The most seriously impacted area has been claims servicing, with higher volumes and a greater complexity in claims managed. Rates are stabilising but still increasing 5-10%; a reflection of where we are with capacity, reinsurance costs, natural peril ratings (in geographical areas) and individual strata plan claims performance. ”

Liability
• Low rate increases across the market, with larger increases generally focused on construction or specific portfolios with poor experience (i.e. construction).
• Expect limited rate movement in general. Clients with direct COVID-19 exposures or high exposure to the public may see stronger increases. Reduction in the yield curve will continue to put upwards pressure on rates across the board.
• No major changes in capacity recently, with reducing capacity for construction, utilities and labour hire exposures, as well as poor performing portfolios.
• Competition in the market will keep capacity relatively strong. Expect continued withdrawal in sectors highlighted above.
• Profitability over the recent year has been impacted by the low yield environment. More rate strengthening is needed by insurers to get back to target profit levels.
• A high amount of uncertainty in the profit result for the coming year due to COVID-19. Expect drops in premium volumes, and a variety of potential claim impacts – more claims or even class actions arising from breach of duty of care for sectors with high exposure to the public; however partially offset by reductions in ‘trip and slip’ style claims.

Damien Coorey, Director, commented on recent conditions surrounding the Cleaner’s Liability Insurance Market. “At the end of April, the NSW Govt. released a new stimulus package to support 550 new and redeployed cleaners to boost the defence against COVID-19 (coronavirus). The $250 million cleaners’ package aims to improve the cleaning of public facilities including NSW transport, schools and TAFE” said Coorey.

“The package was timely, particularly for those contractors who had lost work or incurred reduced hours in the commercial, retail and hospitality industries. Cleaning efforts for NSW transport have increased by 83,000 hours across the network since March 2020.”

“Some liability insurers however have focused on contractor, client-initiated variations to cleaning contract specifications, stemming from COVID-19 and have warned of the impact such variations may have on their policy responding to claims. Cleaning contractors should seek the advice of their broker* before entering into or agreeing to contractual variations, or considering changing the scope of work & services provided, to ensure the policy they have in place will respond in the event of a claim.”

* Broking advice specifically relates to insurance policy wording only and is not intended to override any contract advice provided to you by your legal adviser.

Financial Lines
• The market has continued to harden significantly with insurers continuing to scrutinise their renewal book and take a cautious approach to new business. Financial institutions, D&O and construction professionals reported the strongest increases, with more pressure on primary and mid-level limits.
• Expect further increases at the next renewal with higher increases for segments with direct (healthcare or aged care providers) or consequential (travel, entertainment, retail) impacts to COVID-19.
• Local and Lloyd’s players have materially reduced their capacity and overseas insurers (particularly Singapore), have stepped in. Placement at lower limit levels are proving challenging – flexibility around program structure, panel and price required to ensure placement, particularly for high risk profile accounts.
• Expect more difficulty getting cover for finance, listed entities and construction professionals. Do not expect cover to be available for cladding, Royal Commission or remediation.
• Despite 2 years of strong rate increases, this class is still in loss-making territory, with prior year deteriorations continuing as a common theme across the market. The reduction in the yield curve has made things even worse.
• There are some signs of profit in the horizon, although below insurers target levels. Potential claim impacts from COVID-19 directly or the consequential claims from an economic downturn is likely to place even more pressure on profitability in the short term.

Vikram Choudhry, Business & Product Development Manager, remarked that “Professional Indemnity premiums and excesses are continuing to increase with premiums set to rise by up to 20% in some fields.” He added “Depending on the type of activities involved and associated claims histories, some may experience a higher increase in premiums.”

Business Packages
• Small rate increases achieved across both property and liability covers.
• Insurer support packages expected to limit any rate changes over the short term given the financial strain businesses are facing.
• A large number of new entrants has increased competition and capacity, taking market share off the larger insurers. These new entrants are offering fresh approaches in a low expense environment, aided by technology.
• Early signs that new entrants are ‘on hold’ over the next six months as COVID-19 unfolds. However, insurers supportive response to COVID-19 suggests capacity will remain strong.
• One of the better performing commercial lines classes, with liability performance subsidising property however, is still not meeting target returns.
• Potential for drop in premium volumes and claims impacts due to COVID-19, impacting certain sectors in travel, entertainment, hospitality and construction.

Private Motor
• Insurers have been successful in achieving price increases to counter claims inflation, despite the competitive environment.
• COVID-19 is likely to result in a lower claim frequency given the materially lower use of vehicles. However, the drop in the Australian dollar and increases in the cost of labour and parts may reverse this benefit and put pressure on premium rates.
• Some insurers may offer discounts in premium as a result of the lower exposure.
• Abundance of capacity currently and expected going forward.
• We expect the landscape to continue to be competitive, with auto clubs increasing market share, and traditional commercial players (via intermediated channels) and challenger brands moving more actively into the personal lines space.
• This class continues to improve, with its best result in five years. Whilst event costs were high, this did not impact the net result.
• Continuing claim inflation pressures and increasing cost of labour and parts will limit further improvement in profit. However, expect a short-term reduction in claim numbers with increased working from home and fewer discretionary trips.

Home
• While average premiums increased by around 3-4%, this reflects increased sum insured rather than rate. Building rates have been flat, with contents rates slightly reducing.
• Very little upward movement in premium rates expected in the coming year, particularly as individuals are under financial pressure.
• Indefinite suspension of new business landlords’ insurance (or at minimum the rent default cover) by the market. Understanding policy wordings will be important, as the Government’s freeze on evictions may make it difficult to claim on existing policies.
• Abundance of capacity for Building and Contents. However affordability remains a key challenge with no real progress made in the last 12 months on key issues including ESL and Northern Queensland.
• Bushfire events over the summer have moved this class into loss making territory.
• Buildings claims inflation, limited rate growth and heightened competition will inhibit
the ability for this class to move towards target profitability. There may be some claims relief from the COVID-19 lockdown environment as theft is expected to reduce.

Catastrophes

Recent bushfires created widespread geographical devastation, however the financial cost was not ‘catastrophic’ for insurers.

• the second half of 2019 saw several cyclical climate patterns converge to create conditions conducive to high bushfire risk. Insured losses from these bushfires are estimated to be $2.2 billion according to ICA data.
• these bushfires burnt the largest area of vegetation out of all historical bushfires events by far. However, it’s estimated to be the third largest bushfire event for insurers since 1967 (on a normalised basis).
• there was also a large hail event in late January, which ICA reports as being $1.2 billion of insured loss; as with the bushfires the loss is large, but similar to other historical insurance catastrophes.

Recent catastrophes may trigger some premium rate increases for natural peril exposed locations, although climate change presents longer-term pressures.

• generally we expect some premium rates to increase as insurers implement improvements in perils modelling. However, given the events are not outside of historical experience, more sophisticated insurers may have already priced this into current rates.
• whilst we don’t consider the recent bushfires to be the ‘new normal’, their impact has been exacerbated by long-term trends of a warming climate. Studies show that Australia will be exposed to longer and drier summers, thereby “loading the dice” for seasons like this, making them more likely in the future.
• it‘s expected that overall natural perils risk will increase, although the impact may vary by region – some locations seeing higher costs and others lower costs. Adaptation measures (building standards, coastal defenses etc.) can help mitigate some of these increased risks.

About Finity

Finity Consulting is a leading independent actuarial and analytics firm. Market leading analysis is a core part of everything we do, underpinning our track record navigating industry trends. Finity is a seven times ANZIIF award winner and has been inducted into the ANZIIF Hall of Fame.

Download the full report here.

Disclaimer: This report is general commentary on market conditions by Finity only, and neither CRM Brokers nor Finity can be held responsible for the consequences of any action taken or not taken based on the interpretation of Finity’s report.

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