Finity Market Report – November 2019

Finity Market Report – November 2019

Following the successful launch of the Insurance Market Report in April, CRM Brokers is pleased to share the second edition, again produced by Finity Consulting.

This report provides an update on the Australian insurance market with insight into current capacity and pricing conditions. 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:
The hardening market has continued for most commercial lines off the back of a number of years of poor profitability for insurers. While material rate increases have been achieved to date, insurers require more to get back to the target profitability they are aiming for. Further pressure on profit has been created for insurers as a result of the reduction in interest rates. For long tail classes premium rates will need to increase by another 5% to account for the lower yield.

Finity forecast a continuation of premium rate increases and tightening of capacity across most classes for medium and large businesses – expect more difficulty placing risks without material rate increases. Foreign insurers have started to provide more capacity to cover the shortfall from local insurers – we think this will continue. The SME space is an area which players are favouring and this competition means that we expect rates to be fairly flat and capacity to be readily available. Home and private motor have been the only classes that have met insurers profitability in recent years, therefore we do not forecast material rate or capacity changes for these classes.

The economic and regulatory outlook is challenging for businesses as a result of the sluggish economy and significant increase in regulatory scrutiny ahead. The Royal Commission aftermath is slowly unfolding, but it is clear that significant changes will be required from insurers and this is likely to be at a material cost to the industry.

CRM Brokers has access to local and international markets – and because not all markets are at the same point in the cycle, that assists us in sourcing the appropriate terms for our clients.
Our experience in risk management allows us to tailor the right processes in place and being more strategic about your business risk in order to find the right cover in a hardening insurance market.

Insurance Class Commentary

• The hard market continues as insurers focus on improving profitability, even at the cost of market share.
• Expect solid rate increases at next renewals across all risks.
• Double-digit rate increases for corporate and high hazard risks.
• Large corporates and high hazard risks have had difficulty finding cover.
• There are signs of further reducing capacity in these segments and risks which are not performing well.

Further to Finity’s Report, Christian Lingga,  CRM Brokers’ Strata Broking Manager, commented on the Strata Property class specifically. “Strata insurance premiums continue to harden, with increases between 5%-15% expected for at least the next 12 months. Emphasis continues on providing clients with effective risk management, correct protection, and backed by a solid claims service.”

Christian added, “Broker involvement is crucial to assist the Owners Corporation’s insurance program, particularly when providing solutions where reduced appetite in the market has resulted in fewer options.”

• Rate increases have generally been focused on construction or specific portfolios with poor experience.
• Expect rate increases across all risks to account for the reduction in the yield curve.
• Material rate increases expected for construction and utilities.
• Reducing capacity at the larger corporate end, mainly focused around poor performing portfolios.
• Withdrawal of capacity for construction, utilities and labour hire exposures – expect this to get worse at next renewal.

Financial Lines
• Market has continued to harden significantly, with financial institutions, D&O and construction professionals reporting the strongest increases.
• Expect similar increases again at the next renewal.
• Local and Lloyd’s players have materially reduced their capacity and overseas insurers (particularly Singapore), have started to step in.
• 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.

Business Packages
• Small rate increases achieved across both property and liability covers.
• Expect modest increases given the competition looming in this class.
• Large number of new entrants has increased competition and capacity, taking market share off the larger insurers.
• Finity expect an influx of capital over the coming 12 months with new entrants offering fresh approaches in a low expense environment, aided by technology.

Domestic Motor
• Insurers have been successful in achieving price increases to counter claims inflation, despite the competitive environment.
• Expect inflation level increases over the coming year.
• Abundance of capacity currently.
• Finity 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.

• While average premiums increased by around 3-4%, this reflects increased sum insured rather than rate. Buildings rates have been flat, with contents rates slightly reducing.
• Very little upward movement in premium rates expected in the coming year.
• Abundance of capacity currently, however affordability remains a key challenge with no real progress made in the last 12 months on key issues including ESL and Northern Queensland.
• We expect the landscape to continue to be competitive (like Private Motor).

Topical Issues

Climate Change
Actuaries Institute Climate Index shows extreme heat and dryness is a continuing trend. The current bushfires are linked to unseasonably warm weather.

Industry is still at odds on the best way to deal with Northern Queensland affordability crisis. Flood cover take-up is still low for SME’s given affordability issues.

Defective Buildings
Inconsistent building standards have caused problems around combustible cladding and other defects. States have recently agreed to take a nationally consistent approach, though this will take some time to work through.

Financial Services Royal Commission
Insurers will have a lot to do. Recent developments include:
• APRA and ASIC are taking a tougher stance, with a number of fines and capital loadings recently issued.
• Hawking crackdown – ASIC has set out a proposal in July for no hawking of retail products.
• Add-on sale reforms – Treasury put out a proposal in September proposing a 4-day deferred sale model. It is not yet clear what will be included in the add-on definition.
• New product design and distribution obligations will apply from 5 April 2021, requiring insurers to develop and document a target market determination for each retail client product.
• General Insurance Code of Practice – is likely to be made mandatory and enforceable, with sanctions for code breaches. A revamp of the code is on track for a January 2020 introduction with an 18-month transition.

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 was awarded the Insurance Industry’s Professional Services Firm of the Year in 2018.

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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