1 d’finitive JUNE 2013

d’finitive®

Keeping you informed. APRIL 2015

[ APRA GI statistics ]

What goes up…About three hundred years ago, Isaac Newton wisely observed that ‘what goes up must come down’. The Australian insurance industry has recently experienced tremendous growth, and while our industry is removed from the principles of universal gravitation (or is it?), Newton’s adage no doubt still applies. While industry premium has not actually ‘come down’, during 20141 growth slowed significantly.

Our assessmentDirect insurers’ premium growth slowed significantly in 2014

after a very strong period from 2011 to 2013.

This slow-down was driven by a number of factors:

Subdued growth is likely to continue into 2015, as these

factors continue to work against premium rate increases.

In this edition:>> Focus on the top line of

direct insurers’ P&L; Gross

Written Premium (GWP)

>> Examine the industry’s

growth over the past decade

>> Explain the experience by

class of business.

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1All years reported in this d’finitive are Calendar Years ending 31 December.

2'The Guy Carpenter Global Property Catastrophe Rate on Line' index fell at the 1 January 2015 renewals to its lowest level since 2001. This was driven by

surplus capacity and low global catastrophes.

Lower reinsurance

costs2 (increased

global reinsurance

capacity)

Benign weather

bolstered profitability and reduced the need to

increase rates

Increased capacity,

particularly in commercial

lines

Increased competition

put downward pressure on

prices

Slower growth in Australian economy

2 d’finitive APRIL 2015

Industry growth

Over the period 2011 to 2013, direct insurers experienced strong

GWP growth, averaging 7% p.a. This was a key driver of the

industry’s recent strong profitability (Nov 2013 d'finitive), along with

other contributing factors including:

• Relatively benign net claims experience

• Improving expense rates since 2009 (May 2014 d'finitive)

• Solid investment returns since the GFC.

However, premium growth slowed to just 1% in 2014. This is very

low, compared to the average growth over the last decade of 4.5%

p.a. and the 2.5% nominal GDP growth in 2014. 2014 has shown that

strong premium growth cannot be counted on to continue driving

industry profitability.

Let’s look at GWP growth by class of business to better understand

the drivers of the slowdown in 2014.

2006 2007 2008 2009 2010 2011 2012 2013 2014

Gro

wth

Calendar Year

0%

2%

4%

6%

8%

10%

Direct Insurers’ GWP Growth

Estimated growth without FSL change

Direct insurers’ GWP growth was significantly lower in 2014 than recent history.

Industry Profile

Direct insurers collected $39.2 billion in gross premium in

2014, an increase of less than 1% from 2013 ($38.8 billion). This

pie shows the breakdown by class of business:

Motor (Commercial)

Motor (Domestic)

Fire & ISR

Householders All Others

Employers liability

Professional indemnity

Public and product liability

Motor (CTP)

APRIL 2015 d’finitive 3

Property classes

Both property classes grew strongly in 2012 after the 2011

Queensland floods. Premium rates increased as higher reinsurance

costs were passed on to customers. Exposures increased with the

inclusion of flood coverage – off the back of a wider conversation

with the community about the issue of under-insurance.

From 1 July 2013, insurers ceased collecting the Fire Services Levy

on behalf of the Victorian Government. We estimate that this artificial

GWP reduction contributes to about half of the slow-down for property

classes in 2014. The estimated growth without this change is shown as

a red dot. Discussion following is based on reported figures.

During 2014, Householders delivered $7.5 billion in premium, a

relatively small 3% increase from 2013. Householders has grown

at an average of 10% p.a. over the past decade, even outperforming

the strong 6% p.a. growth in the Australian motor insurance market.

Over the last three years, strong growth and benign weather have

produced very good Combined Operating Ratios (COR). Very healthy

returns on capital – around 30 to 40% – have attracted increased

competition, which has considerably constrained premium rate

rises in 2014. Additionally, increased reinsurer capacity has seen

reinsurance costs reduce, which alleviated the need to increase

prices. These market dynamics will continue to dampen premium

growth in the coming year.

During 2014, Fire & ISR contributed $3.7 billion of premium, a

reduction of 7% since 2013 and a significant deviation from the 5%

p.a. average growth rate until 2013.

Fire & ISR has reported underwriting losses for much of the last 35

years. In the past five years, only 2013 saw an underwriting profit (i.e.

a sub-100% Net COR). Despite the short-lived hard market in the few

years post-2011 (particularly in high natural peril risk areas), premium

rates remain inadequate to deliver an acceptable return on capital

over the long term. Falling reinsurance costs, increased insurer

capacity and continued growth in business written by unauthorised

foreign insurers (UFIs) have spurred competition. This has culminated

in the premium base reduction for this challenged class.

-10%

-5%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013 2014

-10%

-5%

0%

5%

10%

15%

20%

2006 2007 2008 2009 2010 2011 2012 2013

Gro

wth

Householders

Gro

wth

Fire & ISR

Estimated growth without FSL change

2014

Benign weather

Competition

Reinsurance

Reinsurance

Capacity

4 d’finitive APRIL 2015

Motor classes

During 2014, Domestic Motor delivered $7.9 billion of gross

premium. This class had enjoyed stable growth averaging 6% p.a.

over the nine years to 2013. However it grew by only 1% in 2014, by

far the lowest growth rate in almost a decade.

The motor market has been extremely profitable for at least the

past decade. Consistently strong returns on capital – as high as

40% for some insurers – has attracted increased competition

and thirst for market share, putting downward pressure on

prices. Insurers will need to combat the commoditisation of their

products by creating differentiation and enhancing their customer

relationships. Technology changes and innovation, such as safer

cars and telematics, as well as shifting societal dynamics, such as

declining usage and collaborative consumerism, will also play a

significant role in the future of this class.

During 2014, Commercial Motor provided $2.1 billion of gross

premium, a 2% increase from 2013.

The commercial motor class’s growth is more volatile than its

domestic counterpart. This is caused by the greater variety of

risks, different distribution channels, discretionary discounting and

the segmentation of the market. For much of the past decade,

Commercial Motor has grown by at least 5% p.a. The lower than

average growth of 2% in 2014 is likely due to the increased level

of competition and capacity in the market, as well as the relatively

weak domestic economy.

Competition

Competition

Slower economy

Capacity

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Gro

wth

Domestic Motor

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

2006 2007 2008 2009 2010 2011 2012 2013 2014

Gro

wth

Commercial Motor

5 d’finitive JUNE 20135 d’finitive APRIL 2015

Long tail classes

Premium growth in Public and Product Liability (2014 GWP: $2.2

billion) and Professional Indemnity (2014 GWP: $1.5 billion) has

been relatively subdued over the decade following the surge

during the ‘liability crisis’ in the early 2000s. As profitability has

been maintained since the ensuing tort reforms, premium rates

have been mostly stable, which means premium growth has only

been driven by increasing exposure. Over the nine years to 2014,

GWP growth has averaged 1% p.a. and 2% p.a. for Liability and

Professional Indemnity, respectively. With an abundance of capacity

in the market, the environment remains competitive, especially due

to the large number of overseas insurers operating in Australia.

Employers Liability (2014 GWP: $1.6 billion) has had very strong

growth, averaging 13% p.a. in the three years to 2013. This has been

in line with strong wage inflation in the privately underwritten states

– particularly as a result of the mining boom in Western Australia.

However, this class contracted in 2014, with GWP reducing by 6%.

Our recent Workers Compensation d’finitive discussed recent

developments and scheme performance for each jurisdiction in

Australia and New Zealand.

Compulsory Third Party (2014 GWP: $3.5 billion) experienced

an average of 9% p.a. growth in the five years to 2013. However

growth in 2014 was much lower at 3%. For a more detailed

discussion of CTP, including premium rates, affordability and recent

developments across all CTP jurisdictions, please refer to the latest

CTP News.

Other classes

Collectively, the six remaining ‘Other’ APRA classes delivered $5.5

billion of gross premium in 2014. In aggregate, these classes grew

by 4%, driven by strong growth in Travel (15%).

Capacity

Competition

Competition

Slower economy

This article is based on Finity’s analysis

of APRA’s quarterly statistics. It does

not constitute either actuarial or

investment advice. While Finity has

taken reasonable care in compiling the

information presented, Finity does not

warrant that the information is correct.

We refer the reader to APRA’s website

(www.apra.gov.au) for further details.

Copyright © 2015

Finity Consulting Pty Limited

If you have any ideas for topics we can cover in future issues, we'd love to hear them!.

This is the sixth edition of our APRA GI Statistics d’finitive

series. Each edition focusses on a different facet of the industry data. You can find past issues on our website, or contact us to receive future

updates by email

d’finitive[ APRA GI statistics ]

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Finity is one of Australia and New Zealand’s leading actuarial and management consulting firms, specialising in general and health insurance. Finity works closely with large and niche insurers, government agencies and large corporations to deliver world-class actuarial, pricing and strategic advice.

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Please contact one of our consultants if you’d like more information on the material presented in this publication.

Authors

David Wilheim david.wilheim@finity.com.au + 61 2 8252 3317

Claire White claire.white@finity.com.au + 61 2 8252 3305

Luke Cassar luke.cassar@finity.com.au + 61 2 8252 3418

Contact

Andrew Cohen andrew.cohen@finity.com.au + 61 2 8252 3346

David WilheimTel + 61 2 8252 3317david.wilheim@finity.com.auSydney Office

Luke Cassar Tel + 61 2 8252 3418luke.cassar@finity.com.au Sydney Office

Contact the Authors