New blood will steady insurance premiums

New blood will steady insurance premiums

16 September 2009

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Australia — Australia’s biggest general insurers may be forced to keep premiums on hold and focus on other ways of managing the rising costs of natural disasters as competition within the $24 billion sector heats up.

KPMG’s annual survey of the general insurance sector found that the advent of new players such as Australia Post, Virgin Money and Coles may put pressure on the larger insurers to stabilise premium rates, which have been rising steadily, or risk losing market share.

KPMG insurance sector head Brian Greig said that by focusing on price, the new entrants had the capacity to provide robust competition in the market, which was currently dominated by four players — Suncorp, Insurance Australia Group, QBE and Allianz.

He said unlike the British car insurance market, which was heavily driven by price, there was still a degree of customer loyalty to insurers in Australia.

“Any competition in the market is always going to have some pressure on the ability to increase rates, but I think the larger players would be thinking these are small players at this stage,” Mr Greig said.

Premium rates have risen steadily over the past five to six years as insurers seek to manage rising claims costs and, more recently, offset the impact of lower investment returns.

KPMG found that the 4.3 per cent increase in gross written premiums last financial year to $35.2bn was predominantly driven by premium rate increases as insurers focused on pricing for risk, rather than for volume.

It said that frequent, extreme weather events were rapidly becoming a part of the Australian environment for general insurers.

The Victorian bushfires in February cost the insurance industry $1.12bn, making it the third-largest weather event by cost in the past 15 years.

KPMG reports that with weather patterns changing from La Nina (wet) to El Nino (dry), there is now an increased risk of bushfires.

However, if premium rates come under pressure, Mr Greig said insurers would need to focus on other ways of ensuring they had adequate capital to deal with those sorts of events.

He said these included carefully managing their reinsurance program so that reinsurers bore the brunt of the increased claims costs.

By doing this, they could achieve a decent return from their investments through good funds management, and improve their claims processes so that only valid claims were paid.

He added that as employee costs were typically high in the insurance sector, some of the larger players might also need to consider restructuring.

“So they have a number of levers to pull, all of which they try and manage progressively,” Mr Greig said.

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