Soaring insurance premiums are pushing more consumers to search for cheaper alternatives, but analysts are cautioning that the rapid rise in prices could attract regulatory scrutiny.
In a report to investors, Macquarie analysts highlighted that while claims inflation continues to challenge insurers and drive prices up, global reinsurance markets are beginning to improve, according to The Australian. This environment has allowed smaller insurers, such as Youi—owned by South Africa’s OUTsurance—and other competitors, to capitalize on the situation, picking up business from major players like IAG, Suncorp, QBE, and Allianz.
Youi, which entered the Australian market in 2007, reported a 24% growth in gross written premiums across its personal lines in the second half of the financial year. This growth came at the expense of larger rivals, aided by premium increases passed onto consumers.
Meanwhile, major insurers such as IAG and Suncorp have also been raising prices. IAG increased its personal lines premiums by 15.9%, and Suncorp implemented a 12% hike.
Macquarie analysts noted that Youi’s growth has been closely tied to market switching, where customers shop around for better deals, while larger insurers rely more on broad price increases. "As affordability becomes more of an issue, this could increase market churn and spur additional growth for challenger brands," the analysts said.
Industry insiders confirm that customers are increasingly comparing policies to take advantage of discounts offered to new clients, The Australian reported. However, insurers like IAG are holding firm, primarily offering better deals to long-term or multi-policy customers rather than enticing new ones with discounted rates.
A softening reinsurance market has also helped Youi secure favourable terms for its latest cover renewal. Reinsurance, which insurers purchase to protect against significant losses from catastrophic events, has seen prices climb nearly 40% over the past five years due to substantial natural disaster-related payouts. Recent floods in eastern Europe are expected to further strain global reinsurers.
Currently, reinsurance and natural disaster coverage account for almost 65% of the cost of home insurance policies in Australia.
Citi analyst Nigel Pittaway pointed out that both IAG and Suncorp are benefiting from strong earnings growth as they pass on price increases faster than inflation. Over the past year, IAG’s shares have risen by 34%, closing at $7.72, while Suncorp shares are up 31%, finishing at $18.35.
Pittaway also suggested that QBE, another major insurer, has been undervalued despite a recent 11% rise in its share price, which closed at $16.74. He described the valuation as "almost irreconcilable" given the performance of its competitors.
"The outlook for IAG remains strong, with the full impact of recent price increases yet to be fully realized and claims inflation starting to ease," Pittaway told The Australian. He added that while QBE continues to trade at inexpensive multiples, sentiment around the insurer might be overly negative.
However, falling interest rates pose a risk to insurer earnings, though Pittaway noted that higher rates, relative to inflation, could offset some of that pressure.
The steep rise in insurance prices also raises concerns about possible regulatory intervention. A parliamentary inquiry into insurers' handling of the 2022 floods is set to report findings by October 18.
"For now, there doesn’t appear to be anything overly concerning, and the industry is hopeful that the reasons for such significant price increases are well understood," Pittaway said.
