The Australian general insurance industry’s return on equity (ROE) has bounced back in the 2023 financial year (FY23), ending three years of low single-digit returns, according to strategic analytics firm Finity.
Finity released its 17th Optima report on October 24, 2023, at Crown Sydney at an event attended by more than 200 industry professionals.
Optima is Finity’s flagship annual “state of the industry” report that delves into the key general insurance market trends from the previous financial year and unveils the firm’s forecast for the coming year. It also assesses overall industry and class of business performance and key prospects in the future across 11 classes of insurance.
The latest Optima report revealed that the Australian general insurance industry’s ROE bounced back to 14% in FY23, equivalent to net profits after tax of $3.6 billion, a significant increase on the average level of only $0.5 billion between FY20 and FY22.
“The strong industry reported profitability is a remarkable result given ongoing challenges, on multiple fronts, in the operating environment,” said Andy Cohen, principal at Finity and lead author of Optima.
The general insurance industry saw 12.5% gross earned premiums in FY23, much stronger than the 10% achieved in the 2022 financial year (FY22). The significant growth was driven more by rate change than volume growth.
The industry also reported a 68% net loss ratio, two points worse in FY23 compared to the previous financial year. The change was driven by several factors: positive outcomes included a benign year for catastrophe-related claims costs and higher reserve releases, while negative outcomes that outweighed positive ones included a weaker upside from discount rate changes and the rise in attritional or smaller catastrophe-related claims costs.
For the 2024 financial year (FY24), the Optima report predicts 11% growth, but a 4% increase in net loss ratio due to an increased underlying loss ratio (+1%), lower COVID-19 business interruption releases (+1%), and no discount rate movements (+2%).
The report also expects higher investment returns in FY24 and a lower expense ratio that will keep industry profitability close to FY23 levels.
“Looking forward to FY24, we see the ITR margin and ROE holding up (at 10% and 13%, respectively), albeit slightly lower than in FY23,” said Scott Collings, managing director of Finity and co-author of the Optima report.
In other news, Finity recently boosted its tech capabilities by appointing a head of product management and marketing and a head of product development and innovation.
