The Australian insurance industry has faced hurdles since the COVID-19 pandemic began. As the industry goes through another year, S&P Global (S&P) delved into industry changes and what to expect for the remainder.
In its latest report, S&P said it expects the Australian insurance industry to face a “balancing act” in 2023 as premium rates rise to offset the rising cost of claims.
“However, this [might make] policies less affordable at a time when the cost of living is rising, which could dampen new business growth,” the report said. “At the same time, the cost of catastrophes appears to be increasing.
“But insurers are equipped to handle this confluence of challenges, in our view,” the report said.
S&P said it expects insurers to continue to manage their risk exposure by increasing premium rates and re-evaluating their reinsurance arrangements.
S&P said in its report that it expects the underlying profitability of the Australian property/casualty (P/C) insurance industry to strengthen in 2023, driven by strong premium rates.
It said: “The several catastrophes that Australia endured in calendar 2022 will hurt the performance in fiscal 2023 (year ending June 30).
“Headline earnings have also felt the squeeze of unrealized valuation losses.
“While the reinsurance market will absorb most of the major claims, insurers will, in turn, face the rising cost of reinsurance.”
However, it said that P&C insurers will se a continued stabilisation of credit, given their “strong capital adequacy”.
S&P expects life insurance profitability in Australia to strengthen over the next 12 months, driven by the continued improvement in the profitability of individual disability income insurance (IDII) and rising premium rates across all lines.
“IDII was loss-making prior to 2021. Higher interest rates will also bump up profitability as insurers release reserves on long-tail products and benefit from the higher yield on reinvestment. Capital adequacy continues to be a strength and should remain solid, with ownership from supportive offshore parents,” the report said.
S&P predicted that health insurance profitability will remain strong over the next 12 months, thanks to solid premium growth and stabilising claims frequency following the COVID-19 pandemic.
The report said: “Regulatory capital requirements will likely increase for the sector due to the implementation of the new capital standards from July 1, 2023. However, we expect Australian health insurers will remain well-capitalized.”
Skyrocketing interest rates would likely affect mortgage quality and mortgage insurers, according to S&P.
“We expect higher claims to emerge throughout 2023, with greater impact in the third and fourth quarters. In the lead-up, we project profitability for mortgage insurers to remain strong, supported by improved investment returns,” the report said.
The following factors underpin profitability for the sector:
“Capital adequacy has been a key strength of the mortgage insurers. This reinforces credit quality and is necessary because claims can emerge over long periods,” the report said.
Earlier this year, S&P warned Australian organisations to prepare for “more fire, more rain, [and] more risk” as it released extreme weather predictions for insurers, banks, and governments.
