The increasing sophistication of bumper bars is costing a major Australian insurer as more cars get written off instead of repaired.
Insurance Australia Group (
IAG), which sells insurance under brands including NRMA, CGA and Swan Insurance, saw an 8% drop in its share price, to $6.22, after it announced that profit margins would narrow in the year ahead.
Driving the margin pressure were higher average costs for motor-vehicle repairs and a series of large claims in IAG's commercial business, chief executive
Peter Harmer told Fairfax Media, as he expressed confidence in addressing both pressures.
In motor, the IAG boss said that the rising number of technologies used in sensitive parts of cars – especially bumpers – led smash repair costs to skyrocket.
"The parts of some vehicles, particularly grilles and bumper bars, have actually skyrocketed in the past little while, and we've obviously got to make sure that we recover those input costs," Harmer told the news agency.
He cited as an example a car with a grille that cost $21,000 to replace, and said there were more “constructive write-offs” – where the cost of repairing a car is worth more than its current value.
"There is an increase in the number of vehicles written off simply because the cost of repairing them exceeds the cost of replacing that vehicle," Harmer said.
This dynamic drives up costs for the insurer, which Harmer said is being addressed by transferring some of these costs to consumers, limiting costs by having more work done within its car repairers network, and working with manufacturers on “reasonable and sustainable” pricing of car parts, the report said.
The insurer's profits have also been impacted by “elevated large losses” in its commercial division, and the company said insurance prices would likely continue to increase in this part of the division.
IAG saw 48.6% rise in net profit to $929 million, due in part to stronger investment incomes and reserve releases.
In its results for FY2017, which ended on June 30, the insurer reported a widening in insurance margins, from 14.3% to 14.9%, helped by reserve releases. Its outlook for reported insurance profit margins, however, was between 12.5% and 14.5% for the year ahead, caused in part by higher costs in motor and commercial insurance,
Fairfax reported.
The slump in share price was an example of company shares being priced for high expectations, but falling sharply on cautious outlook sentiments, David Spotswood, Shaw Stockbroking analyst, told
Fairfax.
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