For many Australian business leaders, the impacts of inflation are now a major concern.
“I believe claims inflation is the greatest issue at this point,” said Ken Keenan (pictured above), CEO of Pen Underwriting, based in Sydney.
Australia’s inflation rate has gone up by 6.1% during the last 12 months according to the Australian Bureau of Statistics (ABS). The ABS just released its quarterly Consumer Price Index (CPI) update.
“It is clear to everyone that prices are rising rapidly,” said Keenan. “All classes will be impacted.”
Across the economy, the ABS revealed that the most significant price rises were on furniture (+7.0%), new dwelling purchases by owner-occupiers (+5.6%) and petrol (+4.2%).
“We can price for current and future claims inflation through ensuring we have the right values and turnover,” said the Pen CEO. “However, claims inflation can also impact retrospectively on prior claims which are still outstanding.”
Keenan said this is “more concerning” because “the opportunity to price for this is gone.” He expects an impact on underwriting performance.
“Since late 2021 our view on claims inflation and the measures we are taking to understand it is the first question asked by every insurance company we represent,” he said.
However, despite inflationary challenges, he described Pen as “swamped with opportunities.”
In December last year, William Legge, general manager of the Underwriting Agencies Council (UAC), spoke in a similar vein. Despite COVID-19 impacts, he said business was booming for underwriters.
“I’m approached about six or seven times a week by people who are looking to either buy into or buy an underwriting agency,” said Legge. “I think that the insurers have realized - and rightfully so - that the agencies can deliver to the market a lot quicker and probably a lot more cost effectively than they can,” he added.
Keenan said the market had been favourable for underwriting agencies for some time but there’s not always the resource capacity to focus on each opportunity.
“The team has been working really hard in delivering for our brokers and we are achieving good growth,” he said. However, as an industry, he said there is too much “frictional cost and inefficiencies between brokers, agencies and insurers.”
“The challenge is to improve this situation through tech and process enhancements so we can achieve our full potential,” said Keenan.
However, he also said that given the current rate environment now “is a great time to grow with price adequacy at its best level for many years.”
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Some underwriters see the rise of underwriting agencies as a global phenomenon driven by brokers.
“I think it is,” said David Porteous, managing director of The Barn Underwriting Agency and part of the Market Lane Insurance Group. “We always will be a broker-driven market and that’s because complex risk requires a broker and I think it requires a broker who likes to deal with an underwriter on understanding the risk profile.”
He said the underwriting landscape in Australia reflects the situation in Canada, the US and UK.
“Australia is mirrored in those markets,” he said.
The hard market has played a role in speeding up this process, said Sydney-based Porteous. However, he said, agencies have been on the rise for much longer.
“There have been so many strides taken over 10 or 15 years to create that space for agencies,” he said. “I think the hard market has perhaps cemented that space and you can’t see it doing a U-turn from here to be honest.”
However, inflation challenges remain.
According to an ABC news report, if the introduction of GST is taken out of the equation, the inflation rise of 6.1% is the highest since 1990.
The report said economists are warning that inflation may not have peaked but may not hit the higher levels already seen in the US and UK.
On Thursday, Treasurer Jim Chalmers is expected to deliver a ministerial statement on the economic and budget outlook.
“We’ve got data coming out almost every day at the moment which has implications for the forecast, so I’ll give as much as I can, consistent with the fact that it is notoriously difficult right now to pick how the economy is evolving,” said Chalmers on Monday to Australian media.
Last week, the Treasurer announced a review of the Reserve Bank. In a media statement, Chalmers said the “complex and rapidly changing economic environment, as well as a range of long‑term economic challenges,” presented an opportunity to review the current monetary policy framework.
A media statement said the review will produce a final report with recommendations by March 2023.
