Australian insurance sector combats inflation with premium hikes

Its life insurance premiums are seen to grow ~3% in 2024 and 2025 modestly.

S&P Global Ratings assessed Australia’s insurers to remain resilient “despite challenges wrought by elevated inflation, high interest rates, and cyclically high reinsurance costs.”

“Premium rate increases have more than countered earnings pressure from claims inflation in all sectors excepting mortgage insurance. The earnings lift from higher premium rates will continue to offset reinsurance rate pressures, and higher spending on technology, cyber defence, and regulation,” it said in its “Australian Insurance Sector Trends: A Return To Underwriting Fundamentals” research note.

“Ongoing strong investment returns will also likely underpin the profitability of Australian insurers over the next 12-18 months,” it added.

S&P Global Ratings also expects underlying profitability to stabilise at a solid level over the next two years, maintaining stable creditworthiness for Australian insurers in 2024 and 2025.

As inflation normalises, insurers will likely moderate premium rate hikes in 2024 and 2025. 

Lower inflation should benefit the sector, as past premium rate increases outpaced broader inflation and wage growth, leading to affordability issues for customers. 

Adjustments to sums insured and excesses have helped soften the impact of premium hikes.

Australia provides a supportive and stable economic environment for insurers, with effective public policymaking mitigating external shocks and supporting sustained profitable growth. 

High-quality regulation and oversight, while straining operating expenses, ensure broad industry stability.

P&C

The Australian property and casualty (P&C) insurance sector is expected to see moderated premium rate increases and strong profitability through 2025, with underlying return on equity stabilizing at around 12%, similar to 2023. 

Lower natural hazard losses, easing claims inflation, and slowing reinsurance price increases will assist profitability in 2024. Enhanced risk-based pricing, operational efficiency initiatives, well-structured reinsurance, and higher investment yields will also support returns.

Reinsurance costs have risen significantly, with P&C reinsurance costs growing by about 44% over the past seven years, consuming much of the growth in gross earned premiums, which increased by 64%. 

Reinsurance recoveries only increased by 18% in the same period. Insurers are managing exposure through risk-based pricing, adjusting risk appetite, and sharing risk retention with policyholders. Strong risk management and supportive reinsurance programs will help mitigate large losses in the short to medium term.

Capital adequacy remains a key strength, with P&C insurers maintaining sufficient capital buffers above regulatory requirements to absorb earnings volatility and cover losses in extreme stress scenarios.

Life & Health

For life insurance, a modest premium growth of about 3% is expected in 2024 and 2025. The sector benefits from a strong demand for life-risk and income protection products, high per capita income, and tax efficiency benefits. 

However, challenges include outdated product design, lack of innovation, and access to affordable advice. 

Life insurers are addressing these issues through underwriting and product reforms and preventive health and wellness offerings.

Life insurer profitability is set to improve over 2024 and 2025, benefiting from post-COVID reserve releases, higher investment yields, and unwinding of unrealised bond losses. 

However, distribution problems, rising claims frequency, cost-of-living pressures, and unemployment may drag on profitability. Capital adequacy remains strong, with significant buffers above regulatory requirements and access to offshore insurance group resources.

The health insurance sector will benefit from taxation incentives, pandemic-era health concerns, ageing demographics, and steady population growth. 

How profitable will be in 2024?

Profitability should remain sound in 2024, with claims growth and investment returns supporting earnings. The sector will face challenges from affordability concerns, medical inflation, and a shift to out-of-hospital and virtual care.

Capital adequacy for health insurers is expected to remain strong despite rising regulatory requirements. Insurers will meet new capital requirements without raising additional equity, relying on debt capital markets if needed.

The mortgage insurance sector will see modest premium growth as market activity increases, despite weak demand. 

Profitability will remain strong, with claims rising modestly from a low base. Structural changes in underwriting practices and stronger borrower liquidity buffers will support long-term sector strength. 

Capital adequacy for mortgage insurers will remain robust, with strong buffers above requirements.