Bright 2024 ahead for Australian insurance industry – Jefferies report

Investment income is anticipated to remain at elevated levels or potentially improve.

The outlook for Australian insurance maintains a positive horizon for 2024, supported by key factors such as a sustained improvement in investment income, ongoing premium rate adjustments, and a reduction in loss severity related to domestic natural perils, according to Jefferies Equity Research.

Amongst the three Australian general insurers covered, QBE, SUN, and IAG are listed in order of preference.

Investment income is anticipated to remain at elevated levels or potentially improve. The first half of the fiscal year 2023 witnessed a significant improvement in investment income on technical reserves for insurers, with QBE, IAG, and SUN reporting growth rates of +10.8%, +104.5%, and +50%, respectively. 

With the RBA Governor expressing concerns about inflation, elevated interest rates are expected to persist. Although the pace of rate increases has slowed, incremental improvements in investment income are likely as reserves are reinvested. 

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Mark-to-market adjustments are also expected to moderate compared to previous years, and at a minimum, investment levels are expected to be maintained.

The severity of Australian catastrophe weather events is expected to decrease due to the onset of El Niño, characterised by warmer and drier conditions. 

A positive Indian Ocean Dipole, in conjunction with El Niño, could amplify the drying effect. According to Aon Plc, the estimated mean annual loss in La Niña weather events in Australia is A$2.36bn, compared to A$0.75bn in El Niño weather events. 

Despite QBE and SUN increasing allowances above prior-year catastrophe experience, actual claims are anticipated to be below the levels suggested by these allowances.

The momentum of premium rate increases is expected to persist on a delayed basis. With substantial rate hikes, some reaching 20%, insurers are likely to experience further growth in Gross Written Premium. 

As the majority of insurance contracts are renewed annually, this trend is expected to endure for the next six to twelve months.