The outlook for insurance premiums

Kevin Gomes, Principal of Sydney-based analytics and actuarial consultancy Taylor Fry, brings more than a quarter-century of expertise in actuarial and strategic roles to general insurance, where he specialises in reserving, pricing, capital management, reinsurance and investment and business valuations.

Gomes has co-authored the JP Morgan/Taylor Fry General Insurance Barometer since 2011, which surveys insurers and brokers to provide benchmark data to industry.

Ahead of an ANZIIF webinar Rate Trends and Cycles — The outlook for insurers and reinsurers on 5 August, Gomes discussed the likely impacts of catastrophic events, climate change and COVID-19 on premiums for some key classes of general insurance.

HOME AND MOTOR

In terms of premium revenue, Australia’s retail insurance market is dominated by motor and home insurance policies, whose rates were strongly expected to grow before coronavirus became a household word that forced entire populations to retreat indoors.

‘Climate change was pushing up premiums even before the late-2019 bushfires and early-2020 hail storms and flooding , which caused very significant losses to insurers. 

'Higher average and peak temperatures were forcing reinsurers to remodel for catastrophic weather events,’ says Gomes.

There was also evidence of inflation on motor policies increasing faster than for home because of greater reliance on imported parts and the increasingly sophisticated technology featured in vehicles.

‘Even small repairs, say to a bumper bar, came with added calibration of sensors and other collision avoidance componentry that is very expensive to repair,’ Gomes explains.

‘Although in theory these should reduce the frequency of repairs, the average cost side of repairs was rising.’

Conversely, high competition in the motor and home markets put downward pressure on premiums, with slowing growth in the volume of new vehicles making it increasingly difficult for motor insurers to achieve volume growth.

Since COVID-19, however, reduced economic activity  premiums for motor and home benefited from reductions in the overall cost of claims.

‘People are working at home more, so reduced burglaries and car accidents mean fewer claims. How long the benefit for premium rates lasts is a live question because they will then return to normal levels,’ says Gomes.  

The ‘working from home’ effect put policyholder pressure on insurers to rebate premiums; with some insurers obliging, particularly if their customers could substantiate the incidence of economic distress.

COMMERCIAL PROPERTY

A cyclical hardening of rates and the impact of climate change had seen commercial property premiums increase significantly since 2017, and Gomes expected further increases as a market correction because the sector remained profitable.

‘All the above-mentioned catastrophic events put upward pressure on rates in a targeted way, with the small end of the market – mainly SMEs – experiencing lower increases than the large end,’ he says.

The picture post-COVID is mixed and hinges on legal decisions, Gomes adds.

‘Working from home means a reduction in activity in commercial premises, resulting in reduced claims and some rate relief. However, this benefit has been swamped by business interruption (BI) claims.’

Although BI is an add-on to a lot of policies, the burning question of whether insurers are liable or whether they’re covered by pandemic exclusions will go to the courts to answer.

The wordings in BI covers are being challenged legally – it’s a significant issue for this class of business that already was under substantial pressure,’ explains Gomes.

‘The SARS epidemic of 2005–6 had led to general exclusions to BI for quarantinable or infectious diseases as defined by the original Quarantine Act 1908, which was repealed by the Biosecurity Act 2015.

‘Insurers that failed to update the wording of their policies to rely on the definition in the latter legislation may have their exclusions subject to legal challenge.’

PROFESSIONAL INDEMNITY

Of all the PI subclasses, directors’ and officers’ liability policies are probably under the most pressure, says Gomes, who points to settled and ongoing class actions that have pushed up losses.

‘Financial advisers and other finance and banking-related professions have been scrutinised by the recent Royal Commission, resulting in increased the potential for D&O claims. 

'There has been a temporary reprieve on new class actions under COVID, but existing ones remain in play.’ 

While the prospect of increased regulation of litigation funders who have been driving class actions is welcomed by insurers, increased insolvencies from the lockdown-related economic recession has put upward pressure on premiums and claims.

‘The downturn in business means people are looking for someone to blame, and may be tempted to seek legal action against company directors and officers who fail to appropriately manage pandemic risks,’ Gomes warns.

Predictably in an ongoing health crisis, medical malpractice PI policies’ rates also face upward pressure from poor claims experience.

‘Although medical malpractice claims costs were already rising faster than the rate of inflation prior to COVID, infection control and the increased role for medical professionals will mean greater risk exposure post-COVID,’ Gomes says.

PUBLIC LIABILITY

The overall performance for this class is seen by Gomes as not bad although some pockets, such as the construction sector, have not been tracking well.

‘Structural defects that have come to light, for instance in the Opal Tower, and cladding issues as evidenced by the Grenfell Tower fire, could impact upon commercial property cover or PI due to building surveyors seen at fault, as well as public liability,’ he points out.

Public liability exposures were somewhat offset since the COVID-19 ban on mass gatherings, however, because many premises, whether municipal pools, football grounds or private cafes, have had reduced foot traffic. 

LENDERS MORTGAGE

Lenders mortgage insurance protect banks and other lenders against the risk of mortgage defaults. The market is highly concentrated in Australia, with four insurers underwriting the bulk of policies.

‘Under COVID, the real risk in this class is greater default levels, and payouts could be much greater due to reduced property prices,’ Gomes tells ANZIIF.

However, the six-month pause on repayments the banks offered has resulted in about 15 per cent of customers taking it up — not all of who needed to due to government stimulus packages — though only a portion of these are likely to flow through to additional defaults, Gomes reports.

‘If anything, there’s been a decrease in defaults but that rate may catch up after September when the pause ends and interest meanwhile has accumulated.’

TRADE CREDIT

Gomes highlights trade credit insurance — typically purchased by business that supply goods to retailers on credit — as potentially a class very much affected by COVID-19.

‘Trade credit protects suppliers against not being paid, or the time lag in getting paid after supplying the goods.

'But while Woolworths and Coles may be busy, department stores such as Myers and David Jones are struggling, and insurers worried about their prospects may not insure their suppliers.

‘The lack of trade in these retail outlets is causing real problems and they may become uninsurable — which compounds problems for those retailers. Insurers are under great pressure because if a department store chain goes under then their suppliers go under,’ Gomes explains.

On the other hand, if insurance is not extended it will affect the willingness of producers to supply them.

‘Insurers are therefore more wary of underwriting insurance before the supply-chain vulnerability becomes a community-wide issue,’ he adds. 

REINSURANCE UNCERTAINTY

Reinsurance is a global business, with reinsurance rates within each country affected by capital flows and consequential impacts on reinsurance capacity.

In this regard, the growth in recent years of alternative capital instruments such as catastrophe bonds and insurance-linked securities have provided an alternative to traditional reinsurance and put downward pressure on reinsurance rates.

Since the advent of COVID however, all the risks that direct insurers have been facing apply to reinsurers, with added uncertainty from increased volatility in financial and trade markets.

‘While the stockmarkets are defying gravity by remaining bullish, there is less capital available for traditional reinsurance as well as alternative capital, and that puts upward pressure on reinsurance rates.

'This is in addition to any premium increases associated with higher claims risk,’ Gomes says.

‘The attractiveness of particular countries for placement of capital may be affected by many factors, including perceptions of economic or political risk. Interest rates may also affect capital investment in that lower ones are not as attractive. COVID-19 adds another dimension of risk to this.’