Optima has revealed FY19 was another good year for the General Insurance industry. The industry reported an insurance margin of 9% (3 points lower than FY18) and an ROE of 13% (2 points lower than FY18). Nevertheless. after three years of improving ROE, the industry is clearly off what may have been a high point in FY18 and we expect further reductions in reported profitability in FY20.
According to Andy Cohen, Finity Principal and lead author, the reduction in FY19 reported margins and ROE was due mainly to loss ratio deterioration, “Loss ratios were higher in the last year, as a result of a return to an average level of weather-related claims, a lower level of reserve releases and lower discount rates. However, discount rate pressures were offset – not quite completely, mind you – by higher investment returns.”
“Prior year reserve releases in CTP were yet again over the $1 billion mark, but interestingly releases in other long tail classes have just about dried up,” said Andy Cohen.
Looking to FY20, Finity is expecting the insurance margin and ROE to both continue trending downwards, a 7% margin and 10% ROE is our forecast. While this is a lower ROE than recent years, it remains in a range that probably should be considered reasonable given the low interest rate environment and the associated lower cost of capital.
“Although we see premium growing in FY20 as a result of rate increases in both Personal and Commercial Lines, much of this margin improvement will be consumed by claims cost inflation while lower investment returns will drive the margins down.
“We don’t expect prior year reserve releases to help as much as normal either, while there is more to come from CTP, these are expected to be at lower levels than we saw in FY19. Also, despite expense containment programmes in place, we have assumed emerging regulatory requirements will add 0.5 points to the expense ratio in FY20,” Mr Cohen added
As well as providing an overview of recent and prospective industry performance, Optima 2019 also looks at developments in the regulatory landscape over the last 12 months and looks at how general insurers might embrace artificial intelligence in their businesses for improved customer and operational outcomes.
Download a summary OptimaLite here.