A new report has dubbed the non-life insurance outlook ‘stable in the face of challenging conditions’.
The latest S&P Global Ratings report found that despite challenging market conditions, including continued soft pricing and limited investment yield opportunities, Australia’s non-life insurers have generally maintained solid earnings and strong capital levels in the last year.
The report said this had been aided by long-term cost saving initiatives, lower reinsurance rates, and strengthened operational and pricing and underwriting capabilities.
However, S&P Global Ratings also found Australia’s non-life insurers’ ability to maintain their earnings and respond to any further aggressive rate discounting was limited.
On a more positive note for insurers, it said recent policy renewals indicated the soft pricing environment in commercial lines may have peaked in Australia.
Caroline Strahan, a Melbourne-based analyst at S&P Global Ratings, said although Australia’s non-life insurers were certainly facing some headwinds, most notably soft pricing and limited investment yield opportunities, asset quality hadn’t deteriorated.
She said there remained some sensitivity to volatile investment markets, which had hurt the earnings on their reserves.
“On the plus side, it’s clear that players in this sector have generally maintained solid earnings and strong capital levels in the past year. They’ve benefitted from cost-saving initiatives, lower reinsurance rates, and strengthened operational and pricing and underwriting capabilities,” she said.
“With this in mind, we think there remains some capacity for some insurers to provide special returns to their shareholders over the coming year. We also expect some insurers to use some of their surplus capital to continue to reinvest in long-term strategic initiatives such as software upgrades, business simplification, small-to-midsize acquisitions, and new capabilities and products.”
Although costs and claims inflation remained low and pricing remained rational on the whole, she said they expected earnings to remain under pressure, particularly from intensifying competition. Evidence suggested that new entrants, foreign capital, and insurance subsidiaries of banks had made inroads into their traditional market base.
“We believe that insurers best placed to withstand earnings pressures are those with niche product sets and brand strength, as well as diversified portfolios across a range of commercial and retail lines.”
“Those with less reliance of select intermediary relationships and insurers with access to resources of a strong parents and wider group are also better placed.”
Accumulation of risk remained a key source of capital and earnings volatility for insurers. Australian insurers are materially exposed to property catastrophe risk, but have generally alleviated this risk through reinsurance protection and portfolio management”, she said.