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Signs of a pulse The hardening market brings renewed cause for optimism, according to two industry health checks By Andy Swales IT HAS BEEN A LONG TIME COMING, but after years of debate, doom and gloom, false dawns and forecasts, Australian insurers have finally started reporting premium rate rises in key lines. Now two of the industry’s most in-depth annual “health checks” have added to the weight of evidence: the market is turning and moving up, pulling profits along with it. KPMG’s General Insurance Industry Review hails 2016/17 as “a very positive year… and a year that we believe signifies the start of a long-awaited upswing in the insurance cycle”. And Finity’s Optima report, while a little more guarded, notes “signs of a muchneeded hardening of rates in some commercial lines, commercial property and directors’ and officers’ in particular”. It means the key industry metrics paint a much rosier picture than in previous years. 10

KPMG’s report, based on Australian Prudential Regulation Authority industry figures for 2016/17, says gross written premium was up 5% to almost $43 billion. Claims costs dropped, the loss ratio falling two points to 63.5%, with a Cyclone Debbie-led spike in natural catastrophe claims “largely offset by higher reinsurance recoveries and ongoing reserve releases from prior-year claim provisions”. The expense ratio fell 1.4 points to 24.8%, in part due to pricing increases, while a “progressive move away from a call centre and branch distribution network for retail products (car, home and travel) to a distribution platform that is mobile, digital or online is a significant contributor to this cost reduction”. And the upshot? An industry combined operating ratio of 88.3%, improved from 92.2%; an insurance profit of $4.85 billion, up 24.7%; and an underlying insurance insuranceNEWS

December 2017/January 2018

margin of 16.1%, up from 13.6% and moving towards the 18% area last recorded in 201214, after a recent low of 11.3% in 2014/15. The Finity report’s headline figures put industry premium growth in 2016/17 at 4%, representing “a rebound from the lows of 2% in the previous two years”. That’s good, but not great: “While rates may not have gone backwards, this suggests they have not exactly powered forwards either.” It says the loss ratio was down three points to 66% net of reinsurance, despite Debbie’s $1.5 billion impact. And Finity puts the industry’s reported insurance margin at 14%, with return on equity at the same level – up from single digits in 2015/16. However, the report notes reserve releases were a “major prop” to profits, and the underlying margin was more like 10%. Nevertheless, the platform is there for an industry that is furiously restructuring and repositioning to keep pace with

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