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Executive Summary
We highlight here the key themes to emerge from the 2008 survey and our analysis:
1. Profitability unchanged in 2008; will modestly deteriorate in 2009. In
the 2008 financial year, respondents reported an overall industry combined
ratio of 94%, in line with last year's result of 94% and better than the 2009
forecast of 96%. Respondents once again noted high storm activity,
coupled with reserve releases (both of which they expected to reduce into
the future). There was a noted difference between classes, with participants
expecting sharp improvements in combined ratios in personal lines, coupled
with significant deterioration in long tail commercial lines. Whilst combined
ratios may hold up, we believe there will be added pressure on profits at
least in the short term from the effects of the financial crisis on both claims
and falling yields.
2. Premium rates in commercial classes are stabilising. Rates in the long
tail classes fell further during 2008, although the trajectory of rate
reductions slowed. Long tail rates fell 7% on average this year compared to
a fall of 10% last year. Rates in short tail commercial classes bottomed in
2008, with, short tail commercial rates increasing by 1% this year compared
to a 7% fall last year. We expect commercial rates to bottom or turn in
2009 given the deterioration in profitability in some lines, coupled with
expectations for higher claims costs and falling yields as a result of tougher
economic conditions. Survey respondents also expect to see commercial
rates bottom in 2009 and increase in 2010.
3. Premium rates in the personal lines increased, and are expected to
continue to rise. Rates in the personal lines increased 3% on average this
year, compared to a 0% move in rates last year (mainly as a result of 2007
rate reductions in CTP after regulatory change). We expect rates to
continue to rise in the coming year given falling investment yields, the
oligopoly structure of the market, and the consensus opinion by the large
players that rates in personal lines need to increase. Lack of profitability in
NSW CTP, and changes in profitability in QLD CTP were a major concern
though – and large rate rises would be needed here to restore margins seen
in the past.
4. Weaker economic outlook could have adverse impact on claims. A
number of respondents indicated that a poor economic outlook for the
coming year was a concern. Generally speaking, the number of fraudulent
claims and litigation increases during weak economic conditions, which can
have an impact on Professional Indemnity, Director’s and Officers,
Workers’ Compensation and Commercial Property. We believe some
classes such as motor and householders’ could actually face lower claims
costs from reduced vehicle usage and lower building costs.
Table of Contents
Executive Summary..................................................................................................................... 3
Survey Description ...................................................................................................................... 4
Rates bottom but pressures on profits ..................................................................................... 6
How the Financial Crisis impacts insurers ............................................................................. 14
Is the global rates cycle turning?............................................................................................. 24
Performance Management........................................................................................................ 29
Distribution Channels: A reflection on predicted and current trends.................................. 30
Granular pricing: apply the science of predictive models to the art of underwriting......... 37
Regulatory Reforms – threat or opportunity?......................................................................... 43
Carbon emissions and high oil prices: turning challenge into opportunity........................ 47
Location Intelligence: What is it? How can it be used, and what value does it provide? .. 51
Skill shortages – Identifying and retaining critical skills....................................................... 58
Domestic Motor Vehicle ............................................................................................................ 64
Householders............................................................................................................................ 69
CTP............................................................................................................................................. 74
Fire & ISR (Commercial Property)............................................................................................ 78
Commercial Motor Vehicle........................................................................................................ 83
Workers’ Compensation ........................................................................................................... 87
Public & Products Liability ....................................................................................................... 91
Professional Indemnity ............................................................................................................. 95
Directors & Officers................................................................................................................... 99
Overall Loss and Expense Ratios.......................................................................................... 103
Policy Terms and Conditions ................................................................................................. 105
Excesses and Deductibles...................................................................................................... 106
Perceptions of Class Profitability .......................................................................................... 107
Issues Confronting the Underwriters .................................................................................... 110
Issues confronting the Brokers.............................................................................................. 118
Operational Efficiency............................................................................................................. 123
Coverage of Minimum Regulatory Capital Requirement ..................................................... 126
Distribution.............................................................................................................................. 127
Investment Asset Allocation................................................................................................... 130
Brokers Perceptions of Underwriters .................................................................................... 132
Reinsurance Survey Results .................................................................................................. 135
Catastrophe............................................................................................................................. 136
Property Proportional.............................................................................................................. 137
Property Non Proportional...................................................................................................... 138
Professional Indemnity ........................................................................................................... 139
Overall loss and expense ratios............................................................................................. 140
Issues Confronting the Reinsurers........................................................................................ 141
Significant Issues Impacting Reinsurers .............................................................................. 142
Survey Participants ................................................................................................................. 146
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