RADAR FY2023 – Biggest profits since 2014, but affordability threatens sustainability

The general insurance industry rebounded strongly during FY2023, recording a profit of $4.6 billion – the highest in almost a decade, with a healthy return on capital of 14.2%. But beneath the robust figures, affordability, impacted by inflation and climate risk, is the number one issue striking the heart of everyday life for millions of Australians, and raising sustainability concerns for insurers.

Our analysis reveals things may worsen, as many insurers are flagging double-digit rate changes in key classes of business. Householders, in particular, was the only class posting an underwriting loss for the second year in a row.

RADAR FY2023 shares trends, major topics and what it all means for insurers now and in the future. Here is a brief overview to get you started …

Pressure building for householders

In RADAR, Taylor Fry’s annual publication assessing general insurance performance across the industry, actuary and Principal Win-Li Toh warns, “The pressure is building for householders, with elevated inflation an ongoing hurdle, increasing the risk of underinsurance, if sums insured are not adjusted accordingly.”

Key drivers of claims cost inflation

The report identifies construction, motor parts and travel especially as key drivers of claims cost inflation for property, motor and travel insurers. It outlines several critical steps for insurers, including: being alert to an increase in the number of vulnerable customers; focusing on customer retention strategies; and considering the potential for increased fraud and claim-exaggeration activity.

Volatile year for investment markets

The strong overall industry result is nuanced, supported by a sharp improvement in investment returns, with investment income of $3 billion, compared to a $2.8 billion loss last year. But how long will this last and at what level? A decline in consumer and business confidence, high levels of inflation and recessionary talks point to a volatile year for investment markets.

“The pressure is building for householders, with elevated inflation an ongoing hurdle, increasing the risk of underinsurance, if sums insured are not adjusted accordingly.”

Mitigation signals slow but positive change

Mitigation initiatives signal positive but slow change. The industry is making the case for a multifaceted solution, focusing on restructure of insurance taxes, subsidies for high-risk properties and government-sponsored property buy-backs in cases of extreme risk. Win-Li says, “While mitigation efforts to strengthen weather-related resilience through the Disaster Ready Fund are promising, it will take time for the benefits to materialise.”

Increasing regulatory scrutiny

Customer experience is another area of heightened focus in the report, with the long-awaited Financial Accountability Regime Bill 2023 passing on 5 September. Under the new legislation, all directors and some senior executives in financial industries will be personally accountable for a range of new and expanded prudential and conduct-related compliance requirements.

“FAR adds to increasing regulatory scrutiny in the past year,” Win-Li adds, citing ASIC’s attention on whether insurers are honouring pricing promises and the parliamentary inquiry underway to evaluate the appropriateness of insurer responses to the significant flood events occurring in early 2022.

Opportunities to thrive amid urgency to act

Amid the general atmosphere of alarm and calls for urgent action, opportunity exists for insurers and all stakeholders to rise to the challenges. “Considered, proactive planning, innovative thinking, strong governance and collaboration above all will be key towards a thriving industry,” Win-Li says. “Trusted to be there when people are at their most vulnerable.”