Profitability a core issue
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Tuesday, 3 September, 2002 - 22:00
INSURANCE companies must bring profitability back into their core business or risk facing the wall, delegates at an insurance industry conference in Perth were told last week.
Burned by the share market downturn and exposures coming from the HIH Royal Commission, insurance companies are in the process of rewriting their business direction statements.
The difficulties facing the industry are reflected in the $381 million underwriting loss the sector experienced in the 12 months to December 2001. An investment return of $1 billion resulted in an underlying profit of $640 million. In 2000, the industry turned a $640 million underwriting loss into a $1.4 billion profit after investment returns were factored in.
Blessed by years of positive returns on investments in the equity markets, the insurance industry could, to some extent, afford the luxury of making losses in their core business.
The past 12 months have changed all that. Faced with negative equity returns, the underwriting loss has taken on a new significance.
Speaking at the conference, Insurance Council of Australia executive director Alan Mason
said public liability insurance was the most difficult performer
in the insurance stable.
“On an industry wide basis these figures show that the cost of public liability claims is still well in excess of the amount of premium collected,” he said.
“While the Insurance Council welcomes the reform initiatives by NSW, WA, QLD and SA, it
remains concerned about the
lack of a consistent approach. Insurers are looking for predictability in claims outcomes to be able to properly price this type of insurance, and different approaches will dilute the effectiveness of reform.”
Royal & SunAlliance Australia Group managing director Michael Wilkins raised similar concerns at a business luncheon on the same day.
“In recent years buoyant investment markets have allowed insurers to hide many of their underwriting and risk selection sins,” Mr Wilkins said at last week’s Committee for Economic Development of Australia luncheon.
“But no more.
“In these times of reduced investment rates and returns we, as an industry, must revert to the fundamentals of risk selection, underwriting and claims management.
“I believe people sometimes lose sight of the nature of insurance. This is where the Magic Pudding syndrome comes in. People assume that there is a bottomless pit of capital available to use and abuse.”
According to Mr Wilkins the Magic Pudding syndrome assumes that insurers’ capital would some-how magically keep replenishing it-self to be used again and again, keeping the whole situation accelerating, towards possible oblivion.
“In many quarters, including a lot of popular press and probably more particularly talkback radio, this Magic Pudding syndrome seems to still remain entrenched,” he said.
“Realistic pricing is in everyone’s best interest because it ensures we have a vibrant industry that attracts experienced players.
“It rewards shareholders with reasonable, long-term revenue growth and profits. And it rewards consumers because if something goes wrong, your insurer will be there to help you.”
The ICA has announced that it will be releasing a draft code over the next few weeks, which will tackle some of these stakeholder issues, ensuring clients are dealt with in an informed way and disputes are handled effectively.
Burned by the share market downturn and exposures coming from the HIH Royal Commission, insurance companies are in the process of rewriting their business direction statements.
The difficulties facing the industry are reflected in the $381 million underwriting loss the sector experienced in the 12 months to December 2001. An investment return of $1 billion resulted in an underlying profit of $640 million. In 2000, the industry turned a $640 million underwriting loss into a $1.4 billion profit after investment returns were factored in.
Blessed by years of positive returns on investments in the equity markets, the insurance industry could, to some extent, afford the luxury of making losses in their core business.
The past 12 months have changed all that. Faced with negative equity returns, the underwriting loss has taken on a new significance.
Speaking at the conference, Insurance Council of Australia executive director Alan Mason
said public liability insurance was the most difficult performer
in the insurance stable.
“On an industry wide basis these figures show that the cost of public liability claims is still well in excess of the amount of premium collected,” he said.
“While the Insurance Council welcomes the reform initiatives by NSW, WA, QLD and SA, it
remains concerned about the
lack of a consistent approach. Insurers are looking for predictability in claims outcomes to be able to properly price this type of insurance, and different approaches will dilute the effectiveness of reform.”
Royal & SunAlliance Australia Group managing director Michael Wilkins raised similar concerns at a business luncheon on the same day.
“In recent years buoyant investment markets have allowed insurers to hide many of their underwriting and risk selection sins,” Mr Wilkins said at last week’s Committee for Economic Development of Australia luncheon.
“But no more.
“In these times of reduced investment rates and returns we, as an industry, must revert to the fundamentals of risk selection, underwriting and claims management.
“I believe people sometimes lose sight of the nature of insurance. This is where the Magic Pudding syndrome comes in. People assume that there is a bottomless pit of capital available to use and abuse.”
According to Mr Wilkins the Magic Pudding syndrome assumes that insurers’ capital would some-how magically keep replenishing it-self to be used again and again, keeping the whole situation accelerating, towards possible oblivion.
“In many quarters, including a lot of popular press and probably more particularly talkback radio, this Magic Pudding syndrome seems to still remain entrenched,” he said.
“Realistic pricing is in everyone’s best interest because it ensures we have a vibrant industry that attracts experienced players.
“It rewards shareholders with reasonable, long-term revenue growth and profits. And it rewards consumers because if something goes wrong, your insurer will be there to help you.”
The ICA has announced that it will be releasing a draft code over the next few weeks, which will tackle some of these stakeholder issues, ensuring clients are dealt with in an informed way and disputes are handled effectively.