Insurance Comes Off The Boil

Sydney Morning Herald

Tuesday November 15, 2005

Anneli Knight

Australian insurance companies have never been more profitable but fierce competition is about to bring these gains to a screeching halt, an industry survey has found.

"The industry has gone through a spectacular period where it is very, very profitable," said JP Morgan analyst Shane Fitzgerald, co-author of the 2005 General Insurance Industry Survey. "To say we are at the high water mark would be a fairly dramatic understatement."

The Australian insurance industry enjoyed a record 22 per cent return on equity last year fuelled by rising insurance premiums and the implementation of tort reforms. This is a quadrupling of profits over four years and well above the 20-year average of between 8 and 9 per cent, the survey found.

The record profitability is attracting "white hot competition", driving down premiums and taking profitability with it, Mr Fitzgerald said. "The competition is fairly rational because [insurance companies are] competing for a good base."

In 2002, the year after the September 11 attacks, commercial insurance premiums soared 45 per cent and domestic insurance increased by 11 per cent. This compares to 2005 figures which saw commercial premiums drop by 14 per cent and domestic inch up by 2 per cent.

This has been good news to consumers who have been handed greater options in price and availability.

Deloitte partner and report co-author Paul Franks said that over the past few years consumers have gone from asking: "Can I get cover?" to "How cheap can I get my cover?"

Mr Fitzgerald commissioned research last year to investigate the price difference for car insurance among four major insurers, NRMA, AAMI, GIO and Alliance, by seeking 1800 quotes using hypothetical scenarios.

"The price difference between the cheapest and the second-cheapest was [on average] 14 per cent and the cheapest and the most expensive was 40 per cent," Mr Fitzgerald said.

"My old fashioned advice is that it pays to shop around ... If you spend the 15 minutes on the internet and get four quotes you are pretty likely to save some money," he said.

On the back of such a growth spurt, the challenge for the industry will be to stay attractive to the market, Mr Fitzgerald said. "The stockmarket is a very demanding beast, it wants growth [but] revenue growth and profit growth are difficult in this environment."

With an average 20 per cent surplus in capital, insurers are responding to the growth challenge by looking to expand their business overseas, the survey reported.

About 75 per cent of major underwriters, reinsurers and brokers participated in the survey, which was published by Deloitte and JP Morgan for the 13th year.

© 2005 Sydney Morning Herald

Back to News Index | Back to Home