General Insurance Industry Review 2016 - KPMG [PDF]

General Insurance Industry Review 2016 With the Top 10 emerging trends impacting the sector

October 2016

kpmg.com.au

© 2016 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name and logo and are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation.

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General Insurance Industry Review 2016

Contents Foreword

4

Results and Analysis

6

Top 10 Emerging Trends

11

Financial Results

26


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Foreword KPMG’s General Insurance Industry Review 2016, now in its 30th year, includes the financial results up to 30 June 2016 of general insurers that represent a significant part of the Australian market. The results of reinsurers have been excluded from this analysis. The financial information, analysis and observations have been compiled from publicly available financial reports, disclosure statements and Australian Prudential Regulation Authority (APRA) General Insurance Statistics, and include information from the prior year. In certain instances, data obtained from other publicly available information has been supplemented with information obtained directly from insurers. The report also includes what KPMG views as the ‘top 10 emerging trends impacting the sector’. We reflect on the implications of these current and emerging themes, which may require Australia’s general insurers to significantly adapt the way they do business. As always, we appreciate the insurer contributions to the report.

Scott Guse Partner ASPAC Head of Insurance Accounting

Martin Blake Partner National Sector Leader, Insurance


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General Insurance Industry Review 2016 Year in review: results snapshot

Gross written premium $40,953m 2016 $39,958m 2015

Insurance profit $4,058m 2016 $3,452m 2015

GWP up 2.5% despite ongoing competitive pressures

Profit increased by $606m (17.5%) reflecting reduced claims costs

Expense ratio 25.7% 2016 25.8% 2015

Loss ratio 66.0% 2016 68.6% 2015 Loss ratio down by 2.6% as catastrophe events returned to more normal levels

Expense ratio flat - cost discipline maintained despite competitive pressures

New technology Top 10 emerging trends

1 2 3

InsurTech

Momentum is growing

New Payments Platform Enabling real time, data rich payments

Blockchain

A transparency bullet?

New insights 7

Big data

8

Sustainability

An untapped opportunity

Time for insurers to step up

Capital ratio x1.73 2016 x1.75 2015 Capital ratio at 1.73 times the prescribed capital amount compared to 1.75 as at 30 June 2015

New products / markets 4 5 6

Driverless cars

Shifting liability from human to manufacturer

Telematics

Benefits are too great to ignore

Cyber insurance A more sophisticated approach required

New approach 9

Conduct and culture

10

New Accounting Standard IFRS 4

Looking beyond the regulator

We are getting close


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Results and Analysis At a glance Total 2015/16 $m

Total 2014/15 $m

Gross written premium

40,953

39,958

Net earned premium

28,556

30,420

Underwriting result

2,388

1,694

Insurance profit

4,058

3,452

Loss ratio

66.0%

68.6%

Expense ratio

25.7%

25.8%

Combined ratio

91.7%

94.4%

Insurance margin

14.2%

11.3%

Source: APRA Quarterly General Insurance Performance Statistics June 2016. (Direct Insurers only) and KPMG analysis.

Year in review Market conditions continued to be tough for Australian insurers, with ongoing premium pressures, particularly in commercial classes. Despite this, insurance profit for the year ended 30 June 2016 was up 18 percent from the prior year to $4,058 million. The improvement in the industry result was driven by a number of factors including: • lower frequency of natural catastrophes than in 2015

Gross written premiums (GWP) increased by 2.5 percent to $40,953 million, reflecting the pressures on the industry, particularly in relation to soft commercial pricing. Price increases were observed in some personal lines classes although the market continues to be competitive. Opportunities exist in this market for those insurers who are first to market with innovative new products.

• continued focus on cost savings • marginal growth in gross written premiums.


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Key ratios 14.2% 11.3% 18.2%

Insurance margin

17.8% 10.7% 91.7% 94.4% Combined ratio

87.9% 89.8% 101.8% 25.7% 25.8% 26.3%

Expense ratio

26.4% 27.1% 66.0% 68.6% 61.6% 63.4%

Loss ratio

74.7% 2015/16

2014/15

2013/14

2012/13

2011/12

Source: Participating insurer surveys and KPMG analysis

Net earned premiums decreased by 6 percent as the industry reinsurance spend increased, predominantly as a result of IAG’s quota share arrangement with Berkshire Hathaway. In total, industry reinsurance costs were up 35 percent to $12,800 million. The loss ratio has improved in 2015/16 to 66 percent with net claims incurred reducing by 9.7 percent to $18,838 million. This reduction is partly from lower claims for catastrophes in 2015/16 as well as ongoing prior period releases for CTP. In an environment of challenging top line growth, insurers have continued their cost discipline through cost optimisation and rationalisation initiatives and the benefits of these continue to be seen in an ongoing improvement in the expense ratio. The expense ratio decreased marginally in 2016 to 25.7 percent. It remains to be seen whether insurers can continue to find cost savings whilst also investing in innovation and new products to support growth.

The combined impact of all these factors contributed to an industry insurance result of $4,058 million and an insurance margin of 14.2 percent. The graph above shows the trend in the insurance margins over the past 5 years, with 2014/15 and 2011/12 being those heavily affected by natural disasters. Investment income allocated to insurance funds is $1,670 million, down slightly from $1,758 million in 2015. The low interest rate environment continues to limit the returns achieved, with insurers reviewing their investment strategies to diversify portfolios where possible to maximise returns whilst still maintaining a conservative portfolio. The industry’s capital coverage at 30 June 2016 for direct insurers was 1.73 times the APRA prescribed capital amount. This compares to 1.75 times at 30 June 2015.


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Market outlook Competitive market conditions are expected to continue to put pressure on premiums, with forecast GWP expected to continue to be flat in the near term. The average GWP quarterly growth rate for 2015/16 was marginal at 0.6 percent. As can be seen from the graph below, negative growth was seen in the June quarter of 0.3 percent.

Both IAG and Suncorp have established new product offerings this year though IAG’s “Insurance 4 That” and Suncorp’s partnership with “Trov”. Both recognise that the cost associated with insurance may not be affordable to all those who would like the protection that it provides, and therefore now offer cover for a smaller than usual range of possessions.

Opportunities for top line growth exist for those that capitalise on innovative products and technologies. Keeping ahead of the curve in order to grow the portfolio through meeting the changing needs of customers is now a reality and those not prepared to be agile and keep up with the change in pace will likely miss the opportunities which are present.

We discuss innovation further on page 12.

Gross written premium (rolling 12 months) $m

%

50,000

2.5

2.0

40,000

1.5 30,000 1.0 20,000 0.5 10,000

0.0

0 Sep-12 Dec-12 Mar-13

Jun-13

Sep-13 Dec-13 Mar-14

Gross Written Premium (rolling 12 months)

Jun-14

Sep-14 Dec-14 Mar-15

Jun-15

-0.5 Sep-15 Dec-15 Mar-16 June-16

Year or year growth

Source: APRA Quarterly General Insurance Performance Statistics (Direct Insurers only) and KPMG analysis


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Challenger brands - growth in GWP (year on year) % 40 35 30 25 20 15 10 5 0 Challenger brands 2011/12

2012/13

Industry

2013/14

2014/15

2015/16

Whilst the challenger brands continue to provide significant competition within the personal lines market, we noted that their rate of growth slowed this year. At this point in time, it is hard to know whether the recent allegations and Australian Securities and Investment Commission (ASIC) investigation into Youi will have any further impact. Leveraging data will provide insurers with a key to understanding the customer and their risks better. The ability of the insurers to appropriately manage the underwriting risk and to price risk accordingly will be essential for overall profitability – particularly for new products. We discuss this further on page 20. Whilst the development of innovative products and solutions for customers will aid top line growth, insurers must continue to focus on their core

operations, particularly as it relates to ongoing expense management, with insurers continuing to leverage global lower cost services, automation and rationalisation of processes. The quantum of ongoing savings which can be achieved remains to be seen. There continues to be limited opportunities to improve investment returns markedly through changes in investment allocation and strategies. It is expected that low investment returns will continue as insurers are largely opting to maintain a conservative asset allocation. The results of the surveyed Australian-based insurers, including their international operations where relevant, are shown on pages 26 to 29.

Return on equity $m

%

6,000

25

5,000

20

4,000 15 3,000 10. 2,000 5

1,000

0 Sep-12

Dec-12

Mar-13

Jun-13

Rolling 12 months NPAT

Sep-13

Dec-13

Mar-14

Jun-14

Sep-14

Dec-14

Mar-15

Jun-15

Sep-15

Dec-15

0 Mar-16 June-16

Return on Equity (ROE)

Source: APRA Quarterly General Insurance Performance Statistics (Direct Insurers only) and KPMG analysis


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Share price performance The graph below depicts the share price performance of the four listed Australian General Insurers – IAG, QBE, Suncorp (SUN) and Genworth (GMA) – and their performance against the Australian Stock Exchange (ASX) 200 Index for the period from January 2011 to September 2016.

In the period from 30 June 2016 to 19 September 2016 the insurer share price movements have been mixed. Whilst the ASX 200 increased by an average of 1.2 percent in this period, QBE and IAG showed a decline for the same period whereas Suncorp and Genworth saw marginal improvements.

Generally the share price of the Australian listed insurers continued to struggle. All Australian listed insurers experienced a decline in share price in the year to 30 June 2016. QBE was down 12.6 percent, Suncorp by 15.9 percent and Genworth by 22.4 percent, compared to a decrease in the ASX 200 index of 7.2 percent. IAG’s share price performance was above that of the ASX 200 index with a decrease of 4.9 percent.

Insurance companies share price performance since January 2011 200 180 160 140 120 100 80 60 40 20 0

Jan 11

QBE

Jan 12

IAG

Jan 13

SUN

GMA

Jan 14

Jan 15

Jan 16

ASX 200



Top 10 Emerging Trends In this section of our report, we identify 10 emerging trends occurring in the global general insurance sector and consider their implications and importance for Australian general insurers. The list comprises a number of new trends but also incorporates a number of trends that emerged in previous years that are still prevalent today. The list continues to be dominated by technology and innovation which together are creating a new world of opportunity for individuals, businesses and society. The reality is that customers, investors and employees demand innovation. Indeed, they expect it, not only from technology providers and device manufacturers, but also from insurance organisations. We believe it is only by recognising these opportunities and challenges, and responding quickly, that today’s insurers will continue to be competitive. Insurers can no longer do ‘more of the same’ and expect to succeed.


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New technology 01

InsurTech

Momentum is growing

Globally, InsurTech is attracting serious venture capital (VC) and attention from global insurers, however it has largely been left behind in the fintech agenda in Australia. In KPMG’s 2015 Fintech 100 report, which identifies leading established and emerging fintech companies, the top two companies are InsurTech companies, Zhong An and Oscar. Despite this, there are limited Australian InsurTech startups but a high demand from many Australian insurers looking for new technologies to improve their customer experiences, deliver innovative products and services and transform their business models. This poses a great opportunity for tech startups and insurers to collaborate. At a macro level, insurance is an industry ripe for disruption. Insurers around the world are struggling with a myriad of challenges: low levels of consumer trust, high competition, a low interest rate environment, shrinking profitability and legacy IT issues. Addressing these challenges and creating opportunities for growth can be difficult. Any solutions, especially those involving technology, can be complicated, expensive and potentially high risk. While many InsurTech companies are looking to compete with traditional insurers by providing more tailored responses to customer needs, others see a key opportunity in helping traditional insurers solve their problems and create more customer value. However, it is only recently that insurers appear to have started to recognise things need to change. Some InsurTech companies have behavioural analytics and advanced data analytics capabilities which can help insurers gain a deeper understanding of behavioural trends and insights into individuals which allows for the development and creation of much more customised solutions or fast-tracking customer service.

Customers themselves are also driving change — demanding more personalised and relevant services similar to what they are now getting in other industries such as banking. Insurers have traditionally struggled in this respect as they have so few ‘touch-points’ with their customers – typically only once a year at renewals or at stressful occasions such as claims. New InsurTech companies have appeared providing personalised and targeted insurance solutions in response to these changing demands. Successful funding rounds for a number of these companies have helped amplify investor attention on InsurTech, both from traditional VC investors and from corporates. In 2015, InsurTech came into its own, attracting $2.5 billion of VC investment, a massive leap in funding compared to the previous 4 years. By comparison, the first 2 quarters of 2016 have seen over $1 billion in VC investment and tremendous activity by many insurers that are increasingly creating their own venture capital funds in order to invest in InsurTech companies. The top 3 InsurTech deals in the first half of 2016 were Oscar Health, Clover Health and Bright Health which collectively raised US$640 million. While our Pulse of Fintech, Q2 2016 report shows that the US is clearly leading the way in InsurTech, with 60 percent of VC-backed deals, Australia is increasingly seen as an attractive place to test customer focused activities. This presents an opportunity to increase Australian involvement in InsurTech and encourage companies to pilot in Australia. Being a testing ground for prototypes or activities to be rolled out means our local insurance industry will also innovate much faster than if these technologies were piloted elsewhere and brought over.


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This was seen when Trov – an InsurTech start-up app targeting the high number of uninsured millenials enabling them to insure individual items for short periods – was founded in the US but first rolled out in Australia in partnership with Suncorp. In 2016, one of the most noticeable partnering models was the creation of digital garages or labs: in-house innovation units where insurers can foster entrepreneurial thinking. Within this model, InsurTech companies can come together to help resolve specific challenges identified by the innovation unit while providing InsurTech companies with support and expert advisers to help fuel their own growth. Examples of digital garages include Aviva’s digital garage and Met Life’s LumenLab in Singapore. Several of our local insurers including IAG and Suncorp have established labs focused on harnessing digital innovations and advanced analytics. One of the most unique attributes of InsurTech is its ability to harness technology from a wide range of other industries to develop and enhance insurance offerings — from using wearables to adjust insurance premiums to using the ‘Internet of Things’ to provide risk identification and mitigation. Some InsurTech companies are working to leverage blockchain technology as a mechanism for providing automatic payouts, particularly in the peer-to-peer insurance space where smart contracts could ensure payouts are made accurately, efficiently and at a reduced cost. While such activities are still in their infancy, many insurers and investors are excited about the potential opportunities for the future.

“In KPMG’s 2015 Fintech 100 report, which identifies leading established and emerging fintech companies, the top two companies are InsurTech companies, Zhong An and Oscar.”


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02

New Payments Platform

Enabling real time, data rich payments

With the first market release of the New Payments Platform (NPP) project in late 2017, Australia is about to see a significant change to the payments landscape through the introduction of a ubiquitous real time payments capability. The NPP will allow consumers, businesses and governments connected to the NPP (through one of the participant banks or agencies) to transact in near real time (