Australian property and casualty (P&C) insurers are expected to record solid returns in 2018, aided by a combination of prudent risk management and comprehensive reinsurance utilisation, both of which offset the impacts of 2017 catastrophe events, according to Standard & Poor’s (S&P).
Despite the impacts of 2017 catastrophe events driving higher claims, the earnings of Australian P&C insurers proved resilient, with recently reported operating results for 2017 coming higher than expected, according to ratings agency S&P.
Last year, profitability was driven by home and contents (H&C) and domestic motor lines of business, while rate increases in 2017, primarily driven by an increased frequency of claims, claims inflation, reserve reviews and underwriting objectives, is expected to persist with S&P anticipating further rate hardening across certain lines through 2018.
The Australian P&C sector’s reinsurance utilisation also assisted profitability in 2017, with S&P noting that “Sound reinsurance coverage limited the impact of natural hazard events in 2017 for Australian P&C insurance operations.” Adding, “We expect such a prudent approach to reinsurance to continue with regard to retention and coverage, counterparty strength, and prepayments.”
A combination of comprehensive, well-structured reinsurance programs and prudent risk management “significantly lessened the volatility of earnings” said S&P, something that was most notable with the impacts of large events.
As an example, S&P states that in 2017 higher claims were recorded across personal lines of H&C, motor vehicle, CPT, and across commercial lines, but that reinsurance protection effectively halved total claims payable during the period.
“Over the prior two years reinsurance covered about 27% of gross claims, on average,” said S&P.
Looking forward, S&P expects Australian P&C insurers to record solid return on equity (RoE) in 2018, noting that the domestic P&C industry’s RoE has been both strong and stable since 2014.
“Robust reinsurance cover will continue to underpin capital adequacy strength, which underpins our ratings and outlooks,” said S&P.
