General Insurance Industry Review 2016 - KPMG | US · PDF fileKPMG’s General Insurance Industry Review 2016, ... General Insurance Statistics, and include information ... New technology

October 2016
kpmg.com.au
General Insurance Industry Review 2016With the Top 10 emerging trends impacting the sector
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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.

General Insurance Industry Review 2016 3
ContentsForeword 4
Results and Analysis 6
Top 10 Emerging Trends 11
Financial Results 26

General Insurance Industry Review 2016 4General Insurance Industry Review 2016 4
ForewordKPMGs 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 Australias general insurers to significantly adapt the way they do business.
As always, we appreciate the insurer contributions to the report.
Scott GusePartner ASPAC Head of Insurance Accounting
Martin BlakePartner National Sector Leader, Insurance

General Insurance Industry Review 2016
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New products / markets
New insights New approach
Driverless carsShifting liability from human to manufacturer
TelematicsBenefits are too great to ignore
Big dataAn untapped opportunity
Cyber insuranceA more sophisticated approach required
SustainabilityTime for insurers to step up
New Accounting Standard IFRS 4 We are getting close
Top 10 emerging trends
New technology
InsurTechMomentum is growing
New Payments PlatformEnabling real time, data rich payments
BlockchainA transparency bullet?
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Conduct and cultureLooking beyond the regulator
Gross written premium$40,953m 2016$39,958m 2015GWP up 2.5% despite ongoing competitive pressures
Loss ratio66.0% 201668.6% 2015
Loss ratio down by 2.6% as catastrophe events returned to more normal levels
Expense ratio25.7% 201625.8% 2015
Expense ratio flat - cost discipline maintained despite competitive pressures
Capital ratiox1.73 2016x1.75 2015
Capital ratio at 1.73 times the prescribed capital amount comparedto 1.75 as at 30 June 2015
Insurance profit$4,058m 2016$3,452m 2015Profit increased by $606m (17.5%) reflecting reduced claims costs
Year in review: results snapshot

Year in reviewMarket 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
continued focus on cost savings
marginal growth in gross written premiums.
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.
Total 2015/16 Total 2014/15
$m $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.
At a glance
Results and Analysis

Net earned premiums decreased by 6 percent as the industry reinsurance spend increased, predominantly as a result of IAGs 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 industrys 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.
Combined ratio
Expense ratio
Loss ratio
2015/16 2014/15 2013/14 2012/13 2011/12
Insurance margin
14.2%
91.7%
94.4%
87.9%89.8%
101.8%
11.3% 18.2%
17.8%10.7%
25.7%
66.0%
68.6%61.6%
63.4%
74.7%
25.8%
26.3%
26.4%27.1%
Source: Participating insurer surveys and KPMG analysis
Key ratios

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.
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.
Both IAG and Suncorp have established new product offerings this year though IAGs Insurance 4 That and Suncorps partnership with Tro

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General Insurance Industry Review 2016 - KPMG | US · PDF fileKPMG’s General Insurance Industry Review 2016, ... General Insurance Statistics, and include information ... New technology