A new paper released by PricewaterhouseCoopers (PwC) highlights that average earnings before interest and taxes at the top 29 global insurers is declining by nine per cent every year. The consultants warn that the market slowdown is particularly bad in Australia, and that insurers there may suffer a 50-per-cent decline in profits within five years if they don’t find a way to deal with slowing growth, market disruption and shorter insurance cycles
The report, titled Future of General Insurance: Improving profitability in a changing industry, explores the risks, opportunities and challenges that every insurance CEO is up against right now. It details the ‘seven significant challenges’ that modern insurers face.
First of the seven challenges is slow growth and volatility. The report states: “A humble 2.5-per-cent growth in gross written premiums suggests that top-line growth is stagnating or flat.” It also adds that return on assets is falling by around nine per cent per year, amongst other things. The report estimates that insufficiently addressing these problems will lead to a significant decline in profitability within seven to eight years.
Second, the report notes that capital is cheaper and easier to access, citing a diminishing difference in value between high-cost and low-cost models. “Today, underwriting cycles are typically three years, with some as short as two years,” the report reads.
Changing customer needs and rapid advances in technology are the third and fourth challenges, while new market entrants, such as low-cost challengers, and increasing regulatory scrutiny mark the fifth and sixth. “It is worth noting that, relative to most nations, Australia typically takes a conservative approach to regulation (e.g. driving speed limits, swimming pool guard rails, etc.),” the report notes. “According to the World Economic Forum, Australia’s ranking on the ‘burden of government regulation’ is 80th out of 137 in the world.”
Finally, an increased frequency of natural hazards as a result of climate change is the seventh issue that PwC identifies. “The combined total losses from storms, floods, cyclones and bushfires make up more than 95 per cent of the total losses from disasters in Australia. Based on longitudinal data from the past 50 years, financial loss from severe storms is increasing,” the report states.
The report then goes on to detail the ‘three horizons where insurers should focus’ in order to secure their future, and also dictates how insurers can continue to build for the future.
“Tomorrow’s winners will be those who refocus their strategy around the four strategic priorities and focus on the three horizons of market disruption,” the paper concludes. “Doing so will require strategic discipline, careful consideration of the trade-offs, and bold strategic decision-making.”
Read the full report here.