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Adroit Market Summary

  • Adroit Insurance and Risk
  • October 1, 2020

2020 will undoubtedly go down as one of the most challenging years that many of us have faced. The COVID-19 Global Pandemic has seen unemployment levels  rise to their highest levels in 12 years, and for those that remain in the workforce, the conditions under which they are employed have been altered significantly. Businesses have had to evolve and adopt technology, with remote workforces becoming the new norm and Government grants and subsidies, including Jobkeeper a life saver for many businesses.

From an insurance perspective, the industry endured one of the worst bushfire seasons on record, with fires across NSW, QLD, VIC & SA which burnt from September 2019 through to March 2020. A Catastrophe was declared by the Insurance Council of Australia (ICA), and as at 26/08/2020 there were 38,,416 claims received totalling $2,32billion in losses. As many of the fires still raged, a severe hail event occurred effecting NSW, VIC, ACT & QLD in January of 2020. With extreme hail, rain and wind damage causing  $1.63billion in insurance losses another Catastrophe was declared by the ICA.

The below graphic taken from the Australian Institute for Disaster Resilience shows an upward trend in the number of natural disasters.

This trend compounded by a rising population converts to greater insurance losses. For insurers to underwrite and prepare for greater claims, they need to increase their reserves and or purchase greater reinsurance. The net result is passed on to the consumer through rising insurance premiums.

As the nation recovered from the fires and storms, and underwriters endeavoured to manage the higher volume of claims that ensued, on the 11th of March 2020 the COVID-19 Global Pandemic was declared by the World Health Organisation sending Financial Market in to freefall. Insurers rely upon returns not only from the underwriting activity but also from investment income.

The below graphic taken from the Trading Economics Webpage illustrates the drop in the Australian S&P/ASX 2000 Stock Market Index as a result of the COVID-19 Pandemic, wiping 7 years of value and sustained growth overnight.

The Australian Prudential Regulation Authority release a quarterly update on Insurance Performance Metrics, and the latest edition published in late August 2020 details the performance of insurers through to the end of June 2020.  A high level overview of the Insurance industry‚Äôs key performance measures are noted in the below table and they reveal an industry in decline and point towards a continuing hardening of the insurance market.

June 2019
June 2020                                          
Gross claims expense$37.9 billion$42.8 billion      +13.0%
Underwriting result$2.3 billion$1.4 billion-38.5%
Investment income$3.6 billion$1.4 billion-60.3%
Net profit after tax$3.5 billion$1.0 billion-70.5%

Further insight in to the report derived from a review of the statistics, as well industry feedback 

  • The industry net profit after tax of $1.0 billion and return on net assets of 3.7 per cent were significantly lower during the year ended June 2020. This was due to lower underwriting results from the catastrophic bushfire and storm events, as referenced above, and large falls in investment income, mainly from the negative impact of the COVID-19 pandemic on investment markets in the March quarter.
  • Within the underwriting results, insurers reported increases in gross earned premium in most classes of business during the year, particularly in Fire and ISR and Professional Indemnity. We have witnessed premium increases across all lines of insurance
  • Gross incurred claims costs were significantly higher due to natural catastrophe claims costs, as well as a large strengthening of long tail claims reserves. This strengthening in reserves was mainly due to falls in bond yields which were particularly pronounced in the March quarter with the impact of COVID-19 on investment markets.
  • Investment income fell during the year due to lower returns in equities, fixed interest investments and indirect investments, particularly in the COVID-19 impacted March quarter.

A hardening insurance market is underway and we project further increases to follow in the coming 12 months.

With companies embracing new technologies and finding different ways to do business, including the rise of the remote workforce, we are encouraging clients to review system controls in conjunction with their IT consultants. Employees connecting to work networks remotely, using their own devices, including  home wireless connections, all present an increased risk of cyber related interruptions. Management controls are also important with emphasis on appropriate use of company assets and maintaining of professionalism and diligence whilst working unsupervised.

Article written by Damon Edwards, Managing Principal – Adroit Insurance and Risk.

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