That sinking feeling Insurer profitability just “fell off a cliff”, but actuarial firm Finity believes there’s no need to panic By John Deex
A
ustralian insurers have traditionally targeted a return on equity (ROE) of about 15%. In 2018/19, the figure was a respectable 13%. But, as Finity’s latest state-of-the-industry Optima report shows, last financial year it dropped like a stone to 4%. Finity Principal and lead author of the report Andy Cohen told Insurance News “you’ve got to go back a long way” to find an ROE that bad. Two decades, in fact. “So we really have fallen off a cliff a little bit, perhaps not surprisingly given the bushfires [and other natural catastrophes] combined with COVID.” Mr Cohen says insurers “have a choice” about which ventures they can go into, or products they can launch, and “will be looking for a certain ROE to make it worth their while”. “The standard practice a few years ago might have been 15% after tax, but with risk free rates dropping then that target tends to drop. “If you are only getting 1% on your cash then you
20 insuranceNEWS
December 2020/January 2021
are perhaps happy to get something more like 10% on money you invest in an insurance company. “We tend to think of that target range as 10-15%. My personal view is at the moment it could or should be closer to that 10%. While 13% was a good result, there’s been a big slide down to 4%, well outside of that target range.” Although they undoubtedly contributed, it wasn’t bushfires or even COVID that caused that number to plunge to such lows. The real culprit was low investment returns that are getting even lower. “We calculate that eight points out of that nine-point drop are as a result of investment returns collapsing,” Mr Cohen says. “They were worth $3 billion to the industry in 2019, and they fell to $1 billion in 2020 – one-third the level of the return. “That $1 billion is equivalent to about a 2% return versus more than 5% the year before, so it’s quite a big drop.
