Bad to worse to…better? The expected profitability recovery didn’t materialise, but the annual Optima report says the rebound may be back on track By Wendy Pugh
T
he COVID-19 pandemic muscled aside natural catastrophes as the profitability wildcard for insurers in the past year and, after dashing expectations for an overall performance improvement it remains a key risk in the outlook. Profitability, measured by return on equity (ROE) and margins, went from “from bad to worse” last year as the anticipated recovery failed to materialise, the annual Optima report produced by actuarial firm Finity shows. And it identifies the main culprit as the pandemic. Business interruption claims related to COVID triggered court cases and led to reserves bolstering, while supply chain disruptions added to pressures in householders’ insurance and travel premium volume slumped. Motor lines benefitted from lighter traffic and fewer collisions during lockdowns, while companies are still adjusting to pandemic repercussions that are influencing operational activities and investment results. “There is not a class of business that is not affected, nor is there any business in the world that is not affected by what is happening,” Optima report lead author Andy Cohen tells Insurance News. The Optima report, now in its 14th year, reflects premium increases, investment returns, reserve releases, natural disaster impacts and other influences on personal and commercial lines. COVID emerged during the previous reporting period, but its impact is heightened in this latest snapshot. Overall ROE fell to a two-decade low of 2% in the past financial year, slipping from an already poor 3%. The reported insurance margin contracted to 0.2% of net earned premium, essentially just a break-even result, compared with 2.6% previously. A two-percentage-point deterioration in the net loss ratio was driven by the strengthening of COVID-19 business interruption loss provisions. That was partly offset by a return to average catastrophe claims and a favourable discount rate. Gross earned premium growth was “just north of 5%”, similar to the previous period. If figures were
normalised for the loss of 80% of the travel premium, growth was a “surprisingly solid” 7.5%. The elusive profitability improvement is still expected to take place, with the current period tipped to be better for the industry overall. Nevertheless, profitability levels are likely to remain below desired levels, with significant divergences between classes. Motor in personal and commercial was the best performer last year and is expected to still lead the pack, while travel and standalone liability are likely to be loss-making. Other lines are set to remain below target, but at least will not be in the red. “If you look through into the detail you really find it is the motor classes doing all the heavy lifting and delivering the goods,” Mr Cohen says. “They are above target ROEs and are making up for the struggles the rest of the classes are having in terms of profitability.” Overall premium growth of 6% is likely to be supported by volume gains as well as rate strength as the market continues to harden in most lines, while the reported loss ratio may improve six points to 69%, stemming largely from an absence of shock COVID-19 business interruption impacts. The insurance margin is anticipated to rebound 5.5 points to 5.7% and the return on equity should improve to 7.2%, although remaining short of the 10-15% target range. Profitability will be “very much all about underwriting margins” with avenues that have often burnished results in the past providing little assistance in the current environment. Prior-year reserve releases, for so long a useful tailwind, have dwindled and investment return expectations continue to edge lower with yields approaching zero. “Favourable returns from the industry’s small holdings of growth assets along with the credit risk margins earned on corporate bonds are now virtually the only way for insurers to make a significant positive return,” the report says. The release of some of the business interruption
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