COVID whiplash

The challenges for Australia’s biggest insurers have grown more complex, with the coronavirus halting earnings growth

By Bernice Han

The numbers certainly weren’t pretty when Australia’s three major insurers reported their earnings results recently.

QBE suffered a $US712 million net loss for the six months to June, wiping out the $US463 million profit it had enjoyed a year earlier. The half-year loss included a $US335 million underwriting impact from COVID-19.

At IAG, the country’s largest insurer, net profit for the last financial year crashed by more than half to $435 million as its insurance margin weakened to 10.1% from 16.9%.

The headline figures at Suncorp looked much healthier but only because it made a tidy sum of $285 million from selling its automotive businesses, Capital Smart and ACM Parts. The sales helped pushed full-year net profit up fivefold to $913 million.

Cash earnings at the Brisbane-based financial services group were down 32.8% to $749 million, dragged down partly by weaker insurance earnings. Profit from its key Insurance Australia arm slumped 33.9% to $384 million, while its banking and wealth unit posted a 33.5% drop in income to $242 million.

There is no doubt the three leading insurers – and by extension the industry at large – have endured an unusually rough period.

First came the earlier-than-usual arrival of the bushfire season last spring, which grew in intensity and spread rapidly in the eastern states, culminating in the Black Summer of 2020.

Other body blows came in the form of the floods and hailstorms that hit parts of Queensland, the Australian Capital Territory, New South Wales and Victoria. Claims from last summer’s natural disasters are expected to cost the industry at least $5.4 billion, according to the Insurance Council of Australia.

Then in March came the fast-spreading and sometimes-fatal coronavirus, landing a damaging punch on an industry that was already dealing with the aftermath of the Black Summer.

“It’s been a very disruptive year,” Frank Mirenzi, Vice President and Senior Credit Officer at Moody’s Investors Service, told Insurance News. “The effects of COVID-19 are much more broad-based than what they would be for a natural catastrophe event.

“While no one has control over natural catastrophes as well, the only difference is that the effects of COVID-19 are much more long-lasting and less certain.”

The uncertainties are definitely weighing on insurers’ outlooks for the months ahead. QBE has forecast a future impact of $US265 million from the pandemic, mainly in lenders’ mortgage insurance and trade credit. This will take QBE’s total projected COVID-19 cost to $US600 million.

Meanwhile IAG has set aside a $100 million provision for the virus impact, covering potential claim cost pressures in areas such as landlords’ insurance, workers’ compensation and business interruption.

Suncorp is expecting a significantly smaller impact, recognising just $85 million of provisions including risk margin to cover COVID-19 uncertainties such as landlords’ loss of rent and potential business interruption claims.

Analysts say the just-concluded earnings season has highlighted a few key things about the three major insurers. They believe IAG and Suncorp should cope better with the pandemic disruption than QBE because they are more invested in personal lines.

In the case of Suncorp, a $140 million benefit to the business came from lower motor claims frequency in the last financial year – the result of lockdown measures that led to sharply reduced vehicle usage in the June quarter.

“What you’re seeing is the ones that have more retail lines haven’t been affected in the same way,” Mr Mirenzi said. “Then when you look at insurers that have more commercial risk exposure, there is a bit more uncertainty.

“Obviously longer-tail lines of businesses take longer for the claims to emerge and be assessed, and the final cost is subject to inflation expectations.

“So there is probably more likelihood that over the next year or two insurers that have more commercial lines will see more volatility in claims. And because of that, there is probably a bit more downside risk in terms of the earnings.”

Seldom have Australian insurers been through anything quite like the last eight or so months. They are used to handling cyclones, bushfires and one-in-100- year floods – risks they have become adept at managing.

But a pandemic is an entirely new game. It’s fraught with hidden dangers because of its unpredictable nature, meaning insurers can’t forecast with a high degree of accuracy how they could be affected.

“There is a unique challenge around COVID because of the lingering social and economic uncertainty,” Scott Collings, the Managing Director at actuarial services firm Finity, told Insurance News.

“General insurers are used to the random nature of catastrophes and investment markets. They are used to falling discount rates, because that’s been happening for a decade.

“What they don’t really know is how the pandemic is going to play out, because it’s not finished. The worrying thing about COVID is it’s like a long drawn-out catastrophe. It’s not clear what it’s going to do or when it’s going to end.

“And the fact that it is a global event, not just Australian, creates further uncertainty about capital, reinsurance and pricing on a global level.”

What insurers know so far about the pandemic and its corrosive effects on earnings are not encouraging. Mainstream business classes such as travel and motor have been affected to varying degrees.

Mr Collings expects impacts in the liability and workers’ compensation lines will emerge in the longer term.

The Australian Prudential Regulation Authority is similarly concerned, warning the “ultimate claims impact of COVID-19 is likely to remain uncertain for some time given the prospect of litigation across multiple classes of business (most prominently in business interruption insurance)”.

It says there are further potential concerns arising in regard to the future availability and affordability of particular classes of insurance more broadly.

Now more than ever, the three major insurers need strong and stable leadership to steer the businesses, because COVID-19 isn’t the only challenge facing them. Before the pandemic erupted, the insurers were grappling with an array of regulatory reforms arising from the Hayne royal commission, and also having to deal with pressure to contain costs.

For QBE, having a safe pair of hands to lead the businesses during this period has taken on even more urgency as it searches for a candidate to fill the chief executive role.

Its former group chief executive Pat Regan departed in September following an external probe sparked by a complaint from a female employee. Chairman Mike Wilkins is overseeing the day-to-day running of the complex global business until a replacement is found.

At IAG, former chief financial officer Nick Hawkins has been named Managing Director and Chief Executive, taking over from Peter Harmer in November.

Whoever finally takes up the reins at QBE, they, Mr Hawkins and Suncorp Group Chief Executive Steve Johnston are in for a torrid time.

Climate change-related catastrophes are expected to become more intense and numerous, while the coronavirus crisis is straining the risk appetites of reinsurers and insurers around the world.

Coupled with the need for Australia’s insurance giants to become more nimble in the face of innovative new market entrants, these new leaders will have to focus not only on holding the line, but how they can regain the momentum of growth.

insuranceNEWS October/November 2020