Effective policymaking has also protected the segment from external shocks.
The industry risk for Australia’s P&C insurers remains low as some segments benefitted from reduced claims due to a muted economy even if the sector has been hit by market volatility, according to a S&P Global Ratings report.
The country continues to provide its P&C insurers support and stability on the back of effective policymaking, which has bolstered the sector against external shocks and sustained profit growth. Product risks, barriers to entry, and market growth prospects also contribute to the sector’s low exposure to industry risks, said analyst Craig A. Bennett.
Steady real GDP growth has supported the segment’s operating performance, with nominal direct premium growth hiking 5% on average in the three years to end-December 2019. Premium growth in the year to end-March 2020 was 5.8%, and it is expected that COVID-19 uncertainty will materially affect GDP and bring premium growth down to about 3.5% for the year to end-December 2020.
The sector is expected to generate an underlying return on equity above 10% over the medium term, with the exception of calendar 2020 where returns are likely to be about 5%, Bennett said. On the other hand, recent performance has been bogged down by catastrophes and natural disasters, with industry net profit for the year to end-March badly hurt by monsoon flooding and hail storms in southeast Queensland and New South Wales.
Underwriting results continue to benefit from sound reinsurance in the main, although operating performance across commercial lines and long tail class of employer liability, including the directors and officers line, remain negative. Whilst the sector's average underlying return on equity declined to about 7.5% for the year to March 31, the average for the past five years was above 11.0%. S&P expects effective risk management and appropriately structured reinsurance arrangements to moderate the impact of future large claims and catastrophic events, the report said.
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