Australia Q3 Market Dynamics
Landscape
Australia avoided many of COVID-19’s worst impacts until Q3 2021, when it was hit by the arrival of the Delta variant: cases soared from a seven-day average of 33 per day at the end of June to 1,158 at the end of August and states initiated lockdown policies. This is likely to have produced a sharp economic downturn, following already slowed GDP growth of 0.7% in Q2, while inflation remains below Reserve Bank targets and interest rates are held at the historic low of 0.1%.
Economic recovery depends on immunity: at the beginning of the fourth quarter, Australian states were moving to relax lockdowns as they hit vaccination targets, although overall case numbers remained high. Recovery plans include an additional AUD 15.2 billion for new infrastructure projects over the next decade, announced in May and bringing the total budget to AUD 110 billion, while June saw the signing of a post-Brexit free trade Agreement in Principle with the UK.
There has been an encouraging improvement in Australian industry results in the first half of 2021 with a 17% improvement in underwriting results and an 8.9% improvement in investment income compared to a year earlier according to APRA.
There are headwinds on the horizon, however, with natural catastrophe claims running higher than the 10-year average, continued increases in claims costs, and growing inflationary pressures. While there are positive signs for insurance buyers, questions surround the sustainability of these results as economic activity recovers given that insurer margins, while improving, remain extremely thin.
Key Indices - Australia
Market Dynamics
Australia Featured Products Q3 2021
Q3 Automobile Summary
Overall (Stable) Claims activity has significantly decreased due to the impacts of COVID-19 and as a result, insurers are aggressively targeting new fleet business. A minor re-calibration is expected when lockdown periods end in NSW and Victoria.
Rates (+1-10%) Well-performing fleets are experiencing a favorable environment – renewing flat, or with minor increases. Poor-performing fleets are experiencing a more challenging environment; however, the effect has been somewhat muted due to reduced driving activity.
Capacity (Ample) Capacity is stable. Existing insurers continue to support this product; however, there have been no new entrants to provide additional capacity in this space.
Underwriting (Flexible) Coverage extensions, such as increased Hazardous Goods coverage, are available, but on a limited basis, for specific industries only. Autonomous vehicle coverage is not widely embraced by insurers and Section 2 (Third Party Liability) is not generally available.
Limits (Stable) Limits are stable but can be increased on a targeted basis for favorable risks.
Deductibles (Increasing) Deductibles are under pressure, especially for loss-active risks. Many insurers are looking to raise minimum deductibles, and are discontinuing the practice of offering nil Excess Windscreen in some cases, due to the increasing cost to replace modern technology windscreens.
Coverages (Stable) Expiring coverages can be achieved for most placements.
A Look Ahead (Stable) While claims frequency is unlikely to increase immediately following easing of lockdown restrictions, it is expected to increase in 2022 as all drivers around the country return to the road. That said, the motor market is expected to remain competitive, particularly for well performing risks.
Q3 Casualty/Liability Summary
Overall (Challenging) Despite an improvement in net underwriting combined ratios, insurers continue to emphasize profitability over growth, as combined ratios remain under threat from loss development. As such, exposure-specific challenges, particularly for coal, bushfire, sexual abuse and worker-to-worker continue to grow.
Rates (+11-30%) Largely driven by claims activity and claims inflation, substantialal rate increases continue to be imposed on a sector-by-sector basis as insurers look to achieve portfolio sustainability.
Capacity (Ample) Despite significant corrections in 2020, ample capacity remains available for most sectors and risks, with the notable exceptions of coal, bushfire, sexual abuse and worker-to-worker.
Underwriting (Prudent) Head office referrals and treaty limitations are causing mounting pressure on local underwriting teams. In some industries and products, this is leading to portfolio-wide exits.
Limits (Stable) Limitations continue for challenging industries and risk types such as bushfire, thermal coal and sexual abuse.
Deductibles (Increasing) Deductible increases are required for trending loss areas, and minimum deductibles are being applied to challenging sectors such as retail and worker-to-worker risk-exposed businesses. In other cases, increases are driven by insureds’ premium management strategies rather than insurer mandates.
Coverages (Restricting) There is a heavy focus on tightening policy terms and conditions due to historical losses and the long-tail nature of claims, underpinned by soft historical premiums. This is particularly relevant to difficult exposure types. Silent Cyber and Infectious Disease language continue as topics of discussion.
A Look Ahead (Stable) A continuation of current market conditions is expected as insurers align to the areas they are comfortable with.
Q3 Crisis Management Summary
Overall (Stable) Driven by continued portfolio underperformance, Recall insurers are seeking rate and deducible/retention increases.
Rates (+1-10%) Rates on primary policies are increasing modestly while excess pricing is experiencing a more material adjustment, depending on historical risk pricing relative to minimum return-on-capital requirements.
Capacity (Ample) There is ample capacity for most food risks; however, non-food risks continue to experience capacity constraints.
Underwriting (Prudent) Underwriting approaches are rigorous and risk-specific, making risk quality and risk management practices paramount to achieving successful outcomes.
Limits (Stable) Limits remain steady, with some minor downward adjustment of sub-limits. Wine risks are experiencing issues related to aggregation and accumulation due to industry interdependencies.
Deductibles (Increasing) There is a growing trend toward increased deductibles.
Coverages (Stable) Expiring coverages can be achieved for most risks.
A Look Ahead (Stable) The Auto Recall market may come under increased pressure, following poor claims performance in this space. Food & Beverage is expected to experience a continuation of cautiousness and small increases.
Q3 Cyber Summary
Overall (Challenging) The market is challenged by accelerating claims frequency and severity, and many insurers are actively looking to de-risk. Risk selection is now critical. Ransomware is the key driver of market conditions, although aggregation concerns are also becoming a major factor.
Rates (>+30%) Insurers are materially changing their pricing structures, shifting from a long tail view on exposure to a shorter tail approach, as exposures shift to event-based (i.e., ransomware attacks are driving most claims activity).
Capacity (Constrained) Insurers are significantly reducing limits, reserving full limits for best-in-class organisations only. Some are withdrawing from Cyber altogether or deploying capacity for renewals only.
Underwriting (Stringent) There is limited local underwriting authority. Underwriting is rigorous, and coverage often cannot be bound until risk management controls and approaches are fully documented and all questions fully answered. In addition, some insurers are leveraging 3rd party vendors to scan insureds’ networks for vulnerabilities.
Limits (Decreasing) Insureds are satisfied with existing limits as a cost-effective risk transfer solution, although some are finding current limits to be cost prohibitive and are seeking alternatives. In some cases, previous limits purchased are no longer available in the market.
Deductibles (Increasing) Significant deductible increases are being imposed across-the-board, with challenging industries such as logistics, manufacturing, and professional services experiencing the most significant increases.
Coverages (Restricting) There is continued pressure on dependent business interruption coverage and infrastructure-type coverage. Ransomware restrictions have become more common, particularly where proper controls are not in place.
A Look Ahead (Challenging) Conditions are expected to continue to deteriorate in the near term and, in 2022, insurers are expected to focus on a new set of controls.
Q3 Directors & Officers Summary
Overall (Challenging) Premium increases are decelerating as insurer performance reaches a level of sustainability. New entrants are emerging, creating much needed competitive tension and capacity; however, larger limits continue to drive capacity challenges and associated premium pressures. Self-insured retention levels are also under pressure as insurers look to bring them in line with risk profiles.
Rates (+11-30%) Pricing increases are unpredictable but are generally tempering relative to the increases experienced in recent years.
Capacity (Constrained) Capacity remains challenged for large limit programs and challenging risk types, although green shoots of new capacity in the London market have started to drive greater levels of competition and choice.
Underwriting (Stringent) Local underwriting authority and flexibility is limited.
Limits (Stable) Expiring limits can be achieved in most cases, although capacity remains constrained for challenging risk profiles and large limit programs.
Deductibles (Increasing) Self-insured retention levels - most notably, applicable to Side B and Side C - are under pressure as insurers look to bring them in line with risk profiles.
Coverages (Stable) Most coverage remediation has already taken place and coverage is now reasonably stable. There is a continued focus on Mitigation Coverage and there is a trend to remove Continuity across lines placed in London. COVID-19 exclusions are required for challenged sectors, although not across the board.
A Look Ahead (Challenging) Current market conditions are likely to continue for the foreseeable future albeit major remediation has already occurred, with green shoots of new capacity in London which should temper insurer rate expectations.
Q3 Employers Liability/Workers Compensation Summary
Overall (Stable) Market conditions are stable but modestly challenging. Insurers continue to focus on bottom line profitability and there is minimal appetite for poor performing programs or those in undesirable industries such as labor hire.
Rates (+1-10%) Rates are modestly increasing due to insufficient margins, a position supported by independent actuarial reviews of scheme performance. The low interest rate environment is a contributing factor.
Capacity (Constrained) Insurers are not permitted to decline ground-up Workers’ Compensation coverages; however, some insurers are pricing themselves out of the market on undesirable and/or poor performing risks or where the insured requires bespoke endorsements expanding the scope of coverage, leaving these insureds with few alternatives. Within the excess of loss market, insurers can decline coverage and there is an increasing number of insureds who are unable to access alternatives. These insureds typically have claims activity on their programs, are seeking low deductibles, and are exposed to significant accumulation risks.
Underwriting (Prudent) There is increased scrutiny on underperforming portfolios, and some insurers have become rigorous in their underwriting approaches.
Limits (Stable) Limits are regulated.
Deductibles (Increasing) Excess of Loss retentions are increasing, and low retention positions are no longer offered by some insurers.
Coverages (Restricting) Communicable Disease exclusions continue to be applied.
A Look Ahead (Challenging) The current patterns of more prudent underwriting and rate increases are expected to continue and will remain highly dependent on the development of COVID risks (which are covered, and in some circumstances, deemed compensable) as the Australian economy reopens and the virus is allowed to spread throughout the community.
Q3 Environmental Summary
Overall (Stable) Insurers are imposing rate increases on renewals, leveraging capacity management strategies, exercising caution on coverage extensions, and requiring more detailed information.
Rates (+1-10%) Rates are up modestly due to several factors. First, reinsurance appetite has decreased, resulting in an increase in the cost of capacity. In addition, interest rates, and in turn, investment returns, have decreased, driving a need for higher premiums. At the same time, claims are increasing in both frequency and severity, driven by the impact of social inflation on pollution claims.
Capacity (Constrained) Insurers are demonstrating reduced appetite to provide capacity above $25M, except for low-risk project-specific Contractors Pollution Liability policies.
Underwriting (Prudent) Insurers are requiring more detailed underwriting information – particularly for critical emerging exposures - and the underwriting process is rigorous. There is an increased trend to refer sensitive risk types (e.g., mining), as well as some specific coverages.
Limits (Stable) For renewals, limits remain flat, while larger limits on new business are met with reduced appetite.
Deductibles (Increasing) Flat deductibles can be achieved on most renewal placements, unless there has been claims activity. New business, on the other hand, is experiencing increasing deductibles, especially for moderate to high risk types.
Coverages (Stable) Coverages are generally stable; however, insurers are less likely to add in "extras". There is a tendency to restrict or exclude coverage for some critical emerging exposures.
A Look Ahead (Stable) Current conditions are expected to continue through the remainder of 2021.
Q3 Financial Lines Summary
Overall (Challenging) The market continues to be challenging, with upward pricing movement and capacity challenges on large limit programs. The London market continues to be amenable to accommodating overage requirements, and pricing increases are more tempered relative to that of Australian insurers. There is a continued focus on raising self-insured retention levels to become commensurate with risk profiles.
Rates (+11-30%) Rates continue to move on an upward trajectory, driven primarily by continued portfolio profitability concerns and social inflation, which is overlaid by a more onerous regulatory environment.
Capacity (Constrained) Green shoots of new capacity are materializing, primarily out of the London market; however, most insurers continue to focus on capacity management. As a result, large limit placements continue to present challenges.
Underwriting (Stringent) Heightened underwriting scrutiny continues, with many global insurers now transitioning to the use of global underwriting guidelines, limiting the authority of local underwriters.
Limits (Decreasing) Limit adjustments were made during 2020, and some are continuing into 2021 – driven by both insurers and insureds. Insureds are increasingly focused on risk quantification and evaluation of purchasing patterns.
Deductibles (Increasing) There is a strong insurer focus on minimizing their exposure to attritional risk through the elevation of deductible levels. Insureds are also reassessing their risk tolerance and 'resetting’ deductibles as a mechanism to help offset price adjustments.
Coverages (Stable) Most portfolio remediation, from a coverage perspective, took place in 2019 and 2020. As a result, 2021 has seen a stabilization of coverages, with retractions occurring on a risk-specific basis rather than on a wholesale basis.
A Look Ahead (Challenging) New capacity will ultimately play a role in tempering incumbent insurer rate expectations; however, this is not expected to occur in the short-term.
Q3 Professional Indemnity Summary
Overall (Challenging) The market remains challenging, with the construction sector experiencing the most difficult conditions.
Rates (+11-30%) Rates are up significantly, driven by an increase in claims frequency and severity, a lack of competition, and changes in legislation.
Capacity (Constrained) There is limited primary capacity, particularly for challenging risk types. There is a trend amongst insurers to write Miscellaneous Professional lines to bring balance to their portfolios; however, there simply isn't enough of this business to create the diversification insurers are looking for.
Underwriting (Stringent) Underwriting authority continues to transition away from local teams to head office teams. Insurers are using risk engineers and actuaries in setting underwriting guidelines to a greater extent than in the past. More detailed underwriting submissions are required.
Limits (Stable) Limits purchased are generally based on contractual requirements or as a percentage of overall fees. This approach has remained consistent.
Deductibles (Increasing) There is increased deductible pressure as insurers continue to look to drive greater “skin in the game” and a focus on risk management while transitioning further away from the working loss layer.
Coverages (Restricting) Cyber and Communicable Disease exclusions continue to be applied. Cladding/fire safety exclusions have become common on construction risks with loss mitigation often sub-limited.
A Look Ahead (Challenging) Current conditions are expected to continue through the remainder of 2021, or until new capacity enters the market. General Liability insurers are looking carefully at how Professional Indemnity may respond to BI/PD claims; clarification in this space is likely to emerge.
Q3 Property Summary
Overall (Challenging) The work undertaken by insurers to improve performance during the harder market cycle is starting to show positive results, and continuing that trajectory is a top priority for insurers. Conditions overall continue to be somewhat challenging but vary based on sector.
Rates (+1-10%) Single digit increases have become prevalent for well managed, claims-free, attractive risk types, while significantly higher rate increases are required for those outside of insurer appetite, or those programs where “technical rating” has not yet been achieved. In general, insurers are showing little interest in Nat Cat, coal, food & beverage, alpine, and large limits.
Capacity (Ample) Capacity is stabilizing after many quarters of portfolio remediation. Indeed, for some occupancies, capacity is increasing - providing much needed competitive tension and limit. However, capacity remains challenged for high hazard exposures as insurers continue to withdraw from entire portfolios and/or industries.
Underwriting (Prudent) Insurers are looking to cautiously grow, and with this comes greater flexibility; however, they remain wary of falling back into unprofitability after a strong first half. There is a clear distinction in stance between renewal business, where underwriters are constrained by portfolio growth requirements, and new business. Referral processes and lack of flexibility are resulting in long response times, and early engagement is key to achieving successful outcomes.
Limits (Decreasing) Natural catastrophe limitations continue to be imposed by some insurers seeking to better manage their portfolio aggregates. In other cases, insureds are exploring limits decreases as a way to reduce premium spend and increase competition for their risk.
Deductibles (Stable) In the absence of unfavorable loss developments, increases in retention are largely now driven by insureds controlling costs as opposed to market forces.
Coverages (Stable) Continued pressure on specific coverage areas remain, in particular, those related to Infectious Disease, Cyber and Data loss, Supply Chain Risk and other areas of Contingent Business Interruption.
A Look Ahead (Stable) Prudent capacity deployment and rate pressure will continue; however, this position can be challenged on risks considered benign or for insureds that have demonstrated a willingness to mitigate their risk, primarily via capital expenditure.