After years of double digit premium hikes that fuelled mega profits, Australian insurers are bracing for a significant slowdown in revenue growth as aggressive competition for customers hits companies' bottom lines.
Research from JP Morgan and Taylor Fry show insurers expect to book an average of just 1 per cent growth in 2015 across their domestic classes of business, which include motor and home cover and compulsory third party. This is half of the 2 per cent average premium growth recorded last year, and below the 3 per cent claims inflation mark.
It is also a far cry from soaring double digit revenue growth after a spate of natural disasters such as the Brisbane floods and Christchurch earthquakes in 2010-11 that sky-rocketed the price of insurance premiums.
"For the next few years ... the industry is in for a very tough outlook on the growth [side]. Rates are going to stay low for a long period of time," J.P. Morgan senior insurance analyst Siddharth Parameswaran said.
"We do think we are at a turning point in the industry."
Heated competition for cost-conscious consumers' business, particularly in home and motor insurance, is a key driver of the predicted handbrake on growth. Insurers are trying to woo new business while household budgets remain constrained.
Companies are also suffering from low investment yields and juggling vehicle repair cost inflation. Lower reinsurance costs benefit insurers because they pay less for catastrophe cover, but they also lose their reason for passing on high reinsurance costs to consumers in the form of premium hikes.
"The 2014 year saw very strong profitability with the trends exceeding the expectations of the insurance industry, primarily due to the impact of previous rate increases, a soft period for natural peril claims and a continuation of reserve releases, though at reduced levels," Mr Parameswaran said.
"Profitability is expected to deteriorate in the coming years for Australian insurers in part driven by soft premium rates, providing downward pressure on growth," Taylor Fry senior actuary and director, Kevin Gomes, said.
The outlook is even more dire in the commercial insurance sector, where competition among companies is more prevalent. Premium rates fell 12 per cent in the fire and industrial special risks sectors, while rates remained flat in commercial motor cover last year. Professional indemnity insurance rates fell 5 per cent, while directors and officers' cover also posted 2 per cent dips.
Australia's general insurance sector is also notorious for its lapse rates, or the number of customers who allow their cover to lapse at renewal times. According to the research, the industry was recording lapse rates of around 20 per cent per annum - much worse than the beleaguered life insurance sector which is posting 10 per cent drops.
The predictions come as some of Australia's biggest insurers, including Suncorp Group, Insurance Australia Group and QBE Insurance Group, prepare to unveil their profits next month.
