Australia: Premiums to continue to decrease in 2014

Premiums will continue to be lower in 2014 in the face of increased competition among general insurers, coupled with a flood of capital entering the global general insurance business from non-traditional sources seeking better returns than bank rates.

“An influx of capital from non-traditional sources is contributing to increased market capacity, lower premiums, and effectively enhancing competition in the global insurance industry,” cited Mr Jason Disborough, managing director, Global, for Aon Risk Solutions, in Australia.

“The funds flowing into the insurance sector are from major pension and hedge funds as well as family trusts in a way we haven’t seen in the past,” he said. This is due to investors seeking alternative sources of return because the present interest rates are low. Further, these investors are willing to accept lower rates of return than have been usual in the industry.

“Because their investment has the potential to dwarf traditional sources of capital, it has the ability to fundamentally change market dynamics,” Mr Disborough said. Softening market conditions and increasing capacity have seen premiums fall almost across the board, with premium rates dropping in some of the poorer performing product classes.

This trend poses real challenges to insurers, he says. “Many are no longer able to rely on growth from their existing book of business and need to look at new ways of maintaining profitability.”

For 2014, he does not expect general economic conditions to pick up significantly, at least in the short term. “All in all, insurers and reinsurers are facing challenging times ahead, not just because of the ongoing impacts of natural catastrophes, but also due to less favourable operating conditions,” said Mr Disborough.