Investors and analysts remain wary of ASX-listed insurers, concerned earnings are at a cyclical peak after years of strong returns. “The market tends to reward earnings recovery where it looks repeatable,” said Janice How, professor of finance at the Queensland University of Technology. “In insurance, that means disciplined pricing and careful risk management, not just premiums running ahead of costs for a period.”
Premium repricing after a difficult claims environment can produce a strong result without the business being structurally better, she said. The insurance sector has more repricing flexibility than most consumer-facing businesses, she added, but premiums that land hard on household budgets tend to attract political and regulatory attention. “Pricing power that invites intervention isn’t durable pricing power,” she added. “Investors understand that tension.”
Nathan Zaia, senior equity analyst at Morningstar Australasia, said he would not currently advise investment in Australian-listed insurers, which he considered a little over-valued. “I don’t think you would expect to see large premium increases above inflation, and in some lines it might even trail inflation as you see competition go for volume,” he said.
Premium rate increases were slowing, and in some commercial lines they may even fall, he added, but returns had increased to a point where there was room for that happen.
Insurance affordability, Australia’s nationwide under-insurance and lack of innovation were key issues for investors considering the long-term growth of the industry, said Freya Kong, Australian Insurance and Diversified Financials Equity Research director at the Bank of America.
“If you look at insurance penetration rates in the US, they’re over 9 per cent of GDP,” she told the Australian Financial Review Insurance Summit last month. “We are tracking below 4 per cent still, so there’s quite an insurance gap that is yet to be addressed.”
Increasing catastrophe costs have lifted volatility, she added, noting it could be argued that a higher return was needed over the medium to longer term to justify investor confidence in insurance companies.
In the long term, she added, home insurance could evolve from a simple financial product which pays out when damage occurs to more of a partnership-risk mitigation model, taking advantage of accelerating advances in in-home technology.
“We’ve got smart homes, we’ve got integrated technology, we can always see what’s going on,” she said.
Compared with international firms, Australian insurance companies rarely launched new product lines and often looked abroad to gauge interest in new lines of business, she said. “Cyber insurance, for example, is probably not as popular in Australia just yet, but it’s really taken off in the US and the UK”.
Other niche products could be explored to assess their potential of new products, and innovation could prove fruitful over time.
Insurance companies continue to be a good investment, particularly in terms of earning steady dividends, said Michael O’Neill, portfolio manager at Investors Mutual.
The nature of insurers had changed over time and now, in the modern era, they seemed well-aware of their social licence, he added.
“They do try to have options to make insurance affordable for the everyday Australian,” he said. These might include monthly payments or the potential for trimming the excess on policies – all demonstrating a willingness to work with the customer.
Insurers are also now trying to be more proactive with their customers, O’Neill said, including offers such as providing a reward for managing the risk profile of a property, even if it’s something as simple as cleaning out the gutters.
“What we see with insurers and customers going forward is more of a dialogue, more of an openness, and being more proactive in that sense,” he said.