Companies cut back on insurance
The trend, identified by Insurance Australia Group, comes as the sector faces a tougher growth environment after enjoying bumper profits last financial year.
In a sign of softening economic conditions, IAG chief executive Mike Wilkins said a growing number of customers - mostly small and medium-size enterprises - were opting for products that came with a lower premium.
"What we are seeing, particularly in the SME space, is people having a good look at their insurance protections and making conscious trade-off decisions, including taking some higher excesses, because that translates to lower premiums," Mr Wilkins said.
There had also been an increase in the number of households - the largest market for IAG and Suncorp - choosing to cut premiums, though the trend was "much more pronounced" in the commercial sector, he said.
"People are just very conscious of their expenses and I know for some businesses it's tough," Mr Wilkins said.
"So what they're doing is they're saying, 'Look, I'm prepared to trade some of this off'."
The three big ASX-listed insurers - QBE, IAG and Suncorp - last week signalled softer rates of domestic growth in revenue from premiums in the year to come.
While IAG and Suncorp flagged more premium growth after paying out sharply higher dividends, market analysts are debating whether the sector is reaching its peak rate of profitability after a surge in premiums in recent years.
Home cover rates in particular have risen by more than 10 per cent for several years in a row and analysts say insurers are being forced to slow rate rises in a softening economy, in which there is also growing competition from recent entrants Coles and Woolworths.
After Mr Wilkins said IAG would aim to push through premium increases in the low double digits, UBS analyst James Coghill said IAG's commentary was the most conservative in a number of years, and the sector now faced a "much tougher growth phase".
It comes after IAG last week reported a tripling in profits to $776 million, while Suncorp's general insurance arm said earnings jumped 79 per cent to $883 million.
Frequently Asked Questions about this Article…
The article says customers — especially small and medium-size enterprises — are tightening expenses in a weak economic environment. IAG CEO Mike Wilkins noted people are consciously trading off insurance cover for lower premiums by accepting higher excesses to reduce ongoing costs.
SMEs are the most pronounced group opting for lower-premium products with higher excesses, though there has also been an increase among households. The shift is strongest in the commercial sector, while households remain the largest market for insurers such as IAG and Suncorp.
The three major ASX-listed insurers signalled softer domestic growth in premium revenue for the year ahead. IAG and Suncorp have discussed scope for further premium growth, but overall the sector faces a tougher growth phase after recent bumper profits.
Yes — recent results showed strong earnings: IAG reported profits tripled to $776 million, and Suncorp's general insurance arm reported earnings up 79% to $883 million. However, analysts are debating whether the sector has reached a peak rate of profitability.
Home cover rates rose by more than 10% for several years, but analysts say insurers are being forced to slow future rate rises because of the softening economy and increased competition. Investors should note that past strong rate increases may not continue at the same pace.
The article highlights growing competition from new entrants such as Coles and Woolworths, which is one factor forcing insurers to temper premium increases and compete harder for customers.
UBS analyst James Coghill described IAG's recent commentary as the most conservative in several years and said the insurance sector now faces a "much tougher growth phase," reflecting the expectation of slower premium growth.
Based on the article, investors should watch premium growth guidance from major insurers, consumer behaviour around taking higher excesses, competition from retail entrants (Coles and Woolworths), and company earnings updates such as IAG's and Suncorp's recent profit jumps — all of which influence future profitability and growth prospects.
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