The general insurance industry in Australia, that has been one of the most profitable in world for nearly 20 years, is now experiencing a perfect storm of growth contraction, intensifying competition, and worsening cost and claims profiles.
These factors have already pushed profitability down: Net profits after tax were equivalent to around 15% of gross written premiums in 2002 but around 6% in 2019. Despite consistent and significant premium increases, profitability is just over a third of the level in the early 2000s, says a report entitled “Australian general insurers face the perfect storm”, released by the global management consulting firm Oliver Wyman. The macroeconomic downturn induced by the COVID-19 pandemic will further add to the challenge.

Rethink needed

The current challenges to growth and competitiveness mean insurers will need to rethink the balance of activities necessary to survive and differentiate. Greater focus on the new “strategic minimum” will be required to reposition their operating models with more-sustainable cost profiles. More importantly, gross claims, too, have been increasing faster than gross written premiums, at nearly 5% a year since 2013. In particular, claims costs have been on the rise in larger portfolios such as motor, property and liability.


The report says that the headwinds are expected to continue to shape the general insurance industry over the next few years. In the near future, growth and profitability will be put under pressure. But in the longer term, the very sustainability of the business model will be challenged.

Structural shifts

In addition to the challenging local trends, structural shifts are having an impact on the growth and profitability of the general insurance sector globally.

One is the changing nature of risk. Common risks are becoming more frequent and intense, while new risks are continually emerging. The frequency of catastrophic weather events has doubled. The increased adoption of digital technologies will see a corresponding rise in cyber risks.

Another is a shift in the value generated towards distribution. Purely from the perspective of shareholder return and performance, global insurance distribution businesses have outperformed insurance manufacturers. Many of the distribution businesses captured in such analyses are large, listed brokers that focus primarily on the commercial and corporate insurance sectors, but a similar trend is starting to emerge in personal lines. Given insurers’ lack of proximity to end customers and the high costs of customer acquisition, they will need to reassess and optimise their distribution strategies to drive sustainable growth.

As business conditions become increasingly difficult, the report foresees significant structural change in the industry over the next five years. Insurers will need to consider critical strategic choices in two related dimensions: value chain ownership and capability excellence.

Many insurers will find it increasingly hard to maintain a competitive advantage at all stages of the value chain. The changes in distribution are just one example of the difficulty for insurers of being all things to all people,, while trying to maintain superior economic returns. Insurers should re-assess their ownership of different parts of the value chain and make calls on where their competitive advantage lies.

Meanwhile, insurers have made modest progress in investing in contemporary capabilities outside of their core: digitisation, product development and human-centered design are just a few examples. Whilst these capabilities themselves are not new, expectations have risen at a much faster pace than insurers have been able to keep up with.


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