Steep jump in premiums, more to come for home and car insurance
Insurance Australia Group boss Nick Hawkins says a high proportion of customers are renewing their home and car insurance, despite premiums rising by about 10 per cent and household budgets facing a squeeze from the rising cost of living.
Shares in IAG, the company behind insurance brands including NRMA, SGIO and CGU, climbed 5.2 per cent on Monday after the company re-affirmed that it expected to continue pushing through steep rises in insurance premiums, as it flagged in a profit downgrade two weeks ago.
The results showed home insurance premiums rising by 10 per cent and motor cover increasing at a slightly faster rate in December last year, as the insurer flagged further premium increases in this half.
The company argues premiums are surging because it must pass on higher costs from natural disaster, surging repair costs, and higher costs of reinsurance, which insurers use to limit their exposure to big risks.
Yet despite premiums increasing at a faster pace than inflation, Hawkins said the company’s retention rates were high by historical standards, meaning few customers are dumping their insurance.
IAG said its retention rate was 91 per cent for motor and 95 per cent for home cover, and Hawkins said these retention rates were “towards the top end” of its long-term averages.
Some economists fear the rapid interest rate rises could squeeze households to the point of triggering a recession, and Hawkins acknowledged the challenge facing the government, as the Reserve Bank uses the interest rate “lever” in an attempt to tame inflation. Even so, he argued the high retention rates showed the strength of IAG’s brands.
“They’re using interest rates as one of the levers, and it’s a fine line, this. The evidence that we’ve got in IAG on this topic around the sentiment in the community is our retention levels are high, but it’s also a big concern that we get this right. Households are under a lot of pressure, we acknowledge that,” he said.
IAG, which has lagged rival Suncorp in recent times, said it would keep its interim dividend unchanged at 6c a share, to be paid on March 23.
The results confirmed IAG’s profit warning from earlier this month, reporting a contraction in its underlying insurance margin to 10.7 per cent. Net profit after tax recovered sharply to $468 million, from $173 million in the December half of 2021, mainly because it released provisions for “business interruption” cover.
The decline in its margin was driven by higher claims for disasters, including recent flooding in Auckland, and a blowout in the cost of paying out claims. The most dramatic surge in inflation occurred in its motor insurance business late last year, with a jump in the cost of repairs and parts, alongside delays, which Hawkins likened to a “perfect storm.”
UBS analyst Scott Russell, who has a “sell” on IAG, said the company’s guidance for a short-term recovery in its margins was based on it pushing through higher prices, a moderation in the cost of paying claims, better investment returns, and no strengthening its reserves.
“This scenario appears optimistic to us considering the scale and complexity of recent claims headwinds,” Russell said.
As consumers grapple with a budget squeeze, Hawkins said there had also been a small change towards some customers choosing to pay a higher excess to limit the increase in premiums, but it was not a material shift.
IAG shares rose 5.2 per cent to $4.96.
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Source: Thanks smh.com