Inability to control operating costs defines industry performance

By John Grant

2009 was a better year for insurers. Net premiums earned rose 4% over the year while claims paid decreased 1.8%, shifting their loss ratio from 68.5% down to 64.6%. Overall, the members of the Insurance Council reported earnings of $70.7 million in 2009, compared with a loss of $31.1 million in 2008.

However, they are significantly less than the stellar $264.4 million the industry earned in 2005. These results have been published by the Insurance Council of New Zealand (ICNZ) in their annual review for 2009-2010 released a few days ago.

Lower weather-related claims helped limit their 2009 losses. Overall, premiums rose by nearly $110 mil. while claims declined by more than $35 mil., but the costs of running their businesses increased by more than $44 mil.

Nearly all classes of insurance showed improved net results.

The loss ratio for domestic house and contents insurance showed an improvement from 82.3% to 71.7%. Motor improved from 73.7% to 70%. The only categories to show a worsening trend were the Accident and Liability classes.

The clear standout from these results has been the the lack of progress in containing and controlling operating costs.

In 2005, Council members spent $695 mil. running their businesses, but just four years later that has risen by more than a third to $941 mil. It cost a further $44m to run these businesses in 2009 over 2008 at a time when most of their customers were going through belt-tightening.

This is important for people buying insurance.

Premium increases resulting from rising risk levels may get some sympathy, but hikes in response to bureaucratic operating costs will not help the industry's reputation. Don't hold too much hope for premium rate restraint as we have already seen increases by a number of insurers in 2009-2010.

Commenting on the results, ICNZ CEO Chris Ryan said, "The recessionary effects of the global financial crisis saw an increase in fraud throughout the industry, and the Insurance Council’s Fraud working group was actively engaged in addressing this issue."

"In addition we saw an increase in fires around both domestic and commercial dwellings which had a huge cost for the industry, and committee members were also engaged on this matter. A wide range of media outlets are now including insurance as part of their services and regular commentary."

"The Insurance Council worked with a number of websites and other media that have broadened their business coverage into specifically addressing the issues of insurance, rather than including insurance under the financial banner. This has been both a help to the industry and a challenge to us in the Council assisting with a greater understanding of insurance within the media."