Customers of New Zealand general insurers are getting the least bang for their buck in at least a decade.
Last year general insurers (not life and health) parted with the smallest portion of money they received through premiums, to pay for claims, since at least 2004 (when interest.co.nz started collecting this data).
The latest figures for the year to September 2014 have just been released in the Insurance Council of New Zealand’s 2014 Review.
They reveal insurers paid $60 in claims for every $100 they received in premiums.
Dividing the claims they paid by the premiums they received after deducting commissions and brokerage fees (net earned premiums), gave insurers a net loss ratio of 60%.
This loss ratio has dropped from 68% in 2010, 112% in 2011 (the year of the major Canterbury quake), 68% in 2012 and 62% in 2013.
The closest the ratio has come to where it is now (since at least 2004), was when it sat at 61% in 2005.
So while insurers are receiving more in premiums, they are paying out proportionately less in claims.
Subtracting the amount insurers paid in claims, from the net amount they earned in premiums, shows they made $1.56 billion in 2014.
This is 17% more than they made in 2013, and 54% more than they made in 2009 – the year before the first major Canterbury earthquake.
ICNZ chief executive Tim Grafton says it’s difficult to pinpoint the reasons for this.
"There are so many different factors coming into play here."
He says the values of premiums and claims also go up and down depending on the type of insurance.
He can't rule out the possibilities that premium prices have increased and insurers are fine-tuning the wordings of their policies to make it harder for clients to make claims.
"I can't give you a straight answer," he says.
How the picture looks when factoring in rising business costs
Grafton points out business costs have also been increasing since the quakes.
He says, "I'm not close enough to know how insurers are spending their money there. There are a whole bunch of costs.
"There may well have been an increase in staffing levels around the earthquakes, and certainly a lot more people would have been hired."
Despite increased costs around staffing, property and marketing for example, 2014 was still the industry’s most profitable year since 2005.
Note this doesn't take any profits or losses insurers made through other investments into account.
Subtracting the $2.35 billion of claims and the $1.32 billion of business costs insurers paid in 2014, from the $3.91 billion of net premiums they earned, shows they made a profit of $247 million.
In 2014, insurers made 89% more than they made in 2013 and 249% more than they made in 2009.
They made losses of $20 million and $1.37 billion in 2010 and 2011.
Grafton says it’s important to consider the amount insurers paid for both claims and business costs, as a proportion of net premiums they earned.
Considering this, we can conclude that while insurers dished out a smaller portion of the premiums they received to pay for claims alone in 2014 compared to a decade ago, they paid out a smaller portion for claims and business costs combined.
Canterbury quakes – a major blow to insurers
Focusing solely on premiums related to earthquake cover and claims arising from earthquakes, the picture is less rosy from the insurance industry’s perspective.
For every $100 insurers earned in net premiums in 2014, they paid $109 in claims. This means their loss ratio was 109%.
The ratio fell from 211% in 2010 and a whopping 31,163% in 2011. The loss ratio was 2% in 2004.
Subtracting the amount insurers paid for quake-related claims, from the net amount they received in quake-related premiums, shows they lost $1.84 billion between 2010 and 2014.
It isn’t possible to accurately factor in business costs related specifically to quake insurance, as this kind of data isn’t available.
Insurers sitting pretty – quakes aside
Given insurers have been profiting post 2011; they’re making up the shortfall suffered by the quakes in their non-quake-related businesses.
Taking quake-related premiums and claims out of the equation, the insurance industry’s sitting pretty.
In 2014 insurers paid $57 for every $100 they received in premiums. This means their loss ratio is the lowest it has been in at least a decade.
While the ratio’s been below 63% since the quakes, it sat between 64% and 70% between 2004 and 2010.
Subtracting the amount insurers paid for non-quake-related claims, from the net amount they received for non-quake-related premiums, shows they made $6.41 billion between 2010 and 2014.
This gain is more than three times larger than the loss they incurred through the quakes.
Insurers made $4.12 billion between 2005 and 2009.
Motor and domestic buildings and contents insurance making up the quake shortfall
Breaking this down even further, we can see insurers are making more money from domestic buildings and contents insurance.
This class of insurance made up 28% of the gross written premiums in 2014.
For every $100 insurers received for domestic buildings and contents premiums, they paid $52 for related claims in 2014.
At 52%, this is the lowest portion for this type of insurance in at least a decade.
The loss ratio remained below 63% between 2010 and 2014, and sat between 72% and 84% between 2004 and 2009, meaning a substantially larger portion of insurers' domestic buildings and contents premiums went towards paying claims before the quakes.
Subtracting the amount insurers paid for domestic buildings and contents claims, from the net amount they received for premiums, shows they made $1.97 billion between 2010 and 2014, compared to $702 million between 2005 and 2009.
Commercial and private motor insurance made up the largest portion (29%) of the gross written premiums insurers received in 2014.
The loss ratio for this type of insurance bounced between 64% and 66% between 2010 and 2014. It sat between 69% and 74% between 2004 and 2009.
Insurers made $2.33 billion from motor insurance between 2010 and 2014, and $1.58 billion between 2005 and 2009.
Once again, it’s important to note this isn’t profit as such, as business costs specifically related to domestic buildings and contents insurance and motor insurance haven’t been factored into the equation.