APRA, the lead financial regulator, has warned about potential problems emerging in commercial property insurance, joining the Reserve Bank which has been concerned about lending to the sector now for more than year (especially to the apartments).
In a speech in Sydney this week to the insurance industry, Geoff Summerhayes (the former CEO of Suncorp Life since 2008), the recently appointed APRA member overseeing insurance, said the regulator “has observed with some concern the emerging trends in commercial property insurance.”
"While there are some recent signs of stabilisation in pricing, it is too early to predict whether this will hold in coming years. We continue to hear anecdotes of pricing anomalies and in the intense competitive environment there appears to be an element of ‘finger-pointing’.
"APRA does not intend to debate price settings with insurers. But when we see deterioration in key product areas over time we need to ask the question: how are insurers managing this risk and how sustainable is the current situation?
“APRA is monitoring closely commercial property claims trends and loss ratios and, while we are comfortable to leave any necessary corrections to industry for now, we will adjust our supervisory intensity in this area in response to worsening trends.
"We are also well aware of the challenges in CTP, particularly in NSW. APRA welcomes the current reform activity by the state regulator and we remain alert to similar patterns of deterioration across other states. We are currently monitoring claims experience of those insurers with large CTP exposures in light of potential implications for reserving and reserve releases, which may not always be available as the environment shifts,” Mr Summerhayes said.
And he also reminded insurers about underwriting – what he called the “bread and butter” of the business. he said that with investment returns and interest rates expected to remain low for a while longer, insurers “need to adjust expectations.”
"We’ve seen in recent years insurers taper back their insurance profitability targets, including their insurance trading ratios towards more reasonable settings and this is considered prudent in the current environment. What we don’t want to see though is a material shift towards sub-grade investments to chase yield. To date, we’ve only seen small movements in this area. While our capital rules capture higher risk investments, insurers need to take care not to adjust their investment portfolios outside of their risk appetite and without due consideration to the risk-return trade off.
"The more positive opportunity, however, of the current low interest rate environment lies in underwriting improvements. This is the time to improve robustness in pricing for risk to ensure healthy underwriting ratios are maintained in this low yield environment.”
