Premium prices to fall further: QBE

Extreme competition will mean another year of falling prices, the insurance giant says.

Marty Becker said QBE had fallen victim to low investment rates and market volatility.

Global insurance giant QBE says extreme competition is continuing to drive down premium prices, with chairman Marty Becker warning shareholders of another year of falling insurance prices across the business.

Mr Becker, who guides the $15 billion Sydney-based firm, said loose monetary policy across the globe was helping to feed a flood of new capital into the booming insurance industry and, when coupled with a relative lack of catastrophes in recent years, had caused a persistent slide in the company’s premium prices.

“On average, insurance pricing across our business decreased by 1.3 per cent in 2015, and we anticipate similar declines in 2016,” he told shareholders at the company’s annual general meeting on Wednesday.

Along with the rest of the insurance industry, which is heavily dependent on investment income to support profitability, Mr Becker said QBE had fallen victim to low investment rates and market volatility, and flagged an expected investment return of just 2.4 per cent over the 2016 financial year. That falls far below the 2007 investment return of 6 per cent, which added 8 percentage points to QBE’s insurance margin — the key measure of the firm’s profitability. Last year’s return of 2.2 per cent contributed just 3 per cent to the insurance margin.

But chief executive John Neal added that, falling insurance prices aside, gross written premium had risen 3 per cent year-on-year during the March quarter.

Competition in the insurance industry is heating up, with disrupter challenger brands, such as Youi and Budget Direct, forecast to reach 13 per cent of the general insurance market over the next three years, while banks are expected to increased their reach to 10 per cent of the market.

These changes would see $3.8 billion of gross written premium “flowing away” from the three listed major insurers QBE, IAG and Suncorp, according to Macquarie analysts.

“In this environment insurers have no alternative but to focus their efforts on high quality underwriting, efficiency and cost reduction,” Mr Becker said.

Last year, QBE booked a cash profit of $US893m after gross written premium slumped 7 per cent to $US14.8bn. Over the last 12 months, the company’s share price has tumbled nearly 16 per cent to $11.20, after trading as high as $15 and as low as $9.50.

Mr Neal said QBE, which operates across 37 countries, was intending to reduce operating expenses by another $150m million over 2016, which would lead to a 1 per cent improvement in its expense ratio.

“While our strategy is designed for a low-growth environment, we are well positioned for upside performance when market conditions improve,” he said.

Mr Becker blamed the wild fluctuations in the stock price on the company’s link with global interest rate movements, which were expected to lift late last year but were derailed as the US Federal Reserve pushed anticipated rate hikes further into the future. The impact on QBE shares was compounded when the broader equities market fell sharply in early 2016.