Insurance profits tumble on catastrophe, pandemic

Bushfires, floods and the pandemic mean Australia’s entire insurance industry earned only $35m in after-tax profit in 2020.

A NSW home destroyed by bushfire.

Insurer profits have plummeted on the back of natural catastrophe claims, provisioning for business interruption claims, and a hammer blow to investment income.

Data released by the Australian Prudential Regulation Authority showed the industry earned only $35m profit after tax for the year to December 31.

This profit represented a return on net assets of only 0.1 per cent.

Dragging down the year’s overall return was a horror December quarter during which the industry posted $649m in losses.

That followed a September quarter during which insurers reaped $836m in profits, and profits of $860m in the June quarter.

However, those two profitable quarters followed a March quarter loss of $1 billion.

The overall result of a choppy year was a 98.9 per cent turnaround in net profit after tax, compared to the $3.1bn profit in 2019.

Gross claims for the year ballooned 23.7 per cent to 47.2bn.

Investment incomes were slashed, collapsing 48.8 per cent on the back of dividend cuts and deferrals.

Increased provisions for COVID-19-related business interruption insurance claims, alongside storm events and reserve strengthening, ate into profits.

Industry prescribed capital amount coverage ratio decreased during the December quarter to 1.70x, largely due to falls in capital levels from increased provisions set aside by the industry in the wake of a shock loss in the NSW Court of Appeal.

The insurance industry lost its first battle in its attempt to block pandemic-related business interruption claims.

The case is currently before the High Court awaiting an answer on whether the industry will be granted the right to appeal.

Potential claims could be hugely costly for the industry, with almost $2bn set aside by major players.

The outcome of a second set of test cases launched by the insurance industry in recent weeks could see claims on broader grounds blocked or opened.

The Council of Financial Regulators statement on Wednesday noted the broad uncertainties about business interruption insurance claims.

“Members welcomed the commitment of all general insurers to abide by the terms of the test case protocols, including insurers not a party to the proceedings,” the council said.

“In particular, they welcomed insurers’ commitment to waiving their rights to deny liability due to an insured’s insolvency or delay in lodging a claim due to awaiting the final outcome of the test cases.”

The council noted ASIC would closely scrutinise statements made by the insurer and other licensees about the application of the test case and would take action if required.