Macquarie warns of continuing insurance price rises over next two years

Analysts from investment bank Macquarie have warned insurance prices will continue to rise for the next 18-24 months.

Insurers are locking in double-digit price rises ahead of reinsurance renewals, according to Macquarie analysts, who warn repricing trends will remain in insurers’ favour for some time ahead.

In a note distributed on Wednesday, Macquarie analysts said they had identified a 17.1 per cent rise in home insurance premiums in the March quarter against those offered by insurers in the same time last year.

Macquarie said it was a similar story for commercial pricing, with 14.4 per cent premium increases on the prior comparable period.

The investment bank’s analysts said the premium increase from the insurers was now “materially ahead” of internal estimates for backbook repricing. An insurance backbook is retained policies from existing clients, who roll over their cover when it comes up for renewal.

Macquarie analyst said they expected the price rise trends to continue for the next 12 months “at these high levels”.

However, Macquarie noted pricing movements were mixed between Australia’s major insurers.

For example, Suncorp repricing in home policies came in 110 basis points lower than competitor Insurance Australia Group. This saw IAG pass on 17.6 per cent price rises in home policies againt Suncorp’s 16.5 per cent.

Macquarie noted this was the first time in five years Suncorp has come in below IAG for pricing, noting IAG was trying to get ahead of its upcoming reinsurance renewals.

IAG announced it had renewed its catastrophe reinsurance program in January, but tougher reinsurance market conditions saw the listed insurer left holding a larger maximum cost.

IAG’s maximum cost for its first catastrophic weather event was boosted to $236m, up from the previous limit of $135m.

The insurer will announce its aggregate reinsurance cover and quota share agreements in July, which will see it lock in deals to cover large losses.

Macquarie analysts said insurers were all struggling with parts inflation, labour cost inflation and rising reinsurance costs “each contributing to an extension of the premium rate cycle”.

“While customer retention remains at all-time highs across most products, repricing trends will be positive for all insurers,” they said.

“We maintain our positive outlook for the sector.”

Macquarie said the industry view was the pricing cycle had a further 18-24 months “left to run” before price rises “are zero”.

“Our analysis shows the premium rate cycle (premiums written) are a strong lead indicator for the investment case of insurance brokers, while margin expansion (as premiums are earned) is a better lead indicator for PE multiple expansion of insurers,” Macquarie said.