Suncorp stares down the inflation genie but faces new storm front

Suncorp chief executive Steve Johnston. Picture: John Feder

Anyone looking for signs where inflation is likely to go should take a peek under the bonnet of an insurance company.

There’s a bit of crystal ball gazing built into insurance premiums that are sold today to pay for repairs that could take place a year from now. And Suncorp, which also controls insurance brands AAMI, APIA and GIO, has backed the Reserve Bank’s view of the world by declaring any price breakout across Australia can be contained.

But that doesn’t mean homeowners and drivers should breathe a sigh of relief. Annual premiums are still moving higher given the increasing frequency of storms and floods particularly across Australia’s east coast this summer. And Suncorp chief executive Steve Johnston isn’t shying away from that.

Over the past six months Suncorp’s average pricing for home insurance has increased a whopping 7.5 per cent and 4.9 per cent for motor – not because of supply side inflation but almost entirely to a jump in costs as global reinsurers calculated Australia as a riskier place given the string of costly disasters through La Nina.

General business signage in Brisbane. Suncorp have a new logo. 3rd October 2020 Brisbane Picture by Richard Gosling

The figures came as Suncorp delivered better-than-expected cash earnings of $394m million, while the figure was down 30 per cent from the same time last year given higher payouts for floods and storms coupled with lower investments returns, it still came in ahead of analyst expectations. Suncorp’s banking arm also benefited from low level lending losses which offset a steep crunch in lending margins to deliver a modest profit lift to $200m.

Helped by a higher-than-expected dividend of 23 cents for the half, Suncorp surged 5.5 per cent to a four-month high of $12.03.

Suncorp’s insights into inflation also gives an indication of the type and sustainability of price rises currently running through the economy. It also shows that some businesses are actively responding to price breakouts by also looking for savings inside their own operations before simply pushing higher costs onto customers.

Inflation picked up in Australia towards the end of last year and now underlying inflation (which removes volatile and seasonal items) is already running at 2.6 per cent, or around the midpoint of the Reserve Bank of Australia’s target band. Last week Reserve Bank governor Philip Lowe said the central bank was prepared to be “patient” when it comes to lifting the cash rate to cool inflation.

For insurers, it is absolutely critical to get inflation forecasts right. They risk picking up the bill on ever escalating home construction and car repairs which simply eats into profit. For now, Suncorp’s Johnston says he can manage the price rises by looking for efficiencies in the business.

“We are obviously keeping a very close eye on inflation. Always have and always will,” he says.

Johnston says there is clear evidence of pressure in the building supply chain and while broader industry figures show building repair costs rising between 6-7 per cent, Suncorp’s own experience with construction and pressure on builders saw “negative inflation” in home building costs.

Car costs are risking, including for smash repairs. Apprentice spray painter Isabella Turrise. Picture: Jonathan Ng

Car repair costs due to accidents are more problematic given the supply chain squeeze on parts and a surge in used car prices, which is seeing underlying inflation run between 4 per cent to 6 per cent. (Higher used car prices increase the point where a new car is written off as a total loss).

This was offset by fixed price contracts and a push to automation in claims.

“We’ve got good early forward warning indicators to help us manage (inflation). But we’ve got a good handle on it and got it very much under control at the moment,” Johnston says.

Disaster planning

One area that both Suncorp and the Reserve Bank have little control over is the climate and it’s here where the real pain is coming for consumers. Governments need to know what’s coming.

There is a start with the $10bn government backed tropical reinsurance scheme legislation slated to be introduced into federal parliament this week, that has emerged out of several reviews into limited insurance coverage across northern Australia.

Johnston says mitigation planning and support to provide resilience protection for disasters is still desperately needed.

“We spent 97 cents cleaning up and three cents preparing for and mitigating the impacts of disasters. So we’ve got that balance completely wrong,” he says.

“You can get a subsidy to put a solar panel on your roof, but you can’t get a subsidy in North Queensland to baton your roof down so that you can handle a category four or five cyclone,” Johnston adds.

The La Nina event across Australia saw Suncorp payout $626m in natural hazard costs during the December half mostly for storms and floods. This was $150m more than what it had budgeted for and it is expecting natural hazard costs to be just over $1bn for the full year.

Johnston says there were 19 declared disasters in the first half compared to just seven for the same time last year. Two years ago insurers were facing an unprecedented summer of bushfire claims.

Natural disasters increased including a storm that hit Melbourne last October. Picture: NCA NewsWire

Johnston highlighted the frequency of natural disasters, which has been forcing it to go out to the global market to secure more reinsurance. The high cost of this additional cover reinsurance eats straight into Suncorp’s profit margin.

But as Johnston notes, price rises can’t do all the heavy lifting. “We have to make our business more efficient,” he says. This will involve getting more customers claiming through digital channels which are open around the clock.

Indeed, digital is at the heart of Johnston’s three-year plan for Suncorp. This was accelerated through Covid with more customers interacting with the insurer and bank online. He is bringing forward spending to use automation to speed up claims processing or writing home loans to make Suncorp best in class for customers. The payback in terms of cost savings will be “substantial”.

The rate of claims now made online has doubled over the past year. Now 41 per cent of all Suncorp’s motor claims are made online and 36 per cent in terms of home insurance. For cases where there is hail or storm damage online claims surge to 50 per cent.

Johnston says this improves the customer experience, speeds up the repair process and brings down the ultimate cost of hazard claims.

Rival Insurance Australia Group, which is behind insurance brands NRMA and RACV, is set to give its take when it delivers interim profit result on Friday.

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