IAG warns insurance prices to rise, puts growth goal on hold

IAG will delay its goal of adding a million new customers by at least a year, after revealing premium price rises and natural catastrophes have weighed on attempts to snag new business.

Insurance Australia Group will delay its goal of adding a million new customers to the insurer by at least a year, after revealing a torrent of premium price rises and natural catastrophes have weighed on attempts to snag new business.

In a market update on Wednesday, IAG said the goal, originally slated for 2026, was to be delayed but not dumped.

The insurer said it had added 207,000 new customers since July 2021 in the wake of moves to roll out the NRMA brand outside NSW.

IAG chief executive Nick Hawkins said instead of going for growth, IAG would focus on ­prioritising its returns and keeping a lid on costs as it moved to further streamline operations.

“The business is also on track to deliver $400m of value through increased claims and supply chain effectiveness,” he said.

Mr Hawkins told The Australian IAG was “adjusting” its goals due to “real challenges around the way we’ve been running the business around perils and costs”.

IAG announced in February it was staring down a $1.145bn ­natural perils budget for the year after being battered by floods that swamped its New Zealand customers.

In its latest update, IAG said it was aiming to deliver a 10 per cent lift in gross written premiums and was trending towards a 10 per cent insurance margin for the full financial year.

Mr Hawkins said IAG had lifted its return on equity target to 13-14 per cent, as part of the insurer’s medium-term goals to take returns to 15 per cent.

Speaking at an investor briefing, Mr Hawkins said IAG was facing a “material lift” in the payout on premiums it collected, which have lifted from 13-14c in the dollar to almost 19c.

Mr Hawkins said the pricing momentum was affecting IAG’s growth prospects in Australia and New Zealand, the insurer’s core markets.

“We’re not walking away from some of those ambitions, we’re being a bit more realistic around the current environment,” he said. 

But Mr Hawkins said IAG was benefiting from a high retention rate of current customers, who were holding on to insurance policies despite breakneck premium price rises. IAG is also banking on a wave of migrants to Australia driving organic growth for the insurer, in what may prove the first time in year the sector has faced population growth as its key growth driver.

Mr Hawkins said the insurer was on track to hit its operating cost target for the 2023 financial year, but warned this could worsen next year.

“In FY24, we expect our key expense ratio to remain flat or ­reduce, however, we anticipate that ongoing inflationary pressures and additional technology investments may result in increased operating costs,” he said.

IAG has poured funds into a technological transformation of its claims and policy management systems, going from 16 claims management platforms to one by 2026 and reduce legacy claims systems from five to two.

Mr Hawkins flagged plans to release a “small net reserve”, which along with “favourable credit spread impacts in the second half” would support profits.

IAG will also release some of its remaining $606m business­ interruption provision, taken to cover losses arising from Covid-19m which was slimmed down by $360m in the first half.

But Mr Hawkins warned the “two positives are likely to be offset by natural perils which will be moderately over the revised expectation, assuming an average June month”.

Mr Hawkins said IAG was likely looking at 12 more months of high premium rises to balance perils and reinsurance costs, which were eroding the insurer’s margins.

“We’re seeing material increases in reinsurance, that’s not changing in the near term,” he said.

“It highlights the need for country response to some of these perils issues across Australia and New Zealand,” he said.

IAG shares closed up 2.55 per cent to $5.23 in a slightly higher market on Wednesday.

Originally published as IAG warns insurance prices to rise, puts growth goal on hold