Australian insurers’ profits will feel more pressure from pandemic, natural disasters: Fitch

November 6, 2020.
Commuters wearing masks are seen walking out of and towards Flinders Street Station in Melbourne, Australia, Oct. 28, 2020. (AP Photo/Asanka Brendon Ratnayake)

Commuters wearing masks are seen walking out of and towards Flinders Street Station in Melbourne, Australia, Oct. 28, 2020. (AP Photo/Asanka Brendon Ratnayake)

Australian insurance companies will likely continue to see depressed earnings and slow premium growth this year as the COVID-19 pandemic and extreme weather dampen economic conditions, according to .

The New York-based credit ratings agency released a report Thursday showing that profitability had eroded for the industry so far in 2020 and forecasting that the woes are likely to continue for the rest of the year. 

Property and casualty insurers collectively registered a combined ratio of 100%, teetering on the edge of loss-making for the first time in years, according to Fitch. Life insurers recorded a net loss of AUD 500 million ($364 million), after earning AUD 800 million ($582 million) during the same period in 2019.

“Australian life and non-life insurers’ earnings are likely to fall due to top-line pressure and weaker investment revenue,” the firm said. “We expect premium growth to be sluggish due to lower economic activity and various customer relief packages rolled out by insurers.”

Volatile markets and increasingly low interest rates are eating into insurers’ earnings by reducing their investment income, especially for life insurance companies, according to Fitch. Australia’s central bank lowered the official cash rate to an all-time low of 0.1% from 0.25%, though its board said it does not plan to bring them any lower and into negative rates.

The credit ratings agency said pandemic claims should be manageable for the insurance industry because of its relatively limited exposure, although its liability for business interruption claims is still pending in court. A test case from the , a trade group, began hearings in New South Wales’ Court of Appeal in October to argue against insurers paying for them.

Australia recorded 14 coronavirus cases Thursday, bringing its total to 27,600 with 907 deaths. The virus’ spread in the country peaked in early August, and some locales are leaving lockdowns behind, although Australia continues to enforce a strict ban on international travel.

Natural disasters such as bushfires and hailstorms created huge losses for Australian P&C insurers in the first half of this year. And while reinsurance policies moderated the impact, their prices will continue to rise because of natural catastrophes, Fitch said.

“Weak economic conditions are also likely to impede primary non-life insurers’ ability to pass on higher reinsurance costs,” the agency said.

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