Optima 2022

Date24th October 2022

Optima 2022 reveals three years of poor General Insurance industry outcomes, but FY23 forecast to improve

Finity’s annual state of the industry report Optima has highlighted another year of low profitability for the Australian General Insurance industry, with record low investment outcomes the key driver. A bounce back in FY23 is expected, but returns will still be below target.

Now in its fifteenth year, Finity’s Optima 2022 report was launched on Tuesday 25 October at the Ivy Ballroom attended by over 150 industry professionals.

According to lead author and Finity Director, Andy Cohen, “After a pandemic-induced collapse in ROEs in FY20, then FY21 ROEs lower still, FY22 was only marginally better. With ROE of just 3% in FY22 (a mere 1 point higher than FY21), this marks three years in a row of sub-5% returns”.

“Investment headwinds on all fronts were the key driver of this poor outcome with the industry making its first loss on investments (of over $2b) in at least 20 years”, he added.

Offsets came from many sources: discount rate increases, strong premium rate growth and COVID-19 business interruption reserve releases. But these were still not enough to offset the investment impact, and strong claims inflation in a number of classes.

Finity’s Managing Director and co-author Scott Collings said, "FY23 is forecast to rebound to an ROE of just over 7% – better, but still below target. The key driver of the improvement is the reversal of investment performance from the $2b loss in FY22 to a $3b profit in FY23. This obviously assumes investment markets behave themselves which is never a certainty.”

In addition to better investment returns, reported profitability will be assisted by strong rate increases and further releases from COVID-19 business interruption reserves. However, there remain a number of headwinds that we forecast will keep ROEs in the single digits. These include strong claims inflation particularly in property classes, unwinding of COVID-19 frequency upsides in motor classes, a harder reinsurance market and above average natural perils claims in light of a third La Niña.

Putting it all together, and assuming “well-behaved” investment markets, Finity's forecasts for FY23 are for a 1 point rebound in profitability to an ITR margin of 4.2%, and a 4.8 point rebound in ROE to 7.5%.

To view a summary of the report - OptimaLite and other key highlights please click the download button.