1、Asia Pacific Equity ResearchAgendaFebruary 20202019 General Insurance BarometerJ.P. Morgan Insurance Siddharth ParameswaranAC+ 61 2 9003 8629 HYPERLINK mailto:Siddharth.x.parameswaran Siddharth.x.parameswaranJ.P. Morgan Securities Australia LimitedJulian Braganza+ 61 2 9003 6098 HYPERLINK mailto:jul

2、ian.m.braganza julian.m.braganzaJ.P. Morgan Securities Australia LimitedTaylor Fry Consulting Actuaries Kevin Gomes+ 61 2 9249 2918 HYPERLINK mailto:kevin.gomes.au kevin.gomes.au Taylor Fry Consulting ActuariesScott Duncan+ 61 2 9249 2905 HYPERLINK mailto:scott.duncan.au scott.duncan.au Taylor Fry C

3、onsulting ActuariesSee the end pages of this presentation for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have

4、a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.OverviewThis is the eight edition of The Barometer, a joint effort between J.P. Morgan and Taylor Fry.This Powerpoint reports the

5、 results from a survey of industry participants and APRA statistical data that covers:Detailed product information for the current period and industry expectations for the next year, covering issues such as premium rate trends, capacity changes, claims trends, loss and expense ratios,Perceptions of

6、product profitability,Distribution trends,Practitioner views on key issues affecting the industry and particular classes,Brokers perceptions of underwriters.We have also written a report that includes an article summarizing key numerical findings from the report as well as several articles exploring

7、 key issues raised within the survey or explored by ourselves as key challenges the industry faces. This report can be found here and is supposed to be read in conjunction with this powerpoint presentation.The publication of The Barometer continues from 19 editions of the J.P. Morgan Deloitte Genera

8、l Insurance Survey, the last of which was published in 2012, for the year to 2011, with the first edition of the Barometer published the following year.The 2019 J.P. Morgan Taylor Fry General Insurance Barometer provides a detailed overview of the current state of the Australian general insurance in

9、dustry and the industrys expectations. The report conveys analyses on the key elements of the industry from the perspective of direct underwriters and brokers, including: Key Takeaways Big Picture Industry Issues 2019 Industry Summary Underwriters & BrokersKEY TAKEAWAYSKey takeaways from this years

10、Barometer:Climate Change / Natural PerilsThe insurance industry and IPCC models have been flagging for some time material increases are expected in natural perils costs from climate change, and it was flagged by the industry as its biggest concern (along with regulation). This is expected to increas

11、e the insurance related costs of cyclone, flood, bushfire and hail. The Gold Coast and Northern NSW face the biggest increase in expected costs, followed by Melbourne and Western Sydney but the overall national natural perils costs is also expected to rise 52% for a 3 degree warming in average tempe

12、ratures. Natural peril losses this summer already likely exceed $2.5B, severely impacting property classes of insurance.Insurer Profits / Claims Environment2019 profitability deteriorated and 2020 expected to deteriorate further: Domestic classes combined ratios increased from 78% in 2018 to 83% in

13、2019 and for commercial classes increased from 96% in 2018 to 102% in 2019. Even pre the bushfires, the industry was forecasting a modest worsening in domestic combined ratios (84%) and only a modest improvement in commercial (100%). Fire / ISR profitability and Workers Compensation has been particu

14、larly troubling.Economic conditions for insurers not helping, with lower yields reducing investment income and only a modest likely rebound in GDP growth impacting on revenue growth opportunitiesReserve releases are drying up in Australia and globally, which will put further upward pressure on claim

15、 loss ratios and downward pressure on insurers reported profits. Public liability reserves and claim trends are an area where we have some concerns.Pricing to respond: Survey respondents expected strong premium rate increases in commercial in 2020 (+10%), following similar increases in 2019. Althoug

16、h survey responses were only for modest increases in prices in domestic classes, the recent bushfires could increase pressuresCoverage issues: Issues in the construction industry have led to underwriters either withdrawing from the market, or increasing premiums and introducing exclusionsClass actio

17、ns continue to impact liability and pose a risk of fuelling superimposed inflationRegulationIncreased regulatory demands are having cost and time implications for insurers, placing pressure on innovation and growthGreater volume of insurance complaints being raised and resolved through new ombudsman

18、 AFCANeed to have a more client-centric approach, particularly through the increased responsibilities that come with new design and distribution obligationsBIG PICTURE INDUSTRY ISSUESAUS unemployment stable after picking up in 2019GDP has decelerated in 2019, following a recovery in 2018Inflation an

19、d interest rates real yields have gone negative again.AUD/USD is expected to edge (JPM Economist forecast).Source for all charts : Bloomberg (28/1/2020)Fiscal drag modest drag going forward Mining capex is no longer falling, removing a large drag. Private sector capex also to rise.Source: ABS, J.P.

20、MorganSource: ABS, J.P. MorganSource: Treasury and J.P. Morgan estimatesCrude Oil (USD/bbl.) has fallen 29% in the last two months after recovering from 2016 lows.Iron ore (62%) in USD/ DryCoalSource : Bloomberg(28/1/2020).2019 Catastrophe losses across the globe Australia after bush fires will be h

21、eavy. For the rest of the world, 2019 was a good year2019CY (A$m) Australia another bad yearUS cat cost (US$bn) 2017 the highest CAT year since 1990 5,9155,54811,2779,9905,0004,0003,0002,0001,0001111111111111111122222222017 Reported Cost (Mil) - excl Earthquake967969971973975977979981983985987989991

22、9939959979990010030050070090110132015201720190Source: J.P. Morgan estimates, ICA. Note: We have brought all numbers forward to 2017 except 2018/19 based on total claim cost inflation rates used by ICA and our estimate of long run. 2017 includes latest information as at 06/1/2020 on ICA. There may be

23、 escalation on the costs of the bushfires.Source: Insurance Institute Information,Figures up to 2015 are in 2015 dollars. Numbers there after are as at reported in that year.Global cat cost (US$m): CY2019 catastrophe costs constrained.Lloyds CAT claims (m) in 2017 highest after 2011 levels. Low inci

24、dence of major claims in H1 2019Source: J.P. Morgan estimates, Lloyds.Source: Swiss Re, Munich Re. Chart in USD ($mn). 2019 number is an estimate by Sigma as of 19 December 2019A dry climate was seen in 2019, and the forecast is for fewer tropical cyclones in 2020Lower-than-average number of tropica

25、l cyclones are expected for the 201920 Australian tropical cyclone season (NovemberApril 2020)Source: Bureau of Meteorology (13/12/2019)Warmer-than-average temperatures across Australia (January March 2020)Source: Bureau of MeteorologyShifting away from El NioCatastrophe losses, excluding earthquake

26、 El Nio, Neutral & La Nia YearsAverage catastrophe losses (excl. earthquake) for El Nio, Neutral & La Nia years from 1967 201916.0Trailing 12 monthSOI8.00.0-8.0-16.010,0009,0008,0007,0006,0005,0004,0003,0002,0001,000201320180196819731978198319881993199820032008Average Annual SOI (LHS)Catastrophe los

27、ses (excl. Earthquake) (RHS)Source: BOM, ICA, J.P. Morgan estimates. Note: Numbers pre 2013 are normalised figures as at 2011. 2014 and onwards numbers are current figures based on latest ICA information.Source: ICA, BOM, J.P. Morgan estimates. Note: Estimates for catastrophe costs exclude earthquak

28、e claims and are inflated to 2017 dollars.Bushfire losses - How the 2019/2020 losses compare with other bushfires. sorted by original loss value; normalisation to 2017 values is based on inflation and notional exposure adjustment as calculated by the ICAClimate change, the bushfires and the Insuranc

29、e Industry Costs of extreme weather events to rise significantly; Cyclones to pick up in Northern NSW and Southern QLDSplit of perils costs to insurers by cause since 1967 adjusted for inflation and exposure to 2017Source: ICA data.Source: ICA, J.P. MorganDecadal trends in probability distribution f

30、unction frequency of most intense cyclones in Coral and Tasman SeaGlobal climate variability & changeSource: IAGSource: BOMClimate change: Bushfires to be more intense and frequent, extreme cyclones and thunderstorms to pick up; three-degree warming to result in 52% average increase in costsHail IAG

31、s predictions on hail trends by region from 3 degree warmingVarying tropical cyclone regional trends 3 degrees scenarioOverall IAG view on change in annual average loss from climate change for different temperature warming scenarios on average perils cost by regionSource: IAGSource: IAGSource: IAGSo

32、urce: IAGClimate change and the bushfires IPCC findingsIPCC 2012 report on climate change:IPCC 2012 report predicted more extreme heat, cyclones, drought, and bushfires in Australia. In 2012, the IPCC released the Special Report for Managing the Risks of Extreme Events and Disasters to Advance Clima

33、te Change Adaptation (SREX report) which brings together the latest research on climate change and extreme events. Key findings from the SREX report included It is virtually certain that the world will experience a decrease in cold extremes and an increase in the frequency and magnitude of warm extr

34、emes over the 21st century.It is very likely that mean sea level rise will contribute to upward trends in extreme sea levels in the future.It is likely that the frequency of heavy precipitation will increase over many areas of the globe.Key findings from the SREX report for Australia included:Hot we

35、ather days: Australia had already observed an increase in warm days and a decrease in cold days. This trend is projected to continue with large scale increases in the number of days over 35 degrees Celsius and 40 degrees Celsius and an increase in heatwave duration.Flood Risk: Extreme rainfall event

36、s were projected to increase.Cyclones were likely to become more intense and shift southwards; however the frequency of tropical cyclones could remain unchanged or even decrease.Drought: Since the 1950s there had been an observed increase in drought over the south west and south east of Australia wi

37、th projections indicating this would continue.Bushfires: In south-east Australia, the frequency of very high and extreme fire danger days is expected to rise by 15-70 per cent by 2050. The fire season is expected to lengthen.The conclude the most effective adaptation and disaster risk reduction acti

38、ons for extreme events are those that offer development benefits in the relatively near term, as well as reductions in vulnerability over the longer termSpreads declined following two rate cutsYields are at historical lowsNote: Spreads are relative to the 3 year CGS yieldEquity markets have rallied

39、in 2019 ASX accumulation indexCurve has flattened for the outer yearsSource: Bloomberg 28/1/2020Source: Bloomberg 28/1/2020Real GDP growth (YoY) across globe Unemployment stuck above peersInflation vs Interest Rates US Source: Bloomberg (28/1/2020)US P/C Reserve development surpluses diminishingUS t

40、ort costs as a % of GDP at historic lowsSource: Insurance Information InstituteSource: J.P. Morgan estimates, Schedule P data. Excludes Reinsurance and Crop / LPI /2-year lines. J.P. Morgan analysis on reserve surplus position of the US market at Dec 2018Alternative capital share of global reinsuran

41、ce capital Reinsurance capital deploymentSource: AON Securities Inc.Net premium growth, annual changeSource: CIABSource: Insurance Information InstituteRates picking up in Europe as wellSource: Hiscox group investors presentationSource: Insurance Information Institute presentationSource: J.P. Morgan

42、 AssumptionsSource: JPM, APRA. In 2010 and prior, APRA used a regulatory set of accounts, whilst post 2010 they published an accounting metric of profits and balance sheet.Notional RoE Personal lines by financial years Notional RoE Personal lines by financial yearsSource: J.P. Morgan Study using dat

43、a from J.P. Morgan Deloitte Surveys and APRA Data, + Bloomberg and RBA for notional returns on investment assets. Notional RoEs based on smoothedinvestment return and hypothetical capital based on current APRA standards - if capital levels were set for a large diversified insurer. Notional RoE chart

44、s are on Financial year to June.Growth vs margins: Large players focusing on improving trade-offSUNs tough trends with volumes.Source: J.P. MorganIAGs slightly less tough trends with volumesSource: J.P. MorganGrowth vs margins: Large players focusing on improving trade-off; It may be worthwhile sacr

45、ificing margin to get growth without affecting ultimate valuationValuation - Scenario of an insurer earning 12% margins, with 2% average price inflation and -1% unit inflationSource: J.P. MorganHow value of above insurer changes for different unit growth and insurance margin assumptionsSource: J.P.

46、MorganReserve releases drying up - AustraliaImpact of reserve releases on reported loss ratiosWorkers CompensationCTP120%100%80%60%40%20%2012A%2013A2014A2015A2016A2017A2018A2019A0-20-40%Reserve ReleaseLoss Ratio120%100%80%60%40%20%2012A%2013A2014A2015A2016A2017A2018A2019A%0-20-40-60%Reserve ReleaseL

47、oss RatioProfessional IndemnityPublic and Product Liability80%70%60%50%40%30%20%10%0%-10%2012A2013A2014A2015A2016A2017A2018A2019A-20%-30%100%80%60%40%2012A2013A2014A2015A2016A2017A2018A2019A20%0%-20%-40%-60%Reserve ReleaseLoss RatioReserve ReleaseLoss RatioReserve releases drying up; concerns around

48、 the world UK and USPrimary causes of P&C insurance insolvenciesSource: Property/Casualty Insurance Company Insolvencies September 2010/AM BestUK - concern from PRA on strength of case reserving for 2018 accident yearReserve release and prior year movement in combined ratio Lloyds of LondonSource: J

49、.P. Morgan and Lloyds of London Financial reportsTotal industry wide prior year net reserve release (all accident years) Australia, by class of businessUK Concern from PRA on signs of inflationPrior year reserve releases over 2019 to 3Q2019 US insurersSource: PRA Note that years 2004 and 2010 are di

50、storted due to large events occurring in year 2 but not in year 1 for firms reporting on an underwriting year basis. Hurricane Katrina occurred in 2005 but also impacted underwriting year 2004 for some firms. The 2011 natural catastrophes( including Australia Floods, New Zealand Earthquakes and Thai

51、 Floods ) occurred in 2011 but also impact underwriting year 2010 for some firmsSource: PRASource: APRA (positive number represents a release on prior year reserves)Source: US insurer reserve movements to 3Q2019 S&P Global Market intelligenceJ.P. Morgan reserve analysis - For CTP, public and product

52、s liability, professional indemnity and employers liabilityReserve releases drying up; J.P. Morgan analysis suggests most concerns are about public and product liabilitySource: J.P. Morgan calculations, APRANet paid as % of incurred - Product and public liabilitySource: J.P. Morgan2019 INDUSTRY SUMM

53、ARYUnderwriters and BrokersTop industry issuesClimate Change / Natural PerilsRegulationCustomerExpectationsTechnologyClaims Environment / Emerging RisksHighest Priority IssuesSource: 2019 J. P. Morgan Taylor Fry General Insurance Barometer Climate Change / Natural PerilsSignificant pressure is being

54、 placed on the industry when it comes to dealing with the impacts of climate change and rising natural peril costs as illustrated by the recent bushfiresPoliticians are reluctant to address the politically sensitive issue of climate change. The three-year election cycle doesnt support action in the

55、short term with long-term rewardsInsurers are in a unique position when it comes to understanding and communicating the impact of climate changeRegional and state planning needs to consider the impact of climate change on the level and nature of riskRegulationIncreased regulatory demands are having

56、cost and time implications for insurers, placing pressure on innovation and growthThe main issues raised were:AFCA now applies to a wider jurisdiction and will consider fairness, not only the letter of the lawThere is now a more client-centric approach, particularly through the increased responsibil

57、ities that come with the new design and distribution obligationsTreasurys implementation timetable is short, placing pressure on normal business activitiesSource: 2019 J. P. Morgan Taylor Fry General Insurance Barometer Customer ExpectationsThe balance of power is shifting to the consumer, but there

58、 may be some moderation in the medium termCustomers are expecting more from their insurer. The Royal Commission has led to a trust deficit that needs to be overcomeSocial media gives greater power to the individual and means that poor customer experiences are able to be shared with manyTechnology/Cy

59、berThere is increasing reliance on digital assets, resulting in greater susceptibility to fraud and terrorismThe industry needs to improve its sophistication when it comes to considering the impact on liability coverThere is a significant cost in doing business digitally and moving away from legacy

60、systemsCyber cover provides an opportunity for product development and growthClaims Environment / Emerging RisksIssues in the construction industry have led to underwriters either withdrawing from the market, or increasing premiums and introducing exclusionsClass actions continue to impact liability