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General insurance statistics show impact of lower interest rates

Thursday 6 August 2009

 

09.22

The Australian Prudential Regulation Authority (APRA) today released its Half Yearly General Insurance Bulletin which is compiled from audited annual returns from APRA-regulated general insurance companies for their financial years ending in the period 1 January 2008 to 31 December 2008.

Gross incurred claims were $25.8 billion, an increase of $3.4 billion on the previous year. Insurers reported gross premium revenue of $31.6 billion, an increase of $1.4 billion on the previous year.

Of most note is the reduction in both the underwriting result and net profit after tax for the industry.

The drop in the industry's underwriting result is due to higher claim costs for the industry in 2008. The reduction in interest rates in 2008 has resulted in an increase in insurance liability provisions and this has been reflected in higher claim costs, particularly when combined with a series of severe weather events in the 2007 and 2008 calendar years.

Typically, such increases to insurance liability provisions would be offset by similar increases in the market value of the industry's fixed interest investments.This would limit the impact on the industry's net profits due to increased investment income. However, widened credit spreads on these investments during 2008 affected the degree of this matching. As such, the reduction in interest rates during 2008 has also impacted the net profits of the industry for 2008.

The industry reported a net profit after tax of $2.1 billion, down 61.1 per cent on the previous 12 months. Industry total assets increased by 0.7 per cent to $92.7 billion and liabilities increased by 1.2 per cent to $66.8 billion. This reduced the industry's capital coverage to 1.85 times the minimum capital requirement from 1.91 at 30 June 2008 and 2.04 at 31 December 2007.

APRA Executive Member John Trowbridge said this decline in the industry’s average capital coverage was not material in the context of the recent difficult financial environment.

‘While lower than the previous year, the industry’s average capital coverage is still well above the minimum coverage required by APRA for individual insurers’.

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