Any optimism that storm damage costs would normalise seems to have been disputed by the storms in north Queensland.

Occurring throughout January 2009, they have caused severe floods in a substantial part of north-eastern Australia. Victoria has now experienced the worst bushfires in Australia's history. Far more concerning than the massive property damage, stock losses and financial hardship caused by the fires has been the unprecedented loss of life.

Never since colonisation has Australia experienced such a loss of life from any natural disaster as that experienced in Victoria on February 7, 2009, now known as Black Saturday.

While the financial cost will be very significant, the cost in terms of human suffering is incalculable, The suffering of those affected has touched the nation.

As a lawyer who has worked in this industry for his entire career, I have been overwhelmed by the enormity of the losses sustained by so many and the level of human suffering experienced by all who have lived through what can best be described as a holocaust.

The events of Black Saturday were even worse, in terms of loss of life suffered, than those of Ash Wednesday (February 16, 1983). On that tragic day 71 people lost their lives. This year the loss of life may be more than three times that figure. At such times, the financial cost of these horrific events should be considered incidental.

Increased claims likely to cause pressure profits

The JP Morgan Deloitte 2008 General Insurance Survey has highlighted that profitability in the industry remained unchanged from 2007 with an overall combined ratio of 94%.

However there was a noted difference between classes, with participants expecting sharp improvements in combined ratios in personal lines, coupled with significant deterioration in long-tail commercial lines.

Siddharth Parameswaran, JP Morgan's senior insurance analyst, predicted that while combined ratios may hold up, there would be added pressure on profits at least in the short term, from the effects of the financial crisis on claims and falling yields.

Deloitte partner Stuart Alexander pointed to the weaker economic outlook saying it was expected to have an adverse impact on claims. He expected the number of fraudulent claims and litigation to increase during weak economic conditions, which could then impact on professional indemnity, directors and officers, workers' compensation and commercial property insurance.

Lower claim cost

Mr Parameswaran noted that some classes, such as motor and householders, could actually face lower claims costs because, in adverse economic conditions, there was often reduced vehicle usage and lower building costs.

In 2008, claims frequency increased in several classes, primarily due to one-off events, such as storms, which impacted on personal lines (motor and home) in particular. Claims frequency in long-tail liability classes also increased a little. Survey respondents indicated that weakening economic and financial market conditions may have resulted in increased claims.

The survey said industry participants expected rates to rise and storm costs to normalise.

Mr Parameswaran predicted there will be more pressure on profits this year before an uptick in 2010. He also said general insurers were likely to face less financial pressure stemming from the financial crisis than life insurers and banks.

"However, we expect there will be some pain for insurers and reinsurers that have exposure to commercial, long-tail lines in particular. How insurers deal with these stresses depends ultimately on how quickly they move to increase rates" he said at the survey launch.

Barrier to entrants

Classes where rates were likely to rise fastest were those where capacity was constrained and there was significant barriers to new entrants. However, Mr Parameswaran expected it would take a few months before adequate rate increases flowed through, implying short-term pain to insurance margins.

The survey revealed that in 2008 premium rates in commercial classes continued to fall with long-tail rates down by an average of 7% on top of the 10% reduction in 2007. Short-tail rates, however, bottomed out in 2008, picking up 1% compared to a 7% fall in 2007.

Deteriorating profitability

JP Morgan and Deloitte expected commercial rates to turn in 2009, given the deterioration in profitability in some lines, coupled with expectations for higher claims costs and falling yields because of tougher economic conditions. Survey respondents also expected to see commercial rates bottom in 2009 and increase in 2010.

Premium rates in personal lines increased in 2008 and were expected to continue to rise. "Rates in personal lines increased 3% on average in 2008, compared to no movement in 2007. This was due to accumulated storm losses in 2007 and 2008 encouraging increases," Mr Parameswaran said.

Chris Rodd

AILA President