Australia’s commercial segment seeing increased capacity and stabilisation in rates: Gallagher

Stabilising rates, competitive market, and cyber and regulatory changes are creating new dynamics in Australia's insurance industry.

(Re)in Summary

• Australia’s insurance industry seeing increased capacity and stabilisation in premium rates, says Gallagher in new report.
• Broker identifies challenges, including regulatory tightening, cyber risk management, and geopolitical tensions.
• Rate reductions likely, with underinsurance and exploration of alternative risk transfer consequences of business’s cost management.
• Cyber insurance sees capacity expansion, lower rates, and broader coverage, with insurers leveraging data and technology to address evolving cyber threats.

Australia’s insurance industry is going through a period of increased capacity and stabilisation in premium rates, Gallagher notes in its H1 2024 Business Insurance Market Conditions and Risk Dynamics report. 

This shift comes after years of rising rates and is attributed to a more competitive environment, as Australian insurers and counterparts from London, Singapore, and other global markets actively look to capitalise on the current market conditions. 

“In the last 6 to 12 months, we have seen Australian insurers re-entering the insurance market with gusto, seeking a share of

higher premiums as the market has ‘hardened’ and is at the top of the cycle from a pricing stand point,” Gallagher said.

However, the market is facing a series of market and risk dynamics. Among them, a tightening regulatory environment, with an emphasis on Environmental, Social, and Governance (ESG) compliance; cyber risk management practices; and the fast-paced development of AI. 

Geopolitical tensions are also affecting supply chains and trade, while the claims landscape has become more challenging due to a rise in complaints and regulatory actions, Gallagher said.

Challenges also remain for hard-to-place risks, including those related to EPS, Mining and Energy, and recycling.

6 to 12-month outlook

Over the next 6-12 months, the global broker expects several key trends to impact the insurance market. 

The first is the potential for premium rate reductions, driven by heightened competition within the industry. This view is echoed by Gallagher’s broking competitor Marsh, which in April reported that commercial composite rates had fallen by 2% in Q1 2024 (see story below).

Gallagher also expects to see an increase in demand for natural catastrophe insurance over the next 6-12 months as companies prepare for the possibility of weather-related property damage claims, with parametric insurance solutions likely to gain more traction for managing weather-related risks.

The shortage of skilled labour in the construction and building repair sectors is projected to continue, which could affect business interruption claims. The issue of underinsurance is also anticipated to become more visible, partly due to a growing tendency towards non-disclosure by businesses aiming to reduce their insurance expenses. This could lead to significant financial impacts when claims arise.

Inflation is also expected to play a critical role in shaping future claims, potentially leading to larger settlements. 

Gallagher is also anticipating an increase in alternative risk transfer strategies, such as captives, parametric solutions, and self-retention programs, as businesses explore alternatives or add-ons to traditional insurance as part of their cost management strategies.

Cyber developments

The report also highlighted changes in cyber, including an expansion in capacity, with a continuation of the trend towards lower premiums and deductibles, alongside broader coverage options for businesses seeking to protect against cyber threats. 

The cyber threat landscape in the country remains dynamic, with phishing, human error, and ransomware among the top risks. The interconnectivity of businesses has also highlighted third-party breach risks, underscoring the importance of securing not just individual companies but their entire supply chains.

Insurers are responding to these challenges. 

“By leveraging their datasets and analytical capabilities, insurers can provide businesses with critical insights into emerging cyber threats before, during, and after the insurance process,” Gallagher said.

Developments in this area include advanced analysis of an insured’s cyber security position, historical data on cyber incidents, and industry-specific risk profiles. Machine learning algorithms are also being employed to analyse vast amounts of data and identify potential security breaches, while AI-driven solutions can automate threat detection, response, and protective analysis.

These developments are supported by improved regulatory standards and a government-led push for higher cyber security measures, aligned with the proposed Australian Cyber Security Strategy to 2030.

Recent amendments have focused on tightening privacy laws, including stringent data retention and destruction protocols, to reduce privacy risks and limit threats to personal information. These regulatory enhancements have bolstered insurer confidence, enabling a more favourable cyber insurance landscape. 

“The tightening of data obligations aims to reduce the risks to personal information and limit the resultant privacy threats,” Gallagher said.

Finally, the Australian Institute of Company Directors (AICD) has underscored the responsibility of directors and officers in managing cyber risk, aligning with the Australian Securities and Investments Commission’s (ASIC) more proactive enforcement stance. 

This has placed additional emphasis on the need for companies to demonstrate a commitment to cyber security and resilience, which should help increase the country’s demand for cyber insurance.

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