Inflation demands continued underwriting discipline, says QBE

Premium rate increases are expected to continue, albeit at moderating levels, and market conditions remain conducive to delivering insurers organic growth, according to Andrew Horton, CEO of Australia-based international insurance group QBE, as he announced first half 2022 results. Inflation is one of the key driving factors behind QBE’s belief that the tough market will continue for buyers as claims costs rise. The group reported a decent set of numbers despite taking a big hit on the investment side. Gross premiums written rose from $1.2bn in the first half of 2021 to $11.6bn so far this year. Net earned premiums rose from $6.6bn to $7.2bn. The combined ratio improved from 93.3% to 92.9% and the underwriting result was $512m, up from $437m in the first half of last year. QBE’s net investment result, however, collapsed from a profit of $58 in H1 2021 to a loss of $840m. Despite this, the group still made a net profit so far this year of $151m against $441m for the first half of last year. The strong underwriting result was boosted by continued group-wide premium rate increases of 8.1% overall. North America reported rate increases of 10.4% so far this year against 10.2% in H1 2021. The international business gained rate increases of 7% compared with 10.5%. Australia Pacific continued to see rates rise, up 9.1% so far this year against 7.7% in H1 2021. The group noted that rate increases have been moderating in lines where rate adequacy has improved. “While new business has been an important driver of ex-rate growth, higher retention and underlying exposure growth have also been key contributors," said QBE. Horton said that “substantial progress” has been made in North America to de-risk the company’s property catastrophe exposure, and restructure programmes business performance. Inder Singh, QBE group chief financial officer, said that the improved result was underpinned by continued positive operating leverage and lower catastrophe costs. Singh added that increased inflation assumptions are impacting both current and prior year claims, with prior year development also impacted by the recent UK Covid-19 business interruption ruling. “Lower natural catastrophe costs helped to absorb the impact of the Russia/Ukraine conflict where current best estimate of the net impact remains $75m,” added Singh. Given the ongoing volatility in financial markets, international insurers will have to maintain firm underwriting discipline despite rising capacity in some specialty lines. Failing to adequately take inflation into account could result in the need to bolster reserves over coming quarters. Pricing adequacy will be key. Singh pointed out that consumer price inflation (CPI) and wage inflation are not perfectly correlated to claims inflation across the majority of QBE’s portfolio. She explained that higher CPI inflation most immediately impacts short tail property classes, where rate is “generally responding”. “Key QBE casualty lines are most sensitive to social inflation. In general, claims settlements currently are not indicative of any shift in trend. We have responded to these trends by embedding higher inflation assumptions across the portfolio to reflect a mix of experience, and uncertainty,” explained the CFO. QBE has set up inflation working groups. Singh said that the insurer has improved internal feedback loops to ensure pricing and rate adequacy respond faster to inflation signals. It is also carrying out an ongoing review of scenario analysis and risk appetites to inform decisions on reducing reserve volatility, added Singh. QBE has raised inflation assumptions across a number of classes. But, Singh said that premium rate increases generally remain at, or above, observed claims inflation.

Inflation demands continued underwriting discipline, says QBE

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