The division’s overall GWP performance continued to be characterised by high retention levels, coupled with good conversion of limited
new business opportunities. Notable enhancements to Personal Insurance’s overall customer offering during the financial year were
the release of new funeral and income protection products, both underwritten by a third party. The financial year results also benefited
from the new travel insurance product and improved loyalty scheme, both of which were launched late in the previous financial year.
II. Insurance profit
Personal Insurance reported an insurance profit of $788 million for the financial year ended 30 June 2015, compared to $1,016
million in the previous year. This equates to a lower reported insurance margin of 15.9% (2014-21.4%).
The main influence on the lower reported margin was the significantly higher level of net natural peril claim costs, which resulted in a
3.8% adverse margin effect after allowance, compared to the previous financial year. The combination of higher prior period reserve
releases and a lower favourable credit spread effect had a mildly negative impact on the reported margin, compared to the prior year.
At an underlying level, Personal Insurance’s performance remained strong across the year. The lower current year underlying margin
reflects the combination of:
the first-time inclusion of lower margin former Wesfarmers business volumes, including Coles;
the increased reinvestment in the business; and
some deterioration of CTP profitability owing to the increased level of lower severity claims.
III. CTP adverse development cover (ADC)
Effective 1 July 2014, the Group entered into an ADC in respect of its CTP portfolio, providing protection for 30% of any reserve
deterioration above the central estimate for losses incurred prior to 30 June 2013. This complements the CTP quota share
arrangement which commenced on 1 July 2013, and has been concluded with the same counterparty. Both elements have been
driven by improved capital efficiency.
The cumulative impact of the CTP quota share and ADC arrangements has been a reduction of approximately $150 million in the
Group’s regulatory capital requirement, approximately $90 million of which was crystallised by the ADC on 1 July 2014.
B. AUSTRALIA COMMERCIAL INSURANCE
Commercial Insurance recorded GWP growth of over 40%, reflecting the addition of the former Wesfarmers business, where attrition
remained of the order of 10%. Like-for-like (ex-Wesfarmers) GWP growth was modestly negative, owing to slightly lower average rates
and the maintenance of underwriting discipline in an increasingly competitive commercial market. The business maintained a double
digit underlying margin, with the slightly reduced outcome compared to the prior year reflecting inclusion of the lower margin former
Wesfarmers business and tougher market conditions. The reported margin of 3.0% was considerably lower than the prior year, largely
owing to an adverse effect of over 1,100 basis points from the combination of significantly higher net natural peril claim costs and
lower reserve releases.
I. Premiums
Commercial Insurance GWP of $3,192 million represented growth of 40.7% over the prior financial year (2014-$2,268 million). This
reflects the first-time inclusion of the former Wesfarmers business, which has delivered a market-leading position in the Australian
commercial insurance market.
Commercial Insurance encountered cyclically softer market conditions over the course of the financial year, resulting in a modest
contraction in reported GWP on a like-for-like (ex-Wesfarmers) basis. While partly reflecting lower input costs which have been passed
on to customers, there has also been evidence that general business conditions have resulted in lower average premiums,
predominantly on new business.
In all lines of business, Commercial Insurance has maintained a strategy to compete on the strength of its partnerships and the quality
of its service. As such, the business has continued to apply sound underwriting disciplines.
II. Insurance profit
Commercial Insurance reported an insurance profit of $93 million, a substantial decrease compared to the previous financial year
(2014-$371 million). This equates to a reported insurance margin of 3.0% (2014-18.3%).
The lower reported margin reflects the net effect of:
a substantially higher net natural peril claim cost of $426 million, well in excess of allowance;
a $10 million reduction in prior period reserve releases;
a lower, but still favourable, credit spread movement of $14 million (2014-$35 million); and
the first-time inclusion of the lower margin former Wesfarmers business.
Commercial Insurance produced a satisfactory underlying margin of 10.5%, compared to 12.1% in the prior year. This decline is a
function of incorporating the lower margin former Wesfarmers business and the impact of softer commercial market conditions in
Australia.
III. Fee based business
Commercial Insurance generates fee income by acting as an agent under both the NSW and Victorian workers’ compensation schemes
that are underwritten by the respective State governments. Net income from fee based operations was $16 million, compared to $9
million in the previous financial year.
8 IAG ANNUAL REPORT 2015
