Rates rises to go on amid 'incredible reinsurance crescendo', says Steadfast CEO
The hard insurance market will continue as insurers battle “horrific” reinsurance costs, Steadfast MD and CEO Robert Kelly says.
Reinsurance conditions have reached an “incredible crescendo in this particular time,” Mr Kelly told analysts in a briefing attended by insuranceNEWS.com.au.
A decade ago, Steadfast-owned strata specialist CHU was paying 12% of premium for reinsurance. Today, that rate is up at 32%.
“We have to drive rate,” Mr Kelly said. “You’re running a 35% claims ratio and you’ve got to put in 32% for reinsurance – you have to drive rate to get back to a margin you want to achieve.
“A good margin on property should be a combined (ratio) in the high 80s to low 90s. That should be the margin – not in the high 90s to just over 101. Without a doubt, that’s what it is going to look like over the next 2-3 years.”
Mr Kelly noted rebuilding costs have rocketed since covid, with examples of a $940,000 rebuild now costing $1.4 million. The next two years are likely to see a “generational change from being underinsured to being appropriately insured,” he says.
“I think you’ve got a couple of years’ run before the correct sum insured comes into play, and during those years the insurers have got to drive rates. Their cost of reinsurance is horrific at this stage,” he said.
Reinsurers are requiring higher retention and significant rate increases, and the escalation of cost to Australian insurers – and the ability to retain more risk – is impacted by claims inflation.
“Absolutely significant is an understatement,” Mr Kelly said. “The rate increases and the retentions are amazingly high. All of that adds up to – they have to keep driving price.
“When prices increase for the cost of insurance, we have to unfortunately drive price through the MGAs, and that means the consumer pays more. It’s a fairly simple system.”
CFO Stephen Humphrys said Steadfast had originally forecast “5-to-7.5% type rate increases” but that was now coming through more 7.5-to-10%.
“We’re going to assume that absolutely carries on through the rest of the second half 2023,” Mr Humphrys said.
As insurance companies have to raise prices, and have to be more restrictive, Mr Kelly says underwriting agencies have helpful agility, and the number of agencies and premiums written by that sector has dramatically gained.
“People keep saying to us ‘When is this going to slow down, when is it not going to be good?
“These agencies continue to grow. What was a sidebar 15 years ago, is now a mainstream way for general insurance brokers to place a whole range of businesses that will never go back to the insurers,” Mr Kelly said.
There are opportunities for agencies as insurers reposition product lines, he says, and as brokers approach them for capacity “after being sort of frustrated or turned back or slowed down by an insurance company”.
“They have the agility to be able to say yes or no to something without having to go through some of the ramifications that a general insurance company has in getting authorities pushed through.
“What happens in hard markets is the agencies become agile, the insurers become restrictive. The brokers know that they can go to specific underwriting agencies and get placements – or not placement and don’t get mucked around – and then they come back,” Mr Kelly said.
Steadfast’s July-December revenue was up 27% to $662.8 million. Steadfast’s brokers delivered 15% GWP growth to $5.6 billion. Mr Kelly says the business will do even better in the current half, noting $227 million of available capacity to fund future acquisitions.
“You’re only as good as your performance. It’s a bit like a football game, you can win this week but next week you’ve got to win as well,” Mr Kelly said. “Our track record is proven, it’s successful. We complete acquisitions accretive to our earnings.”
