8/2/2019 Insurance Market

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The general insurance market in Australia is relatively mature and sophisticated in terms of product

offering and risk assessment and management. Its underwriters and actuaries are recognized as world

class, and the industry is subject to strong risk-based supervision and regulation by the Australian

Prudential Regulation Authority (APRA).

The global financial crisis and euro area public debt crisis impacted the insurance market negatively in

the previous years, but fortunately, the market can see recovering signs after GFC, both in US andAustralia. Also, the growth in emerging market gives insurance market more opportunities to explore

and make a profit out of it.

Since 2004, the insurance industry has entered a soft market where insurance premiums are typically

low as a result of intense competition.

A number of recent factors, including a period of large weather event losses and falling investment

returns have brought the soft cycle to an end. The high costs associated with weather-related claims

over the last 2 years, including ……………………..; these significant events have resulted in substantial

losses to insurers and reinsurers. And as a result insurers are facing higher reinsurance costs.

We can see form the chart that the gross premium written shows an increasing trend from 2008 to

2011. However, it is interesting to notice that although most physical disasters happened between

2008 and 2010, the claim amount is actually biggest in 2011. This is a result of ‘tail’ business. The claim

amounts that should be repaid to the policyholders during 2008 to 2010 periods are lagged to 2011.

The claim amounts are not paid out in a lump sum, rather, it is paid out each year, like an annuity. So

that’s why all the claim amounts from natural disasters aggregate in 2011, resulting in highest claims

incurred.

DuPont System is developed by DuPont Corporation in order to measure performance. It works by

decomposing ROE into 3 components, profit margin, asset turnover and equity multiplier.

ROE, by definition, is net income over total equity. Multiply the right hand side by assets/assets and

sales/sales, we get the 3 components just mentioned – equity multiplier, profit margin and asset

turnover.

The other three will talk about each component in detail later.

ROE measures a firm’s efficiency at generating profits from every unit of shareholder equity, which

shows how well a company uses investment funds to generate earnings growth.

So who actually use DuPont analysis?

I would say all stakeholders. In particular, the management teams rely on DuPont system as a strategic

profit model to clearly and systematically explain the financial performance of the firm.

This is the relationship chart of each component in DuPont equation.

The product of profit margin and asset turnover gives ROA; whilst the product of asset turnover and

equity multiplier gives ROE.

Next, let’s look at how QBE performs as opposed to its competitors.

QBE has substantially outperformed all the other competitors in terms of written premiums. However,

due to the high claims from natural disasters, QBE’s profits are actually lower among its peers.

The high losses in claims are shown in its share prices in the past 2 years, where we can see an obvious

decline. Whereas IAG and suncorp only had a slight decrease in share prices compared with QBE.

But in general, QBE’s performance is decently good.

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