Risky business

Insurance brokers are looking at a slow period ahead, with softer market conditions unlikely to firm in the immedite future. By JASON BAKER at IBISWorld.

By Jason Baker

The good times insurance brokers have been enjoying are coming to an end. Unless there is a catastrophe with big claims following, growth is likely to slow over the next five years.

Until the planes hit the Twin Towers in New York and The Pentagon in Washington on 11 September 2001, insurance brokers were struggling through a long soft market. Strong competition and a soft market were keeping premiums relatively low.

After 9/11, things changed. Premiums and brokerage fees went up and insurance terms and conditions got tougher – all good news for the $1.2 billion insurance broking industry.

IBISWorld estimates that insurance broker revenue grew at an average annual rate over the past five year of 5.3%. In 2002-03, service providers to direct insurance and reinsurance companies got busy.

In the aftermath of the terrorist attacks on 11 September 2001, reinsurance rates surged, and became the main driver for growth in direct market products.

Premium rates continued to rise into 2003-04, albeit at a significantly lower rate than in 2002-03, and economic and financial market conditions remained

favourable in 2004-05, but inflationary pressure started to rise.

Insurance markets softened significantly in 2004-05 and 2006-07, competition increased markedly through an increasing number of classes of business. But the favourable economic environment resulted in rising insurance sales and, generally, higher activity levels for brokers and risk consultants. The increased competition on price was offset by increased

demand, and revenue continued to grow.

But growth is likely to slow for brokers over the next five years. The relatively hard market experienced in the past is expected to ease.

IBISWorld forecasts the industry will grow at an average annual rate of 2.5% over the five years to 2012-13. Growth will come from further outsourcing of insurance related services, but will be partially offset by soft market conditions, particularly in the next two years.

Growth of the Australian economy has for some time been assisted by favourable international conditions. Current expectations of official and private-sector observers are that the world economy will continue to grow at an above-average pace in 2007-08.

Key sensitivities

The key sensitivities affecting the performance of the insurance brokerage industry include:

Downstream demand – general insurance

The downstream demand for general insurance products will affect the demand for this industry’s products and services.
Dwelling approvals

Household and mortgage insurance is a key driver of this industry which is driven by an increase in dwelling approvals.
Legislative compliance requirements – insurance brokerage

Government policies relating to this industry will affect the demand for insurance products, hence the demand for this industry’s products and services.
Pervasive technology – total number of motor vehicles

Motor vehicle insurance is a key driver of this industry. Increased new and used motor vehicle sales results in increased demand for compulsory third party and other forms of motor vehicle insurance. Increased demand for motor vehicle insurance pushes up the demand for this industry’s services.
Real GDP growth.

The level of economic growth will affect the demand for this industry’s products and services.

IBISWorld supplies business information databases, including industry reports, company reports and business indicator reports. www.ibisworld.com.au