Ann: FY25 natural perils and financial guidance update, page-3

Insurance Australia Group (IAG): Examining GWP Growth and Customer Erosion

Introduction
Insurance Australia Group (IAG) recently reported that for FY25, its Gross Written Premium (GWP) growth is expected to be between 4% and 4.5%. On the surface, this might seem like a modest but steady growth projection for the company. However, when we factor in the rising premium increases of well over 10% across many of its policies, the picture starts to raise some important questions about the company's underlying performance.

Could this slower GWP growth indicate that IAG's customer base is shrinking and that the remaining customers are having to carry the weight of higher premiums? Let’s dive into the details and examine how these dynamics could affect IAG's margins, customer retention, and long-term profitability.

The GWP Growth vs. Premium Increases Conundrum

The forecasted 4% to 4.5% GWP growth suggests that while IAG is able to grow its premium base, the growth is somewhat muted. If the average premium increase is over 10%, this indicates that IAG may not be expanding its customer base as aggressively as one might expect.

Here's the key concern: if premiums are rising for existing customers at such a high rate, but GWP growth is relatively slow, it suggests that the insurer could be losing customers at a rate faster than they can replace them. Why? Because in a highly competitive market, many customers, particularly those facing double-digit price hikes, are likely to explore other options. As customers leave, the remaining ones are left with the responsibility of supporting IAG's growth through higher premiums.

Is IAG Losing Market Share?

With an increasing number of competitors in the Australian insurance market, many customers may be turning to alternatives that offer more competitive pricing or better service. While IAG might be able to justify the price increases with improved services or coverage, this comes at the risk of losing customers who are more price-sensitive or who value transparency in pricing.

If this trend continues, IAG could be witnessing a shift in market share to competitors who are either managing to keep prices lower or offering better value for the cost. The relatively modest GWP growth of 4% to 4.5% might signal that IAG is struggling to retain as many customers as it needs to achieve more robust growth, despite premium hikes.

The Impact on Insurance Margins

Despite losing customers, IAG is projecting insurance margins to remain at the top end of the 15.5% to 17.5% range. How is this possible if the company is losing clients? It’s likely that IAG is still able to achieve these margins through higher premiums, selective retention of more profitable customers, or operational efficiencies.

While increased premiums can certainly boost revenue, they can also lead to customer dissatisfaction and higher churn. If IAG is selectively keeping higher-value or lower-risk customers, it may be able to offset the losses of other customers, but this approach is not sustainable long-term if too many customers are driven away by increasing prices.

The Role of Customer Retention

It’s critical to point out that customer retention is key for any insurer. When prices rise significantly, customer loyalty often starts to wear thin. Price-sensitive customers are more likely to shop around for better deals, especially if their existing insurer doesn’t offer the best service or pricing value.

If IAG continues to lose customers to competitors, increased premiums alone may not be enough to maintain profitability in the long run. There is also a risk that IAG may start to lose customers in the higher-value segments (those who are more loyal or who don’t want to switch for minor price differences). This would put even more pressure on the company’s margins.

Looking Ahead: Strategies for Retaining Market Share

In light of these challenges, IAG might need to reconsider its pricing strategy and explore new ways to retain customers without relying too heavily on increasing premiums. Some potential strategies include:

• Customer loyalty programs: Offering incentives to long-term customers to discourage them from switching.

• Innovative products and services: Providing customers with value-added services that make the price increase feel more justified.

• Improved customer experience: Ensuring that the overall customer experience is better than competitors, so customers are more willing to stick with IAG even if prices rise.

Additionally, innovating pricing models or looking for new ways to improve efficiency and reduce costs could help the company stay competitive without having to rely solely on price hikes.

Conclusion

IAG’s reported FY25 GWP growth forecast of 4% to 4.5% combined with double-digit premium increases indicates that the company is likely experiencing customer erosion, even as it achieves higher premiums from those who remain. This customer loss could signal that IAG is losing market share to competitors who offer more competitive pricing or better value propositions.

While IAG’s projected insurance margins remain healthy for now, the company must balance this with a sustainable customer retention strategy. If the trend of customer erosion continues, the future viability of relying on premium increases to sustain margins will likely become harder to maintain.

IAG will need to carefully navigate these challenges by improving customer loyalty, adjusting its pricing strategy, and finding ways to offer more value to retain its market position and achieve consistent growth in the years to come.