The Insurance Australia Group Ltd (ASX: IAG) share price has risen 18.45% in the year to date.
IAG shares closed at $5.52 yesterday, down 0.36%.
ASX insurance shares, like IAG, are among the few categories of stocks benefitting from today's inflationary economy.
Inflation has allowed insurers to raise their premiums without losing too many customers. This is because most people view their insurances as essential items, just like groceries and healthcare.
This was among the reasons for IAG's bumper FY23 results, which included a 140% profit jump.
The insurer reported net profit after tax (NPAT) of $832 million and a 10.6% increase in gross written premiums (GWP) to $14.7 billion.
IAG shares were also among those paying the biggest dividend boosts of the August earnings season.
The insurer declared a final dividend of 9 cents per share, up 80% on FY22, with 30% franking.
But one top broker has issued a warning about insurance businesses for 2024.
Let's get into the details.
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IAG share price on a roll in 2023
One of the highlights of 2023 for IAG shares was reaching a three-year high share price in July.
But perhaps the good times are about to stop rolling, with top broker Morgan Stanley claiming there are growing conduct and regulatory risks ahead for insurance companies.
In The Australian yesterday, the broker warned that regulation could impact commercial lines.
Analyst Andrei Stadnik said:
Taking a longer-term view we think the insurance brokers will see more upside from sustainable earnings growth, though it's possible that regulation could also impact commercial lines.
ASIC has been more proactive in pursuing insurance companies for misconduct following a strengthening of laws and penalties.
The Australian reports seven new actions or resolutions against insurers this year.
ASIC targeting IAG
In June, IAG copped the largest-ever penalty against an insurer for breaches of financial services consumer laws at $40 million.
IAG was fined for failing to deliver the full amount of loyalty and no claims bonus discounts promised to more than 600,000 customers who renewed their NRMA motor, home, boat, and caravan insurance.
The policies were written between March 2014 and September 2019.
ASIC Deputy Chair Sarah Court said IAG used "a specific pricing algorithm that limited the discounts renewing customers could receive, ensuring their premiums did not fall below a certain price point".
Court added that pricing failures were an industry-wide issue for insurers, saying:
This pricing method meant promised discounts were not passed on and customers paid more in premiums than they had been promised.
Pricing failures are unfortunately an industry-wide issue.
ASIC has called on all general insurers to remove unnecessary pricing complexity and fix their systems, practices and controls to ensure they deliver on the pricing promises they make to their customers.
On top of this case, ASIC is already pursuing IAG on another similar matter.
As we reported in August, ASIC alleges that IAG made misleading loyalty discount offers to renewing customers of SGIO, SGIC, and RACV home insurance products between January 2017 to December 2022.
In a statement, ASIC alleged that IAG may have increased the customers' premiums before applying the renewal discount offers.
IAG refuted the allegations, saying:
IAL and IMA maintain they have delivered on loyalty promises made to customers, do not agree that they have misled customers about the extent of the discounts they would receive, and intend to defend the proceedings.
What's next for IAG and insurance shares?
Morgan Stanley says it still finds ASX insurance shares generally attractive.
It cites positives such as undemanding valuations and margin expansion.
The broker said there have also been positive earnings per share (EPS) revisions, and there are opportunities to "over-earn" in an El Nino year.
However, it states that regulation risks could emerge for insurers in 2024.
