The recent spate of natural disasters here and in New Zealand will see home and car insurance premiums rise "materially" in 2011, according to ratings agency Standard & Poor’s.
The increases will be driven by the need for insurers to recover billions of dollars in claims and to meet an expected surge in the cost of re-insurance (which is the insurance insurers buy to give themselves added protection against higher than expected claims).
S&P reckons local insurers could have to pay price rises of 15% or more for their reinsurance cover from mid year when new contracts are set.
\Discussions were held in London 10 days ago by the companies and their reinsurers.
Higher premiums will be common for most parts of the country, but especially in the areas hit by the floods, storms and earthquakes (Christchurch in NZ).
The increases will be concentrated in personal lines with business owners facing only modest premium increases, according to S&P.
The forecasts for higher premiums came as Standard & Poor’s said Australian general insurers were financially well placed to meet the higher payout cost from the recent string of natural disasters.
This suggests that even with billions of dollars in payouts (especially for the Brisbane and Queensland floods and cyclones and the two Christchurch quakes), the general insurers are likely to avoid any cuts to their credit ratings.
That’s unlike in NZ where the second biggest home insure AMI (not to be confused with AAMI) has had to be rescued by the national government with a promise of an immediate $NZ500 million backstop because of mounting claims from the second Christchurch quake in February.
"While the spate of recent domestic natural disasters is bound to drag on earnings in the short-term, we expect the sector’s capital strength and reinsurance protection will limit negative rating pressure," Standard & Poor’s credit analyst Mark Legge said.
In a report titled "Australia’s Non-Life Insurance Sector Earnings Lashed By Storms, But Reinsurance Provides Protection", Standard & Poor’s said it will watch how likely increases in insurance premiums counter the cost of higher claims and reinsurance cover relating to recent weather events.
Standard & Poor’s expects premiums in personal lines such as home, contents and motor vehicle insurance to continue to rise materially in 2011, particularly in flood and storm-prone areas, on the back of recent weather events. However, still-strong competition is likely to limit the capacity of insurers to raise premiums in commercial insurance lines.
"We will also closely watch the terms, pricing and capacity of reinsurance available to the non-life insurers, which could prove more onerous in light of the spate of natural disasters in recent months," Mr. Legge said.
Standard & Poor’s believes reinsurance costs for the nation’s non-life insurance firms could rise by more than 15% in 2011 in some cases, largely reflecting local weather events as well as the flow on effect of reinsurers’ exposure to natural disasters in New Zealand and Japan. Recent weather events underline the importance of reinsurance for Australia’s non-life insurers, Mr. Legge said.
‘‘While the spate of recent domestic natural disasters is bound to drag on earnings in the short-term, we expect the sector’s capital strength and reinsurance protection will limit negative rating pressure,’’ said Mr Legge.
Insurers have so far paid out more than $3.6 billion to cover natural disasters ranging from floods, cyclones and even bushfires since December. The bulk of this – or $2.3 billion – has been to cover damage from Queensland’s floods, especially in and around Brisbane and west to Toowoomba and the Lockyer Valley.
Early this month S&P said in a report on the health of the non life insurers in Asia that it was downgrading its outlook to negative on the general insurance markets in Japan, India and New Zealand but upgraded China and Malaysia to positive. It said the outlook for other Asian markets, including Australia, remains stable.
The ratings agency says premium revenue in developing Asian markets will grow by more than 20% due to low penetration and strong real GDP rates.
“Much of the growth is likely to be in China and India, followed by Indonesia, Thailand and Vietnam”, it says in a report on the sector.
Underwriting earnings are likely to improve in most markets except Japan and New Zealand. S&P says divergence between markets has increased due to variable pricing trends.
“Heavy flooding and storms in Australia, for example, cut underwriting profits in 2010, and that is likely to continue in 2011,” it notes. “Insurers in Australia and New Zealand have now raised their prices, which should strengthen underlying underwriting earnings in 2011.”
The agency said that reinsurance costs are expected to rise as a result of disasters in the region, and this will flow through to premiums, particularly in Australia, New Zealand and Japan.
S&P says it downgraded Japan because of a likely deterioration in earnings and capital as insurers start to meet the costs of the tsunami and earthquake. Stock market volatility will also hit insurers’ earnings.
New Zealand was downgraded because of the earnings impact from the February earthquake, the availability of reinsurance capacity and pricing. However, S&P notes the market benefits from a high degree of ownership by highly-rated Australian parent companies and insurance via the Earthquake Commission.
S&P says the Australian market is mature and sophisticated, with robust regulation and str
