Despite the $2.4 billion plus cost of March’s heavy rains and flooding in Southeast Queensland, Brisbane, northern rivers of NSW and Sydney storms and floods, Fitch Ratings believes Australian general insurers like IAG and Suncorp will escape much of that massive cost.
In a report on Monday, Fitch pointed out that that Suncorp and IAG had frequently underestimated the cost of natural disasters in recent years, and this had eaten into profit margins.
“We expect net losses to primary insurers from the extreme weather in late February and early March 2022 to be much lower than Insurance Council of Australia’s (ICA) current gross loss estimate of around $A2.5 billion due to high reinsurance recoveries,” Fitch analysts wrote in the report.
“However, gross losses may rise further as the Bureau of Meteorology forecasts the ongoing La Nina condition to cause above median rainfall in 2Q22 for much of northern and eastern Australia. Insurers have received over 163,000 claims, according to the ICA, of which we believe most are in the property class.”
“Most losses will be borne by Insurance Australia Group Limited (IAG) and Suncorp Group Limited, which command over 50% of non-life premiums in Australia,” Fitch pointed out.
“The two insurers had already used a large portion of their retentions under aggregate reinsurance programmes in response to events leading up to the recent floods, which should allow them to cede losses to reinsurers faster.
“QBE Insurance Group Limited will also be affected, albeit to a lesser extent, through its retail insurance operations,” Fitch said.
Fitch said reinsurance companies would wear a large chunk of the estimated $2.5 billion cost from the flood, and also noted insurance companies had also been able to pass on “high single digit” home insurance premium increases following some previous disasters.
The ratings agency said the flooding would affect insurance companies’ earnings, rather than eating into their capital, due to the strong reinsurance arrangements with the likes of Munich Re, Swiss Re and the Berkshire Hathaway reinsurers such as General Re and National Indemnity (or NICO) which has a shareholding and 20% quota share deal with IAG, which also has separate reinsurance deals.
“Insurers’ robust earnings and capital headroom should ensure their ratings remain resilient to these effects,” Fitch said in the report.
However, higher modelled catastrophe losses and rising reinsurance costs in the face of increasingly frequent extreme weather events, coupled with reduced appetite from global reinsurers, pose risks to insurers’ credit profiles over the medium term,” Fitch said.
IAG and Suncorp have both raised their natural hazard allowances as a result of the increased frequency and intensity of extreme weather events. Insurers typically set such allowances by combining their view of risk through modelled catastrophe losses with reinsurance programmes. Lately, insurers have placed more weight on recent events to reflect the changing weather patterns.
Fitch said that despite the rising number of weather-related ‘events’ and their rising costs, “we believe global reinsurers will continue to provide sufficient capacity to the Australian market, as it helps diversify their global insurance portfolios.”
“The federal government is also finalising a AUD10 billion reinsurance pool for cyclones and related flood damage in Northern Australia, which should reduce the burden on insurers and help improve premium affordability,” Fitch said.
