Australian floods impact could be felt for months to come

The year hasn’t started well for residents of Australia’s Queensland state as rainfall has continued to increase river levels and the flooding they have been suffering from for weeks has now reached a point where it is going to cause huge losses and devastation. Flash flooding from thunderstorms continues to affect the area and the floods now cover an area almost the size of France and Germany combined.

Insurers will be bracing themselves for the fallout and claims to come. The only estimate for insured losses at the moment is from J.P. Morgan analysts who put the losses around $1 billion but stressed that this is very early days and that is likely to rise. They said that the floods impact on production and demand of items such as steel, sugar cane and wheat could shave as much as 0.4% off Australian GDP for the year.

The BBC says that the impact of the floods could hit the global steel making industry for a long period as three quarters of the states coal fields are unable to operate due to the floods. Queensland exports half the coking coal required for the global steel making industry.

So the impact of these floods is going to be felt for a long time and with loss estimates of $1 billion at this early stage it’s safe to say that final insured losses from these Australian floods will be a lot higher than that. This may encourage re/insurers to seek alternative risk financing methods to transfer their flooding risk to the capital markets. Flood risk is a difficult risk to issue in a cat bond (although it has been done in Allianz’s Blue Wings Ltd. cat bond from 2007) due to the lack of measurement stations in some countries but it seems likely, given the extent of global flooding lately, that we will see flood risk more regularly covered by capital market risk transfer in future.