Sydney hail industry loss could reach as high as A$2bn: Analysts

According to analysts the loss to insurance, reinsurance and ILS fund or collateralised interests from December’s major hail storm and severe convective weather outbreak in Sydney and the surrounding area of Australia could rise as high as A$2 billion.

Analysts at boutique Australian investment management firm Firetrail Investments suggest the eventual insured loss from the December 20th 2018 hail storm will settle somewhere between A$1.5 billion and $2 billion, which would require a doubling from the latest claims count by the Insurance Council of Australia (ICA), which recently raised its estimate of insured losses for the hail storm to just over A$871 million.

The hail storm struck the Sydney, Central Coast and South East Queensland region of Australia, damaging residential and commercial properties and automobile’s.

Firetrail’s analysis suggests that the December 2018 hail storm will end up one of the top five most costly Australian catastrophe or severe weather events for the insurance industry in the last 30 years.

It may even surpass the 1999 Sydney hail storms A$1.7 billion insured loss, which for a time was the largest insured loss in the country’s history.

Firetrail’s analysts note that such a hail loss could be disastrous for the results of the largest Australian primary insurers, but note that they have significant reinsurance in force which will cap their losses.

“The combination of various reinsurance protections mitigates a substantial proportion of the direct costs of the hail storm,” the analysts explained.

“The net costs of this event are capped at $169m for IAG and $250m for Suncorp, despite the gross cost likely being multiples of this amount.”

As we covered before, IAG expects its claims this hail storm will drive a loss at least in-line with its maximum first event retention, after taking into account its quota share reinsurance as well.

Suncorp said its losses will exceed its reinsurance program’s first event retention, triggering a payout, and also said the event would eat through its aggregate reinsurance layer retention as well.

In addition, we also reported that a number of insurance-linked securities (ILS) funds are expecting to experience some loss impacts due to the Sydney area hailstorm, through quota share arrangements and collateralized participation in Australian insurer reinsurance programs.

While reinsurance mitigates a lot of the cost for these local insurers, for the major international players that are already exposed the Sydney hail storm losses may find themselves retained in greater amounts.

But as we also said before, it’s to be expected that this hail event drives some minor attrition to reinsurer sidecar vehicles that are exposed and this could see third-party capital supporting any regional losses of major re/insurers exposed to the hail storm.

Firetrail discusses the potential for a major loss from this hail storm to boost reinsurance pricing in Australia, but adds that the fact it remains such a key diversifying zone for major reinsurers suggests any increases may be minimal.

Claims inflation could also be a factor from the Sydney hailstorm in December 2018, as repairers may be stretched in the region and especially on the motor side this could lead to shortages and higher repair costs, inflating insurance claims.

But should reinsurance pricing rise and claims inflation be seen, Firetrail believes this might provide the ammunition required for primary insurers to boost rates in the region, which Firetrail said it a possible outcome following this event.

However, we’d imagine the attraction to writing business in Australia and the significant quota shares already in place might mean capacity remains abundant and any price increases are relatively small by comparison to previous periods of higher losses for this market.

Firetrail estimate range suggests the hailstorm could result in an industry loss of between US $1.1 billion and $1.45 billion, which would be high for an Australian severe weather event and perhaps lead to some questions being asked on rates in the region.

But whether these questions would be asked loudly enough to cause a change in risk appetite in the region remains to be seen.

ILS and collateralised reinsurance markets are set to pay their share of the claims from this event, through their support for the local insurance market and some global re/insurance players.