Australia flood loss hits A$438m, to drive higher reinsurance costs

The severe flooding and storms that affected parts of east and southeastern Australia recently are expected to add to reinsurance pricing pressure for the major insurance carriers operating in the country.

Insurance claims from the flooding are now estimated to have driven a loss of A$438 million, according to the latest figures from the Insurance Council of Australia (ICA).

The ICA’s tally of claims filed due to the flooding and severe weather catastrophe across parts of New South Wales and Queensland is now approaching 30,000 and this figure is expected to continue rising over the coming days.

Australia’s largest primary insurance carriers are expected to exceed their catastrophe budgets for the latest fiscal year, according to analysts at Morgan Stanley, with reinsurance recoveries expected through their quota shares and potentially their excess-of-loss towers.

As we explained Friday, IAG estimated the net cost of the floods and weather at approximately A$135 million after its quota share reinsurance, but A$200 million pre-quota share.

IAG’s net costs from the flood event will be capped at A$169 million, which is its maximum retention per-event, for a first event, under its 2021 catastrophe reinsurance program. So if the claims situation deteriorates IAG could certainly see a recovery under this tower.

In addition, the company said that it expects the heavy rain and flooding event will erode around $150 million of the $400 million deductible on this aggregate reinsurance tower.

Morgan Stanley’s analyst team believe that Suncorp is likely to similarly exceed its catastrophe budget for the period as a result of the flooding and rains, which could again mean the pair of insurers are required to increase these budgets for next year.

Australia’s insurers have steadily been increasing their catastrophe budgets and strengthening their reinsurance provisions in recent years, as weather and climate related catastrophe events have hit their businesses hard.

Favourable pricing on the inwards sides of their businesses will help to offset higher catastrophe budgets and costs somewhat, but there are also expected to be higher cost burdens on the other side, in their reinsurance purchases, Morgan Stanley’s analysts said.

The analysts report that feedback from reinsurance firms suggests these Australian insurers recent years of catastrophe losses and resulting loss-making are seen as an issue.

As a result, the cost of reinsurance protection is expected to rise further for them at the next renewals and increasingly, the Australian carriers are seen as sensitive to these higher costs.

However, lowering the volatility in their businesses is seen as key and of course reinsurance is one way to achieve that.

Both of these insurers catastrophe budgets are rising as a percentage of net earned premiums and have been on an upwards trajectory for well over a decade now.

It’s no surprise we’ve seen the introduction of stop-loss layers in their reinsurance programs, nor that aggregate reinsurance has proven so important to them and seen them sharing a large proportion of their losses with global reinsurers and also ILS funds in recent years.

Reinsurance capital is only going to become more important for these companies, as they deal with the rising costs of frequent and severe weather and catastrophe losses.

But they will pay more for access to it, which could make looking at how they can lock-in protection over multiple years increasingly attractive and may result in them looking to reinsurance from the capital markets, potentially even through catastrophe bonds.

Also read:

– IAG highlights agg erosion, as Australia flood claims pass A$385m.

– ICA highlights billion dollar loss potential of Australian floods.

– Low reinsurance retentions to help Australian insurers as flood claims rise.