Reinsurance mitigates recent catastrophe losses for Australian insurers

A wave of natural catastrophe events in Australia has caused analysts to warn of negative impacts to non-life insurers’ upcoming fiscal year-end earnings, although considerable reinsurance programmes will diminish the total impact, according to A.M. Best.

In a recent briefing from A.M. Best, titled “Recent Natural Catastrophe Losses in Australia Challenge Underwriting Profits,” the ratings agency examines the potential impact a series of natural disasters in the region, and the resulting insurance industry losses will likely have on non-life insurers’ earnings.

However, “in view of the robust reinsurance protection in place for most general insurers operating in the region,” the host of catastrophes are not expected to lead to a net loss for the non-life sector. With A.M. Best describing the situation as “more of an earnings event for the sector, rather than a capital event.”

Several, major adverse weather events have struck Australia in recent months including April’s New South Wales (NSW) storm, tropical storm Marcia in February, hailstorms in Sydney and the intense hailstorm in Brisbane, November 2014.

For the NSW storm alone the Insurance Council of Australia (ICA) provided an insurance industry loss estimate of AUD$295 million on April 28^th 2015.

While Australian primary insurance group IAG revealed a day later that its losses alone from the NSW and resulting Sydney hail event would likely reach AUD$300 million, meaning it will call on its reinsurance protection.

Similarly, Australian domiciled primary insurer Suncorp also reported an expected hit of up to AUD$205 million for the NSW storm and Sydney hailstorm, again leading the firm to call on its reinsurance coverage.

And with the likelihood of further claims to come in the insurance industry loss total is predicted to rise also, leading certain major insurers that operate in the region to revise “downward their forecasted profit margins.”

“The prudent use of reinsurance will substantially mitigate the net impact on the industry primarily through a combination of per risk excess of loss cover, and some forms of aggregate excess loss cover,” notes A.M. Best.

It’s also worth mentioning the potential impact to some players in the insurance-linked securities (ILS) space here. As an increasing amount of ILS and alternative capital continues to penetrate traditional reinsurance layers, via collateralised reinsurance structures and similar, the exposure to these type of events is rising all the time.

A notion amplified by the attractive, diversified nature of investing in an Australian peril for ILS funds, and other forms of risk capital provider.

While it’s currently unclear whether the recent host of Australian natural catastrophes will impact certain ILS funds and vehicles, it is worth remembering that there is certainly potential for this to happen, particularly as reinsurance programmes attach.

The insurance landscape in Australia has always kept focus on natural catastrophes notes A.M. Best, which ensures that the majority of regional insurers are prepared for adverse events, so long as they don’t greatly exceed expectations.

A very different outlook from that of less developed regions of the globe that experience severe catastrophe events, like Nepal. A nation that recently served as a painful reminder to the industry just how damaging low levels of insurance penetration can be, following the devastation caused by two large earthquakes.

Concluding on the impact the events will have on the Australian insurance industry, A.M. Best said; “Overall, the industry is expected to be able to withstand at least a few event retentions annually before the losses may erode the capital base and develop into a capital event.”