Terms & definitions matter in Australian bushfire reinsurance loss: A.M. Best

The quantum of an eventual reinsurance market loss from the Australian bushfire disaster remains highly uncertain, as the specific terms and conditions defining an event on individual reinsurance programs will matter, according to A.M. Best.

The still continuing bushfires in Australia are said to have become the costliest example from an insurance and reinsurance market loss perspective already, as the latest data as of January 23rd showed losses had reached A$1.65 billion (US $1.13bn).

Based on inflation adjusted values the current outbreak is now said to be the costliest bushfire event ever, in terms of insurance market losses, suggesting a growing hit to reinsurance capital at the same time.

Australian primary insurance giant IAG was the first to report that the ongoing bushfires in Australia have triggered its aggregate reinsurance protection.

Suncorp also made an announcement, stating that so far claims from the bushfires had not reached its reinsurance arrangements but that its drop-down and aggregate reinsurance could come into play with as little as another A$50 million of claims perhaps tipping the balance.

These major primary insurers will likely cede some losses to their quota share partners as well.

In addition, ILS fund manager Twelve Capital had revealed that one private ILS contract it had underwritten was exposed to potential losses from the wildfires, suggesting there could be more similar ILS exposure in pockets around the marketplace.

But how far and deeply the reinsurance market will support losses from carriers due to the bushfires remains uncertain, with the specifics of individual reinsurance arrangements set to dictate the eventual loss.

Rating agency A.M. Best explained, “Australian insurers are well placed to withstand the bushfire losses, aided by strong capital positions and support from reinsurance partners.

“The role that reinsurance will play in smoothing earnings from the current bushfire events remains to be seen. As loss estimates and insurers’ exposures increase in certainty, so too will the ultimate destination of losses and the reinsurance coverages triggered.

“Individual insurers’ reinsurance terms and conditions will also play a role, particularly concerning the definition of a single event, notably concerning any geographical restrictions and hours clauses applying to the fire series.”

These terms and condiitons surropunding bushfire event definitionts, hours clauses and other contract details could be “material” for some insurers in deciding just how much reinsurance support they can get for bushfire claims, A.M. Best said.

Until these are understood, it is hard to say where event retentions have been breached, or where aggregate reinsurance attachments could be triggered by an accumulation of losses below event limits.

The eventual ramifications in terms of reinsurance claims from the bushfires in Australia and also now the more recent hailstorms, could define how renewal rates react for the region in future.

“Although the overall message from Australian reinsurance renewals at January 1, 2020, has been one of general stability, meaningful bushfire losses passed to reinsurers may result in upward pressure on reinsurance rates and tightening of terms and conditions in upcoming renewal windows,” A.M. Best believes.

Climate change is also a factor, which A.M. Best notes may mean that reinsurance claims totals are less predictable.

The influence of climate change in these bushfires could also result in some tightening of terms and conditions, as well as pricing, in loss affected areas, the rating agency believes.

A.M. Best explained, “Bushfire is a known and annual risk in Australia; however, managing changes in climate conditions presents a real risk for insurers and reinsurers, particularly as certain areas consumed in the current blazes were previously considered as low-risk bushfire zones.

“Consideration of the impact of climate change, contributing to severe drought conditions, as well as other factors (including increased urbanisation of at-risk bushfire zones), which have the potential to increase both severity and frequency of severe loss events, reinforces the need for insurers to implement robust underwriting, capital and risk management strategies.”