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Australian carriers face reinsurance price hike at July renewal: Morgan Stanley

16th June 2020 - Author: Matt Sheehan

Australia’s primary insurers, which make heavy use of reinsurance and which have exceeded cat budgets in recent years, face a significant increase in reinsurance rates at the upcoming July 1 renewals, according to Morgan Stanley.

australia-mapAmid a wider global trend of reinsurance hardening, Australia in particular has seen a consistent increase in natural catastrophe losses over the past decade, possibly due to a growth in underlying exposures.

Morgan Stanley believes reinsurance pricing momentum was already building earlier this year on the back of these elevated losses, as reinsurers begin to re-evaluate Australia’s changing catastrophe risk profile.

Analysts noted that reinsurance recoveries have averaged 74% of reinsurance expenses since 2010, but they have been 93% in the past 12 months and 87% in the past 24 months.

Adding to the dynamic, the Covid-19 pandemic has the potential to further accelerate reinsurance pricing momentum, given the size of potential global reinsurance losses stemming from Covid19.

And Morgan Stanley also suggested that global reinsurers could take the prognosis for an above average US Atlantic Hurricane season into account when setting their risk appetite and pricing for July 1 renewals.

Certain Australian carriers, and IAG and Suncorp in particular, rely heavily on external reinsurance given that they run relatively concentrated insurance portfolios with risks centred around the capital cities of Sydney, Melbourne and Brisbane.

This means a single event can trigger outsized losses or in an extreme case a weather event could hit multiple cities.

The capital framework these insurers operate under also explicitly looks at maximum possible loss from a single event, as well as accumulation of losses from several medium sized events, and both are dominant in New Zealand, which has high earthquake risk.

QBE is a large reinsurance buyer as well, Morgan Stanley noted, but it is globally diversified with less Australian and New Zealand exposure.

The total Australian general insurer market consists of 85 primary insurers and 11 reinsurers and collectively wrote AU $51 billion (US $35 billion) during the last financial year.

Of this, AU $47 billion was by primary reinsurers and they in turn incurred outwards reinsurance costs of $13 billion.

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