Recent flooding and severe storms in south-east Queensland and New South Wales will affect insurers’ earnings rather than their capital, due to the strong reinsurance program that firms have in place, according to analysts at Fitch Ratings.
The rating agency says insurers’ robust earnings and capital headroom should ensure their ratings remain resilient to these effects.
However, higher modelled catastrophe losses and rising reinsurance costs in the face of increasingly frequent extreme weather events, coupled with reduced appetite from global reinsurers, pose risks to insurers’ credit profiles over the medium term, it added.
Fitch expects net losses to primary insurers from the extreme weather in late February and early March 2022 to be much lower than Insurance Council of Australia’s (ICA) current gross loss estimate of around AUD 2.5 billion due to high reinsurance recoveries.
However, analysts believe gross losses may rise further as the Bureau of Meteorology forecasts the ongoing La Nina condition to cause above median rainfall in 2Q22 for much of northern and eastern Australia.
Insurers have received over 163,000 claims, according to the ICA, of which we believe most are in the property class.
Fitch notes that most losses will be borne by Insurance Australia Group Limited (IAG) and Suncorp Group Limited, which command over 50% of non-life premiums in Australia.
The two insurers had already used a large portion of their retentions under aggregate reinsurance programmes in response to events leading up to the recent floods, which should allow them to cede losses to reinsurers faster.
QBE Insurance Group Limited will also be affected, albeit to a lesser extent, through its retail insurance operations, Fitch says.
According to Fitch, higher net exposure due to frequent extreme weather events, changes to reinsurance structures, or reduced reinsurance capacity, could affect insurers’ capital strength over the medium term.
While the firm does not expect a major change in gross probably maximum loss figures due to recent floods, changes to reinsurance structures due to higher pricing, especially for aggregate volatility cover, may push up net PML values.
Nonetheless, analysts remain confident that global reinsurers will continue to provide sufficient capacity to the Australian market, as it helps diversify their global insurance portfolios.
The federal government is also finalising a AUD 10 billion reinsurance pool for cyclones and related flood damage in Northern Australia, which should reduce the burden on insurers and help improve premium affordability.
