Rising claims, resulting from increased weather-related catastrophes, are fuelling premiums and reinsurance costs for property and casualty (P&C) insurers in Australia, said S&P Global Ratings.
According to a recent report by the credit rating agency, P&C insurers in the country have conservative reserving and appropriate reinsurance coverage, including protection against natural perils, such as bushfires and floods.
Additionally, insurers’ exposures are greatest in the personal lines of home and contents and motor vehicle insurance but also extend to commercial lines.
Collectively, according to S&P, these insurance lines accounted for about 65% of gross premiums written for the year to September 30, 2022.
Over the past 12 years, the frequency and severity of declared catastrophes has trended upward in Australia, and with this, insurance claims have increased.
A series of bushfires, floods, and hailstorms have affected gross claims, particularly since September 2019. Reinsurance cover has grown to soak up 35%-40% of the gross claims cost in recent years, which has cushioned the blow to insurers’ earnings, said analysts.
According to the report, to date, offshore reinsurers have absorbed much of the cost of natural perils in the country.
Reinsurance costs for Australian insurers have risen by about 35% over the past three years alone, and outweighed gross written premium (GWP) growth of about 30% over that period – squeezing P/C insurers’ underwriting earnings.
The higher claims experience borne by reinsurers has meant higher pricing for cover, as well as stricter terms of cover provided, such as increasing insurers’ retention of risks, S&P highlighted.
Australian insurers are responding by setting higher allowances for losses, and this is growing faster than premiums, the agency noted.
P/C insurers are also adjusting their risk appetite and enhancing risk exposure assessments (such as exposure to flood). The Australian government has implemented a A$10 billion cyclone cover, or related damage, reinsurance pool, to support capacity and affordability.
This high-claims scenario will challenge insurer’ creditworthiness, according to the report. Yet, the agency believes that P&C insurers will have breathing space and will be able to handle this.
S&P said: “In our base case, on average, their underwriting profits in the next two to three years should be able to absorb additional catastrophe claims equivalent to 1.7x times the highest of the top three catastrophe claims in recent years.
“Our ratings on insurers could face downward pressure if additional claims exceed this level, or remain consistently high, surpassing the worst seen in the past.”
Over the previous five years, catastrophe claims peaked at about 12.2% of gross claims, while the top three net claims represented about 35% of total net catastrophe claims (for Australia’s largest insurers).
“To approximate reinsurance cover, we’ve increased the top three net claims by 38% – which is the average reinsurance benefit realised over the past five years – to arrive at a gross claims figure,” S&P said. “While the reinsurance cover provided to large risks is typically greater than the average, the scenario provides insight into the buffer available from underwriting earnings relative to catastrophe claims.”
Analysts added: “On this basis, the absorption of additional catastrophe claims, if they occurred, would be viewed as an ‘earnings’ event, with capital resources providing a supplemental buffer. By way of reference, the average gross catastrophe claims for the past 10 events (excluding CAT 221) was about A$470 million. Insurers’ exposure subsequently decreased where reinsurance cover was effective.”
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