Australian insurers resilient to flood losses - Fitch

Recent flooding and severe storms in south-east Queensland and New South Wales will affect insurers’ earnings rather than their capital, as a result of strong reinsurance programmes, says Fitch Ratings.

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.

The rating agency 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 $2.5 billion, due to high reinsurance recoveries.

La Nina conditions continue

However, 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.

Most losses will be borne by Insurance Australia Group Limited (IAG) and Suncorp Group Limited (A+/Stable), 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 (A-/Stable) will also be affected, albeit to a lesser extent, through its retail insurance operations. 

Frequent hailstorms, floods and bushfires are a key feature of the Australian non-life insurance market. Fitch estimates that higher-than-expected natural catastrophe costs added around 1.2pp to the combined ratios of IAG and Suncorp over the financial years from July 2018 to June 2021 (FY19-FY21) compared with 0.5pp over FY16-FY18.

However, underwriting profitability has been strong, with the combined ratio averaging 95% over FY19-FY21. Insurers have passed on high single-digit home insurance premium rate increases, especially following the bushfires in 2019-2020, partly reflecting higher reinsurance costs and rising claims inflation.

Fitch believes global reinsurers will continue to provide sufficient capacity to the Australian market, as it helps diversify their global insurance portfolios.

The new $10 billion reinsurance pool for cyclones and related flood damage in Northern Australia should further reduce the burden on insurers and help improve premium affordability.