Catastrophic Events – Budgeting In An Uncertain Insurance Market
Competitive insurance market conditions have prevailed for almost ten years. Commercial property insurance premiums are set to increase.
Recent natural catastrophes are well documented. The headlines have mainly focused, quite rightly, on the human tragedy. However, the impact on insurers and probably more importantly, reinsurers, is a key issue for organisations in the Asia Pacific region.
Prior to the recent Japanese earthquake and tsunami, New Zealand earthquakes, the Australian floods, bushfires and Cyclone Yasi, APRA reported reinsurance premiums received in Australia for the year ending 30 June 2010 of $9.8 billion against reinsurance claims payments of $6.1 billion.
Munich Re board member Ludger Arnoldussen was recently interviewed by the Australian Financial Review regarding the insurance industry’s response to Australia’s recent weather activity.
Some of the key messages conveyed by Mr Arnoldussen were:
- Australia presents a different exposure than the larger weather exposures in the US and Europe, yet still retains its own regional challenges.
- The incidence of bushfire, storm and floods continues to increase (he commented that the number of natural disasters has trebled since 1980).
- The reinsurance industry was looking for a 15% increase following previously smaller events, but this target is now likely to be increased following these significantly larger losses.
- The reinsurance industry is committed to this region, but they must underwrite profitably.
- Australia continues to have major problems with underinsurance.
Swiss Re announced on 2 March 2011 that its exposure to the most recent Christchurch earthquake is approximately US$800 million. Swiss Re estimates the total insured loss may reach US$12 billion. Swiss Re also commented that this is “a significant event on a worldwide basis.”
On 14 March 2011, both Swiss Re and Munich Re advised that, due to the extent of damage in Japan, it is going to take a considerable time to calculate the insured losses. Current estimates for insured loss range up to US$35 billion.
Given the significant market share of these reinsurers, what does this really mean for commercial insurance buyers in Australia in 2011?
No one can say with certainty how severely the market will react. There is little doubt that Australia’s recent weather-related losses, combined with the New Zealand and Japan earthquakes are going to force insurers and re-insurers to review pricing in the Asia Pacific region.
The majority of insurers’ reinsurance treaties fall due at 30 June and 31 December. Therefore, the focus through 2011 will move to longer term arrangements that insulate buyers from probable premium increases.
As a result of this anticipated reaction, we expect the following changes to occur as early as March 2011:
- Pricing increases in all areas of commercial property insurance of between 5% and 15% for policies without any significant claims activity. It is reasonable to believe that risks located in Nat-Cat prone areas, or with significant claims activity, will suffer higher percentage increases.
- Flood cover will either be removed or restricted through the introduction of lower sub-limits of cover and/or the imposition of higher deductibles.
It’s is important that your insurance broker works closely with its clients to develop strategies to create relative advantage for their business. The basics of getting to market early, providing good information, demonstrating sound risk management (or at least a commitment to risk improvement) and looking to engage you with your incumbent and potential insurers will be even more important as we enter this new market dynamic.
John Mutton
Managing Principal
03 8610 8102
John.mutton@interrisk.com.au