A.M. Best: Australia’s Nat Cat Losses Will Challenge Underwriting Profits

May 12, 2015

A string of recent major natural catastrophe events in Australia is expected to materially affect non-life insurers’ upcoming earnings for the fiscal year that ends June 30, 2015, according to an A.M. Bestbriefing.

However, the Best’s Briefing, titled, “Recent Natural Catastrophe Losses in Australia Challenge Underwriting Profits,” states that the real impact will be more of an earnings event for Australia’s non-life sector than a capital event. These major catastrophes have included a November 2014 hailstorm in Brisbane, Tropical Storm Marcia in February and April events that included a New South Wales storm and a hailstorm in Sydney.

Despite the anticipated negative impact on underwriting profits, these catastrophic events thus far are unlikely to lead to a net loss for the non-life sector given the robust reinsurance protection in place for general insurers that operate in the region, according to A.M. Best. Reinsurance will substantially mitigate the net impact on the sector primarily through per risk excess of loss cover, and some forms of aggregate excess of loss cover.

Overall, the Australia’s non-life sector is expected to be able to withstand at least a few event retentions annually before the losses may erode the capital base and develop into a capital event, the ratings agency said.

Returns from a substantial investment base maintained by Australia’s non-life insurers have helped balance volatility caused by natural catastrophes in the past, and have also significantly contributed to the industry’s net profit and return on equity. The earning pattern, with sizable net investment income but modest and variable underwriting profit, will likely be sustainable given the large size of the non-life industry’s invested asset base, A.M. Best said.

Source: A.M. Best Company

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