Australian Insurers Should Be Able to Withstand Mounting Bushfire Claims: AM Best

January 27, 2020

Australian insurers are well-capitalized and should be able to withstand losses from the 2019/2020 bushfire season, aided by strong capital positions and support from reinsurance partners, said AM Best.

The ratings agency explained that comprehensive use of reinsurance has helped curtail material net loss ratio volatility in most years, and has strongly contributed to the industry’s ability to return combined ratios below 100%, even in catastrophe-heavy years.

At least 30 people have lost their lives as a result of the fires, while losses from insurance claims have reached A$1.7 billion (US$1.1 billion), said the report, quoting estimates from the Insurance Council of Australia (ICA), as of Jan. 23.

“Insured losses are expected to continue to rise, and total economic losses from the fire season, although currently uncertain, have the potential to be significant, particularly for directly impacted industries—including tourism—in the region,” said the report, noting that subsequent heavy rainfall and flooding in affected areas may increase losses.

Full-Year Earnings to Be Hit

Despite insurers’ resilience, the current fire season is expected to make a dent in the full-year earnings and net loss ratios of the country’s direct insurers, said AM Best in its report titled “Australian Insurers Able to Contend with Mounting Bushfire Losses,” published on Jan. 24.

While Australia’s Jan. 1, 2020 reinsurance renewals were generally stable, the report predicted there could be upward pricing pressure and tightening of terms and conditions in coming renewals, if substantial bushfire losses are passed to reinsurers.

The ultimate destination of losses and the role that reinsurance will play in smoothing earnings remains to be seen, said the report. AM Best noted that individual insurers’ reinsurance terms and conditions will also be a determining factor, particularly concerning the definition of a single event along with the geographical restrictions and hours clauses that apply to the fire series.

Determination of these terms may prove material for certain insurers in ascertaining “whether event excess of loss retentions have been reached, or whether aggregate reinsurance protections will be hit from accumulation of losses below event limits.”

Robust Non-Life Market

The underwriting performance of the non-life market in Australia has been robust, and the industry has shown itself capable of absorbing natural catastrophe losses over recent years, said AM Best, pointing to the fact that at least 11 catastrophes declared by the ICA have generated insured losses in excess of A$1 billion (when loss values are adjusted to 2017 terms).

Recent events include a significant hailstorm that affected urban and rural locations across NSW (including Sydney) in late December 2018, generating insured losses of A$1.4 billion (US$1.0 billion), and flooding in Queensland in January and February 2019 that resulted in losses of A$1.3 billion (US$900 million).

Respite for Active Fire Zones

The report noted that changing weather fronts and rainfall have brought some respite in active fire zones, providing an opportunity to gain control, and assess the impact of losses incurred to date. Despite the recent swing in weather conditions across the region, “severe to extreme fire warnings remain in place for areas in NSW, Victoria and South Australia, indicating that the 2019/20 bushfire season is set to continue.”

Although insurers are considered well placed to face these event losses, they will be carefully considering their approach to managing bushfire exposures, which may ultimately result in tightening of terms and pricing increases in loss affected areas.

“Consideration of the impact of climate change, contributing to severe drought conditions, as well as other factors (including increased urbanization of at-risk bushfire zones), which have the potential to increase both severity and frequency of severe loss events, reinforces the need for insurers to implement robust underwriting, capital and risk management strategies.”

Photograph: A firefighter walks past burning trees during a battle against bushfires around the town of Nowra in the Australian state of New South Wales on Dec. 31, 2019. Thousands of holidaymakers and locals were forced to flee to beaches in fire-ravaged southeast Australia as blazes ripped through popular tourist areas leaving no escape by land. Photo by Saeed Khan / AFP via Getty Images.

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