Australian insurers able to contend with bushfire losses – AM Best

Despite rising loss totals, Australian insurers are well placed to withstand losses from the current bushfire season, aided by strong capital positions and support from reinsurance, according to credit rating agency AM Best.

A new Best’s Commentary states that given the scale of the fires and geographical spread of the losses, Australia’s market-leading nonlife insurance groups are expected to pick up the lion’s share of insured losses, while smaller, niche or regional insurers may be exposed to portfolio concentrations within the fire zones.

“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. “Despite catastrophe losses contributing to variable gross losses for insurers, the comprehensive use of reinsurance has served to curtail material net loss ratio volatility.”

The net loss ratio for direct non-life business has generally been below 70 percent over the past ten years, according to figures published by the Australian Prudential Regulatory Authority. AM Best said this has strongly contributed to the industry’s ability to return combined ratios below 100 percent, even in catastrophe-heavy years.

Despite the resilience of Australia’s insurers, AM Best does expect the current fire season to make a dent in the full-year earnings and net loss ratios of the country’s direct insurers.
“The role that reinsurance will play in smoothing earnings from the current bushfire events remains to be seen,” said AM Best. “As loss estimates and insurers’ exposures increase in certainty, so too will the ultimate destination of losses and the reinsurance coverages triggered.

“Individual insurers’ reinsurance terms and conditions will also play a role, particularly concerning the definition of a single event, notably concerning any geographical restrictions and hours clauses applying to the fire series.”

AM Best said that determination of these terms may prove material for certain insurers in determining whether event excess of loss retentions have been reached, or whether aggregate reinsurance protections will be hit from accumulation of losses below event limits.

It also noted that although the overall message from Australian reinsurance renewals at January 1, 2020, has been one of general stability, meaningful bushfire losses passed to reinsurers may result in upward pressure on reinsurance rates and tightening of terms and conditions in upcoming renewal windows.

“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,” said AM Best. “Bushfire is a known and annual risk in Australia; however, managing changes in climate conditions presents a real risk for insurers and reinsurers, particularly as certain areas consumed in the current blazes were previously considered as low-risk bushfire zones.”