Climate Costs Burden Heaviest For Aussie Insurers

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Australia’s overweight exposure to natural catastrophes is weighing on insurers, with steadily increasing catastrophe costs likely to impact on margins moving forward.

-Australian insurers remain more exposed to catastrophe risks than insurers in other geographies
-Morgan Stanley warns catastrophe events should be considered structural moving forward
-Insurers may look to increase premiums to offset catastrophe costs, market experts warn high prices could leave Australians underinsured

By Danielle Austin

Increasing numbers of natural catastrophes are set to continue to impact on insurers, but Australian insurers have a larger burden to bear than international peers.

With climate change driving natural catastrophe occurrences to be more frequent and intense, analysts from Jarden noted catastrophe activity drove a -$200m loss for Australian general insurers over the third quarter.

With Australia’s unique geological conditions providing exposure to risk from climate change-driven natural catastrophes including flash flooding, hail events, storms and east coast lows, bushfires, as well as the dangers presented by rising seas levels, Jarden analysts expect general insurers will look to increase their catastrophe budgets in the coming years, which coupled with inflation is likely to support strong rate momentum in the coming year.

With the general insurance industry reporting annual increases in natural catastrophe losses since 2008, Morgan Stanley is now of the belief that catastrophe risk should be considered structural rather than cyclical.

The recent climate-change driven La Nina weather events, which included the Queensland and New South Wales floods earlier this year, could result in insurance industry losses of over -$4bn globally, making it the largest insured loss event to date.

Insurers have been working to increase awareness of the industry impacts of climate change driven catastrophic events in a bid to stabilise earnings, but any impact will likely be the result of a multi-year journey requiring government support according to Morgan Stanley, and for this reason the broker expects catastrophe risks to worsen before they improve.

Some market experts are anticipating catastrophic costs could increase 5-7% annually moving forward

At a topline level, Morgan Stanley analysts expect increasing instances of catastrophic events and associated claims will drive increased earnings volatility for insurers, and we can likely expect those insurers to look to offset this with higher premiums and investment income, changes to risk selection, and through further purchasing of reinsurance which will likely also become more expensive.

Additionally, while insurers currently rely on reinsurance to reduce exposure to these events, moving forward they may need to hold more capital to buffer catastrophe risk.

Australian insurers bear the burden of climate change catastrophes

Jarden analysts noted the insurance trading ratio for domestic general insurers compressed to 2.8% in the third quarter off the back of catastrophe floods and weather events, while the experts from Morgan Stanley noted Australia currently appears to have almost eight times more exposure to natural catastrophe events than the global average, equating to around $38bn in economic costs annually since 2020.

Not only is the country as a whole more exposed to natural catastrophes, the Climate Council estimates Australians are five times more likely to become displaced by these events than those in Europe, and that by 2030 one in every twenty-five homes will be considered uninsurable. Morgan Stanley warned that increased costs from insurers could lead to Australians being underinsured, or without insurance all together, leaving them at further risk.

Those insurers more exposed to natural catastrophes, such as Suncorp ((SUN)) and Insurance Australia Group ((IAG), will naturally be more impacted by increasing instances of catastrophe events. Jarden noted both Suncorp and Insurance Australia’s insurance trading ratio lagged peers with more commercial exposure in the third quarter.

The broker remains Overweight rated on Suncorp and Buy rated on Insurance Australia Group.

Both Suncorp and Insurance Australia Group have shifted their respective business mixes towards short-tail insurance over the last decade, with the insurers now reporting business mixes comprised of 80% and 85% short-tail insurance, with short-tail insurance more prone to catastrophe risk.

The Morgan Stanley analysts noted Suncorp has higher exposure to Queensland, the state predicted to have the largest number of uninsurable properties by the end of the decade and the highest current catastrophe risk, but also remains a more diversified company than Insurance Australia Group.

Accounting for increased catastrophe events, Morgan Stanley has reduced its net profit forecasts for Suncorp by -6% and -4% for FY23 and FY24 respectively, as well as increasing its forecast catastrophe budget to 12% of earned premiums in FY23.

For Insurance Australia Group, the broker reduced its net profit and earnings per share forecasts -6-7% over FY23 and FY24, and also lifted its forecast catastrophe budget to 12% of earned premiums in FY23.

What do other brokers say?

Ord Minnett has similarly commented on the impact of increased catastrophe risk to insurers, and noted a preference for insurers with commercial exposure over personal exposure.

The broker recently anticipated Suncorp will increase its costs and perils allowances materially as a response to the recent catastrophe event season, which it expects could impact on company margins by -1.5 percentage points. Ord Minnett anticipates premium increases are ahead for Suncorp’s personal insurance lines.

Looking at Insurance Australia Group, the broker noted this insurer increased its expected full year perils claims to $1.1bn from $1.045bn following the catastrophe event season, with the company receiving 25% of claims related to recent east coast flooding and weather events.

Ord Minnett expects Insurance Australia Group will face higher reinsurance premiums, with renewal due in July. The broker remains Buy rated on both insurers.

The sentiment was again echoed by analysts from UBS, noting east coast flood events have driven insurance industry margins down -1% and that indicators from these weather events are not supportive of a strong pricing response from domestic insurers. While UBS is Buy rated on Suncorp, it retains a Sell rating on Insurance Australia Group.

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