Rates Over Reinsurance For General Insurers 

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Brokers are largely in agreement that the outlook for domestic general insurers is positive, anticipating the current strong commercial rate environment will persist. 

-Current rate cycle is expected to persist, underpinning a positive outlook for general insurers
-Might re-insurance become uneconomic at the next time for renewal?
-New Zealand flooding event could further drive up reinsurance costs 

By Danielle Austin 

Despite a number of pressures facing the domestic general insurance sector, including the rising costs of reinsurance, a number of brokers have outlined a constructive look on the industry. It is expected that ongoing strength in the rate cycle, combined with easing inflation pressures, will support revenue growth and expanding margins.

Goldman Sachs currently holds a largely positive view on the general insurance sector, including insurance brokers. The broker anticipates headwinds and tailwinds are likely to offset each other over the second half of 2023, but that the industry can deliver gradual margin improvement longer-term as the impacts of higher premium rates emerge. 

Goldman Sachs named QBE Insurance ((QBE)), on which it recently initiated, its top pick within the sector. It considers QBE to be most exposed to strength in the commercial premium rate cycle and likes that the insurer is experiencing organic volume growth.

The broker also initiated on Suncorp Group ((SUN)) and Insurance Australia Group ((IAG)) with a Buy rating. Of insurance brokers, Goldman Sachs prefers AUB Group ((AUB)) over Steadfast Group ((SDF)), predominantly because of a noticeable difference in valuation.

Aggregate reinsurance and catastrophic events 

Macquarie posits purchasing aggregate reinsurance at upcoming renewals may no longer prove an economic option for insurers at this point. The broker explains that pricing may now have moved to a point where the earnings certainty may not justify the cost for insurers.

It wouldn’t be the first time insurers had decided the cost outweighed the benefits, with insurers last opting out of buying aggregate reinsurance in 2008. 

Aggregate cover offers insurers some earnings protection against hard to predict catastrophic events. With the frequency of these events increasing over the last decade, largely a result of climate change impacts, reinsurers are accordingly offering less coverage at a higher price. 

Macquarie does anticipate investors will initially respond negatively should insurers opt out of aggregate cover, given the greater risk of earnings volatility. Conversely, this broker considers the scenario could be a positive, given it anticipates material underlying earnings upgrades. 

While insurers have mostly been spared the impacts of catastrophic events in recent months, New Zealand has, in recent days, experienced significant rainfall causing landslides and flash flooding. In its last update on the sector, Jarden notes Insurance Australia already appears to be feeling the effects of higher catastrophe retention, and the broker expects Suncorp Group will soon follow. 

With its new reinsurance cover coming into effect from the start of the year, Insurance Australia is now subject to higher retentions, and recent flooding events have significantly increased the likelihood the insurer will exceed its catastrophe budget.

Suncorp Group, which currently retains better reinsurance coverage, is better insulated than its counterpart from the event, but Jarden notes this could change into the new fiscal year. Currently, Insurance Australia's maximum event retention is $236m, compared to Suncorp Group’s NZ$50m. 

To date, the broker highlights Insurance Australia and Suncorp Group have respectively received 5,000 and 3,000 claims related to the flood event. Given these early numbers, Goldman Sachs expects this event could pose a significant cost to insurers, with claims expected to rise significantly as events unfold.

This broker highlights Insurance Australia has already flagged it may review its perils costs for the fiscal year as it gains clarity on the financial impact of the event. Goldman Sachs expects to see Suncorp Group benefit from its preferable reinsurance, but sees the insurer as being at risk of higher costs and retentions when renewing at the beginning of the new financial year. 

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