Inflation and disasters front and centre as premiums rise

Almost like Exhibit A, IAG’s margin downgrade and discussion about rising premiums, inflation and natural peril costs came just a day after the first meeting of a new Federal Government and industry group looking at resilience and insurance affordability.

“At the moment pretty much across the entire enterprise we are repricing at 10% plus, which is pretty significant,” CEO Nick Hawkins told an analyst briefing on Friday, while also noting that the environment driving pricing changes is not likely to change materially in the next 12 months.

“What we know we are going to have to continue to price for, is increased perils assumptions,” he said. “Inflation is not going to drop away tomorrow, so are going to continue to be pricing for that.”

A hardening market for commercial classes is likely to continue longer than originally thought, he said, and personal lines will also have to be managed to take account of cost structures.

Claims inflation impacts are expected from the Auckland floods, while the event has blown out IAG’s natural perils allowance and comes as global reinsurance costs are increasing and as Australia continues to work through claims triggered by a slew of floods and other catastrophes.

“This is a global challenge right now that pricing is up everywhere, not just from inflationary pressure, but also from perils cost of reinsurance,” Mr Hawkins said. Everywhere in the world is repricing and it’s expected to continue in Australia and New Zealand, he says.

The rising cost of reinsurance means insurers are having to take hard decisions about their levels of cover for frequent “secondary perils” such as floods. Whichever way they move, premium levels for their customers are likely to be impacted.

Mr Hawkins says the reinsurance market has changed greatly over the past five years, and in some cases it’s a better decision to retain some of the risks rather than paying “80, 90 cents in the dollar” for protection provided by increasingly expensive lower layer covers. The company also benefits from its quota share arrangements, he says.

“All of the lower layers of reinsurance are all about managing the volatility of the company for what we believe is a reasonable economic cost,” Mr Hawkins said. “I think the market should assume that those lower level covers are going to be either unavailable or so expensive that companies like us don’t automatically buy them.”

IAG estimates gross costs from the Auckland floods will top $350 million, and that after reinsurance the cost will be at the $236 million retention level, boosting estimated full-year peril costs. The retention was increased as part of the program renewed in January in a harder reinsurance market.

The Auckland floods have followed seemingly endless flooding in Australia over the past couple of years as La Nina has influenced weather patterns. Supply chain pressures continue to have an impact, and were particularly a factor in motor for IAG during the first half.

The company at a briefing in August was confident about managing inflation impacts, but motor has been hit by a confluence of rising activity post covid and higher-than-expected expenses. Roads became busier increasing crash repairs at the same time as parts and labour shortages persisted. Longer repair times translate into higher costs.

The impact of rising natural catastrophes has spurred the Federal Government to commit $200 million a year over five years on mitigation and resilience and has raised the heat on the cost of insurance, particularly for properties considered more exposed to perils.

The Federal budget also provided $22.6 million for the Hazards Insurance Partnership involving industry and the government, which aims to more effectively target mitigation spending and explore affordability issues.

Emergency Management Minister Murray Watt said in launching the partnership at its first meeting in Brisbane on Thursday that more natural disasters are having a huge impact on insurance affordability.

Assistant Treasurer and Financial Services Minister Stephen Jones says the only way to bring premiums down is to reduce the impact of severe weather events, and the partnership is about better data, better infrastructure and better housing development. At the same time, taking out insurance for natural hazards, must be easier to understand, he says.

IAG’s latest update has again underlined the wider challenges ahead for the industry on a number of fronts as catastrophes impact the market and premiums rise.