Risk repriced. Australia no longer a “good hedge” for reinsurers: ICA CEO

Delivering a speech in Canberra today, Andrew Hall, the Executive Director and CEO of the Insurance Council of Australia (ICA) explained that insurance and reinsurance markets are repricing risk globally and for reinsurers, writing risk in Australia is no longer seen as the diversifying hedge it used to be.

Which is contributing to the development of insurance protection gaps, Hall said, driving a need for a partnership approach to reduce the pressure on premiums for consumers and ensure coverage is sustainable.

Australia has been beset by natural catastrophe and severe weather events in recent years, with the losses falling to the insurance and reinsurance market rising fast.

Hall explained the role of inflationary costs in driving claims quantum higher, highlighting that a repeat of the $3.3 billion 1999 Sydney hail storm could drive an insurance market loss of almost $9 billion today.

With the number and value of buildings increasing all the time in severe weather and catastrophe exposed regions, insurance is even more critical today.

Urbanisation, geopolitical strife, growing weather volatility, increasing cyber threats, rising exposure values, all mean “We are living in a time now though when risk is being reassessed,” Hall explained.

“The certainties about how we see the world are changing,” Hall said, “Risk isn’t receding, it’s accelerating.”

Hall stated, “All of these pressures have come together to create a perfect storm in insurance markets.

“Risk is being repriced.

“The pressures and costs are increasing. The trend lines are all going one way. Because of these pressures, insurers’ input costs are going up and up. One of those costs is capital.”

He went on to explain how the global capital markets have supported Australia’s insurance industry, in particular through the global reinsurance markets.

Saying that, “Reinsurance is our way of accessing a wider pool of protection when disasters strike. Year to year the financial performance of the insurance sector can be volatile, as we’ve seen in the years since the 2019 Black Summer fires. Reinsurance allows insurers to smooth their losses, protecting themselves and the Australian financial system from the impact of significant loss – usually as the result of a large event. And reinsurance is how global capital helps underwrite Australian risk.”

He continued to say, “Australia used to be seen by reinsurers as a good hedge against events in the northern hemisphere such as Japanese earthquakes, or Florida hurricanes.”

But, “Not anymore.”

Hall said that, due to the trends towards volatility in a world of rising values, “Australia is being re-assessed by reinsurers.”

“After wearing losses over several years in the Australian market they are having to put through significant increases in the cost of their cover,” Hall explained.

Which is being reflected in the price of premiums and has led to, “Some of the biggest price adjustments in nearly two decades have gone through the insurance system.”

With these price hikes in insurance hitting consumers at a time of high inflation, energy costs and a cost-of-living crisis, Hall said that this is driving a widening of the insurance protection gap.

Which means pressure on people, the economy, as well as banks and the financial system.

Hall said, “Extreme weather events in areas of growing population mean banks are increasingly exposed to the protection gap risks. It will also place greater pressure on governments to bear recovery costs.”

Posing the question, “What can we do in partnership with all levels of government, other stakeholders like banks, and customers, to alleviate the pressure on premiums, and not let the gap turn into a chasm?”

Then stating that, “For the industry this is the key problem to solve in this time of dramatic change.”

Hall has laid down the key challenge facing global insurance and reinsurance markets, maintaining adequate coverage at affordable prices, in a time of rising risks, exploding values, increasing volatility, climate change and currently a trend towards a retrenching of capital away from those factors, not towards them.

Hall, in his speech today, provided insights into what he and the ICA see as potential answers and the progress being made by the Australian insurance industry.

But, critical to the industry there, is going to be the cost of reinsurance over the longer-term, as this can act as a brake on insurers own capital deployment and ability to assume risk.

Australia faces the same issues as the rest of the world, which have become especially evident in insurance markets in California, Florida and elsewhere.

With consumer insurance premiums likely to keep rising, while reinsurance costs look set to remain higher than experienced over the last two decades, the industry must start to look for where efficiency gains can be made.

To lower the cost of risk capital, for its users. While maintaining adequate returns for the global capital providers, to ensure more capacity becomes available to help the world absorb volatility, rather than less.