“It’s a good question,” said Craig Bennett (pictured above).
During a recent S&P Global Ratings webinar, Bennett, his firm’s director and lead analyst of insurance ratings, was asked about Australia’s insurance landscape.
The anonymous questioner set the scene in the context of how local insurers have so far successfully covered their higher reinsurance costs by hiking up their customers’ premiums. The questioner asked how these reinsurance costs and the need to increase catastrophe allowances are impacting insurers’ ratings?
“Reinsurance is a key component of risk management within the Australian property casualty insurance sector,” said Bennett. “We’ve seen reinsurance rates increasing by about 6% in the year to March.”
However, he said in 2022 increases were at a rate of 13% and in the prior year at 10%.
“So they’re continually increasing but the rate of increase is slowing in terms of the cost of reinsurance,” said Bennett.
In response to recent claims from natural disasters – like last year’s record round of flooding – insurers have also, he said, raised their retentions or allowance for catastrophes.
“It’s worth mentioning, though, these higher allowances also account for growth in the premium base that they’ve been liking, as well as new units and higher sums insured,” said Bennett. He said this partly explains the appetite of reinsurers for exposure to the Australian market.
“If you look back at past decades, reinsurers have received, on average, about $1.25 for every dollar of claim paid,” said Bennett. “So they’re ahead in terms of the risk taken in the Australian market.”
He said that augers well for reinsurance capacity going forward.
“One thing to probably point out, though, is that there will be different levels of capacity or appetite, at different levels of attachment of risk,” said Bennett. “We’re seeing that play through in terms of the way the reinsurance programs are being structured.”
“In terms of impacts for ratings, we are seeing primary insurers raising headline rates or premium rates by between 6%, up to the 12% range,” he said. “These follow similar levels of rate hikes in prior years, not only in response to higher reinsurance costs, but higher costs of claims and claims arising in response to inflation.”
Bennett detailed familiar cost factors like repair costs impacted by a shortage of materials and labour shortages.
“All of those factors are feeding into the higher claims [costs] that need to be covered for the insurers to make a profit and underwrite the risk,” he said.
Bennett said the “dynamic” of insurers rising their premiums to cover higher expenses and claims is continuing.
“But we do see risks moderating going forward,” he said. “So the rate of increase in premiums will likely slow and, similarly, there should be some sort of moderation in the cost of meeting those claims.”
The webinar also looked at the risk factors faced by the insurance industry across the Asia-Pacific. The extensive list included: Volatile capital markets, shifting reinsurance capacity and changing risk appetite among global reinsurers, higher claims costs, slowing economic growth, inflation, ESG challenges and cyberattacks.
The prospect of an easing in the rate of insurance premium increases brings some measure of good news for brokers. However, any rise brings the challenge of conveying that bad news to customers.
When Insurance Business asks brokers what their biggest challenge is, the answer is often rising premiums.
“That’s a really easy question to answer,” said John Farrell, director of Steadfast Taswide Insurance Brokers. “It’s the continuing rise of insurance premiums.”
Farrell, who spoke to IB from his Devonport office in Tasmania, attributed the rises partly to the high inflation impacting the global economy and Australia’s record round of storms and floods last year.
Much like last year and the year before, Farrell said hard to place risks – he included high hazard sectors, including in construction and also property related coverages for heritage listed buildings – are still hard to place.
Melbourne-based broker Shane Brady said the volatility of the insurance market can result in much more work for brokers compared to a few years ago.
“We’re working a hell of a lot harder just to achieve the same results we were three or four years ago,” said Brady who is director of McLardy McShane South East.
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