Best’s Commentary: Reinsurers Count the Cost as Australia Endures Another Devastating Flood Season

Business Wire

SINGAPORE--(BUSINESS WIRE)--
AM Best is of the opinion that the majority of gross losses from the recent and devastating flooding in Australia likely will be borne by the reinsurance industry.

The flooding has brought widespread damage to regions of New South Wales and Queensland. In its Best’s Commentary, titled, “Reinsurers Count the Cost as Australia Endures Another Devastating Flood Season,” AM Best notes that while the flooding should have limited impact on primary insurers’ balance sheet, insurers may find higher pricing and tougher terms and conditions in subsequent reinsurance negotiations, which could place negative pressure on operating performance.

“Insurance costs associated with natural catastrophes is generally subject to demand surge inflation, resulting from a localised increase in costs of labour and materials to rebuild,” said Yi Ding, senior financial analyst, AM Best. “Prices of building materials are already at inflated levels due to supply-chain slowdowns and as demand intensifies in the aftermath of COVID-19-related lockdowns, as well as historically high oil prices and commodity shortages prompted by the conflict in Ukraine.”

The commentary states that Australian property insurers typically buy catastrophe excess-of-loss reinsurance with a limit above an expected 1-in-200-year loss, driven by national regulatory capital requirements. Losses associated with these floods are anticipated to fall well-below this threshold. However, the total net exposure of direct insurers is driven in part by reinsurance contract terms, including the hours clause, which stipulates the reinsurer will cover all the financial losses accumulated in a defined number of hours. Treating the flooding as multiple events based on the hours clause could lead to significantly higher net cost or increased utilisation of annual aggregate reinsurance programmes for direct insurers.

With the increased frequency of flood, cyclone and bushfire events resulting in large insured losses in Australia in recent years, AM Best expects to see an increased focus by (re)insurers on understanding, controlling and mitigating climate risk.

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=318753.

To view a video discussion about this commentary, please visit http://www.ambest.com/v.asp?v=ambaustralianfloods322.

AM Best is a global credit rating agency, news publisher and data analytics provider specialising in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.