Storms and floods dampen profits for insurers

Storms and floods dampen profits for insurers

12 March 2010

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Australia —  Catastrophic weather events along the east coast of Australia struck thousands of home and business owners, and the damage has spread to the bottom line of the nation’s major insurers.

Insurance Australia Group (IAG), the country’s second biggest general insurer, says the Victorian floods mean the company’s natural peril costs will exceed its budgeted allowance and the insurance margin forecast has been reduced.

Australia’s biggest general insurer Suncorp-Metway and third largest Allianz have both received thousands of claims already, and more are likely to follow.

Already there are predictions insurance premiums will rise as a result of the culmination of these extreme weather events.

Professor Michael Sherris, head of Actuarial Studies at the Australian School of Business, says insurers will be reassessing the risk of flood and weather damage.

“These events result in higher demand for insurance, just after the point at which insurers look at increasing premiums to cover their losses,” he said.

The hailstorms and heavy rain that pounded Melbourne recently are already the most expensive weather catastrophe to hit Australia since the devastating Black Saturday bushfires in regional Victoria in February last year.

In Queensland, residents in the south-west are cleaning up after floods hit Roma and Charleville, while some homes in St George remain inundated.

Parts of central Queensland were also hit, impacting swathes of crops and taking out valuable transport infrastructure.

The Insurance Council of Australia (ICA) said about 71,000 insurance claims had been lodged in Victoria by owners of damaged cars, homes and businesses, with the price tag currently at $460 million.

It would be weeks before the full extent of the damage and insurance claims can be assessed, meaning the ICA’s initial estimate of 40,000 insurance claims appeared extremely conservative.

IAG said on Friday that it had received more than 24,000 claims related to the Victorian storms and natural peril costs were likely to exceed the budgeted allowance for the second half by $105 million.

The company underwrites motor and home insurance for RACV in Victoria, exposing it to a large number of claims arising from Melbourne’s freak storm.

IAG, which also owns brands including NRMA, SGIO and CGU, also reduced its insurance margin forecast for the full year.

In Queensland, about $120 million worth of insurance claims had been lodged, according to the ICA.

Suncorp Metway Ltd operates AAMI, GIO and Apia, and is a popular choice for Queensland residents.

Suncorp has received about 12,500 claims from Victoria and 1,300 claims from southern Queensland so far.

A spokesman for Allianz Australia, the third largest general insurer, there had been over 7,000 received by Friday and the company expected that number to “increase somewhat”.

It had been a good 12 months for insurers.

The last significant weather activity were storms in northern NSW and southeast Queensland in April and May last year, which saw about $85 million in claims lodged, according to research by financial services firm KPMG.

Claims for 2009 in Australia totalled an estimated $14.8 billion, down 19 per cent on the previous year.

That included the impact of the devastating Victorian bushfires in February 2009, which came at a cost of $1.12 billion to the insurance industry, KPMG’s 2009 insurance survey found.

Almost 10,300 claims were believed to be made as a result of the Black Saturday fires.

Remarkably, the fires rank as just the third largest weather-related disaster in Australia since 1985.

The largest, at a cost of $1.7 billion, remains the hailstorms that smashed roofs and wrote off cars across Sydney in April 1999.

Number two, at $1.48 billion, were the floods and damaging storms that hit the NSW central coast and Hunter regions across the Queen’s Birthday long weekend in June 2007.

They caused widespread flooding in the region, and caused the 225-metre coal ship the Pasha Bulker to run aground off Newcastle’s Nobbys Beach, where it remained stranded for 25 days.

While the latest round of bad weather will hit the insurers, the companies are protected because of reinsurance.

Suncorp stands to lose a maximum of $200 million as a result of these weather events before reinsurance takes the brunt, while IAG will pay $135 million before reinsurance kicks in.

Analyst Jason Kim, of Tyndall Investments, does not believe the market will punish Suncorp and IAG for these losses.

“I think the market should take it in its stride, realising that these things are beyond the control of management,” Mr Kim told AAP.

Fitch Ratings said the storms and floods would no doubt have a negative impact on insurers’ profits for the second half of the year, but the reinsurance programs mitigate the likelihood of major losses.

However any further catastrophic events before the end of the financial year would add to the woe, particularly for IAG.

“This potentially eats into their allowances for large claims catastrophes for the remainder of this half, so any other major event then will impact on their guided profitability,” Mr Kim said.

Suncorp’s reinsurance program protects it from a higher frequency of large events, meaning another significant event would not incur significant further losses.

For the smaller players in the industry, the storms and floods pose a major test of their resources and claims systems.

New brands in the home and motor vehicle insurance sector such as Youi, Real Insurance and Budget Direct will be facing their first widespread claims period as a result of the Melbourne storm.

“A lot of people have been attracted to these guys because their premiums have been cheaper, but you don’t really know what the experience is like when you need to make a claim,” Mr Kim said.

“This will be a test for them, and consumers will ask `was it worthwhile to buy this insurance for $100 less if I find it quite painful to claim?’.”

Reinsurance protection will also come under scrutiny, and if inadequate could put real financial pressure on these smaller players, he said.

As Professor Sherris observed, though, there can be a silver lining to the storm clouds.

Catastrophic weather events inevitably spark consumers into reassessing their insurance coverage, and insurers stand to attract new customers or upgrades to current policies in the coming months.

In the meantime, it’s a busy month ahead for for assessors.

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