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In this update, we share practical insurance insights from the quarter that’s been, and forecasts for the quarter ahead.
The insurance market was again tested by two significant events in the period January – March 2021 (Q3). Declared ‘Catastrophes’ by the Insurance Council of Australia (ICA), the Perth Hills bushfires (February), followed by the floods impacting large parts of New South Wales and SE Queensland (March), once again forced property insurers to reduce their exposure to extreme weather perils. As reported in our FY21 Q2 edition of HoneIn, such corrections take the form of reduced capacity to insure against risk, sub-limits for hail, bushfire, flood and windstorm, alongside continued price increases and higher deductibles.
In early March, the Australian Prudential Regulation Authority (APRA) released its Insurer performance statistics for the year ending 31 December 2020. The results did not bode well for insurers, with Net Profits After Tax falling 98.9% from $3.1bn to $35m in comparison to the same time last year. This dramatic reduction has been driven by natural catastrophes, provisions for COVID Business Interruption losses, as well as continued declines in investment income.
1. Pricing increases between 5-15% for non-catastrophe exposed risks and 20%+ for catastrophe-exposed risks such as floods, cyclones and bushfires
2. Reduced capacity to insure assets located north of the 25th parallel and in regional/bushfire exposed regions.
3. Non damage Business Interruption extensions (closure by Public Authority, Prevention of Access and Public Utilities) to be further sub-limited or excluded altogether
4. Infectious Disease exclusions
5. Cyber and Electronic Data exclusions.
Pricing and capacity appear to be stabilising somewhat for high hazard sectors (food & beverage and EPS building material) as competition gradually increases, while rapid rate rises over the past four years will see some insurers willing to re diversity and/or redeploy capacity for a short-term return. This being said, underwriters are likely to remain incredibly conservative and will require Management referral approval.
FY21 Q4 is also reinsurance treaty negotiation season for the larger Australian Insurers. We expect the impacts of a realignment of underwriting protocols, appetite, and capacity deployment to be felt in July-August. If the 31/12 and 01/01 results are any indication, capacity will remain stable with any upward pricing likely to remain orderly.
With the market remaining volatile, insurers will continue to be highly selective about taking on risk. Further aversion to certain perils by insurers will likely result in clients having to continue to fund such exposures via their own balance sheet protection, or alternative means such as parametric risk transfers or captives – owned or rented. While often seen as an unconventional form of risk transfer and financing, these options are becoming increasingly popular among medium sized corporations.
Furthermore, increased levels of competition are being witnessed in the Asian market via Singapore. While the Australian market remains fixated on reducing exposure to risk, appetite exists for some Asian markets to diversify their underwriting across varied sectors and industries. There is also a willingness to look at offering capacity in medium to high catastrophe zones.
Feel free to reach out to discuss your risk exposures.
National Head of Corporate Insurance & Risk Solutions
Read the Q&A with BRIC CEO - Chris Bovill
