Bushfires this summer could lead to increased reinsurance rates at renewals while underwriters will also be looking at their approach to managing exposure to the risk in future, AM Best says.

The role reinsurance will play in smoothing underwriter earnings impacts from the fires will depend on individual insurer terms and conditions, including retention levels and aggregate protections, the ratings company says.

Single event definitions will be particularly important “notably concerning any geographical restrictions and hours clauses applying to the fire series”, AM Best says.

Losses from the catastrophe declared on November 8 were $1.65 billion as of January 23, with claims coming from NSW, Queensland, SA and Victoria, the Insurance Council of Australia says.

The NSW Rural Fire Service says a further 25 homes have been destroyed since Friday, while in Victoria access to East Gippsland areas remains restricted.

“As loss estimates and insurers’ exposures increase in certainty, so too will the ultimate destination of losses and the reinsurance coverages triggered,” AM Best says.

“Meaningful bushfire losses passed to reinsurers may result in upward pressure on reinsurance rates and tightening of terms and conditions in upcoming renewal windows.”

Insurers will also be carefully considering their approach to managing bushfire exposures, which may ultimately result in tightening of terms and pricing increases in loss-affected areas.

“Bushfire is a known and annual risk in Australia, however, managing changes in climate conditions presents a real risk for insurers and reinsurers, particularly as certain areas consumed in the current blazes were previously considered as low-risk bushfire zones,” AM Best says.

The fire season will likely make a dent in direct insurer full-year earnings and net loss ratios but Australian insurers are well capitalised and the industry has shown itself capable of absorbing natural catastrophe losses over recent years.

“Despite rising loss totals, AM Best is of the view that Australian insurers are well placed to withstand the bushfire losses,” it says.