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Look beyond reinsurance to mitigate weather risk, insurers told

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S&P Global Ratings has urged Australian insurers to consider other measures such as government-backed schemes to cope with what is expected to be a worsening claims burden from weather-related disasters as climate change intensifies.

The credit ratings agency says in a report today reinsurance programs will remain an effective tool to partially cushion catastrophe losses but it believes going forward, the industry will have to look at other options to ease the strain on earnings.

Last summer’s catastrophic bushfire season has already led to claims in excess of $2.3 billion while towards the end of September, the combined bill from four recent natural disasters - bushfires, hailstorms, flooding and strong winds - passed $5.4 billion.

COVID-19, which has spawned disputes here and globally over what is or is not covered, has also added to the mounting pressure on insurers to find a solution for future communicable disease outbreaks.

“The ongoing availability of large reinsurance programs comes at a price,” S&P said. “Particularly with the pricing cycle on an upward trajectory and tightening underwriting terms, we believe reliance on reinsurance alone cannot overcome weather-related challenges.

“The industry's ability to establish additional solutions to natural perils and the pandemic will be key. It could do this through measures such as implementing government-backed schemes or seeking new capital resources from alternative investors.”

S&P Director of Financial Services Craig Bennett says Australian insurers will benefit from having a number of different approaches.

“I don’t think there is one silver bullet to this,” Mr Bennett told today. “Reinsurance is definitely a material factor that reduces the risk but there are other ways to reduce the risk as well.”

He says New Zealand’s Earthquake Commission is an example where “insurers don’t have to wear the complete exposure” to natural disasters.

The S&P report says Australian insurers are among the world’s biggest buyers of reinsurance coverage, led by IAG.

Conscious of the climate change impact on extreme weather events, Australian insurers may seek wider use of multiyear contracts or longer contract periods as a form of earnings protection.

“Australian [property and casualty] insurers have signed on to reinsurance programs containing reinstatements, top-and-drop cover, and multiyear cover attributes,” S&P said, “Without a doubt, reinsurance protection had proved useful for them.”

S&P says since 2008 the benefits from reinsurance have strengthened, providing 28% of cover for claims incurred in the year to June 30.

The S&P report, which looks at the Asia Pacific region including Australia, believes the underlying proposition of reinsurers and insurers remains unchanged.

“They help policyholders manage risk and reduce financial burdens related to extreme weather and, more recently, pandemic-induced losses,” S&P said.