IAG expects there will be “some pressure around reinsurance costs” but believes its multi-year quota share programs will provide some relief.

The insurer made the assessment after a report from Morgan Stanley predicted mounting catastrophe losses fuelled by climate change will push up the industry’s overall reinsurance expenses.

“Our view is that there will be some pressure around reinsurance costs, but more so around the tactical perils stop-loss and aggregate covers due to recent experience of utilising them,” an IAG spokesman told insuranceNEWS.com.au.

“Our overall outcome, though, will be mitigated somewhat through our multi-year reinsurance deals, including quota shares.”

The Morgan Stanley report says reinsurers’ risk appetite has hardened considerably after two years of underwriting losses as earnings at Suncorp, IAG and QBE took a hit from bushfires, floods and other severe weather events.

Climate studies have concluded there is a strong correlation between global warming and the increasing numbers and severity of natural catastrophes.

Since 2010, reinsurance recoveries have averaged 74% of reinsurance expenses and in the past 24 months, it has increased to 87%. Reinsurers working in Australia operate with expense ratios of 27-28%, which means they are probably not making any profits here.

“We think reinsurance pricing will rise for Australian general insurers after a decade of severe catastrophe losses,” the report said. “While all Australian general insurers are starting to address climate change risk, it is not yet clear how much they can control an issue of this magnitude.”

Morgan Stanley estimates the industry’s natural catastrophe losses have seen a consistent increase since 2008, with last year and the early months of this year recording “substantial” figures.

It says Suncorp and IAG have regularly exceeded their catastrophe budgets while QBE is less affected because a significant portion of its business is from non-Australian markets.

A 10% increase in group reinsurance cost in the 2020/21 financial year could lead to a 1.2 percentage point fall in Suncorp’s insurance margin and 11% drop in insurance profit, the report says. In contrast, IAG’s insurance margin will only decline by 0.7 percentage points and insurance profit by 5% under the same scenario.