Australia’s property and casualty (P&C) sector has been warned it faces a “bumpy” year as the industry attempts to address a raft of pressing challenges such as uncertainties stemming from two business interruption test cases.

S&P Global Ratings, which sounded the warnings last week, says rising reinsurance costs and heightened market volatility are the other potential risks that could materially affect the industry.

“It’s going to be a bumpy year,” Credit Analyst Craig Bennett told insuranceNEWS.com.au. “They have been affected both in heightened claims and they have also been affected by investment earnings.

“On the flip side though, it is a hardening market and they are getting good premium rates. That is a positive.”

As was reported last week, proceedings have commenced in the Federal Court of Australia for a second business interruption test case. The second case will look at the application of “further issues” in relation to pandemic coverage in business interruption policies.

In the first test case launched last year, the NSW Court of Appeal ruled insurers could not rely on exclusions that referenced the now repealed Quarantine Act. The insurance industry is seeking leave to appeal that decision.

Mr Bennett says the industry has been “proactive” in addressing potentially adverse BI claims exposure, referring to the actions taken by major insurers - IAG, Suncorp and QBE - to set aside significant provisions.

“The sum total is about $2.5 billion which is quite meaningful in size,” Mr Bennett said. “It has had a bigger impact on the earnings profile and they have put aside reserves for that. Their biggest exposure has been to business interruption.

“I think they have been proactive in terms of setting up provisions where there is that uncertainty.

“In terms of whether they are realised in terms of payouts, I guess that is a second question.”