The most significant impact of the year’s natural disasters on the industry has come from reinsurance, reinstatements and renewals, Australian Prudential Regulation Authority (APRA) Executive Member Ian Laughlin has told a House of Representatives inquiry.

Mr Laughlin said reinsurance has increased an average 50% and “reinsurers are now less willing to write lower levels of cover”.

He told the Standing Committee on Social Policy and Legal Affairs, which is examining the insurance response to disasters, that APRA is conducting stress tests on insurers following the series of events.

“In simple terms, we are looking at the insurers again and asking them: given their resources now and the reinsurance arrangements now, how would they cope with another round of these sorts of events?

“We are doing some desk-based research as well, to understand from our point of view how they would cope.”

Mr Laughlin said APRA set up a small team of specialist staff earlier this year when it became apparent that natural disasters were going to be extraordinary in their frequency and impact.

The team worked on establishing the scale of insured claims and the impact on general insurers and the industry as a whole.

“We wanted to satisfy ourselves that each APRA-regulated general insurer had the financial capacity to meet our capital requirements and ultimately its claims,” he said.

Mr Laughlin said the overall industry capital position was strong when the events occurred.

Some smaller insurers asked for additional capital from foreign parents and this was received promptly.

“This work gave us confidence that no general insurer would have difficulty continuing to operate in the face of the potential losses from these disasters.”

APRA GM Policy Development Helen Rowell said there have been some very significant reinsurance increases for insurers operating in Queensland or that have material exposures in Victoria or Perth.

She said reinsurance prices are increasing because global capacity has been strained.

“Reinsurers generally are putting up their rates by 10% to 15% every renewal and have done over the last few years.”

Ms Rowell said insurers have been exposed to windstorm and flooding in Europe and reinsurance rates are also being driven by low investment returns.

“In an environment of low returns, they obviously cannot make as much from investment returns and therefore they have to ensure that their underwriting of the insurance risks is adequately priced.”