SINGAPORE–(BUSINESS WIRE)–AM Best believes that the majority of the gross losses resulting from the recent and devastating floods in Australia are likely to be borne by the reinsurance industry.
The floods caused extensive damage in parts of New South Wales and Queensland. In his Comment by Besttitled “Reinsurers count the cost as Australia endures another devastating flood season”, AM Best notes that while the flood is expected to have a limited impact on the balance sheet of primary insurers, insurers may find prices more higher conditions and more stringent conditions in subsequent reinsurance negotiations, which could put negative pressure on operational performance.
“Insurance costs associated with natural disasters are generally subject to high demand inflation, resulting from a localized increase in the cost of labor and materials needed for reconstruction,” said Yi Ding, analyst senior financier at AM Best. “Building material prices are already at inflated levels due to supply chain slowdowns and increased demand following COVID-19 related lockdowns, as well as historically high oil prices. and shortages of raw materials caused by the conflict in Ukraine”.
The commentary says Australian property insurers typically purchase excess of loss reinsurance with an upper limit of one expected loss over 200 years, due to national regulatory capital requirements. Losses associated with these floods are expected to fall well below this threshold. However, the direct insurers’ total net exposure is determined in part by the terms of the reinsurance contracts, including the hours clause, which stipulates that the reinsurer will cover all accumulated financial losses for a set number of hours. Treating floods as multiple events based on the hours clause could result in a significantly higher net cost or increased use of annual global reinsurance programs for direct insurers.
With the increased frequency of floods, cyclones and bushfires resulting in large insured losses in Australia in recent years, AM Best expects (re)insurers to focus more on understanding, controlling and l climate risk mitigation.
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