How do the cyclones impact Insurance firms?
It is quite well known that a cyclone is a natural calamity that may sometimes cause a significant damage to businesses, households and infrastructure, and further leads to rise in number of insurance claims (and these can be extremely costly for insurers if the damage is quite high).
Natural disasters impact the insurance companies those who have high exposure to businesses and usually insurers struggle to assess the damages of commercial and industrial properties in affected areas and process claims in accordance to the damage. Further, in the last few years’ insurance premiums have gone up due to extreme weather events, increased costs for reinsurance and advanced risk modelling. However, strong capital adequacy and reinsurance arrangements sometimes are sufficient to provide relief in terms of mitigating claims and protecting insured persons. Furthermore, financial firms generally defer loan repayments from clients, waiving of costs on early redemption of deposits, waiving of fees on loans and equipment finance to assist in rebuilding operations and this can have a severe impact on many insurance companies’ financials in their respective forthcoming results.
A key aspect thus becomes putting together a rational approach for determining the maximum loss for which an insurance company should have protection by way of reserves and reinsurance arrangements. It is also noted that government reinsurance companies act as a lender of last resort by providing reinsurance at a reasonable cost in the event of a shortfall in paying claims by the insurance companies.
The recent jitter coming-in from the Debbie Cyclone
Australia witnessed a catastrophic situation owing to the Debbie Cyclone that recently hit areas such as Queensland.The Insurance Council of Australia is reported to have given a figure of about 28,000 claims already lodged and insured losses are now above $300 mn.
Suncorp has been expected to face huge costs due to the company's significant presence in Queensland (North Queensland’s major insurer) and has already pointed to about 8000 claims being received. However, the group had earlier highlighted that it is well protected against the financial impact as the claims costs are expected to be covered by a combination of Suncorp’s main catastrophe program ($250mn to $6.9bn) and the additional natural hazard aggregate protection ($300mn). The stock price for the group has been down 1.22% in last five days (as at April 03, 2017).
Another major insurer, RACQ, had earlier recorded about 170 claims and expected them to keep accelerating over coming weeks. It is now being said that there might be more than 2500 claims already received by the group so far. QBE Insurance reported that initial claims have been small and linked to problems such as damaged fences and flying debris. As per latest figures, QBE is reported to have received about 1500 claims. While profitability may be affected in coming quarters as the financial impact of the disasters flows through, it is to be seen how the insurers handle the situation given the protection covers in hand. At a larger note, it is also said that the cyclone impact would be felt on Australian economic growth and inflation in the current quarter.
Rising insurance premiums due to increasing frequency of natural disasters in Australia
The amount paid out to customers who make claims is the biggest single cost for any insurance company. Claims levels across Australia have been said to have reached unprecedented levels over the past few years (for instance, home and content premiums in the north Queensland rose 80% from 2006 to 2013, while the national average rose 25%) due to natural disasters. It is also worth noting that the estimated cost of cyclone risk is the main reason for North Queensland high premium rates as the rates are significantly higher than premium rates in most of the other parts of Australia. Given the scenario, the insurers may have to undertake a more proactive approach in order to deal with the rising claims and managing their respective performances.
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