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should take your risk as opposed to another risk.” Suncorp has adopted a more sophisticated pricing and risk assessment capability by adapting its general insurance pricing engine from personal insurance to commercial for its SME portfolio. Mr Day says the application went live in May and enables the group to use a greater amount of data and rate for fire, storm and cyclones. It will enable Suncorp Commercial to de-risk its own business and become more competitive by attracting better risk through more targeted assessment and pricing. Coming months will show how clients react and how cushioned insurers are by a relatively buoyant economy. Standard & Poor’s expects demand for non-life insurance to continue to benefit from the solid performance of the economy, with real GDP growth, low unemployment and low interest rates. It also considers that the media coverage of disasters could boost business. “Recent natural disasters highlight the importance of adequate insurance coverage to consumers and businesses and, in our view, the events could trigger an increase in the take up and retention of both personal and commercial lines to some extent,” S&P analysts say in a report. Alan Jones of Austbrokers has not seen clients reduce cover in order to cut the cost of their insurance, but says brokers will have to explain increases and how they are working to find the most appropriate cover at the best price. Anthony Day notes there is still significant capacity in the reinsurance market globally and says reinsurers still have an appetite for Australia. Another industry leader, who did not want to be identified, says there has been “considerable uncertainty” in the period leading up to the reinsurance renewals, but underwriters are trying to get price rises where they can because clients expect an increase and insurers know they are facing higher costs. “Until most insurers get past June 30 and know the outcome of the natural catastrophe treaty renewals, there is a feeling of being in limbo,” he says. “Brokers in the SME area are telling me they are certainly seeing increases of 10% and north Queensland brokers are complaining about lack of availability.” The consequences of floods and earthquakes were most obvious in reinsurers’ first-quarter results announced last month, with companies reporting significant profit falls on liabilities for Japan, New Zealand and Australia. While reinsurers have given some indication of the impact on this year’s profit, the fallout will be reflected not only in the June treaty renewals but possibly in a longerterm re-evaluation of catastrophe risk in this part of the world. Hannover Re Senior Underwriter and Germany-based Head of P&C Treaty Department for Australasia, Michael Harms, says there will certainly be significant price increases in the Australian and New Zealand markets this year as treaties are renewed. “I feel we are in the midst of a giant exercise in recalculating the Australia/New Zealand risk, and we are witnessing the Australasian risk map being rewritten very quickly,” he says. “New Zealand was struck by two events in rapid succession which have possibly each exceeded a one in 500-year recurrence. “That changes the metrics of a market completely. It has never happened before in global reinsurance markets where a developed market like New Zealand with high earthquake insurance penetration was affected by two events of this frequency and severity in such a short time span.” 12
Mr Harms says that although the Australian floods, cyclone and bushfires were smaller than the New Zealand earthquake events, being less severe and hitting comparably higher ceding company retention levels, Australian clients should be prepared to shoulder some of the pricing reaction to New Zealand, since many Australian ceding companies were affected by the earthquakes via their local operations. “New Zealand will see much bigger premium increases than the rest of the world this year because of its two extraordinary events in rapid success,” he says. Mr Harms believes Australia will also see a sizeable “uplift effect”, and probably much larger price increases than the US or Europe, where the markets are larger and can take a more significant event before price changes are triggered. He warns that if the catastrophe modellers start reclassifying risk, pricing will react and the available reinsurance capital might be exhausted much faster for Australasian exposures.
“Australia will see a sizeable ‘uplift effect’, and probably much larger price increases than the US or Europe” – Hannover Re Senior Underwriter and Head of P&C Treaty Department for Australasia, Michael Harms
Reinsurers will have to readjust their risk appetite or underpin the risk with larger capital amounts, and price accordingly, he says. “We may not see this development go full circle within a year but we will certainly see it happening within three or four years.” Although there is a view in the industry that foreign insurers and reinsurers favour Australia and New Zealand for geographic diversification, and may have previously considered the region comparatively low risk, Mr Harms believes that is a myth that is fast fading. Hannover Re classifies Australia and New Zealand as a “mid to high” peak risk, with Australia towards the peak end. “New Zealand is somewhere in the middle but may see an upgrade into the peak category going forward once the risk-curve has been adjusted on the basis of post-loss experience.” However, Mr Harms says one outcome of a hardening market might be to encourage opportunistic entrants into the market because there are signs of rate increases, as has happened here before. “It remains to be seen how these new kids on the block – if and when they arrive – have the ability to stop this general trend from happening or whether this will reduce the anticipated price increases to less severe levels.”
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= June/July 2011
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