Q&A: Hannover Re’s Michael Eberhardt talks BI and climate change risk

June 7 2021 by

InsuranceAsia News (IAN) recently caught up with Michael Eberhardt, the managing director of Hannover Re’s Australia operations, to explore several key issues affecting the reinsurance market down under.

Topics discussed include the country’s ongoing business interruption litigation and the Australian government’s response to climate change risk.

IAN: How are the ongoing business interruption cases in Australia affecting the market at the moment?

Eberhardt: Firstly and as way of background, it is worth highlighting that the intention in Australia had been to exclude pandemic-related exposure for most lines of business well before the first Covid-19 case was known. Whilst insurers had written that into their own internal underwriting policies, they had not updated their policy wordings for a number of years and continued to make reference to the Quarantine Act — which was repealed in 2016 — instead of the Biosecurity Act.

Whilst the argument was put forward in the first test case scenario that this was an “obvious mistake”, the NSW Supreme Court ruled that coverage was enlivened — leaving insurers with a potential billion dollar provision. At the same time, it is worth highlighting that the question to the court was very narrow and did not consider the many variations of policy wordings that exist and even the ongoing second test case will not clarify all pending questions. As such and whilst provisions were built up in the industry, uncertainties in determining the ultimate net loss for pandemic-related business interruption claims in Australia will remain for quite some time.

IAN: What has been the effect of the extreme nat cat activity – bushfires and flooding – in Australia on reinsurance pricing and capacity?

Eberhardt: The extreme frequency of nat cat activity throughout 2019/2020 led to a tightening of conditions and restructuring of particularly the cat aggregate segment. Capacities reduced as reinsurers and ILS markets adjusted their risk appetite. As a consequence, prices and attachment points increased and certain placements were repriced. We are now heading into another renewal season and as the “heavy lifting” was done last year, we would expect adjustments more in line with exposure and year-on-year loss experience in an overall rate hardening environment.

IAN: How would you assess the Australian government’s natural catastrophe mitigation efforts and overall regulatory response to climate change risk?

Eberhardt: Firstly and in terms of climate change overall, science shows that there is a clear correlation between higher frequency / severity of natural catastrophe events and rising temperature levels. The impact is felt globally and as such, no single country will be able to “solve” this topic on its own. The new federal budget in Australia announced in May this year contains a A$600 million (US$460 million) “mitigation program” and includes the foundation of a new National Recovery and Resilience Agency.

The objective is to make communities and houses more resilient and to share knowledge with a number of institutions including the insurance sector — identifying particularly vulnerable regions. The setup shall establish a platform that facilitates informed decisions and will hopefully assist in allocating funding to projects with measurable outcomes. Whilst the ratio of 3-4% to 96-97% of pre- versus post-catastrophe spending remains unbalanced, I believe it is a very sensible approach as it establishes an ongoing forum for dialogue and targeted investments.

The government also announced the foundation of a new cyclone pool in Northern Queensland effective July 1, 2022 with a A$10 billion government guarantee replicating certain mechanics of the the Australian Reinsurance Pool Corporation (ARPC). As the details of the scheme are still to be elaborated in coordination with the insurance sector, it is too early to comment on it yet.

IAN: What are some of the key reinsurance trends to be tracking as Australia and New Zealand emerge from the Covid-19 pandemic?

Eberhardt: From a coverage perspective, the most prevailing trends in reinsurance contracts are related to communicable disease and (silent) cyber exclusionary language. The pandemic and corresponding court cases reinforced the requirement to clarify coverage and to identify and assess unknown accumulations.

Secondly, the direct and indirect economic consequences from the pandemic affect all reinsurers on a global level and the ongoing uncertainties related to quantifying losses from particularly business interruption cases — but also other classes — have led to an overall hard market environment. I would expect this trend to continue for some time as the effectively zero (or negative) interest rate environment in most developed nations will continue to force insurers and reinsurers to improve their capital ratios further if they want to restore profitability to target levels.

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