Market hedged against Australia’s long, hot summer

January 15 2020 by Andrew Tjaardstra

The unprecedented bushfires haunting Australia are not a complete surprise to market players which have been warning about the dangers of climate change for well over a decade.

A 2008 government report predicted that from 2020 global warming would cause the fire season to start earlier, end later and be more intense; although you didn’t really need the government to work that out – a child probably could have.

While the scale of this season’s fires might be shocking, the market doesn’t have time to reflect as it goes about the messy job of assessing claims and helping rebuild people’s lives.

“There is a low probability of our natural hazard allowance of A$820 million (US$562.5 million) [for the financial year] being exceeded.” Suncorp spokesperson

Losses from the numerous fires are increasingly eating into insurers and reinsurers earnings this financial year – which typically ends at the end of June.

Losses have already surpassed the A$1.34 billion (US$930 million) mark with a significant escalation expected this week. This means insurers’ nat cat reinsurance programmes are being eaten into with IAG breaching its post-quota share allowance by A$80 million (US$55.2 million) in the first half of the financial year.

Willis Re Analytics noted that the number of homes destroyed over the summer, 2,500, now exceed the Ash Wednesday disaster of 1983 and Black Saturday’s losses in 2009; the overall losses in 2009 surpassed US$3 billion.

The broker added the likelihood of reinsurance impacts is increasing, as insured losses pass the A$1.34 billion (US$930 million).

Despite the losses Moody’s is still relatively bullish on the sector in part as a result of the protection from reinsurance; much of which is very mature and world leading.

IAG uses several leading reinsurers through quota share arrangements and has already increased its nat cat reinsurance cover by US$700 million overall and rearranged some of its covers.

Suncorp also breached in the first half reinsurance allowance by A$109 million (US$75 million) when it recorded A$519 million (US$358 million) of losses; showing the losses to come – in the first five days of January the  firm recorded another A$75 million (US$52 million) to A$105 million (US$72.5 million) of losses.

The insurer had 360 events with claims greater than A$10 million (US$6.9 million) in the first half of the year.

It is so far difficult to assess the exact impact on its reinsurance arrangements, but the firm is being cautious. It acquired an aggregate stop loss protection which provides an additional A$200 million (US$138 million) of cover for all nat cat losses in excess of the natural hazards allowance of A$820 million (US$566 million).

“Suncorp has a strong reinsurance program in place for the second half of the financial year so there is a low probability of our natural hazard allowance of A$820 million (US$562.5 million) being exceeded for [the financial year 2020],” a company spokeswoman told Reuters.

Australian insurers have long valued the protection of reinsurance and its value is only going to rise in future.

Climate outlook

What is particularly scary is we are only now entering the worst part of the fire season for Victoria.

Willis Re said that temperature forecasts are close to average for the rest of January, but above average ones are expected for February and March. It is expected the extreme fire season in southern states and territories to continue.

The ending of the Indian Ocean Dipole and negative Southern Annular Mode weather patterns that enhanced dry conditions for eastern Australia have finally broken down and this has increased the chance of some rainfall in south-eastern Australia in January; this follows record-breaking dry and hot weather of December.

Already the qualifying for the Australian Open tennis championship has been disrupted with Slovenian Dalila Jakupovic being forced to retire on January 14 as the result of smoke inhalation; the main tournament is slated to start next week on January 21.

Meanwhile the bushfires are expected to cost the wider economy US$3.45 billion and shave between 0.2% and 0.5% off GDP growth.

It is the very definition of a long, hot summer for Australians.

 

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