Insurers profit from benign CAT outlook

  • By Elizabeth Fry

Australia is set for a ‘typical’ cyclone season and relatively benign CAT outlook which is good news for the country’s three listed general insurers.

While bushfire risks appear elevated, severity is relatively low and the wet and wild La Nina - the bigger driver of CAT losses -is looking weak, according to the Bureau of Meteorology’s latest predictions.

The CAT season historically peaks from December to March and this week the Bureau of is expecting a 'typical' number of tropical cyclones.

This is based on a benign Southern Oscillation Index pointing to weak La Nina-like conditions.

The SOI has historically proven to be an indicator of catastrophe experience, with heaviest losses experienced in strong La Nina years.

According to Morgan Stanley analyst, Daniel Toohey, on average, there are 10 to 13 cyclones each season in Australia, though only 4 typically reach the coast.

Cyclone, storms and floods account for 67 per cent of historic CAT losses, he said in a report.

Over the last 50 years, neutral SOI year CAT losses have been 60 per cent lower versus La Niña years.

IAG in pole position

Of the three locally listed insurers, Toohey reckons Insurance Australia Group is best placed to navigate 2018 CAT risk.

“With IAG triggering its reinsurance aggregate cover CAT losses are capped at $340 million," he wrote in a client update.

“Meanwhile, for Suncorp Group, a first event is capped at $250 million and QBE Insurance group has US$350 million remaining in its CAT budget for the fourth quarter.

Meanwhile, as recently as a month ago, analysts were convinced that aggregate industry losses from hurricanes Irma, Harvey and Maria were more likely to be earnings events than capital events for the sector, globally.

Capital event

But a recent update from S&P Global has quashed that view given a year of unusually frequent and severe natural catastrophes.

“Losses from these same hurricanes, as well as the Mexico City earthquake that took place during the third-quarter, will likely wipe out global reinsurers' annual earnings and ultimately become a capital event for this sector.”

According to the ratings agency, Maria aside, Harvey and Irma could cost the insurance and reinsurance industries US$60 billion, adding to the US$15 billion of catastrophe losses in the first half of the year.

“This puts the toll as high as $75 billion of insured losses, with the Atlantic hurricane season only halfway done.

In other words, including Maria and emerging catastrophe events, 2017 could be a worse catastrophe year than 2005, when there was US$77 billion in insured losses  related to Hurricanes Katrina, Wilma, and Rita.

The ratings firm said reinsurers are also nervously watching the remainder of the Atlantic hurricane season and the California wildfires.

As a result, S&P argued, with likely more than US$100 billion in insured catastrophe losses in the third quarter alone future events could still affect ratings.

“There isn't consensus among the vendor catastrophe modelling firms regarding third-quarter Hurricane loss estimates.

“In particular, given  the wide range in estimates for Hurricane Maria, the delta for industry estimates varies by more than US$100 billion."