December 18th, 2008

Australia/New Zealand: Catastrophe Reinsurance Market 2008

Posted at 12:50 AM ET

Jamie Cook, Senior Vice President
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2008 Reinsurance Market Position

Catastrophe program limits continue to be set in accordance with Australian Prudential Regulation Authority (APRA) guidelines. Insurers are required to consider a catastrophe event with a return period of 1-in-250 years when calculating their Maximum Event Retentions (MER).

Because of the frequency with which smaller catastrophe losses have fallen within catastrophe program retentions, carriers have seen a renewed focus on managing earnings volatility and moving toward lower attachment points, where reinsurer pricing has been viewed as competitive. The average catastrophe program attachment point on a return period basis is approximately seven years. We have also seen an increased demand in catastrophe aggregate covers.

Despite the relatively high levels of catastrophe limit that are purchased, appetite for Australian and New Zealand catastrophe programs remains high, and reinsurance capacity supply continues to exceed demand. As a result, there has been continued downward pressure on catastrophe program pricing in 2007 and 2008.

The following chart highlights the continuing reduction in average program rate on line (ROL) in Australia and New Zealand, albeit the decline has been tempered to a degree by insurers choosing lower catastrophe retentions and purchasing higher ROL first layers.

The following chart shows how the loadings that reinsurers apply in excess of the expected annual loss have again decreased throughout the catastrophe programs in our survey for 2008.

Recent Merger Activity

In April 2008, QBE approached IAG with a merger proposal through a scheme of arrangement. The proposal was ultimately rejected by the Board of IAG, and QBE withdrew its offer in late May. While this particular merger did not occur, speculation continues that further consolidation within the Australian and New Zealand insurance industry will take place in the near term.

Catastrophe Exposure

With a land area of approximately 7.7 million square kilometres, Australia comprises 5 percent of the world’s total land surface and is the sixth largest country. In addition to being the planet’s smallest continent, Australia is also the lowest, the flattest and, apart from Antarctica, the driest. It has a risk profile that includes earthquake, flood, drought, cyclone, thunderstorm, hail, tidal surge and bushfire.

By contrast New Zealand has a land area of approximately 270,000 square kilometres. Situated on the boundary of the Pacific and Indo-Australian tectonic plates, New Zealand’s North and South Islands are prone to frequent earthquakes, volcanic eruptions, and landslips, in addition to storms and flooding.

There were a number of severe weather events in Australia in 2007 and 2008, the largest of which was the Queen’s Birthday weekend storms of June 2007, which according to the Insurance Council of Australia (ICA), cost insurers approximately AUD1.5 billion (USD1 billion). Storm activity in Queensland in early 2008 caused widespread flood damage, particularly to the region’s mining operations.

New Zealand also witnessed a wide range of storm and flood events, the largest being the storms that affected the Auckland area in July 2007, costing insurers approximately NZD57 million (USD31 million). The largest event to have affected New Zealand in the past 12 months was the magnitude 6.8 earthquake centred near Gisborne, which struck on December 20, 2007. Current commercial and domestic insured losses are estimated at NZD60 million (USD38 million).

Insurance Availability

Private insurance coverage is available for most Australian perils, with the notable exception of subsidence, which is excluded from residential policies. Cover for flood, which according to the ICA accounts for one third of natural hazard damage in Australia, remains limited as a result of both availability and affordability.

In New Zealand, the Earthquake Commission provides cover for homes, residential land, and personal possessions for those who have taken out traditional fire insurance. The perils covered are earthquake, landslips, tsunami, volcanic eruption, hydrothermal activity, storm or flood damage (to land only), and fire following any of these perils.

Recent loss activity in Australia and New Zealand has drawn attention again to the issues of under-insurance and non-insurance. Industry bodies in both countries continue to promote public awareness campaigns highlighting the benefits of insurance, as well as lobbying their respective governments on the need for tax reform on insurance products. Inefficient taxes such as the Fire Services Levy have been identified as key barriers that prevent individuals from taking out insurance.

Following the Queen’s Birthday weekend storms of June 7, 2007 to June 10, 2007, Guy Carpenter produced a report focusing on the complex phenomena of East Coast Lows, intense low-pressure systems that can occur several times each year off the southeast Australian coast. We were also able to provide detailed analysis of the distribution of claims using i-aXs®, which in Australia and New Zealand now incorporates all major catastrophe perils. A pilot feasibility study has been completed and full production is now planned for a national bushfire accumulation assessment risk map for Australia hosted in i-aXs.

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Additional contributor:

  • Peter Cheesman, Senior Vice President
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