FITCH: Reinsurance protects Australian insurers against floods

(The following was released by the rating agency)

January 11 (Fitch) Fitch Ratings has commented today that catastrophe reinsurance offers reasonable protection to Australia’s major non-life insurance companies against floods in Queensland and Northern New South Wales.

“Initially, insured losses appeared to have been relatively low given that the areas affected were less densely populated,” commented John Birch, Director at Fitch Ratings. “However, with the floods now inundating Ipswich and Brisbane cities, losses could escalate substantially,” added Mr Birch.

While events continue to unfold and it is too early to know what the final insured cost will be, Fitch notes the comprehensive catastrophe reinsurance protections that are in place to deal with these events.

As measured by premium volume, Suncorp Group Limited (Suncorp) has the largest exposure to the Queensland region, have originated AUD1.9bn of premiums from the state in the year to 30 June 2010. While it is uncertain whether the gross losses from the floods to-date will trigger a recovery on the group’s main catastrophe reinsurance program, they will count towards the group’s aggregate cover.

Suncorp’s main catastrophe reinsurance provides a significant AUD5.6bn of cover, in excess of AUD200m per event, should the inundation of Ipswich and Brisbane be extremely severe. In addition, as time restrictions governing what defines a single event will likely result in the floods being multiple events, each event in excess of AUD10m would count towards the group’s aggregate cover. This provides AUD400m of protection once the sum of these net losses exceeds AUD300m. Based on a 1 July start date, this reinsurance lessens the annual impact on earnings from an increased frequency of large loss events. Moreover, following larger natural peril losses in recent times, Fitch notes that premium rate increases have allowed Suncorp to fund an increase in its natural peril allowance up 15% to AUD460m in FY11 from AUD400m in FY10.

Insurance Australia Group (IAG) generates around AUD600m of premium from Queensland, but also has a significant reinsurance program should the crisis escalate or spread further into New South Wales. As IAG’s reinsurance arrangement runs on a calendar year basis, losses to date in excess of AUD15m and up to AUD50m may be covered by their 2010 aggregate policy due to an active year for large loss events in 2010 having already eroded IAG’s aggregate deductible.

Notably, Fitch would expect that further losses from the current catastrophe may be defined as separate events and captured under the 2011 program. During 2010, IAG’s main catastrophe program provided AUD4.1bn of cover in excess of AUD200m, although additional reinsurance reduced the net retention to AUD135m for a first event and lower for a second and third. Renewing 1 January 2011 IAG has not yet announced the extent to which their 2010 program has been maintained in 2011 and while Fitch believes the group would have sought to obtain similar cover, following the Christchurch earthquake losses additional lower cover below the AUD200m layer may have been expensive to renew.

The largest listed insurer in Australia, QBE Insurance Group (QBE), manages aggregate exposure through geographic and product diversification in addition to various reinsurance programs. Premium originated through its Australian operations is around 25% of total premiums, although it also has Australian risk exposure through its Lloyds of London operations. While QBE has not disclosed its exposure to the Queensland floods, Fitch expects the impact to the group will be immaterial given the group’s historically strong aggregate management and low level of concentration in any one particular line or geography. Business units including the Australian operations purchase individual catastrophe cover, while a group-wide, three year aggregate cover provided additional protection for group earnings against an increased frequency of large losses. The latter provided up to AUD500m of cover over the three year period against an increased frequency of large losses (defined as net losses in excess of AUD2.5m), and ended on 31 December 2010.