One of the less understood areas of insurance for some brokers, and many of their clients, is how reinsurance impacts premiums, insurance affordability and protects insurers from devastating nat cat claims losses. A new Actuaries Institute report, released Tuesday, found that if local insurers like QBE, IAG and Suncorp did not spend $2.5 billion on reinsurance with global reinsurers they would need to have a huge $70 billion to meet their current capital levels. This would likely lead to significant increases in property premiums, reduce insurance availability and massively complicate the work of brokers.
“Our paper talks about the fact that without it [$2.5 billion in reinsurance], we believe that it's a market that can't serve consumers, because this provides capital relief and also stability in the returns for the Australian insurers,” said Kate Bible, chief actuary and head of capital for Aon’s Reinsurance Solutions in Australia and New Zealand.
Reinsurance brings “essential stability” to Australia’s insurance market, according to Bible – and it’s important that brokers convey that to their clients. One result of increased awareness could be greater appreciation of global influences on local insurance premiums and less surprise from brokers’ clients when disasters in a faraway place result in their premiums going up.
The capital relief that reinsurance provides insurers, along with the stability of returns to their investors, argued Bible’s paper, represents the difference between an insurance market that can serve consumers affordably and one that could become inaccessible to many.
“What we tried to do with the paper is really provide education and knowledge around reinsurance and how it works - and that is a resource we think the brokers could easily turn their mind to share with their clients,” said Bible.
She said unlike Australia’s local insurers, the greater diversification in the portfolios of global reinsurers is what makes this $2.5 billion cost possible. Despite the constantly rising cost of climate-driven nat cats, these global reinsurers see Australia as an attractive market, said Bible, because of the way it helps them spread risk and diversify. “The important thing is that Australia is a natural diversifier for reinsurers,” said Bible. “They [global reinsurers] don't only want exposure to US hurricanes and European storms.”
She said factors, including Australia’s geography and distance from overseas nat cats, are key. This helps global reinsurers balance their portfolios and, over time, experience less volatility. “And they don't demand as much return as if they were a reinsurer who only has exposure in Australia, so there's positive and negatives of being in a global marketplace,” said Bible.
Australia boasts some of the world’s largest catastrophe reinsurance programs, a necessity given the region’s exposure to floods, cyclones and earthquakes. Yet, compared to international counterparts, Australian insurers face limited options, said Bible, when it comes to the types of reinsurance products that qualify for regulatory credit.
Industry leaders say the reinsurance landscape is evolving rapidly, with alternative capital sources such as catastrophe bonds now reaching US$115 billion and outpacing the growth of traditional reinsurer capital. “However, Australian regulations currently limit credit to these potentially cheaper funding sources,” said Bible. “Material adjustments to these regulations could help unlock access to these alternative capital sources, leading to improved pricing and terms for some components of reinsurance.
She added that an ongoing focus on risk mitigation and resilience from insurance industry stakeholders – including brokers – will remain crucial to maintaining affordable coverage for Australian households and businesses.
How do you see the role of resinsurance and its impact on the cost of the insurance you sell? Please tell us below.
