Australian general insurers spent an estimated A$2.5 billion on reinsurance in the last financial year, allowing them to avoid holding up to A$70 billion in capital to cover natural disasters and other losses, according to a new paper from the Actuaries Institute.
The report outlines how reinsurance serves as a financial backstop for insurers, protecting them from the bulk of costs associated with major claims events such as floods and earthquakes.
Kate Bible, chief actuary and head of capital for Aon’s Reinsurance Solutions in Australia and New Zealand, estimates that local general insurers allocated A$2.5 billion to reinsurance last year to shield their portfolios from increasingly frequent and severe natural disasters.
Bible noted that the industry currently holds A$34 billion in capital. Without reinsurance, general insurers would need to raise an additional A$23 billion to meet minimum capital requirements, or A$70 billion to reach their current capital levels.
“This capital relief that reinsurance provides insurers, along with the stability of returns to their investors, represents the difference between an insurance market that can serve consumers affordably and one that may become inaccessible to many consumers,” she said.
The report highlights that climate change, urbanization, and rising costs to repair and replace buildings are reshaping insurance costs. Over the past 25 years, insured losses from natural disasters have averaged nearly US$100 billion annually worldwide.
During this period, total annual losses from secondary perils – such as severe thunderstorms, floods, droughts, wildfires, and landslides – have gradually overtaken those from primary perils like hurricanes and earthquakes.
In addition to these pressures, a 2022 Climate Council report estimated that 4% of Australian homes could become uninsurable by 2030, with some high-risk areas facing even higher projections.
This trend is driven by the increasing frequency and severity of extreme weather events, which continue to challenge both insurers and policyholders. The potential for uninsurability underscores the importance of reinsurance in maintaining access to coverage for households in vulnerable regions.
Australia and New Zealand maintain some of the world’s largest catastrophe reinsurance programs, reflecting their exposure to cyclones and earthquakes. However, Australian insurers face more limited options for reinsurance products that qualify for regulatory credit compared to their global counterparts.
The global reinsurance market has also seen reinsurers reduce their property exposures in recent years, contributing to hard market conditions. While property reinsurance has become more challenging, casualty reinsurance capacity has remained stable or even expanded in some lines, such as workers’ compensation.
The Australian Prudential Regulation Authority began consulting in late 2024 on ways to expand insurers’ access to a broader range of reinsurance solutions, including alternative products. The regulator is expected to report its findings by the end of the year.
Bible described the reinsurance market as evolving, with alternative capital sources such as catastrophe bonds reaching $115 billion and outpacing growth in traditional reinsurer capital.
“However, Australian regulations currently limit credit to these potentially cheaper funding sources. 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 said.
She added that continued focus on risk mitigation, resilience, and regulatory barriers will remain important for maintaining affordable coverage for Australian households and businesses.
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