Industry insights for Q1
Following the tumultuous 1st January reinsurance negotiations earlier this year, annual treaty renewals occurred in June and July for many of the major Australian Insurers with a continued focus on risk accumulation in catastrophe-exposed risks, including flood, wind and bushfire. Reinsurers are still questioning whether increased rates are sufficient to cover potential risk, specifically due to increasing claims costs, rising asset values from inflation, cost of reinsurance capital, and expected natural catastrophic events. The cost of reinsurance capital will likely be passed onto insureds, specifically for secondary perils, such as flood, bushfire, hail and storm. Honan are watching these developments closely.
The construction industry, having learned valuable lessons from the combustible cladding crisis, is witnessing a substantial transformation in the insurance landscape. While coverage for claims related to combustible cladding is gradually becoming more accessible to practitioners, new challenges are on the horizon. One area regulators and industry professionals have shifted their focus towards is waterproofing, recognising the potential flow-on effects of mould developments in the built environment. As a result, insurers are taking a cautious approach when it comes to underwriting, closely monitoring the situation. Some insurers proactively tighten their policies by restricting coverage for claims arising from toxic mould varieties but insurance options remain available in the market for businesses impacted by these changes.
Developments to watch over FY24
The Australian government has committed a $1 billion disaster recovery fund to help Australian businesses tackle the impact of natural catastrophe losses. This is complemented by an extensive $200 million infrastructure program, designed to build resilience over five years through changes to housing development, zoning, and town planning. The deployment of this fund and program will be critical in supporting businesses and communities facing the impact of floods and fires in coming years, but also driving sustainability in insurance coverage and pricing in the future. By reducing the impact and cost of catastrophic events, we might see a positive impact on insurers’ profitability, which will drive insurer appetite and premium prices.
With the BOM declaring an official El Nino, it is important that insureds are well prepared for potential catastrophic bushfire losses in the upcoming summer season. It is a critical time for businesses in risk zones to review any business continuity and disaster recovery plans and ensure adequate business interruption limits and indemnity periods. With the upwards pressure on rebuild costs due to supply chain issues, cost of materials and general inflation, we advise businesses to ensure that sum insureds reflect recent asset valuations to avoid underinsurance. Lloyds Chief of Markets Patrick Tiernan weighed in on this issue at a recent industry convention, surmising that it is the significant increase in insured values in high-hazard locations that is driving the impact of catastrophic events, rather than purely the frequency and severity of the events themselves.
To finish on a positive note, BOM expects a “below average” cyclone season this year due to El Nino, a welcome potential relief for businesses in northern locations.