Climate Change Pain Continues for Insurers

Insurance Australia Group has been hit hard by the recent spate of severe weather events across South Australia, Victoria and southeast Queensland in the past month to the point where the insurer has downgraded its 2021-22 profit outlook.

The company’s net claim costs for the first four months have exceeded its previous assumptions by approximately $280 million.

The revised expectation for financial year 2022 also includes around $510 million for perils for the remainder of the financial year.

Suncorp has already revealed that various storms (though not the latest event in South Australia, Victoria and South East Queensland) which includes the impact of the Victorian earthquake in late September, had used up more than half the $980 million it had provided to cover these types of claims in the year to June, 2022.

Investors swallowed the bad news really well – IAG shares only dipped by just over 1% to $4.45, although that was in a market up solidly all day. But the shares are down from the most recent high in mid-October of $5.35.

The result of these extra claims is a sharp cut in the group’s insurance margin for the year to June, 2022.

The $280 million increase in net natural perils claim costs equates to approximately 360 basis points at the reported insurance margin level,” the company said in the update to the ASX on Wednesday.

“As a result, IAG has lowered its FY22 reported insurance margin guidance range from 13.5% – 15.5% to 10.0% – 12.0%. “other assumptions remain unchanged, with inherent uncertainty in the revised net natural perils claim costs expectation,” the insurer added.

IAG said it estimates that the $270 million (post-quota share) deductible attached to the FY22 aggregate cover has been eroded by $209 million as a result of recent weather events.

“Total protection available under the aggregate cover amounts to $236 million, post-quota share. After allowing for quota share arrangements, the combination of all catastrophe covers at 1 November results in IAG having a maximum event retention of $95 million.”

The company is obviously hoping there are no more storms or cyclones in the coming summer, or bushfires.

Wednesday’s statement detailed a growing list of expensive claims events.

“With the most recent event, which impacted South Australia and Victoria between 27 and 29 October and SE Queensland on 30 October, IAG had received approximately 14,000 claims by 4pm on 1 November and this is expected to rise further over coming days.

“The net cost for this event is anticipated to be $169 million, the maximum retention for a first loss under IAG’s catastrophe program.”

That seems to have been the last straw for the company.

IAG said that following the South Australian hail and Victorian wind event, and other events that impacted the second half of October, IAG has increased its expectation for FY22 net natural perils claim costs to $1,045 million, compared to the previous assumption of $765 million.

This estimate includes $535 million for the first four months of FY22 as follows:

  • $204 million for events incurred in the three-month period ending 30 September;
  • $142 million for weather events across Eastern Australia in October;
  • $169 million attributable to the South Australian and Victorian event; and
  • $20 million of attritional events incurred in October.

IAG has been harder hit than Suncorp which issued its own list of woes 8 days ago.

In a statement issued to the ASX on October 26, Suncorp said it had been hit by the storms in October as well as the Victorian earthquake in late September.

Suncorp said there had been five storms in October alone, and preliminary figures suggested its total natural hazard claim costs for the year so far were between $382 million to $492 million.

The Victorian earthquake in September has a costing estimated in a range of $50 to $70 million and is second (so far) in cost to a hailstorm in the NSW town of Coffs Harbour with a mooted cost of $70 to $10 million (to Suncorp).

The top end of that range is about half of Suncorp’s full-year natural hazard allowance of $980 million, which is divided equally between the first and second halves of the year.


About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →