THE cost of general insurance is set to jump as insurers move to protect their profits by passing on the higher price of reinsurance to customers.
As this year’s spate of natural disasters forces up reinsurance costs, analysts are forecasting the extra costs could translate into personal and general insurance increases of up to 5 per cent.
In New Zealand, which has been devastated by recurring earthquakes and aftershocks in Christchurch, reinsurance costs are expected to increase by 100 per cent while local reinsurance costs could rise as much as 70 per cent.
“The commentary from reinsurance brokers at July renewals points to significant rate increases for catastrophe-hit regions like Australia and New Zealand,” RBS analyst Richard Coles said.
“Aon has noted that Australian insurers are seeing price increases ranging from 15 to 70 per cent, while Willis Re says rate rises are closer to 30 per cent for Australian loss-hit catastrophe risk.”
RBS has lowered forecasts for Suncorp, QBE and IAG earnings per share for the current financial year by 5 per cent, 1 per cent and 1 per cent respectively.
IAG and Suncorp have warned that higher reinsurance costs will hit short-term profitability and both have made early moves to protect against the expected falls.
Suncorp has indicated it will look to lift home insurance premiums by 10 per cent; IAG has already increased premiums in the New Zealand home insurance market by 15-20 per cent to offset rising reinsurance costs.
However, to protect profits over the next two to three years, RBS estimates that Suncorp and IAG will need to lift home rates by 3.4 per cent and 3.3 per cent respectively to offset an expected 20 per cent lift in catastrophe reinsurance rates. If reinsurance costs surpass the expected 20 per cent lift, general insurance prices would increase even more.
“We acknowledge a potential lag effect from such rate increases, as previously alluded to by IAG; increases of this size should help insulate margins to some degree,” Mr Coles said.
Of the nation’s three largest insurers, only IAG remains to renegotiate its reinsurance cover, which is due to be settled at the end of this year.
Its last reinsurance rates were negotiated at relatively favourable rates as the deal was concluded before the worst of this year’s natural disasters struck. But analysts expect the insurer will face reinsurance increases of at least 25 per cent when it next negotiates, probably leaving it in a less favourable position than its rivals that have already signed new deals.
Suncorp recently locked in $5.8 billion worth of reinsurance protection for payouts linked to major disasters such as earthquakes, cyclones, storms, floods and bushfires, while QBE negotiated its reinsurance terms in three-year blocks. Because of this, analysts believe that QBE is in the best position.
“While Suncorp has faced rising reinsurance costs first, the structure of its new reinsurance program appears broadly favourable,” Mr Coles said.
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