With one or two notable exceptions, rates continue to fall in the Australian insurance and reinsurance market as competitive market forces and savvy buyers dictate renewal trends

The Australian insurance market continues to attract international attention despite softening rates and a high level of catastrophe losses in 2010, locally and internationally. “For the third quarter of 2010, invariably you saw price reductions from 10% depending on the risk profile,” says THB Global Risks Australia specialist Paul Butler. “By all accounts, until the end of the fourth quarter it will remain similar.”

But while previous soft markets have led to more uniform falls in premium, today’s prices are dipping more than anticipated on some accounts while those on loss-hit lines have remained flat. Rates for loss-making professional lines have stayed relatively stable – in particular for directors’ and officers’ (D&O) business.

But elsewhere, most property and casualty rates have fallen further over the year. This is largely a reflection of competitive forces at play for the better accounts and the relative profitability of the past three years.

Despite international catastrophe losses – including the Chile earthquake and Deepwater Horizon disaster – local and national catastrophe events, such as the New Zealand earthquake and hail storms in Perth and Melbourne have not had a big enough impact to turn the market. Reinsurance pricing remains soft (see box, right, for the implications of the extensive flooding in Australia).

However, in the commercial insurance sector, there are signs that prices may be getting too soft to bear. According to Marsh’s November 2010 Australia Insurance Market Review, it may be difficult to achieve further price improvement in the primary market.

Low rates on line are beginning to affect insurers’ returns on an account-by-account basis and there are signs that claims activity is beginning to undermine positive underwriting results. In the third quarter, notes the review, we see “the first signs of incumbent insurers walking away from deals they believe to be underpriced”.

Cat-filled year

Despite the absence of US hurricane losses in 2010, there have been plenty of catastrophe claims at home and abroad to dent Australian and international carriers’ earnings. There were up to $38bn of insured natural catastrophe losses over the year, Aon Benfield says.

For international (re)insurers, the Chile earthquake is set to be the most expensive insurance event of the year, prompting up to $8.5bn in insurance claims and $30bn in economic losses. Lloyd’s continues to predict a pre-tax loss of $1.4bn, while Swiss Re and Munich Re both upped their loss estimates to $630m and $1bn in the months following the quake.

In the Gulf of Mexico, it was an offshore oil rig rather than a hurricane that stole the headlines this year. While not as huge a loss for the industry as it may have been (had BP bought cover in the commercial market), the Deepwater Horizon disaster is still expected to fetch total claims of up to $3.5bn. This is helping to push up rates in the offshore energy sector, although this may yet prove to be a short-lived spike.

The year’s second-biggest earthquake – and one that was much closer to home for Australian (re)insurers – was in Christchurch, New Zealand in September. As proof that earthquake losses are notoriously difficult to assess post-event, four reinsurers (Platinum, Aspen Re, Catlin and PartnerRe) recently raised their loss estimates, with suggestions that total losses – originally expected to bring $3bn to $4.5bn in claims – could go as high as $5.5bn.

Despite rising loss estimates, the New Zealand earthquake is likely to remain a reinsurance event rather than a hit for primary carriers.

The mature Australian insurance market, dominated locally by primary insurers QBE, Insurance Australia Group (IAG) and Suncorp, continues to be big buyers of property catastrophe reinsurance protection. According to Fitch Ratings, IAG and Suncorp-Metway have a combined market share of 60% in New Zealand, but their net exposures to the quake are surprisingly low – NZ$60m (US$45.6m) for Suncorp and a “negligible” exposure for IAG.

Chile, New Zealand and Deepwater were significant events for global carriers, but they occurred in a year without major hurricane losses. “While there has been no singular event of sufficient magnitude to immediately affect the global market, there have been enough significant catastrophe losses during the year to potentially dampen future underwriting profits, particularly in the local market, and contribute to a tempering of further rate reductions,” Marsh notes.

Closer to home, hail storms earlier in the year in Melbourne and Perth both resulted in losses in excess of A$1bn (US$988m), while severe storms in western Queensland and flooding in southern New South Wales and Victoria have added to the loss register.

With a higher loss than its peers, Hardy Underwriting Bermuda predicts a gross loss estimate of A$34.6m (US$34.2m) from the hailstorms and has pulled back capacity as a result.

“Our share of the loss in Australia is large compared to our peers and we have considered it appropriate to adjust our underwriting in this region,” the insurer revealed in its half-year results.

Meteorologists are continuing to predict an active tropical cyclone season across northern Australia this summer (October to April). Nevertheless, more localised weather events are unlikely to have much influence on global rates.

“You’d expect the New Zealand rate to rise, reflecting the quake, but generally it’s not expected that Australia’s two major losses will have a material impact on rates,” THB’s Butler says.

“If you look at global ratings, the issue is that it’s just not enough,” THB managing director Craig Kingaby says. “The total cat losses are strange in that they’ve come from areas people wouldn’t necessarily have expected, but they’re not sufficient enough in their own right to trigger any global market correction. There’s too much capital and there are too many people prepared to come in – if they’re not in yet.”

Continuing competition

Despite diminishing margins for profit, the Australian insurance sector continues to command attention, attracting new capital to a market that is already carrying too much capacity.

This is conspiring to keep rates low, even on lines where loss activity has been higher than usual in 2010.

“There are different players saying: ‘the day the rating environment changes, we’ll be in’,” Kingaby says.

Insurers such as Zurich, CGU and Lumley have expanded their involvement in the corporate sector, while new entrants to the market in general include Axis, Mobius (Lloyd’s capacity) and CV Starr, among others.

“You’re getting a lot of capital provided by managing general agents, which is much more targeted and lower key,” Kingaby says. “In theoretically profitable segments of the market, you are getting new players coming in and focusing solely on those small sectors.”

Some are trying to replicate the Catlin model. The international and Lloyd’s (re)insurer established its Australian subsidiary in 2004 to focus on specialist classes including aviation, casualty insurance and reinsurance, crisis management, facultative reinsurance and general liability and specie.

“You’re getting to the point where people can’t see the overall return if you’re coming into the market as a generalist. But coming in as an absolute specialist is becoming a bit more fashionable,” Kingaby says.

The need to maintain underwriting discipline in an already saturated market remains a key challenge. The savvy Australian insurance buyer provides another hurdle.

“Australian buyers are not going to be held to ransom by the local market,” Kingaby says. “They can travel and look offshore for solutions. Part of the attraction to us is there are a lot of risk managers and chief executive-level individuals who are happy to try to diversify risk, particularly after what happened in the global financial crisis.”

One area that has maintained steady premium rates over the year is professional lines. Following the financial crisis, this sector experienced a high level of claims – particularly for D&O and errors and omissions lines – with insurance prices rising as a result.

Competition across the class is limited to a few insurers fighting for primary positions on large complex placements. Chubb, Chartis, Lloyd’s insurer Novae and HCC are the most dominant players, says Marsh.

Diversification factor

For excess layers there is more competition, with new Lloyd’s syndicates (such as CV Starr and Barbican) and new company market firms (such as Iron Starr, Alterra, Argo Re and Torus) competing for business. The diversification appeal is evident for Bermuda players seeking to balance their exposure to North American risks.

“In professional lines you are usually seeing ‘roll-overs’ and sometimes discounts, and that’s just a reflection of the market regulating itself,” Butler says. “Particularly with the demise of AIG in the Australian market [AIG Australia was rebranded Chartis in 2009 and restructured across three lines], the likes of Chubb and some of the carriers with better quality paper were able to maximise the opportunities.

“Particularly for large D&O programmes, you saw them with 10% to 30% rises, whereas now it’s fairly static.” GR

Queensland in deep water

Reinsurers should bear the brunt of claims resulting from the worst flooding in Queensland in more than 30 years. Three-quarters of the state is a disaster zone after 40 towns and cities were engulfed by floodwater in late December and early January. Catastrophe modelling firm AIR Worldwide has estimated insured losses from the floods could range from A$3bn (US$2.9bn) to A$6bn.

Queensland’s two main flood insurance providers – Suncorp and Insurance Australia Group (IAG) – are processing more than 8,000 storm- and flood-related claims lodged since Christmas. Suncorp’s preliminary estimate of pre-tax losses is A$130m-A$150m. This cost will be included in the group’s half-year result for the period ending 31 December 2010. Suncorp said it would be limited by a reinsurance programme to between A$70m and A$90m. It is also likely to incur additional reinsurance costs of about A$120m to reinstate multiple covers for the remainder of the financial year.

As a consequence of this and other natural hazard events during the first half, Suncorp said it expects to have eroded between A$220m and A$240m of retained costs under its aggregate reinsurance program.

IAG’s expectation for December storm damage is that the net claim cost will be A$10m-$30m, taking the total natural peril claim cost for the second half of 2010 to an estimated $120m-$140m.

The insurers said estimates would be included in results for the second half of 2011.

IAG chief executive and managing director Michael Wilkins said the firm’s renewed catastrophe reinsurance programme for the year commencing 1 January 2011 was structured similarly to that which operated in 2010. Under the programme, the group’s maximum event retention for a first event in calendar year 2011 is $150m.

Reinsurers’ eventual payouts will depend heavily on how many loss events the flooding is deemed to constitute. They are currently expected to be classed as two or three events.