Insurance Industry’s Profit Margin to be Hit by Natural Catastrophes

Climate change is changing the financial landscape of Australian insurance companies. The Insurance Australia Group (IAG), whose profit margin is expected to be hit anew by natural catastrophes, warned that the changing and less-predictable climate has the potential to reduce insurers' capacity to calculate, price and spread the weather-related risk.

IAG warned shareholders on Tuesday of a possible earnings downgrade due to claims related to the Christmas Day hailstorm in Melbourne. The claims were higher than expected, Australia's biggest insurer of homes and cars said.

For the Melbourne hailstorm, IAG received 24,000 claims which would boost natural peril costs for the last six months of 2011 from A$400 to A$420 million. The amount would be higher than the Sydney-based firm's A$266 million allowance or a 58 per cent overrun.

The same catastrophe would cost Suncorp A$200 million to A$250 million to cover 28,000 claims the insurer received. The amount is 75 per cent above Suncorp's allowance.

For 2012, IAG is forecasting payments of up to $720 million for catastrophic reinsurance as the insurer braces for more natural disasters such as floods, cyclones and bushfires. It hinted that premiums may go up this year, averaging between 5 and 10 per cent.

In 2011, the Australian insurance industry paid over $4 billion insurance claims, mostly due to natural calamities such as the Queensland flood for which 58,463 claims worth $2.4 billion were paid. Cyclone Yasi led to the filing of 72,203 claims worth $1.33 billion.

UBS analyst James Coghill estimated that the higher claims would hit IAG's profit margin by $85 million. IAG Chief Executive Mike Wilkins said the insurer is expecting to receive more claims as Australians return home from their yearend holiday and assess the damage on their homes and businesses while they were away.

To assist its clients, IAG opened several temporary hail assessment centres. The firm is processing total motor claims faster and ensures the availability of hail repairers to complete the job as quickly as possible, Mr Wilkins said.

Tony Coleman, chief risk officer and group actuary of IAG, in a paper, said that human-induced climate change is a reality which must be addressed with appropriate urgency. He based his warning on presentations made by the Intergovernmental Panel of Climate Change and associated modeling made by the re-insurance sector.

Mr Coleman stressed the importance of underwriting weather-related risks in the Australian economy. He said reduction in the industry's ability to underwrite such risks will have a serious impact on the economies of vulnerable regions where climate and weather risk is greatest.

A 2000 study showed that between 1960 and 1999, there were 8,820 natural catastrophes to hit the world of which 75 per cent resulted in economic losses. For the same period, the economic losses in Australia were 87 per cent.

Mr Coleman said that Australia has an enormous potential to suffer from forthcoming climate change since over 80 per cent of the country's population live within 50 kilometres of the coast. Moreover, $1,500 billion of the country's wealth is locked in homes, commercial buildings, ports and other infrastructure which is nine times the current national budget or twice Australia's gross domestic product.

Quoting Frank Nutter, the president of the Reinsurance Association of America, Mr Coleman said the insurance industry could no longer wait for interventions because climate change and global warming could potentially bankrupt the industry,

He pushed for proactive approaches immediately. In the case of IAG, he said the firm is researching adaptation strategies and would push for public awareness programs to identify vulnerable areas.

The firm is also continuing its pioneering hailstorm modelling work and working to reduce IAG's greenhouse gas emissions of 8.6 tonnes of carbon dioxide equivalent for each employee yearly through initiatives such as recycling, green power purchases and a review of its fuel usage.

He pushed for a collaboration among business, governments and community groups to seek sustainable solutions to 21^st century challenges, particularly on climate change.