Ongoing flooding won’t make Australian insurers tap reinsurance: S&P

The analyst also said insurer earnings will only erode slightly.

There will be no need for Australian insurers to tap reinsurance as they will be largely able to self-finance claims stemming from the recent flooding in the southeast of the country, S&P Global said.

“The scale of the event is unlikely to trigger catastrophe reinsurance cover, in our view, even if further rain and flooding are likely over the coming week. We believe the insurers' earnings will erode only slightly,” S&P said.

In a release, the Insurance Council of Australia (ICA) has declared a ‘significant event’ for regions of Victoria, New South Wales and Northern Tasmania impacted by flooding.

The ICA said claim numbers are steady at the moment but may continue to climb as the event unfolds.

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The ICA views recent floods as a modest insurance event and not widespread relative to past significant climate events, including the February 2022 South East Queensland and New South Wales floods. The latter floods were the worst on record in Australia with total claims incurred of about $3.44b (A$5.45b). S&P said that given the scale of that catastrophe, insurers have relied on reinsurance to absorb claims. Claims due to the current floods are coming largely from content cover for home and small businesses and agricultural lines, rather than material property damage.

“Insurers' setting of natural peril allowances have been insufficient in recent times. This shortfall has lifted premium rates and the cost of reinsurance. Weather events such as the current floods will further constrain the availability and affordability of flood insurance cover,” the analyst said.

“Direct fiscal costs to governments and damage to the economy will be manageable, in our view. The states are responsible for most of the immediate relief efforts related to the flooding and will boost grants to local councils to repair infrastructure. This includes restoring essential public assets, such as roads and bridges. Under Australia's Disaster Recovery Funding Arrangements, the Australian government will then typically reimburse up to 50%-75% of their costs.