Inflation, extreme weather to rain on insurers’ parade, warns Swiss Re

Twin threats of accelerating inflation and extreme weather events will heap pressure on Australia’s major insurers in the coming year.

A car is inundated by floodwater in Lismore at the end of March. Picture: Getty Images

Twin threats of accelerating inflation and extreme weather events will heap pressure on Australia’s major insurers in the coming year, including when it comes to reinsurance negotiations, with global reinsurance giant Swiss Re warning prices must lift to match the “substantially” higher risks at play.

In an exclusive interview with The Australian, Swiss Re CEO Reinsurance Moses Ojeisekhoba said the reinsurer was in talks with its Australian clients on their own pricing adjustments in the local market, saying premiums needed to reflect rising inflationary ­pressures.

“From our standpoint, the nature of the risk that we see this year is substantially more than last year. Prices have to adjust to match up with the increased risk itself,” Mr Ojeisekhoba said.

“Clearly our discussions with our clients are fairly similar to the ones they’re having with their own insurance (customers), to say this is the profile of losses we’re seeing and as a result of that we feel that our prices have to change.”

Swiss Re last week forecast a stagflation-like global economic environment for 2022 and 2023, characterised by higher inflation and lower real GDP growth, and tipped the chance of a global recession over the next 12-18 months at 20-30 per cent.

The impact on home insurance will be higher construction prices, a scenario already playing out across the east coast of Australia following weeks of heavy rains and flooding earlier this year. “From our perspective, inflation affects both the liability as well as the asset side of the house. So we must make sure that we evaluate the risk itself and that we price for it,” Mr Ojeisekhoba said.

“And pricing for it means if a house is today insured for $200,000 and it will take $250,000 to replace that house, we need to reflect the new value of that house. Otherwise you’re not collecting the right amount of premium to reflect the exposure that you’re taking on.

“So in our discussions with our clients, we’re making sure that the exposure that they take on reflects some of these elements.”

Swiss Re CEO Reinsurance Moses Ojeisekhoba. Picture: Britta Campion

Mr Ojeisekhoba’s comments come weeks after analyst warnings flagged the difficulty Australia’s insurers will have in passing on soaring reinsurance costs.

“With higher reinsurance costs you see rising claim inflation, but you can only do that for so long before people either stop getting insurance altogether or opt for lower insurance cover,” Morningstar banking and insurance analyst Nathan Zaia said in March, when IAG and Suncorp were already grappling with an influx of claims from homeowners affected by the east coast flooding.

This could be a tipping point for the nation’s general insurers, with a big question mark over their profit outlook as they grapple with spiralling reinsurance costs, he warned.

Swiss Re is also in talks with government on resilience and mitigation actions, Mr Ojeisekhoba said, as he called for greater action to be taken in high-risk areas.

“We have the benefit of having significant knowledge and expertise and data in this particular area and we are able to also draw correlations for what happens in other parts of the world.

“So we can say if you don’t put in place the right elements then this is what can result from that. And we share that information with the government here,” Mr Ojeisekhoba said.

“The creation of the (reinsurance) pool, that’s a positive development. But the government needs to be a bit more active in remediation actions in areas that are much more prone (to extreme weather events).”

The Morrison government in 2021 announced a reinsurance pool for cyclone and related flood damage in northern Australia, with close to 900,000 residential, strata and small business property insurance policies tipped to be eligible to be covered for event risks.

“Clearly, the (extreme weather) events across Australia in recent years have been on our mind, but in this case, Australia is not alone,” Mr Ojeisekhoba said.

“Wherever we look, we see the manifestation of climate change around the world. So it’s important that the insurance industry continues to be there for its clients, but we must price risk appropriately.”

Originally published as Inflation, extreme weather to rain on insurers’ parade, warns Swiss Re