This was published 4 years ago
'Not enough capital': Insurer says government to pay for COVID-19
Insurance Australia Group chief executive Peter Harmer says there is not enough capital in the insurance industry globally to cover the financial fallout from COVID-19, as the insurer posted a 60 per cent fall in profit.
Mr Harmer said it was the government’s responsibility to foot the bill for the pandemic ahead of the NSW Supreme Court’s decision on whether insurance policies that exclude pandemics are valid.
“There is a size of loss that becomes quite systemic where the government needs to act as a shock absorber,” Mr Harmer said. “The government has an interest in making sure we have a viable, sustainable industry.”
IAG chief executive Peter Harmer said catastrophic weather events and the pandemic in the second half had undermined the company's bottom line.Credit: Anthony Johnson
The test case will determine if insurance policies that rely on an outdated definition of “quarantinable disease” mean insurers would be forced to cover losses associated with COVID-19 under business interruption policies.
Mr Harmer said the case was launched by the industry's lobby group, the Insurance Council of Australia, to extinguish any “lingering doubt” about the validity of industry-wide pandemic exclusions.
"It’s probably worth explaining why insurance policies around the world exclude things like war, terrorism and pandemics. Those events will impact many, many, many customers all at the same time," Mr Harmer said. "There’s simply not enough capital in the insurance industry globally to be able to insure these events and payout claims."
The comments come as IAG reported its net profit after tax was $435 million for the financial year, falling by 59.6 per cent compared to the same time last year.
IAG confirmed it would not pay shareholders a final dividend for the first time since the company was listed in 2000, after cash earnings fell by 70 per cent.
The insurer said the financial year was a "tale of two distinct halves" as its operating performance for the first half was strong and broadly in-line with expectations but the catastrophic weather events and pandemic-related investment losses in the second half undermined the company's bottom line.
The group’s insurance profit was down by 39.5 per cent to $741 million, impacted by higher reinsurance costs and a spike in claims after the summer bushfires and hail storms across NSW, Victoria and Canberra.
IAG reported it paid $904 million in natural perils claims, exceeding its revised guidance of $850 million and original allowance of $641 million, prompting Mr Harmer to call for greater action on climate change.
“We need to do things at a macro level, the government level, but also an individual level,” Mr Harmer said.
The insurer's sliding profits were made worse by a "relatively severe hit" to investment income as a result of volatile market conditions compounded by the historically low interest rate environment.
The group has progressively de-risked its portfolio over the past six months to brace for further pandemic-induced volatility. Deputy CEO Nick Hawkins said IAG's allocation to growth assets – typically stocks – had been reduced from 40-50 per cent to 25-30 per cent of investors' money.
“In a way, what we’ve done is try to factor in uncertainty over the next six to 12 months,” Mr Hawkins said.
IAG has made a $100 million provision for potential COVID-19 related claims, including landlord and travel insurance, but this could blow out pending the results of the test case. Mr Harmer said he was "very confident" the court would find in the insurance industry's favour.
Tribecca Investment Partners lead portfolio manager Jun Bei Liu said IAG's revenue was on the weaker side and cautioned the outcome of the test case would be among the challenges to confront the business in the coming months.
"They didn't give any '21 guidance but they have talked to some of the headwinds that will impact the business, including higher reinsurance costs," Ms Bei Liu said. "It sounds like there is still quite a bit of challenge moving forward."