Storm brewing for insurers even before cyclone smashes into coast

It isn’t only the residents of South East Queensland and northern NSW who are in disaster mitigation mode.

For state and federal governments, catastrophes present an opportunity to shine, but risk a backlash if their response goes pear shaped.

It might sound like cold comfort, but if a disastrous event such as Cyclone Alfred is about to hit, victims should at least receive the best treatment when it’s happening in the lead-up to an election. Helping mitigate damage, assisting those in the cyclone’s path to remain safe, and castigating or threatening insurers that are tardy in payouts works well in the political playbook.

Getting ready for the storm: A composite visible-infrared satellite image showing Tropical Cyclone Alfred on Wednesday morning.Credit: Weatherzone.com.au

For insurance companies, it’s equally important to brace for the impact, with a significant financial injury expected if the damage from the cyclone exceeds the $1 billion estimate, as forecast. And that estimate is probably optimistic given this storm will hit a large city (Brisbane) and the densely populated coastline of the Gold Coast in addition to regional towns and farms.

Property records reportedly show there are close to 1.9 million properties and businesses in the wider zone of the cyclone alert.

Statements made this week by two of the nation’s three large general insurers, Suncorp and IAG, aimed to provide some comfort that they were financially prepared. Still, nervous investors marked down the big three insurance stocks (including QBE) by between 2 per cent and 6.8 per cent over the past five days.

Alfred will be the first major test of the federal government’s $10 billion cyclone reinsurance pool that provides cover for the period that the weather system is classified as a cyclone, and for the 48 hours after it is downgraded. The idea is that this assistance to insurers should reduce their reinsurance costs, and those savings would be passed on to lower insurance costs for consumers.

There will be horror stories of people who sought but were denied insurance.

While there is some evidence of success, a report from the Australian Competition and Consumer Commission last year said savings generated by the reinsurance pool had been offset to varying extents by other cost increases affecting the industry – the broader hardening of global reinsurance markets, extreme global weather events and price increases of building materials and labour.

The consumer watchdog’s conclusion was that premiums remained very high for many consumers and were generally rising nationally, and insurance affordability remained a key concern in many communities.

It is this lack of affordability, coupled with a cost-of-living crisis, that has put pressure on households to ditch insurance.

According to research done by comparison website Finder.com.au, more than one in four (27 per cent) Queenslanders lack home and contents insurance.

Home insurance premiums have climbed by 50 per cent in high-risk parts of Australia in the year to March 2024 as global warming increases the frequency and cost of climate disasters, according to an Actuaries Institute report last year. Its research on home insurance affordability and funding for flood costs found median home insurance premiums rose by 28 per cent in the year to March 2024, sitting at an average of $1894 across all states.

For high-risk properties, including those in flood-prone areas, premiums were up by half.

There is a certain air of inevitability about the insurance industry PR disaster about to unfold because regardless of what happens in the cyclone, there will always be under-insured households. There will also be horror stories of people who sought but were denied insurance in the days leading up to Alfred’s onslaught.

Insurance companies understandably want to avoid people without insurance signing up when the cyclone is about to hit, getting a payout then cancelling their policy, so some place an embargo on new policies in the lead-up to an event.

However, people who have just acquired a new property risk getting caught in this insurance moratorium.

And then there is a longer tail of public relations damage that can hit insurers if they use legal technicalities to avoid paying claims and social media screens become awash with disenfranchised customers.

Before there has even been a drop of rain or a gust of wind, there are clouds gathering for plenty of stakeholders.

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