Insurance premium hikes loom with flood costs set to inundate Allianz budget

Allianz, one of the country’s largest insurance companies, has run through almost 90 per cent of its annual natural catastrophe budget – six months before the end of the year.

Allianz’s Australian managing director Richard Feledy says high catastrophe claims will force it to raise premiums. Picture: Chris Pavlich

Allianz, one of the country’s largest insurance companies, has run through almost 90 per cent of its annual natural catastrophe budget – six months before the end of the year, and as Sydney braces for extensive flood damage.

In a rare interview, the managing director of the European giant’s local operation, Richard Feledy, said Allianz’s natural catastrophe budget “needs to be replenished … and that’s going to be at a cost and that’s one of the additional costs above what we’re seeing with current inflation”.

“That ultimately we’ll have to feed into the pricing of our products and services,” he said.

Governments should stop houses being built in flood plains and invest in mitigation systems or they would face worsening affordability issues, he added.

“Without a concerted effort between government and the private sector, we will see further expansion of higher risk (natural catastrophe-exposed) communities,” he said. “Whether it be affordability or availability, it’s the same outcome. It’s uninsured.”

Mr Feledy spoke to The Australian just days before unrelenting rain across NSW led to flood warnings and evacuations across swathes of the state at the weekend. On Sunday afternoon, almost 10,000 people had been told to evacuate their homes or put on notice they might have to.

New insurance claims related to the flooding are expected within days, with homes inundated in Camden and Wallacia in Sydney’s southwest.

Earlier flooding this year, which affected Queensland and NSW, has already cost insurers at least $4.38bn across more than 225,000 claims, according to Insurance Council data.

Mr Feledy said price rises were already expected across the company’s products – varying from mid-single to early double digit increases – with motor and home lines facing the steepest hike.

“We have to pay for our insurance policy and then, second of all, what we’re observing in the underlying inflation that’s across labour cost and materials,” he said. “When I was in Lismore, talking about customers, a very common product such as silicone went from $8 to $12.

“That’s before we start talking about some of the increases we’re seeing in timber and steel and other materials that are super-important as part of the rebuild.”

Allianz has about $5.58bn in gross premiums.

This ranks it near QBE, which holds $5.2bn in gross premiums and above Suncorp, which has $4.47bn on the books.

Insurance Australia, the country’s largest insurer, has $6.6bn on its books.

Last month, JPMorgan equity analysts said Suncorp and IAG would need to lift their natural catastrophe budgets “substantially to account for lower aggregate covers and to restore credibility with investors”. Suncorp had come in under budget twice in the past 14 years, a feat IAG had only achieved three times in the same period, the analysts added.

Allianz, like its peers, faces a reinsurance market reeling from the earlier flood losses.

Mr Feledy said the reinsurers were making it clear that higher prices were coming, and would push for Allianz to hold a larger portion of the loss on its own balance sheet. In April, European reinsurance giant Swiss Re flagged it was seeking to lift its return on equity to 14 per cent in a move which will mean higher prices for its insurer customers.

Suncorp, which has its reinsurance program up for renewal in July, is tipped to face price rises of 10-15 per cent across its platform, according to JPMorgan.

Now in his fourth year as local MD after taking on the job in 2018, Mr Feledy said he has seen remarkable change across the sector in the last few years.

He said the real challenge for the business was executing its technical transformation.

Allianz is spending $6.4bn (€4.2bn) across its IT budget this year as it pushes to transform its systems.  Mr Feledy, who was previously the chief technical officer of the local Allianz business, said this was “extremely painful” given the insurer’s legacy systems. “I’ve heard plenty of people talk a really good game and it looks really good in PowerPoint, but being on that journey as an organisation, we are replatforming and retooling the entire business and have made some really sound progress,” he said.

The cost of not investing can be just as real, with fellow insurer IAG hit with court action by the corporate regulator and forced to refund at least $100m after its systems failed to apply discounts to customers who held other policies with the insurer.

The Australian Prudential Regulatory Authority also hit Allianz with an enforceable undertaking last year over past risk and compliance weaknesses.

“I feel very confident that we’ve completed that series, that whole program of work,” Mr Feledy said. “Whilst I never speak on behalf of a regulator … I feel comfortable that we have addressed the issues that were raised.”