JPMorgan warns of $30bn bill to fix growing insurance catastrophe losses

Government spending in excess of $30bn is needed to head off growing natural catastrophe losses, according to JPMorgan.

Government spending in excess of $30bn is needed to head off growing natural catastrophe losses, according to JPMorgan. Picture: Tim Hunter.

Some $30bn will need to be spent over the next 50 years to protect against coastal erosion, according to analysts at JP Morgan – who note the country’s largest insurers have consistently exceeded their planned spend on disasters.

In a note to clients – authored by Andrei Stadnik, Sally Zhou and Charlie Hall – the investment bank concludes both Suncorp and Insurance Australia Group need to lift their natural catastrophe budgets “substantially to account for lower aggregate covers and to restore credibility with investors”

“These CAT budget increases present margin headwinds,” the note, published this week, reads.

The warning comes as the insurance industry faces a $4.3bn clean-up bill from floods that lashed southeast Queensland and swathes of NSW over the summer months, inundating towns and suburbs across the states.

The massive bills follow cost blowouts after storms and floods smashed the east coast last year, with costs topping $1bn.

JP Morgan analysts found insurers are more exposed than their international counterparts to massive losses from natural catastrophes, noting peak loss periods totalling between $4bn and $7bn were “occurring more frequently, and Australia has almost (eight times) more exposure to natural (catastrophe) costs than the global average”.

Suncorp has come in under its expected catastrophe losses budget twice in the last 14 years, a feat IAG has only achieved three times in the same period, the analysts add. But JP Morgan said investors are failing to recognise the catastrophe costs as “structural risks” for the businesses, noting the overall baseline of catastrophe costs was now higher. “We think CAT impacts will become worse for insurers before they become better,” the analysts said.

Suncorp posted a $388m profit in the six months to December 31, but the groups’ insurance arm was stung by a $205m blowout in its natural catastrophe budget.

Claims from 19 separate catastrophic weather events saw Suncorp hit for $695m in claims costs.

This was all after Suncorp moved to lift its ceiling to $1.1-1.3bn from its earlier limit of $980m.

IAG had a similar story, when reporting its mid-year results in February, with $681m in natural catastrophe losses.

But losses for the insurers were offset by reinsurance cover.

JP Morgan warns the big losses run up under reinsurance are likely to come into play as the two insurers look to settle cover pricing for the coming year.

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 JP Morgan.

Recent modelling from the Climate Council suggests as many as 1 in 35 homes in Australia could be uninsurable for natural catastrophes by 2030.

The Insurance Council of Australia has said governments could look to head off price rises by investing $2bn in more resilience measures over the next five years, which it estimates will slash costs to government and households by more than $19bn by 2050.

An ICA spokeswoman said governments needed to change what was built, where, and make funding available to improve resilience. “Increased investment has only become more urgent as we see increasing impacts on homes and communities following the recent extreme weather event in Queensland and northern NSW,” she said.

abrdn investment manager Shawn Lee said investors were watching not only the size of reinsurance price uplifts, but also the exposures insurers would choose to retain. “For some lines, price rises might be double digit or crazy,” he said.

Mr Lee said investors could take solace in the capacity for insurers to pass on inflation risks

“Where we have to look out for risk are the prior year developments. Are there insurers out there which have got to increase their reserves because of the claims inflation,” he said. “By and large it’s a pretty safe place to hide given what the market is doing.”