QBE chief Pat Regan flags climate change risks

QBE has warned of the material risk climate change poses to its insurance business.

QBE chief executive Pat Regan Picture: Britta Campion

QBE has warned of the material risk climate change poses to its business as it revealed it has ­already burned through its first-quarter catastrophe allowance due to the bushfires that have raged across Australia this ­summer.

Chief executive Pat Regan said climate change was one of the biggest challenges facing QBE as he called for insurers and government to keep insurance affordable in high-risk areas and increase mitigation activity.

“Climate change is a global risk that has had, and will continue to have, ramifications around the world. It is a material risk for QBE and across our operations,” Mr Regan said.

“Governments always want insurers to have lower premiums and insurers always want governments to do more mitigation. I’d like to see more mitigation generally, (including) flood prevention. No doubt both sides will do more over time.”

Globally, the costs from natural disasters have exceeded the 30-year average for seven of the past 10 years, while the number of extreme weather events globally has tripled since the 1980s.

“Already we’ve used up a bit more than our full quarter allowance in January and the first part of February,” Mr Regan said, adding he was not yet “unduly concerned” about the spike.

While warning of the prospect of insurance premiums becoming unaffordable in disaster-prone regions, Mr Regan flagged that premiums across the board would be affected by the more frequent and severe natural disasters.

“There have always been ­places that are much more prone to flooding and bushfires,” he said.

“It’s exacerbated now because events are more severe and it does threaten to make insurance in those areas unaffordable.

“What we’ve got to buy into is there’s an element of community pricing you’ve got to have, you can’t just leave communities excluded from insurers. Implicitly, what we’ll say is we’re not going to make areas uninsurable and we’ll factor that into the broader portfolio pricing.”

Mr Regan’s comments come a week after Suncorp chief executive Steve Johnston called for a federally funded program in the May budget to improve infrastructure and the resilience of communities in the wake of the recent natural disasters. “The irony is you can get a subsidy to put a solar panel on your roof but you can’t get a subsidy to batten that roof down to protect it against a category four or category five cyclone,” Mr Johnston said.

On Thursday, RBA governor Philip Lowe warned of the economic implications of climate change. “Addressing climate change isn’t something that’s any responsibility of the Reserve Bank, but what we do have a responsibility to do is to understand the economic and the financial implication of climate change,” Dr Lowe said.

“The economic implications in Australia are profound. The world is getting hotter and the climate is more variable. We’re seeing already in Australia, perhaps more than anywhere else in the world, the effects of that.”

QBE on Monday posted a 41 per cent lift in net profit for the 12 months to the end of December to $US550m ($817m), on revenue of $US15.2bn, down 1 per cent following the divestment of its insurance divisions in Indonesia and The Philippines, as well as the wool and livestock-in-transit businesses in Australia during the year.

Shares in the insurer surged following the result and closed up 4.31 per cent at $14.76.

On a continuing basis, the group posted a combined operating ratio of 97.5 per cent for the year, above the target range of 94.5-96.5 per cent.

A combined operating ratio is a key measure of profitability. It compares claims and other costs to total premiums. If the ratio is more than 100 per cent, it indicates the underwriting activity is unprofitable.

Australia’s recent bushfires contributed to the higher ratio, as did adverse weather in the US, QBE said.

The insurer in December warned that its US crop division’s 2019 combined operating ratio would blow out on higher-than-expected claims and adverse weather conditions, pushing the ratio for the entire group above its target range. But QBE still sees the 2020 combined operating ratio coming in at 93.5-95.5 per cent.

Gross written premium fell 2 per cent in the year to $13.4bn, but was up 2 per cent on a constant currency basis.

It recorded an average renewal rate increase of 6.3 per cent, with premium rate momentum accelerating during the year, most notably in Europe and North America.

Commenting on the result, Mr Regan pointed to the poor weather conditions in the US, which he said detracted from the positive momentum in the business.

“Regrettably, this weighed on the group’s underwriting result, despite very good pricing momentum and a strong investment performance in an otherwise challenging global interest rate environment,” he said.

“Despite the impact of adverse weather conditions on our North American crop business, the underlying fundamentals of our business remain strong and we continue to see improvement in both the quality and resilience of our earnings.”

He noted the progress the business had made by slimming down and refocusing its operations in 2019 and said it was well positioned heading into 2020, “with strong prospects for further sustainable margin improvement”. QBE would focus on growing organically in 2020, he added.

Bell Potter analyst TS Lim said he was encouraged by the company’s outlook for the year ahead.

“It was a pretty good result,” Mr Lim told The Australian. “I liked the outlook statement, they’re pointing to [premium] rate rises and also more efficiency gains.

“I think if you look past all the noise of last year, when there were a lot of claims coming through, they have maintained the guidance and the pricing momentum is important because it shows top line is growing strongly. The surprise factor (on the profit) was the bushfires in December. (But) the attritional claims are still going down so I think that’s a positive sign. Capital is strong, it’s been de-risking and it shows they’re doing the right thing.”

Updating shareholders on its catastrophe models, QBE said it had made adjustments to factor in the expected impacts of climate change out to 2100. From modelling done to date, under an estimated 2-3 per cent rise in global mean temperatures, it said it did not expect material increases in claims costs as a result of cyclones in Australia before 2050.

“Annual claims cost related to hurricanes and tropical cyclones could go up by more than 50 per cent in the second half of the century, with a wide variation in local impact, and a rate of change that will depend on how the global community addresses this critical challenge,” the insurer said.

Mr Regan confirmed it would be modelling the potential impact of bushfires in the coming months.

QBE will pay a final dividend of 27c a share, 30 per cent franked, bringing the full-year dividend to 52c a share. The final dividend is up 2c a share on 2018’s payout, but the second-half dividend is lower than last year’s 28c a share.