Self insurance boom on back of pandemics and bushfires

Funds are set up to provide insurance at costs lower than the market, or insure against risks the market refuses to cover.

Funds are set up to provide insurance at costs lower than the market, or insure against risks the market refuses to cover. Picture: Lice MOVONO / AFP

Australian corporates are rushing to set up their own insurance funds as continued pressure of catastrophic events and falling rates of return put pressure on product premiums.

Insurance broker to many of the ASX-200 Marsh said the continuation of the pandemic in 2021 would boost the growth of the captive insurance market, which has seen a bumper year of growth.

Captive insurance are funds set up by companies and institutions to self insure against risks.

Many funds are set up to provide insurance at costs lower than the market, or insure against risks the market refuses to cover.

IN BUSINESS: PICTURES FROM 2020

Marsh said it had set up 89 new captive insurance funds between January and September 2020 alone, up 154 per cent on last year.

Many captive insurance funds for Australian businesses are based in Singapore, where Marsh data shows a 20 per cent growth in new captive funds since January.

Marsh Captive Solutions senior vice president and international sales leader Robert Geraghty noted reinsurers were reducing capacity or withdrawing altogether on the back of some risks, increasing prices in the market and restricting access to underwriting.

“Companies are getting more sophisticated in risk management,” he said.

“They’re saying ‘why should we just go to market and buy everything?’, if there’s an ability to use the captive insurer and manage their own risk better it’s more an optimal usage.”

Mr Geraghty said the growth of captive funds was due to rising reinsurance prices, coupled with many businesses caught in the unenviable position of fighting an insurance industry hostile to pandemic related claims.

A recent Moody’s survey showed most insurance buyers expected reinsurance prices to rise by at least 5 per cent in 2021.

Over 90 per cent of respondents to Moody’s said they expect price increases in 2021 across all lines, but none foresaw a decrease.

That’s compared to 2019 when only 50 per cent of respondents expected reinsurance price rises, while some had expected prices to fall.

The insurance industry has consistently stated that it did not price to cover pandemics and that if forced to pay out COVID-related claims premiums will be forced to rise.

In its recent filing to the High Court of Australia, the Insurance Council of Australia suggested costs from pandemic related claims could be as high as $10bn.

Mr Geragthy said only 20 Marsh clients were writing pandemic before COVID-19 hit but now “we have a lot more looking at it”.

“We have a lot of companies saying we want a captive quickly. That’s reflective of the insurance market,” Mr Geraghty said

Property remains the largest line of business written by Australian captives, at 55 per cent.

Internationally, only about 33 per cent of captives write property.

Financial institutions and Mining, metals and minerals companies represent two in five captive fund holders currently in the Australian market.

Geraghty said Australia’s captive insurance funds were lopsided in an international perspective, with a heavy leaning to property.

Mr Geraghty said the lopsided structure of Australia’s captive insurance market was due to the resources and commodity exposure of the Australian economy.

“Something like property or general liability, those lines are large premium spends with large limits,” he said.

“I’ve had some discussions in the Australian context and I expect directors and officers insurance will increase in the Australian captives.”

Recent losses arising from catastrophic events in Australia, including the summer bushfires, the Canberra hailstorms, all followed by major flooding across the eastern seaboard have proven expensive for the insurance industry.

Marsh noted that these disasters had led to loss ratios exceeding 100 per cent over multiple years and would see a large sharp rise in pricing to reflect current costs.

This comes on the back of global insurance prices rising for the past 14 quarters.

Fitch Ratings in a recent check-in on the Australian insurance market noted earnings across insurers were under pressure due to weaker investment revenue and record losses from catastrophes.

But it noted insurers would have to eat the cost of the rising payouts, due to weak economic conditions which would “impede primary non-life insurer’ ability to pass on high reinsurance costs, which have risen due to the recent catastrophe losses”

Fitch Ratings Associate Director Kanishka de Silva said insurers were seeing a lot of pressure from claims.

“That’s driving the hike in premiums we are seeing that globally as well especially in North America and Europe,” he said.

“Some of the insurers have quoted they’ll reinstate the premium rate hikes, QBE they came out saying from 1 October they would reinstate their premium rate hikes.”

Mr de Silva said if insurers were to be forced to pay pandemic claims some would be covered by reinsurance.

“At the same time the costs have been going up so (catastrophic) losses have been rising, especially on the back of the bushfires,” he said.

“That means the reinsurance premiums will go up.”