New Zealand floods expected to pressure insurers’ margins as the number of claims swell

Analysts say prices could rise further as insurers respond to New Zealand’s floods and the rising tide of claims inflation.

Damage to cars and a building at Tauranga: Picture: Cameron Avery/NZME

Claims are mounting from floods which have swept New Zealand’s North Island and insurance analysts warn that the damage may cause reinsurers to further pull back from troubled Australian insurers.

Insurance Australia Group on Tuesday reported that claims lodged by its NZ customers had increased – topping 7226 by Tuesday morning.

This was up on the 5000 lodged on Monday morning.

Suncorp said claims had lifted to 4000 across its Vero and AA Insurance brands, which was a lift from the 3000 reported to the Queensland-based insurer on Monday.

QBE said its exposure to New Zealand was limited to losses across motor and property, contract works and engineering insurance as well as marine and trade credit.

Goldman Sachs analysts said in a client note on Tuesday that the rising number of claims could put pressure on reinsurance prices as Australian insurers prepare to renew coverage in the coming months.

A train derailed near Teu Puke after heavy rain undermined a track. Picture: Tyson Smith

Suncorp has said its hefty reinsurance cover would limit losses from the floods to $45m.

Reinsurance is coverage major insurers buy to offset their losses from major events.

Goldman Sachs said Suncorp’s high reinsurance cover may mean it could be faced with higher prices or forced to hold higher retentions, but noted this depended on “how reinsurance markets track over the next few months”.

But Goldman Sachs said Suncorp was better placed than IAG, which faced higher losses from NZ and the potential loss of market share to competitors.

“We are somewhat concerned about the implication of this event for IAG’s FY24 perils allowances in context of what is proving to be a weak allowance set for FY23 (in addition to FY22,” Goldman Sachs analysts wrote.

“In context of greater retentions (weaker reinsurance programs) from January 1 as well as IAG’s allowances now proving to be more tenuous over recent years, we think there will be a greater focus on setting more robust perils allowances into FY24, which we think they will look to price for.”

In a recent update, investment house Macquarie said insurers would be forced to raise its prices as claims inflation was eroding its margins.

A house at Remuera destroyed by a landslide. Picture: Alex Burton

Macquarie analysts said claims inflation was tracking at nearly 12 per cent across major lines and was likely to continue its run for at least three to six months.

Claims inflation is a measure of the increased cost to replace an insured product.

Macquarie said although Suncorp and IAG had been repricing ahead of claims inflation it was likely more price rises were coming.

“We do not believe pricing 12 months ago incorporated claims inflation at these levels, thus underlying margins should continue to improve into FY24,” they wrote.

In its note, Macquarie said its index showed claims inflation was tracking at about 11.5 per cent across personal and motor lines in the December quarter.

The picture was starker for home policies in which claims inflation was running at 11.9 per cent.

The Macquarie analysts said that Suncorp’s personal motor claims were heavily exposed to the expiry of the insurer’s deal with crash-repairs business AMA Group in June 2023.

“We estimate underlying industry claims growth would be around 40 bps higher from this contract alone in the December quarter of 2022,” they wrote.

But, Macquarie said claims inflation in home insurance may have peaked after double-digit price escalation in the September and December quarters.

Shares in Suncorp slipped on Tuesday, down 0.2 per cent to $12.53.

IAG traded up 0.2 per cent to $4.90, while QBE rose 0.5 per cent to $13.74.

Originally published as New Zealand floods expected to pressure insurers’ margins as the number of claims swell