Mr Guse added that insurers like QBE had certainly turned into a “little more risky” asset for potential investors though the sector was focused on tackling its operating risks by active lobbying of governments to seriously act on climate change.

Insurance premiums are set to soar after insurer QBE raised its allowance for claims relating to catastrophic weather by nearly a quarter following a year of record weather events that rocked Australia and the United States.

QBE informed investors on Monday that it had set aside a whopping $US685 million ($890 million) for insurance claims relating to extreme weather events in 2021 calendar year, after it exceeded its $US 550 million cap in 2020 due to Australia’s highly destructive bushfires and the northern hemisphere’s unprecedented and most horrible hurricane season.

The ASX-listed global insurance company based in Sydney, stated last month that it was likely going to report a huge loss of $US1.5 billion for the year as a consequence of the higher-than-expected claims filed during and after the catastrophic weather, causing the insurer’s share price to dip by more than 12 percent over the day.

“Drive appropriate margin expansion”

Nevertheless, QBE’s interim chief executive Richard Pryce expressed confidence that the group would “drive appropriate margin expansion” this year having beefed up its reinsurance program that considers greater exposure to increasingly frequent and extreme weather events.

According to the KPMG partner and insurance specialist Scott Guse, insurers may have to increase premiums or slash costs in order to pay for growing costly reinsurance—basically a cover purchased to safeguard insurers against instances of mass claims.

“There are a number of levers that insurance companies can pull, pricing is the main one – they can increase prices to improve margin,” Mr Guse stated. Insurers might also cut costs, he added.

“However, you can only use those levers too much before insurance becomes unaffordable or before your cost base is already at a rock bottom and you can’t reduce costs any further.

“At the moment, they have these levers they can use to maintain similar margins at this point in time. But in the future, who knows?”

Mr Guse revealed that global reinsurers assessed the level of risk caused by extreme weather in jurisdictions across the world annually. Earlier, the Australian market provided attractive opportunities for reinsurers to diversify their portfolios but the highly severe Australian weather patterns had pushed prices upwards.

“Our track record has not been good,” he said. “If you look over the past probably decade, you would say that reinsurers have made a loss in total in Australia.

“Every year, we seem to have either cyclones or floods or bushfires that have created a level of reinsurance cost that has surpassed the actual premiums the insurers have collected from Australian businesses.”

QBE reported that the additional allowance simply means that the possibility of the group surpassing its catastrophe allowance is much lower than that of 2020. However, analyst Nathan Zaia noted last month that it was “proving impossible” to correctly provide for these extreme weather events.

QBE is currently the largest insurer in Australia when it comes to market capitalisation, and provides a wide range of services including agricultural crop protection in Europe, North America and Asia. The 2020 California bushfires seriously destroyed winemakers within the Napa Valley, leading to a rise in claims that played a role in pushing the group’s extreme weather bill to breach its yearly allowance by at least $US130 million.

Mr Guse added that insurers like QBE had certainly turned into a “little more risky” asset for potential investors though the sector was focused on tackling its operating risks by active lobbying of governments to seriously act on climate change.

The former QBE chief exec Pat Regan who left the company unexpectedly last August had warned that premiums would soon become too expensive in various parts of the world which frequently experience extreme weather events.

QBE’s share price leaped in the morning but fell 1.05 percent or 9 cents to close the day at $8.47.

The information contained in this article is of a general nature only. It does not take your specific needs, objectives or circumstances into consideration, and is not financial advice, legal advice or otherwise a recommendation to purchase any financial product or insurance policy. You should seek your own independent financial advice from a qualified financial and insurance adviser before making any financial decisions, and seek your own independent legal advice from a qualified solicitor before making any decisions of a legal nature.

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