Earth, wind, fire (...and water)

01-09-2011

Jonathan Stephenson

While Australian and New Zealand perils have traditionally been eagerly sought by global re/insurers seeking diversification, a series of costly natural catastrophes in the region has forced the industry to re-evaluate these risks and seek better data.

The scale of the human tragedy and economic loss facing New Zealand is immense. Devastating earthquakes struck the city of Christchurch on three separate occasions over a nine-month period; in September 2010, February 2011 and June 2011. While the total cost of these events—in economic and human terms—is, of course, immeasurable, the insured losses for each event range from NZ$3 billion to in excess of NZ$10 billion.

Across the Tasman, although not of the magnitude of the New Zealand earthquakes, Australia has also seen a recent spate of large catastrophe losses. These have not gone unnoticed; witness the 24/7 media coverage of Brisbane as it succumbed to the waters of the Brisbane River.

Over the past four years, there have been no fewer than six loss occurrences, each with insured loss estimates in excess of AU$1 billion ($1.07 billion). The suffering and loss to Australians in Queensland, New South Wales, Victoria and Western Australia have also been significant.

Predominantly caused by weather-related perils—storm, bushfire, hail, flood and tropical cyclone—these losses are a reminder that Australia is also prone to the ravages of nature.

Storm

In 2007, between June 7 and June 10, during the Queen’s Birthday weekend, strong winds and rain associated with an east coast low off the New South Wales coast caused approximately AU$1.4 billion of insured loss. Winds reached more than 125 kilometres per hour (kmph) and heavy rain caused widespread flooding. Sydney, the Hunter Valley and the New South Wales Central Coast were hardest hit.

Bushfire

Bushfires are normally associated with El Niño years; however, the Black Saturday bushfires that struck Victoria in February 2009—a period associated with a weak La Niña event across eastern Australia—were in part caused by the fact that January to February 2009 witnessed dry hot weather in the southern part of the country. These fires caused devastating loss of life in many rural Victorian communities and approximately AU$1.2 billion in insured losses.

Hail

In March 2010, there were two significant hailstorm events affecting first Melbourne and, just two weeks later, Perth. Both caused losses of similar size, approaching AU$1 billion each. However, the unusual magnitude of the loss in Perth particularly was a surprise to many insurers and reinsurers.

Flood

December 2010 was the wettest on record for eastern Australia—this coincided with one of the strongest La Niña events ever recorded. From late November 2010 through to early January 2011, record rainfall levels produced fl ooding in parts of Queensland, New South Wales and Victoria. On January 11, 2011, Toowoomba and the Lockyer Valley in Queensland were hit by flash flooding. Torrents of water literally washed away towns and a number of lives were lost.

Floodwaters moved downstream and the Brisbane River breached its banks. Parts of Brisbane city centre and many suburbs were inundated as the river peaked at 4.46 metres. The town of Ipswich, inland from Brisbane, was also flooded as the Bremer River peaked at over 19 metres.

Insured losses are widely reported as being in excess of AU$2.5 billion. Unfortunately, the widespread variance in flood cover for both personal and commercial lines provided by insurers makes this a difficult figure to estimate with any degree of accuracy.

Tropical cyclone

Tropical Cyclone Yasi crossed the Queensland coast at Mission Beach in the early hours of February 3, 2011 as a Category 5 cyclone. With winds gusting up to 275 kmph, Yasi was the strongest and largest cyclone to cross the Queensland coast since an unnamed storm in 1918.

The storm devastated those smaller communities in its path such as Mission Beach, Tully and Cardwell, but the fact that it had moved south prior to landfall meant that Cairns—the major population centre in the area—was spared its full force. A direct hit to that metropolitan centre would have caused enough damage to dwarf the actual insured damage bill of circa AU$1 billion.

The recent magnitude 4.4 quake that struck Korumburra in Victoria on July 5, 2011 serves as a reminder that earthquake remains a peak peril for those living in New South Wales, Victoria, South Australia and Western Australia.

Taking cover

For insurers and reinsurers, these tragic events are unfortunately nothing new and the catastrophe perils involved are reasonably well understood. Vendor models exist in respect of earthquake, cyclone and hail storms in the major urban areas. Guy Carpenter continues its work developing models for the so-called ‘non-modelled perils’ such as bushfire and storm.

Insurance coverage is widely available for these perils—although each loss brings to the fore the potential issues of under-insurance and non-insurance. The Brisbane flooding of January 2011, together with widespread flooding in Victoria (smaller in insured loss, although it is estimated that nearly one-third of the state of Victoria was under water at its height) and New South Wales has again focused re/insurance, public, media and political attention on the vexing issue of flood insurance.

The government has taken control of the situation—recognising that simply defining the peril is not the answer—and has set up a Natural Disaster Insurance Review (NDIR). The scope of the NDIR is to consider the availability and affordability of insurance in general, but it does have a particular focus on fl ood insurance, acknowledging that the insurance industry cannot find the solution itself.

For insurers, the eventual recommendations of the NDIR regarding flood coverage will be another factor to consider in addition to possible increased capital requirements emanating from the Australian Prudential Regulation Authority’s latest capital standards review. As well, there has been much press lately about the need to pass on to consumers, through price increases, the impacts of additional reinsurance costs following the reinsurers’ reaction to the past 15 months of loss activity.

As a source of diversification, Australian (and New Zealand) catastrophe exposures have traditionally been sought after ‘commodities’ by the global reinsurance market. In addition to a locally domiciled market dominated by the world’s two largest reinsurers, Munich Re and Swiss Re, reinsurers from Bermuda, Lloyd’s and the broader London continental European markets have historically been keen to write Australian catastrophe business.

Recent loss activity has not necessarily diminished this appetite. With a few more data points to now consider, however, reinsurers are reanalysing the costs and requisite returns of deploying their capacity to cover natural catastrophe perils in Australia.

Jonathan Stephenson is managing director in charge of Guy Carpenter’s Australian operations and CEO of the Pacific region, based in Sydney. He can be contacted at: jonathan.m.stephenson@guycarp.com.

Guy Carpenter, Diversification, Peak perils, Australia , New Zealand

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