Claims from the hailstorm could be as high as $2 billion

Claims from the hailstorm that battered Sydney before Christmas could eventually be as high as $2 billion and lead to more premium rises, according to an equity analyst.

While the Insurance Council of Australia’s current estimate for the December 20 event stands at $871 million, Scott Olsson from Firetrail Investments believes that figure could more than double as claims continue to roll in.

“Our analysis suggests the cost could eventually reach $1.5-2 billion once all claims are reported and paid, which would make it one of the top five most expensive weather events of the past 30 years and possibly the most damaging hailstorm since the Sydney hailstorm in 1999.”

Mr Olsson believes IAG and Suncorp, with a combined 60-70% share of the NSW home and motor markets, are most exposed and says “at face value such an event could be disastrous for … profits”.

However, he says both insurers have “very strong levels of protection” through reinsurance.

“The net costs of this event are capped at $169 million for IAG and $250 million for Suncorp, despite the gross cost likely being multiples of this amount.”

Reinsurance costs would be expected to increase after such a large event, but Mr Olsson says IAG and Suncorp have a strong track record of negotiating favourable terms.

He attributes this to surplus capacity in global reinsurance markets, IAG’s and Suncorp’s position as two of the largest reinsurance purchasers in the world, and “the attractiveness of Australia as a source of diversification for global reinsurers”.

The number of repairs needed after a significant weather event can strain insurer supply chains, Mr Olsson says.

Following hailstorms, motor repairer capacity typically becomes stretched and costs are pushed higher.

“While any claims blowouts from the hailstorm should be covered by reinsurers, it is inflation in the day-to-day claims over the following six months that can put pressure on IAG and Suncorp,” Mr Olsson said.

He believes the storm could ultimately affect premium rates for home and motor.

“The indirect impacts from higher reinsurance costs and supply chain inflation tend to affect all insurers, which typically drives a pricing response across the industry (albeit sometimes with a lag).

“We believe there is a case for recent price increases to continue or perhaps accelerate.”

NSW emergency services levy (ESL) payments are set to surge

NSW emergency services levy (ESL) payments are set to surge as the state government improves firefighter access to workers’ compensation and buys more aircraft ahead of the next bushfire season.

ESL levy contributions will jump from $780 million this financial year to $967 million next year and to $1.131 billion in the following 12 months, a half-year budget review shows.

NSW continues to fund more than 80% of the cost of fire and emergency services through a levy on insurance after dropping a plan to switch to a property-based charge collected by local councils in 2017.

The budget update says the increase in workers’ compensation costs will be largely recovered through gains in the ESL collection, insurance duty and local government contributions, increasing revenue by $602.9 million over the four years to 2021-22.

The state is also acquiring a large air tanker and two twin-engine aircraft for the Rural Fire Service.

The ESL and insurance duty is expected to increase by a one-off $21.3 million in 2020-21, while councils’ contribution is forecast to increase by $3.1 million next financial year to help meet the aircraft costs.

The workers’ compensation changes will make it easier for firefighters to receive benefits if they are diagnosed with one of 12 specified cancers. The legislative amendments mean they no longer have to show the cancer was caused through their work, leaving the employer with an option to prove that wasn’t the case.

“The onus has historically been on firefighters and it is a difficult task when all the science, all the studies and all the understanding is that all firefighters go into unknown hazardous situations,” NSW Emergency Services Minister Troy Grant said last year.

Funding of emergency services through insurance is set to continue indefinitely after the Government earlier this month rejected the concept of reintroducing a property-based levy if it wins the March election.

In a response to a parliamentary committee report on the issue, the government of Premier Gladys Berejiklian says it “has no plans to introduce a revised fire and emergency services levy in the next term of government”.

The Insurance Council of Australia (ICA) says its members are assessing the impact the increases will have on insurers and customers.

"The ICA is in discussion with NSW Treasury on the implications," a spokesman told insuranceNEWS.com.au.

"The ICA continues to advocate for a fairer and more equitable funding model for NSW’s emergency services. It notes NSW customers pay the highest level of tax on policies of any state. At present, the addition of ESL, GST and stamp duties typically adds 45% to the base premium for a NSW household policy."

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