Reinsurance is vital to the local general insurance industry



Reinsurance is vital to the local general insurance industry – Suncorp white paper Reinsurance costs certainly contribute to increasing insurance costs but without reinsurance Australian general insurers would find it difficult to operate.

This is the key finding of a Suncorp “Insurance Insights” white paper entitled “Reinsurance – villain or hero?”, released today

“The cost of meeting claims would be impossible without reinsurance. The spate of major disasters has heavily impacted on insurers’ costs. Without the support of reinsurance the increase in costs could be even steeper,” said the author of the white paper, Suncorp’s Commercial Insurance CEO, Mr Anthony Day.

“Without reinsurance the cost of insurance could be higher. Instead of putting aside greater amounts of capital to pay claims, insurers can use that capital to ultimately provide better service to customers,” said Mr Day.

His white paper notes: The ability of reinsurance to provide Australian insurers with a global balance sheet is crucial to doing business domestically. In fact, reinsurance lowers the cost of insurance as, by buying reinsurance, insurers are tapping into a global, diversified balance sheet which allows them to purchase capital / capacity for a cheaper price than if they had to provide it themselves. Therefore, rather than reinsurance being a cost to the insurer, it is an enabler, freeing up capital that insurers would otherwise have to put aside for claims and allowing them to reinvest that capital in their business proposition to their customers.

Reinsurance also helps insurers meet their regulatory obligations. Regulator Australian Prudential Regulation Authority (APRA) requires insurers to buy a minimum amount of catastrophe reinsurance as specified in their prudential standards. APRA is proposing to implement by the beginning of 2013 further changes to insurers’ present capital requirements to cover events, including holding capital against several smaller losses.

Mr Day, in his white paper, notes: This will have a significant effect on insurers – and the reinsurance cover they will require. With reinsurance more than likely to cost more in the future, this will impact on the bottom line. However, to be able to meet these proposed requirements without reinsurance would serious affect insurers’ ability to operate in Australia.

Reinsurance allows insurers to:

Manage their capital more efficiently Better protect themselves and their balance sheet from the effects of large claims Maintain solvency Reduce large risks / accumulations / exposures Finance growth Offer larger limits / more cover Tap into worldwide expertise Develop new products

Mr Day said a number of factors – besides reinsurance - were contributing to the increase in the cost of insurance and the rise in premiums.

The claims from the severe weather catastrophes that hit globally – including Australia and the earthquakes in Japan and New Zealand – were significant for insurers and affect the overall costs to the consumer.

“However, without reinsurance, the ultimate costs would probably see insurance too costly for much of the community,” said Mr Day.

The current global economic uncertainty and volatile financial markets also affects insurance costs.

“The financial markets have a profound impact on insurers,” said Mr Day. “They rely not only on premiums to derive income, but also heavily on investment income.”

He also notes in his white paper that state and Federal taxes and levies had a major impact on the cost of premiums, “with insurers finding themselves acting as tax collectors.”

Mr Day added that there were growing signs the insurance market was hardening (that is, when insurance companies increase rates and be more selective in the types of risks they were willing to underwrite).

“Both insurers and reinsurers have – and are still - experiencing the effects of the continuous, widespread weather natural catastrophes. This, coupled with the uncertain global economic issues which are unsettling the local stock market, business community and consumers, has been reflected in the genuine signs of market hardening.

“Some insurers have taken an early lead to increase prices, while others are poised to do so,” he said.

Suncorp is one of the largest users of reinsurance in the world and was one of the first major Australian insurers to renew its catastrophe reinsurance program following the succession of natural disasters. The insurance industry as a whole is reviewing its reinsurance cover in anticipation of major increases being sought by reinsurers.

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