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Australia's largest insurers brace for greater bushfire severity as claims grow

As loss estimates from the rampant bushfires scorching Australia breach the A$1 billion mark, insurers are recognizing the environmental costs and bracing for increasing severity from fires.

More than 10 million hectares have burned, with a large portion of the damage reported in New South Wales, which is Australia's most populous state. Bushfires have also burned through parts of Victoria, South Australia and Queensland. Many are still uncontained.

Claims grow

As of Jan. 14, insurers have received 13,750 bushfire-related claims from the four affected states, with losses estimated at A$1.34 billion.

"Most of the main insurers have exposure to claims, with different exposures in each state," said Campbell Fuller, a spokesperson for the Insurance Council of Australia. He said most of the impacted communities are relatively small.

Insurance Australia Group Ltd., the largest general insurance company in Australia, said it has received more than 7,000 claims for the bushfires since September 2019. The company estimates it will log A$400 million in natural catastrophe losses for the second half of 2019, surpassing the A$320 million it had budgeted. As of Jan. 3, it estimated overall bushfire events will contribute more than A$160 million in losses in the first half of 2020.

Suncorp Group Ltd. has received more than 2,600 bushfire claims since September 2019, with total estimated losses sitting between A$315 million and A$345 million as of Jan. 9. Youi Pty. Ltd. expects to take up to A$40 million in gross losses, excluding potential reinsurance recoveries.

Mark Leplastrier, IAG's executive manager for natural perils, in an email said it is still too early to determine any impacts the bushfires will have on future premiums.

"One single event will not necessarily affect insurance premiums," a Suncorp spokesperson said of its policies.

Although exact numbers have yet to be determined, business interruption claims are also expected to be "significant," Fuller said.

As of Jan. 3, IAG had received 108 business interruption claims. A Suncorp spokesperson said it has received a small number of business interruption claims, but cautioned that it was "very early days" for them.

Australia has actually incurred greater insured losses from bushfire events in the past. Among these extreme wildfire events is what is known as Black Tuesday, which took place in 1967 and incurred A$2.2 billion in losses. The Ash Wednesday event in 1983 caused A$1.8 billion in losses in Victoria.

In a Jan. 14 release, Aon said the impact from the current fires may not be as significant as some of the previous events from a reinsurance perspective.

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Geographic considerations

When faced with severe wildfires, insurers can be exposed to fatal risks due to overconcentration of policies, as was the case with one Californian insurer that was liquidated in 2018. The market in Australia is both "mature and competitive," Fuller said, and the industry has a strong understanding of the disaster season.

A spokesperson for IAG said the company has been able to counter concentration risk through the application of reinsurance capital, which has been a growing part of its overall capital platform over the past several years. It recently increased its gross reinsurance protection to up to A$10 billion for the 2020 calendar year.

"We have deliberately focused on our home markets of Australia and New Zealand," the spokesperson said, adding that IAG removed itself from the U.K. in 2012 and has been increasingly retreating from business in Asia.

Both IAG and Suncorp have suspended the sales of insurance policies in parts of Victoria and New South Wales that have been affected by bushfires, according to a report from The Guardian.

"We are constantly reviewing areas that are embargoed and aim to lift restrictions once the imminent threat has passed," a Suncorp spokesperson told S&P Global Market Intelligence.

Both companies said they do not plan to issue any nonrenewals of homeowners policies.

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Environmental risk intensifies

According to Australia's Bureau of Meteorology, 2019 was the country's hottest and the driest year on record, creating conditions that helped to fuel the bushfires.

"We expect to see increased frequency and severity of major disasters in Australia with rising temperatures," IAG's Leplastrier said. "It’s likely that bushfire seasons will be prolonged and more severe in the future."

A spokesperson for Suncorp said the company would conduct scenario analyses over the next year to understand the "actual and potential impacts of climate change" on its business and community. Both Suncorp and IAG said they, along with the government and other businesses, have a role to play in helping mitigate natural hazard risk.

"The economic loss is likely to be extreme, perhaps unprecedented," Aon said. "The longer-term impacts must be considered, with improving Australia's urban environment resilience at the center of those discussions."