Business View Oceania | February 2020

5 6 BUSINESS VIEW OCEANIA FEBRUARY 2020 BUSINESS VIEW OCEANIA FEBRUARY 2020 A M Best believes Australian insurers are well-capitalized and should be able to withstand losses from the recent bushfires, aided by support from reinsurance partners. However, meaningful bushfire losses passed on to reinsurers may result in upward pressure on reinsurance rates and tightening of terms and conditions in upcoming renewal windows. The new Best’s Commentary, “Australian Insurers Able to Contend With Mounting Bushfire Losses,” notes that the 2019-2020 bushfire season will be one of the costliest for Australia. The bushfires, which started in September 2019, have devastated an area in excess of 10 million hectares across south and eastern Australia. Given the scale of the fires and geographical loss spread, Australia’s market-leading nonlife insurance groups are expected to pick up the lion’s share of insured losses, while smaller, niche or regional insurers may be exposed to portfolio concentrations within the fire zones. Australia’s insurance industry has shown itself capable of absorbing natural catastrophe losses over recent years. Furthermore, comprehensive use of reinsurance has served to curtail material net loss ratio volatility, and has BEST’S COMMENTARY: AUSTRALIAN INSURERS ABLE TO CONTENDWITH MOUNTING BUSHFIRE LOSSES OPENING L INES strongly contributed to the industry’s ability to return combined ratios below 100%, even in catastrophe-heavy years. Still, despite the resilience of Australia’s insurers, AM Best expects the current fire season to make a dent in the full-year earnings and net loss ratios of the country’s direct insurers. The role that reinsurance will play in smoothing earnings from the current bushfire events remains to be seen. As loss estimates and insurers’ exposures increase in certainty, so too will the ultimate destination of losses and the reinsurance coverages triggered. Individual insurers’ reinsurance terms and conditions also will play a role, particularly concerning the definition of a single event, notably concerning any geographical restrictions and hours clauses applying to the fire series. Determination of these terms may prove material for certain insurers in determining whether event excess of loss retentions have been reached, or whether aggregate reinsurance protections will be hit from accumulation of losses below event limits. Although insurers are considered well placed to face these bushfire losses, they will need to carefully consider their approach to managing bushfire exposures, which may ultimately result in tightening of terms and pricing increases in loss affected areas. AM Best will continue to monitor the development of the current bushfires, and will assess any impact arising on the credit fundamentals of rated entities as the impact and loss estimates become available. Access the full copy of this commentary at: http://www3.ambest.com/bestweek/purchase. asp?record_code=293900 *AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries. For more information, visit www. ambest.com . Given the scale of the fires and geographical loss spread, Australia’s market-leading nonlife insurance groups are expected to pick up the lion’s share of insured losses