Rising Insurance Premiums: How Global Disasters Impact Australian Consumers

The wildfires tearing through Los Angeles highlight the unpredictability of a warming planet, according to insurance analysts. This translates to greater claims volatility and stokes expectations that higher reinsurance costs will be passed through to policyholders in 2025.

Australia’s largest listed general insurers – IAG, Suncorp, and QBE Insurance – had a strong year as earnings and share prices surged due to premium hikes and a relatively mild season for natural disasters compared to the 2022 Southern Queensland and Northern NSW floods.

Barrenjoey equity analyst Andrew Adams noted that the LA wildfires serve as a timely reminder of how prone Australia is to natural disasters. He mentioned that while hurricanes are typically the largest industry events, the LA wildfires, occurring in the middle of winter, underscore how weather patterns are becoming less predictable and events more extreme.

Although IAG and Suncorp aren’t directly exposed to the wildfires, they could feel the ripple effects in the global reinsurance market, which provides financial protection to insurers when disaster strikes. QBE Insurance, with a US footprint concentrated on the East Coast, might also be impacted. Despite this, share prices for the ASX-listed general insurers have remained steady in the absence of any market updates.

Mr. Adams emphasized that Australian insurers will likely continue to increase premiums despite questions around affordability and pressure from governments. The Insurance Council of Australia’s climate and social policy team lead, Alix Pearce, stated that reinsurers have increased prices and reduced capacity, pushing global reinsurance costs to a 20-year high in 2024. Australian insurers faced cost increases of up to 30 percent. Although conditions are expected to soften in 2025, current reinsurance cost rises are being passed on to policyholders.

Atlas Funds Management’s Hugh Dive expects insurers could face higher reinsurance costs over the coming year as reinsurance capacity is reduced. However, he believes insurers will be able to absorb these costs and pass them on to consumers, representing a high point in the insurance cycle with high premiums and higher investment returns.

Firetrail’s Blake Henricks, who holds QBE Insurance and IAG shares, does not expect reinsurance costs to rise dramatically. With QBE Insurance holding less than 1% market share in California, he speculated there will be only a benign impact on the insurer.

Barrenjoey’s Mr. Adams concluded that the true toll on reinsurance costs will not be known until the US hurricane season wraps up in the second half of the year. However, an event as expensive as the LA fires will put the industry on notice.