The Cost of Catastrophe: LA Wildfires and potential impact to Australia’s Insurance Market

Global reinsurance allows insurers to spread risk, but major losses, like the LA fires, deplete capital reserves. To compensate, reinsurers raise costs, leading to higher premiums worldwide, including in Australia. The LA fires add pressure to an already challenging reinsurance market. Reinsurance costs for Australian insurers have risen by up to 30% in response to increasing climate-related disasters worldwide. These rising costs inevitably flow down to insurers and, ultimately, policyholders. This is particularly concerning given that 15% of Australian households already face home insurance affordability stress, with premiums consuming more than four weeks of gross household income.

Australian insurers have historically taken a cautious approach when faced with emerging risks. Asbestos coverage was largely excluded from policies after its health risks became widely recognised, leading to a phased-out use of the material in the 1980s and a complete ban in 2003. Similarly, concerns over aluminium composite panels used in cladding led to strict exclusions in many policies. As the climate crises deepens, insurers will continue to restrict or avoid exposures in high risk areas altogether, this will impose pressure in certain lines on business, not only on the personal lines sector but across commercial insurance as well.

Insurance markets fluctuate between ‘soft’ (lower premiums, broader coverage) and ‘hard’ (higher premiums, stricter terms). Climate-related disasters are shortening soft market periods, making premium increases more frequent. Over the past three decades, more than nine million Australians have been affected by extreme weather events. As catastrophic losses mount, insurers struggle to maintain low premiums for extended periods, leading to shorter soft market conditions and more frequent premium increases.

There are early indications that certain segments of the insurance market may be entering a softening phase. Increased competition among insurers, improved underwriting results, and higher investment yields are contributing to a more stable financial outlook. Additionally, the Australian insurance market is bracing for slower premium growth in 2025 as inflationary pressures ease. However, these conditions may be short-lived. The increasing number of climate-related disasters, such as the LA fires, could quickly reverse any softening trends, pushing premiums higher once again. Just in the past week, the Queensland floods are directly impacting the local insurers, with many of them activating their emergency response protocols and bolstering their claims teams to respond to the disaster.

While rising premiums may seem unavoidable, there are steps policyholders can take to manage their insurance costs. Reviewing policies regularly ensures adequate coverage for natural disasters, particularly bushfires. Investing in risk mitigation, such as fire-resistant building materials and smart fire detection systems, can also help reduce exposure. Additionally, taking advantage of soft market conditions by renegotiating policy terms or exploring alternative providers may offer cost-saving opportunities.

The interconnected nature of global reinsurance means that losses from major disasters, like the LA fires, have far-reaching effects on insurance markets worldwide. As global insurers adjust pricing in response to catastrophic events, Australian policyholders will likely experience increased premiums. The impending shift toward a hard market reinforces the importance of proactive risk management and strategic insurance planning to mitigate financial impacts.

Key Takeaways:

• Global reinsurance markets are interconnected—losses from events like the LA fires drive up reinsurance costs worldwide.
• Rising global insurance premiums will likely lead to higher costs for Australia.
• Insurance cycles alternate between hard and soft markets, but soft markets don’t last long due to increasing catastrophes.
• Proactive risk management can help Australians mitigate rising premiums.
• Insurers may initially take a cautious approach by limiting coverage for high-risk properties but could adjust over time as fire mitigation improves.

At KBI, we understand the challenges that businesses and individuals face in an evolving insurance market. Our team of experts can help you navigate complex policy changes, assess risk exposure, and secure tailored insurance solutions that provide comprehensive protection. Whether you are looking to review your existing coverage or explore cost-effective strategies, we are here to assist. Contact KBI today to ensure you are well-prepared for the shifting insurance landscape.

Disclaimer:

KBI PTY LTD is an Authorised Representative (450152) of KBI Group Pty Ltd (ABN 56 167 437 121, AFSL 494792). Any advice in this article is general in nature and does not take your personal circumstances into account. When considering the purchase of an insurance policy, you should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the KBI Financial Services Guide and relevant product disclosure statement.