Australian general insurers spent around AUD2.5 billion on reinsurance last financial year, a strategy that prevented the need for up to AUD70 billion in capital to cover natural disasters and other major claims, according to research from the Actuaries Institute, the professional body representing actuaries in Australia.
The Institute’s Dialogue Paper, Reinsurance Explained: A Pillar of Strength for General Insurers, authored by Kate Bible, Chief Actuary and Head of Capital for Aon’s Reinsurance Solutions in Australia and New Zealand, explains how reinsurance—the insurance that insurers purchase to protect themselves from large claims—serves as a key financial safeguard.
Bible estimates that the AUD2.5 billion spent by local general insurers on reinsurance last year helped shield their portfolios from increasingly frequent and severe natural disasters.
She notes that climate change, rising population density in vulnerable areas, and higher costs for repairing or replacing property are reshaping the cost structure of insurance.
“The industry currently holds AUD34 billion in capital but without reinsurance, general insurers would need to raise an additional AUD23 billion, if they were to meet minimum capital requirements, or AUD70 billion, if they were to meet their current capital levels,” Bible commented.
“This capital relief that reinsurance provides insurers, along with the stability of returns to their investors, represents the difference between an insurance market that can serve consumers affordably and one that may become inaccessible to many consumers.”
According to Bible, over the past 25 years, global insured losses from natural disasters have averaged nearly USD100 billion annually, with “secondary perils” such as severe thunderstorms, floods, droughts, wildfires, and landslides gradually surpassing losses from “primary perils,” which include more infrequent catastrophes like hurricanes and earthquakes.
Australia and New Zealand operate some of the world’s largest catastrophe reinsurance programs due to their exposure to cyclones and earthquakes.
Bible points out, however, that compared with international peers, Australian insurers have fewer options for reinsurance products that qualify for regulatory capital relief.
The Australian Prudential Regulation Authority began consulting in late 2024 on ways to expand insurers’ access to a broader range of reinsurance solutions, including alternative products, with recommendations expected by year-end. Bible emphasises that the reinsurance market is changing quickly, with alternative capital sources such as catastrophe bonds growing to USD115 billion, outpacing the growth of traditional reinsurer capital.
“However, Australian regulations currently limit credit to these potentially cheaper funding sources. Material adjustments to these regulations could help unlock access to these alternative capital sources, leading to improved pricing and terms for some components of reinsurance,” Bible continued.
“Ongoing attention to risk mitigation and resilience, as well as regulatory barriers, will still remain crucial to maintaining affordable coverage for Australian households and businesses.”
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