The cost to insurers of the hailstorm that hit Sydney last December could eventually reach A$1.5bn ($1.1bn) to A$2.0bn once all claims are reported and paid, which would make it one of the top five most expensive weather events of the past 30 years and possibly the most damaging hail storm since the Sydney hailstorm in 1999, says Firetrail Investment, an investment management boutique.

A statement last week from Insurance Council of Australia said that insured losses from the disaster had already reached A$871m with claims continuing to be lodged.

Firetrail analyst Mr Scott Olsson in a commentary said, “The hailstorm that hit Sydney late last year made a lot of headlines, but has not changed our fundamental view that insurance is an attractive sector in the current environment. Losses from weather events are part and parcel of running an insurance business. While they introduce profit volatility and can have some flow-on impacts, we believe the major insurers are in a strong position to mitigate and offset these factors.”

Direct impacts are quantifiable and contained

With 60-70% combined share of the New South Wales motor and home markets, at face value such an event could be disastrous for IAG’s and Suncorp’s FY19 profits. Both however, have very strong levels of protection which restrict losses and pass the excess on to reinsurers. The net costs of this event are capped at A$169m for IAG and A$250m for Suncorp, Mr Olsson says.

Both insurers also have allowances in their guidance for a “normal” level of total weather losses in any given year, notes Mr Olsson. While the Sydney event increases the chance that IAG and Suncorp exceed these allowances in FY19, both also have covers in place that provide protection if claims from multiple weather events over a 12-month period begin to add up.

The combination of various reinsurance protections mitigates a substantial proportion of the direct costs of the hail storm.

Firetrail believes indirect impacts are more relevant for ongoing profitability. Two main impacts from such events are:

1.Reinsurance costs

The price IAG and Suncorp pay for reinsurance would normally be expected to rise following large claim events, but over the years both have shown a strong ability to negotiate reasonably attractive terms. Most recently, IAG renewed its reinsurance programme for 2019 at “relatively flat” rates, despite incurring losses on its 2018 programme. The flat rates were a result of significant surplus capacity that exists in global reinsurance markets.

2.Supply chain pressures

The high number of repairs needed in a short space of time after a weather event can place insurer supply chains under strain. Following a hailstorm, motor repairer capacity typically becomes stretched and costs are pushed higher. While any claims blow-outs from the hail storm should be covered by reinsurers, it is inflation in the day-to-day claims over the following six months that can put pressure on IAG and Suncorp.