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Double whammy hits insurers

THE terrorist attacks in the US have amplified a problem the Australian insurance industry has been dealing with for the past few years – losses in net underwriting income and poorly performing investments.

Insurance companies have been subsidising heavy losses in underwriting by investing premiums in the equity market.

According to the Insurance Council of Australia, the Australian insurance industry made a collective under-writing loss of $1.7 billion in the year to June 2000. Investing the premiums into the equity market substantially reduced the net loss to just $292 million.

Paterson Ord Minnett Ltd head of research Greg Galton said running a loss on underwritten work had become standard practice.

“The only way you can run an insurance company is that you are going to make an underwriting loss, but your investments need to return more than the underwritten loss,” he said.

The net underwriting profit or loss is the difference between the amount the insurer makes from premiums and the payouts made to claims.

Mr Galton said the US attacks were unprecedented because it was the first time in history high insurance claims combined with a drop in equities as investors left the market.

DJ Charmicheal research analyst Peter Strachan shares the sentiment.

“If the stock market falls and insurance claims rise at the same time there is a double whammy, and all the people who support the insurance companies, like the banks, brokers and finance companies will also suffer,” Mr Strachan said.

Previous heavy insurance losses, such as the $20 billion cost of Hurricane Andrew in the US in 1992, never affected the equity market as has occurred now.

Interestingly, much of the drop in equity markets has been caused by the insurance industry itself, which has been drawing down its equities and putting its funds into safer securities, such as in fixed interest.

On the surface it may appear that, besides QBE, which has a direct exposure to insurance claims from September 11, other Australian companies should be left relatively unscathed, with exposure limited to the drop in the stock market.

But many industry observers feel the attacks could be the beginning of the end for the insurance market, not only internationally, but in Australia as well.

Some believe that, if one or two large insurance or reinsurance companies collapse, the whole industry could come down with them, because all are interlinked through globalisation.

“They all reinsure against each other and you only need one to fall over and the rest will fall over. That’s what happened with Lloyd’s some years ago,” Mr Galton said.

“All the companies seem to be tied in with Swiss Re and Munich Re, the biggest insurers in the world.”

Insurance Council of Australia corporate affairs manager Rod Frail agreed, saying that while the Australian insurance market could hold up well, these international links ultimately could be the undoing of the local companies.

With income coming from invest-ments looking shakier, there are expectations that premiums will rise to cover the shortfall.

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