Australian insurers face increased weather exposure as climate risks intensify, according to a Moody’s Ratings regional report.

High property cover take-up means the industry absorbs a larger share of economic losses from weather events than in most Asia-Pacific economies, where insurance markets outside of Japan are less mature, the ratings agency says.

“Weather-related losses will rise across [Asia-Pacific], but the impact will vary … it will remain the greatest in Australia and Japan.

“Australia stands out because its insurers already bear a large share of economic losses from weather events.”

The industry here covers about 50%-75% of weather perils including cyclone, flood, hail and wildfire – similar to levels in Japan for typhoon, flood and hail, according to Moody’s.

“In Australia, large insured losses also reflect evolving catastrophe patterns, demographic shifts and increasing claims severity. Floods and hailstorms are becoming more frequent and severe, while increasingly affecting regions historically less exposed.

“In addition, wildfire losses are increasing as hotter, drier and windier conditions raise fire risks, while population growth continues to drive residential development into bushfire-prone areas, expanding insurers’ exposure to potential losses.”

At the same time, high labour costs and construction bill inflation have increased insurers’ rebuilding expenses.

“More stringent building and resilience standards for reconstruction have further driven up insurers’ claims costs.”

Insurers’ ability to reprice risk will help preserve profitability, Moody’s says, noting premium changes have “helped Australian … insurers maintain underwriting profit”.

Moody’s says solid capital buffers remain an important source of resilience as weather risks increase.

Insurers will also increasingly rely on reinsurance, risk-based pricing, underwriting discipline and government-supported risk-sharing mechanisms.

“Reinsurance is a key mitigant of earnings and capital volatility, particularly for insurers in Australia, Japan and Taiwan.”

The report notes governments in the region are providing reinsurance capacity, premium subsidies and public-private risk-sharing mechanisms to help insurers expand coverage.

“Policy support and regulatory development will enhance insurability of catastrophe risks. Regulatory support for the issuance of insurance-linked securities will also attract private capital into the catastrophe risk market, expanding insurers’ risk transfer capacity and diversifying their reinsurance capital.”

In July, the Australian Prudential Regulation Authority finalised a revised reinsurance framework to support access to catastrophe bonds and other stop-loss options for general insurers. The changes will take effect on January 1.

Moody’s VP of ratings Kelvin Kwok said: “We view the changes as credit-positive for Australian insurers because they reduce the regulatory burden associated with accessing alternative reinsurance, including insurance-linked securities.

“This should give insurers greater flexibility to diversify their reinsurance protection and transfer catastrophe risks to a broader pool of capital.

“Over time, such flexibility will become increasingly valuable as weather-related losses rise in frequency and severity.”