QBE Insurance Group Limited (QBE, the Group, ASX: QBE) was founded in 1886 and has been listed on the ASX since 1973. Today it is an international insurer that offers a product portfolio including property, motor, public and product liability, professional indemnity, workers’ compensation, energy, marine, and aviation. Operations are conducted in 27 countries across North America, Australia Pacific, and International, employing more than 13,000 people.

Los Angeles fire impact unlikely to be material to earnings

The release of QBE’s full year profit result to be released on 21 February is likely to reveal negligible impact on reported earnings from the Los Angeles (LA) fires in January. This is despite that QBE conducts insurance obligations in North America.

Estimates put the LA fires total insurable damage cost at about A$48 billion. To put this cost into perspective, the Insurance Council of Australia estimates that the total damage bill from natural disasters in Australia between 2013 and 2023 was A$60 billion.

There are several reasons why the LA fires are unlikely to have a material impact on QBE’s full year earnings. One reason for this view is that QBE maintains a provision for future Catastrophe Claims and provided claims arising from the LA fires are within allowance, then catastrophe costs will be covered by the existing claims provision. This is likely the case given that in the Catastrophe Claims update provided to the market on 27 November, management reported that given recent portfolio exits and portfolio optimisation initiatives, the catastrophe experience was tracking broadly in line with expectations up to 31 October 2024. This is the position that has been assumed by the share market in January 2025 because as the extent of the fire damage to properties in Los Angeles became evident, the share market responded by decreasing the QBE share price by just 2.5 percent. This was the largest decline by an Australian General Insurer and reflects the fact that QBE has considerable exposure to the North America insurance market. IAG shares fell by 1.6 percent and Suncorp shares were 2.2 percent lower on the same day.

As well as providing for future Catastrophe Claims, QBE enters Reinsurance Treaties with global Reinsurers to effectively off-load some of the insurance risk once potential claims exceed a pre-agreed specified threshold. Reinsurance is effectively insurance for insurance companies and is a widely applied risk management tool used by global insurers like QBE.

Based on QBE’s extensive historical performance, QBE’s management have proved to be highly adept at risk mastery. This is the ability to systematically assess and manage insurance risk by having a deep understanding of extreme weather events and other catastrophic perils driven by changing climatic conditions, including fires. If QBE has significant exposure to the LA fires, then their Reinsurance Treaty would have responded to any relevant claim, if it were material.

Insurance costs likely to rise beyond FY25

Global Reinsurers respond to major losses like the LA fires with higher premiums worldwide, including Australia. This is where the financial impact of the LA fires will be felt in Australia.

Major Australian Insurers like QBE will incur higher Reinsurance costs because of the LA fires. Global Reinsurers were already under pressure from rising climate-intensified claims brought on by intensifying adverse weather events and lengthening fire seasons.

Reportedly, Reinsurance costs for Australian insurers have risen by up to 30 percent over recent years in response to increasing climate-related disasters worldwide. These rising costs inevitably will be passed on to policyholders.

Another factor driving insurance costs higher is the increase in inflation experienced since 2021. Claims inflation increases the cost of claims over time and must be addressed by insurers increasing their claims reserves to meet future obligations. The cost of claims inflation, like higher reinsurance costs, is reflected in higher insurance premiums charged to policy holders.

Higher Gross Written Premium income beyond FY25

QBE has the pricing power to recover higher insurance claim costs by increasing the insurance premiums charged to policy holders.

Average Group-wide insurance premium rates increased by 10.2 percent in the 2023 half-year and 6.7 percent in the 2024 half-year. Despite these increases, Gross Written Premium income increased by 11 percent (after adjusting for exited portfolios) in the 2024 half-year.

These figures confirm the pricing power of major insures like QBE and their ability to maintain adequate claims reserves to comfortably meet future insurance obligations. It is expected that the release of QBE’s full year profit result on 21 February will confirm this position.