‘Nonsense’: Top fund managers say insurers can withstand climate risks

Two of the country's most respected fund managers – Allen Gray managing director Simon Mawhinney and IML 's Anton Tagliaferro – have dismissed claims insurers are becoming un-investable due to growing risks of natural disasters caused by climate change.

Mr Mawhinney said banks and buy now pay later stocks posed a higher risk than insurers because they are highly leveraged and face greater regulatory challenges. "We have investments in things that are far riskier than insurance. And so does every other fund manager in Australia," he said. "This notion that they [insurance companies] are uninvestible because they're too risky is nonsense in our mind."

The comments come after global insurer QBE last week announced it would increase its catastrophe allowance by almost a quarter as it braces to report a $US1.5 billion ($1.93 billion) loss for the year following mass claims from unprecedented weather events around the world.

Allan Gray’s Simon Mawhinney says its “nonsense” that insurers are ‘uninvestible’. Credit:Brook Mitchell

Unisuper chief investment officer John Pearce separately told The Australian Financial Review the $90 billion pension fund was reducing its exposure to insurance companies after more frequent natural disasters had strained the sector’s profitability.

General insurers IAG and Suncorp saw cash profits pummelled by mass claims last year following unprecedented fire, hail and flooding events. Meanwhile, former QBE chief executive Pat Regan, who left the company abruptly in August, warned premiums could soon become unaffordable in parts of the world that are exposed to repeated extreme weather events.

Yet while fund managers agree the risk profile for insurers has increased in recent years, many argue the industry has been proactive in retaining earnings by ramping up premiums.

We have investments in things that are far riskier than insurance. And so does every other fund manager in Australia.

Mr Mawhinney said there may be a lag in repricing some types of insurance, such as home and motor vehicle cover, but overall he remains confident the industry can manage climate change by analysing the risks and charging accordingly.

"I don’t think the industry is in the midst of an existential crisis," he said. "Climate change and/or the incidence of natural catastrophes et cetera have definitely increased insured losses over time, but I think the big question is whether premiums can sufficiently rise to offset those risks? I think in a number of lines of insurance that is possible."

IML investment director Anton Tagliaferro said reducing exposure to insurance companies due to climate change concerns was an "extreme view" and the greater threat for these companies was investment returns.

"One of the bigger issues for insurance companies is generating returns when interest rates are zero," he said. "That’s a bigger drain on earnings."

Mr Tagliaferro said climate change could actually increase the demand for insurance, adding the industry was by no means an outlier when it came to risk.

"The corollary is if disasters are going to become more commonplace, the necessity for insurance increases," he said. "Rio [Tinto] can be higher risk than insurers, not because of its balance sheet – but because it’s totally exposed to the iron ore price."

NGS Super chief investment officer Ben Squires, who oversees about $11 billion in assets, said his fund would not follow Unisuper's lead in the pivot away from insurance but agreed it was a "natural conclusion" that the risk profile had increased due to climate change.

"It certainly does appear on the surface that these things are becoming more risky. But you’re also seeing the premiums increase as well which is providing a higher level of compensation to some extent," he said.

Mr Squires said insurers had used historical data to model future weather events which had caused shortfalls in insurance cover, adding the industry was adapting – "but probably not fast enough".

Mr Mawhinney said "funnily enough", renewable energy companies were more exposed to the risks of climate change as the world transitions to a low carbon economy. "Not because of the stranded asset risk, but because of the high level of competition."

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