The catastrophic wildfires in Los Angeles, which have already caused insured losses estimated at up to 30 billion USD (48.3 billion AUD), are not just a local disaster. Their effects ripple across the global insurance market, including here in Australia.
With insurers interconnected through the global reinsurance market, the financial toll of these fires could lead to higher premiums for Australian policyholders.
In this article, let’s explore how interconnected insurance markets and global reinsurance trends could lead to rising insurance costs for Australians. We’ll also examine the potential changes in fire management practices and offer actionable advice for mitigating these impacts.
How Global Insurance Markets Are Interconnected
With insurance being a global industry, almost all insurers are connected through the reinsurance market. Reinsurance acts as “insurance for insurers,” allowing them to transfer some of their risk to other companies in exchange for premiums. This system helps insurers manage large-scale catastrophes by spreading the financial burden across multiple entities.
How Reinsurancing Works and Why It Matters
When an insurer sells policies, it transfers a portion of its risk to a reinsurer. In turn, the reinsurer may diversify its risk further by transferring some of it to other reinsurers.
This matters because reinsurers operate on a global level, meaning losses from events like the LA fires affect their capital reserves. When this happens, they adjust their pricing models globally by raising premiums worldwide, which impacts Australian insurers and, ultimately, policyholders.
Major reinsurers such as Munich Re and Swiss Re have exposure across multiple markets, including Australia. Australian insurers depend heavily on international reinsurers like these to manage risks from natural disasters like bushfires, floods, and cyclones.
Impact of LA Wildfires on Australian Insurance Prices
The LA fires are expected to exacerbate an already “hard reinsurance market” – a term that describes rising prices and reduced capacity. Reinsurance costs for Australian insurers have risen by approximately 35%, driven by increasing climate-related disasters globally.
As a result, Australian insurers will likely face higher premiums as global reinsurers adjust their pricing models following the LA fires. This isn’t an ideal scenario, especially when 15% of all households in Australia now face home insurance affordability stress. Their insurance premiums now cost more than four weeks of gross household income.
As climate risks intensify globally, reinsurers are adopting stricter underwriting practices and increasing rates. This trend could make insurance less affordable for many Australians.
Soft vs. Hard Markets: How Insurance Cycles Work
The insurance industry operates in cycles that alternate between “soft” and “hard” markets. These cycles affect everything from pricing to coverage availability.
What’s A Soft Market?
A soft market is often referred to as a buyer’s market, in which premiums are stable or falling, coverage terms are broader, and insurers compete aggressively for new business by offering lower rates and higher limits of liability.
This typically occurs when there is an abundance of capital in the insurance industry and fewer catastrophic losses. Policyholders can shop around for better deals or negotiate lower premiums during these periods.
What’s A Hard Market?
A hard market is the exact opposite; it’s a seller’s market. Premiums increase significantly, coverage terms become stricter, and insurers reduce their capacity or even exit high-risk markets altogether.
Hard markets usually follow periods of large-scale disasters or financial losses that deplete insurers’ capital reserves. Underwriting becomes more conservative as companies focus on restoring profitability.
Lessons From Past Crises
Australian insurers have a history of taking a cautious approach when faced with emerging risks, such as the following:
- Many insurance policies exclude asbestos coverage entirely due to its life-threatening risks. Since then, the country has phased out asbestos from the 1980s and banned its use, sale or import in 2003.
- Similar exclusions were applied following concerns about aluminium composite panels (ACP) used in cladding.
In the wake of the LA fires, insurers may initially exclude or limit coverage for high-risk properties. However, as fire mitigation strategies improve – such as better equipment and training – coverage terms will likely soften over time.
Why We Experience Shorter Soft Markets Now
Soft markets have become increasingly rare and short-lived due to the growing frequency and severity of natural disasters globally. Over the past 30 years, more than 9 million Australians have been affected by natural disasters or extreme weather.
Catastrophic events such as wildfires, floods, and hurricanes drive up claims costs, making it more difficult for insurers to maintain low premiums for long periods.
Signs of A Softening Market in 2025
There are early indications that parts of the insurance market may be entering a softening phase:
- Competition among insurers is increasing in some lines of business.
- Improved underwriting results and higher investment yields contribute to a more stable financial outlook for insurers.
- The Australian insurance market is bracing itself for a slow premium growth in 2025 as inflationary pressures ease.
However, this trend may not last long. The increasing number of catastrophic events worldwide, such as the recent California wildfires, could reverse any softening conditions quickly. For Australian consumers, this means taking advantage of periods of lower premiums to secure favourable terms before prices rise again.
What You Can Do to Manage Your Insurance Costs
While rising premiums may seem inevitable, there are steps you can take to manage your insurance costs.
- Review Your Policy: Check whether your current policy adequately covers natural disasters like bushfires. Look for exclusions or limitations related to fire damage.
- Invest in Risk Mitigation: Install fire-resistant building materials, such as metal roofs or concrete walls. Upgrading your smoke alarms or installing smart fire detection systems that notify you remotely also helps.
- Take Advantage of Soft Markets: When the insurance market is showing signs of softening, use this opportunity to negotiate better terms with your current insurer or explore alternative providers.
Key Takeaways
- Global reinsurance markets are interconnected; losses from events like the LA fires drive up reinsurance costs worldwide.
- Rising global insurance premiums will likely lead to higher costs for Australia.
- Insurance cycles alternate between hard (higher premiums) and soft (lower premiums) markets; soft markets don’t last as long anymore due to frequent catastrophes globally.
- Proactive steps – such as reviewing policies, investing in risk mitigation measures, and comparing providers – can help Australians manage rising premiums.
- Insurers may initially take a cautious approach by excluding or limiting coverage for high-risk properties but could adjust over time as fire mitigation improves.