IAG’s $80m east coast AU storm loss suggests industry exposure to rise

by Artemis on June 9, 2016

IAG said it expects losses of up to AUD$80 million (USD$59.5 million) from storms that struck Australia’s east coast recently, above the latest industry loss estimates and pushing its net natural catastrophe claims towards its AUD$600 million budget for the 2016 financial year.

The primary insurer has reported that to date it’s received approximately 10,000 claims relating to storms that impacted much of Australia’s east coast recently, stating that the event will result in pre-tax losses of between AUD$60 million and AUD$80 million (USD$44.6mn – USD$59.5mn).

The expected loss, which remains uncertain and could creep higher, takes IAG’s net natural peril claim loss in line with its $600 million loss budget for the 2016 financial year, which ends June 30th 2016.

Interestingly, and not for the first time in recent memory, IAG’s loss estimate for the east coast storms’ is actually higher than the industry loss estimate provided by the Insurance Council of Australia (ICA), which said that as at 9.30am AEST today, 19,100 claims had resulted in an estimated insured industry loss of $74.3 million.

Owing to IAG expecting losses of up to the $80 million mark it’s extremely likely that the ICA will increase its insurance industry loss estimate in the coming days. The $74.3 million reported today is already an increase from the $56 million estimate provided by the organisation on Tuesday, after it expanded the footprint of the event to include the east coast of Victoria and northern and southern coastlines of Tasmania.

With IAG far from the only insurance company exposed to the event, it’s safe to assume that the insurance and reinsurance industry loss from the storm is going to rise considerably.

As well as its $600 million perils budget for the 2016 financial year, IAG also has an additional layer of natural perils reinsurance cover of $80 million in excess of $680 million.

With recent losses pulling the insurers net claims for the year towards the $600 million threshold, the insurer is almost within $80 million of triggering the additional aggregate reinsurance protection it has in force.

Total losses from the east coast storms remain uncertain, so it’s unclear how much, if any reinsurance protection IAG will utilise for the 2016 financial year, the firm states that it has “a comprehensive catastrophe reinsurance program for the 2016 calendar year.”

IAG’s main catastrophe cover for the 2016 calendar year covers losses of up to $7 billion, with the insurer retaining the first $250 million of each loss. In addition the firm has aggregate catastrophe reinsurance protection of $450 million excess of $375 million, which it put in place for the first time in 2015.

During 2015 the firm revealed that it was close to eating into its aggregate, but no such revelation has been announced this year.

The firm’s catastrophe program and additional coverages suggest it’s unlikely that the east coast storms will see the insurer eat into its reinsurance protection, but does point to further erosion of its overall catastrophe loss allowance.

It’s not the first time the insurer has eroded its catastrophe loss allowance in a given financial year, so it might be that IAG looks to purchase more reinsurance protection for the 2017 financial year to limit the erosion of its overall catastrophe cover in the future.

IAG, as with other Australian insurance companies utilises collateralised reinsurance protection within its operations, so it’s possible, although unclear that losses could erode through to insurance-linked securities (ILS) players should the insurer continue to exhaust its catastrophe program, particularly in a year with an extreme loss event.

After eroding its catastrophe budget allowance for a given financial year on several occasions it will be interesting to see if IAG increases its reinsurance protection at the upcoming renewal to mitigate the impact of future losses.

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