IAG tops up with $1bn catastrophe reinsurance buy

by Artemis on June 9, 2017

Australian general insurer Insurance Australia Group (IAG) has bulked up its catastrophe reinsurance protection, adding another $1 billion of additional coverage which will sit atop the companies catastrophe reinsurance tower of $7 billion.

IAG has faced a number of severe weather and catastrophe events in the last year, some of which has eroded portions of its reinsurance program, calling on its reinsurers for Cyclone Debbie support most recently, and having claimed on its aggregate reinsurance earlier this year due to the impacts of hail, storms and the New Zealand Kaikoura earthquake.

The insurer, which we understand to be a buyer of collateralized reinsurance protection from some ILS fund managers, said that it has “strengthened its reinsurance cover through the purchase of additional catastrophe protection.”

IAG has bought $1 billion of gross catastrophe reinsurance protection, in excess of $7 billion, with an arrangement that includes one prepaid reinstatement, the company said.

The placement covers 80% of the layer (so $750m of losses), which reflects the insurers existing quota share arrangement that it has with Warren Buffett’s Berkshire Hathaway (so allows for the 20% quota share agreement with Buffett’s reinsurer) and the new reinsurance has a term of 19 months, beginning 1st June 2017 and running to the end of 2018.

IAG Chief Financial Officer Nick Hawkins commented on the reinsurance buy; “We are always looking for ways to strengthen our reinsurance protection in a cost effective manner, and this purchase meets those requirements. It significantly extends the upper end of our gross protection.”

IAG’s main catastrophe reinsurance tower covers the insurer up to $7 billion of gross losses and runs on a calendar year basis. The next renewal for this main program is January 1st 2018.

IAG continues increase its use of reinsurance capital, as has been seen in recent years. The collateralised markets and ILS funds have been playing an increasing role in its program, but we can’t confirm any details for this additional $1 billion.

IAG’s use of multiple sources of reinsurance capacity, the quota share and its own reinsurance captives,which subsequently utilise retrocession, means that the ILS market has a chance to play a growing role in its program, particularly via rated fronting or parent reinsurers to ILS entities, to support the insurers increasing need for catastrophe protection.

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