AIG to be a predictable buyer of reinsurance: Duperreault

Insurance giant American International Group (AIG) will aim to be a “predictable buyer of reinsurance” going forwards, according to CEO Brian Duperreault, as it looks to reduce its exposure to frequency catastrophe events and better manager its overall natural catastrophe exposure, particularly in the U.S.

“My philosophy on reinsurance is that it is an important tool for AIG to best manage its portfolio of risks,” Duperreault said during the insurers recent third-quarter earnings call.

“It provides another set of eyes on our underwriting, helps to manage volatility and control loss exposure. Going forward, you can expect us to be a predictable buyer of reinsurance,” he continued.

This is good news for the reinsurance and insurance-linked securities (ILS) market, as it likely signals an increasing use of reinsurance and third-party capital at AIG, with the company perhaps aiming to leverage efficient reinsurance capital as a driver of growth.

AIG is set to cut its premium growth through utilisation of more reinsurance in the coming year, but as this strategy beds down it is likely that growth will return, but perhaps in a more controlled manner with the volatility passed on to reinsurance and ILS markets.

AIG is already utilising a significant amount of ILS capital within its newly restructured reinsurance program, with key players such as Nephila Capital having participated in the insurers reinsurance program renewal on a collateralised basis.

For 2018, AIG has restructured its reinsurance program from an arrangement providing per-occurrence coverage of up to $1.5 billion, to a new program with aggregate coverage of $750 million and $2 billion of occurrence cover as well.

This is designed to help AIG better manage the volatility in its results created by loss years like 2017.

Peter Zaffino, CEO of General Insurance at AIG, explained the new reinsurance strategy, saying, “In light of our reinsurance strategy and actions to manage the overall portfolio we expect 2018 premium volume to be relatively flat with 2017 levels.

“Last quarter, we stated that one of our main priorities is to take a more strategic approach to reinsurance, building long-term relationships with our partners to manage future volatility. Our reinsurance philosophy is to take smaller net lines in property & casualty, reduce volatility and to be consistent buyers of reinsurance.”

Zaffino went on to explain some of the new structural items within the AIG reinsurance program, explaining that at January 1st the insurer, “Began to execute on our strategy by reducing severity and frequency exposures to North American cat and net retention on our property per-risk, and also obtained a new catastrophe cover for international cat.”

These actions have already had an effect, he explained, saying that these changes and future changes or reinsurance purchases made through 2018, will “substantially reduce our risk of future volatility.”

He said that AIG’s probably maximum loss (PML’s) for a 1-in-100 or 1-in-250 catastrophe event are now 30% lower than they were before these actions, a significant decrease in volatility thanks to the increased use of reinsurance.

Zaffino also said that AIG would be taking a “hard look” at its average annual losses as well, as it looks to get its results under better control with the help of reinsurance.

In fact, Zaffino said that were the 2017 loss events to be repeated, AIG’s own losses could be between 40% and 60% lower, as a result of the actions taken to reduce exposure and increase reinsurance protection.

AIG is set to continue to restructure its international and other reinsurance arrangements throughout the year ahead, meaning that the firms volatility could be greatly reduced by 2019.

The company also recently announced the launch of a dedicated legacy reinsurance platform DSA Reinsurance in Bermuda, which would manage its run-off and legacy portfolios of risk.

These changes and the expansion of the reinsurance strategy at AIG bode well for both traditional and alternative reinsurance capital providers, perhaps even for the catastrophe bond investment market.

It would be interesting to see AIG return to the cat bond market, as a way to lock-in coverage from the capital markets over a longer-term. AIG was a heavy user of cat bond coverage for a time, although it has not sponsored a cat bond since 2005 now.

The new reinsurance strategy and approach to becoming a predictable buyer of coverage means that AIG has opened up its access to the capital markets and ILS investors even more, something expected to continue.

AIG had also tapped the ILS investment space when it purchased a back-up reinsurance cover after the Q3 2017 hurricanes, with a number of ILS fund markets participating in that placement as well.

Zaffino also mentioned the impending acquisition of Validus, which was announced recently, saying that it will also help AIG control its PML’s and provides complementary business avenues, “including access to the ILS market through AlphaCat.”

AlphaCat offers even more chances to tap into the capital markets for AIG and the company is likely to find significant opportunities to share risks with AlphaCat investors, as it looks to continue this trend of managing volatility within its business.

ILS fund managers and investors will be pleased to hear that AIG intends to buy reinsurance more predictably and for the insurer, the use of the capital markets as a capacity pool to help it grow its business with lower volatility provides an ideal opportunity to enhance its results.