AIG enhances agg reinsurance, adds new occurrence, all at 7% lower cost

Insurance giant AIG has continued to enhance its catastrophe reinsurance program as it looks to take volatility out of its General Insurance business, further optimising its aggregate tower and adding new occurrence towers at the January renewals.

AIG made some relatively significant changes to its reinsurance program at the middle of 2019 renewals, adding two new property reinsurance treaties and an aggregate retro arrangement through Validus.

The company has continued to adjust its reinsurance program at the January 2020 renewal season, finding markets accommodating to its needs despite the general increases seen in pricing.

AIG has been able to optimise its program, add to it and ultimately lower the potential for volatility in its underwriting book, by leveraging reinsurance capital, all at a reduced cost as well, the company’s President and Global Chief Operating Officer and CEO of General Insurance Peter Zaffino explained yesterday.

Speaking to analysts during an earnings call, Zaffino explained that, “We continue to refine and enhance our reinsurance purchasing strategy as our underwriting actions take hold.”

Discussing how the renewal season went for AIG, Zaffino said, “Overall we are pleased with the outcome of the January 1 renewals. While there are signs of firming in the reinsurance market, the significant relationships we established over the last two and a half years enabled us to achieve favourable renewals of our major treaties, in line with our expectations.”

He moved on to discuss the continued restructuring and optimisation of AIG’s property catastrophe reinsurance program, an area of specific focus as the insurer has been seeking to remove volatility from its General Insurance business.

“We continue to enhance both the aggregate and occurrence structures of our global property cat program, which provide significant protection against both severity and frequency of events in addition to providing extreme tail protection against events in geographies where we have lower market-share,” he explained.

On the aggregate tower Zaffino said, “For the 2020 aggregate protection, we improved the expiring cat program by combining the international and North American deductibles into a single worldwide deductible and reducing each and every event deductible to be more tailored by geography and peril.”

“These enhancements increase the relevance of the aggregate protection, particularly with respect to secondary and lesser modelled perils,” he highlighted.

The changes mean the aggregate reinsurance will kick-in more frequently for AIG it seems, with a global approach to the major event deductibles likely a better way for the company to manage its cat exposure and a regional approach to smaller event deductibles a more responsive way to use aggregate protection.

“As with our expiring 2019 global cat program, the global aggregate protection also provides us with significant additional limit for losses arising from a single large occurrence,” Zaffino said.

Moving on to discuss AIG’s per-occurrence reinsurance protection, Zaffino highlighted two specific 1/1 renewal purchases.

“We also purchased two core occurrence towers,” he explained. “One tower covers North America commercial property and the other covers all international property including Japan.

“In addition we purchased a separate occurrence tower for our U.S. private client group bifurcating it from North America commercial, to have a dedicated tower as part of our initiative at Lloyd’s to establish Syndicate 2019 which is focused on our U.S. high net worth business. This was the only substantial new program we entered into on January 1st.”

Further changes were made in the area of property per-risk underwriting business, where Zaffino explained that thanks to a “significant reduction in gross limits deployed and enhanced reinsurance purchasing” AIG has now “dramatically reduced our net retention to any one property loss.”

All of these enhancements might come with added cost, you would think, especially at a time when the market has firmed a little.

But the expansion of AIG’s reinsurance program over the last year or so has served the insurer well, in helping it to become a bigger partner with large markets and a wider range of smaller markets, including the insurance-linked securities (ILS) fund market.

This partnership seems to be reflected in the ability of the company to enhance its reinsurance without adding undue costs.

Zaffino went into more detail, “We renewed our 2020 cover with enhancements that reduced the maximum attachment point from $50 million to $25 million and we reduced our purchases for higher layers, as our strategy to reduce gross limits continues to dramatically improve our risk profile.

“In the aggregate we were able to improve our overall cat reinsurance program, including terms and conditions while reducing the overall cost by approximately 7% year over year.

“We will continue to refine and enhance our reinsurance program as the year progresses.”

Reinsurance capital is playing a significant role in helping AIG bring its General Insurance business back to profit, as it achieved in 2019.

Going forwards it’s expected reinsurance capital will continue to help AIG by bearing the brunt of major catastrophe losses throughout the year.

It would be particularly encouraging to see the insurer return to the catastrophe bond market at some point in the future, as it’s program expands. While not currently on the cards it seems, as AIG continues to expand its use of reinsurance the capital markets will no doubt play an increasing role, in one form or another.