AIG expects reinsurance to limit severe losses in second-half

Global insurer American International Group (AIG) expects to pass on a greater share of its major loss experience to reinsurance capital through the second-half of 2018, as it has already used up a chunk of the retention in the most recent quarter.

During the second-quarter of 2018 AIG revealed catastrophe losses amounting to $150 million and so-called severe losses (non-catastrophe events causing a loss of more than $10 million to AIG) amounting to $293 million, both net of reinsurance.

$276 million of the severe loss toll was driven by AIG’s commercial lines insurance business, with the rest from the insurers personal lines book.

Severe losses are up significantly on the prior year, when they came out as just $125 million for AIG.

So far this year the severe loss activity AIG has suffered has driven its combined ratio higher, coming out at 101.3% for the General Insurance division as a result, so reflecting an underwriting loss for the unit.

Having experienced these elevated severe losses in the first-half of the year, more than double the impact to the combined ratio as AIG would have normally expected from its severe category, it seems that AIG is nearing the end of its retention for these types of smaller loss events and that some kind of aggregate reinsurance protection may be about to kick in.

AIG said that given the level of severe losses suffered in the first-half of the year, it now expects that its severe loss bill in the second-half of 2018 will be limited thanks to its reinsurance protection.

That could be the main AIG aggregate reinsurance cover that provides the firm with frequency protection for larger losses, which AIG had bolstered in the last twelve months, or perhaps more likely a newer reinsurance cover specifically designed to protect the insurer against these severe losses.

In fact it seems that AIG has a stop-loss protection in place that will kick in after its severe losses reach $415 million, so with them already at $293 million this must be why the firm is expecting its reinsurance to kick in over the remainder of the year.

The insurer had purchased additional reinsurance protection to cover severe losses on an international basis, as it realised that these smaller losses can be as impactful to earnings as the major catastrophe losses for which it has a separate reinsurance tower.

With AIG’s reinsurance program having participation from capital markets players, including ILS funds and other collateralized reinsurance providers, this suggests that as AIG’s severe losses rise through the rest of 2018 there is a good chance of them claiming on this protection, pushing some share of their losses to capital market investors.