Australian primary player Insurance Australia Group (IAG) has spent significantly more on its reinsurance protection in the last six months and added stop-loss protection to cover it when catastrophe losses go above its natural perils budget and servicing a larger overall program.
At the January reinsurance renewal earlier this year IAG secured its $8 billion catastrophe tower citing “modest upwards pressure on like-for-like reinsurance rates.”
The company had already set up last December a new five-year 12.5% quota share arrangement with reinsurance giants Munich Re, Swiss Re and Hannover Re, which when added to the insurers existing 20% whole-of-account quota share with Warren Buffett’s Berkshire Hathaway, means that IAG now passes on 32.5% of its losses to global reinsurance giants.
At the mid-year renewals IAG has renewed a stop-loss reinsurance cover that extends above its natural peril budget, so soaking up losses when they surpass the anticipated level.
Having gone beyond budget in previous years, this is a sensible move for IAG. The insurer already has a robust aggregate reinsurance protection in place as well, to soak up initial frequency losses, but having eaten into its aggregate layer of protection before, the stop-loss will now offer its shareholders and capital even greater protection.
The stop loss reinsurance, which IAG has purchased over the last five years, extends above the natural peril limit, providing IAG with $150 million of protection in excess of $900 million (before the quota shares are accounted for) for a 12 month period to 30th June 2019, or $101 million excess of $608 million after the quota share coverage is accounted for.
Calendar year 2018 is looking much healthier though for IAG, as the firm has only eroded $29 million of the deductible in respect of its aggregate, or sideways, reinsurance protection, leaving the insurer with $296 million of deductible erosion over the balance of calendar 2018 before accessing the aggregate protection, or $200 million on a post-quota share basis.
IAG explains that it had a “favourable net natural peril experience, assisted by the use of reinsurance protection in 1H18, which saw related claim costs fall below allowance by $84m.”
In the prior financial year IAG overran its allowance by $138 million, hence the stop loss reinsurance would have kicked in.
IAG’s reinsurance spend has increased significantly, thanks to the impact of the quota shares that were first entered into at the start of 2018, as well as some additional purchases.
For the full financial year of 2018, which runs from July 2017 to end of June 2018, IAG spent AU $3.851 billion on reinsurance protection, up by 23% on the prior year.
But for the first-half of 2018, so the second half of IAG’s financial year, the increase in reinsurance expense was much higher, as the costs of the new quota shares and the stop loss are accounted for in that period.
In this period in 2018 IAG spent AU $2.24 billion on reinsurance, a whopping 44% more than the AU $1.551 billion spent in the same period of 2017.
IAG has clearly adopted the use of efficient reinsurance capital and the support of some of the largest players in the market as a lever to asisst with its profitability and growth, while minimising its catastrophe and severe weather exposures.
The firm said it has achieved “Enhanced protection via increased cover and greater diversification” in the last financial year, at greater cost of course, but even so the effects have been seen in reducing IAG’s exposure to recent catastrophe loss events in the last year.
Some of that increased cost was also due to rate increases following reinsurers major losses of 2017.
IAG explained, “While reinsurance capital levels remain high, the level of catastrophe activity has contributed to some modest upwards pressure on reinsurance rates, as experienced by IAG at the time of its calendar 2018 catastrophe renewal.”
But looking ahead, “Whilst further modest increases may occur, market conditions across all classes of business should remain relatively favourable for purchasers of reinsurance.”
IAG continues to utilise some collateralised reinsurance protection, from ILS funds and third-party capital vehicles.
In fact, 91% of IAG’s reinsurance protection at June 30th 2018 came from A+ or better rated sources, but the company counts its fully collateralized reinsurance coverage within this, as it considers funds in trust to be equivalent to or better than this rating.