IAG bolsters reinsurance with new aggregate cat cover & stop loss

Australian primary insurance group IAG has added new catastrophe reinsurance protection at the July 1st renewals, increasing its aggregate protection and also capping potential losses with a stop loss cover.

IAG has been making relatively heavy use of its reinsurance protection in recent quarters, as catastrophe loss activity in Australia saw it making recoveries across its aggregate protection in particular.

The insurer earlier this year revealed “significant reinsurance recoveries” made under its program in 2019, including around $280 million from its aggregate tower.

So it’s no surprise the company has added to its frequency protection, as Australia was beset by numerous large catastrophe and severe weather events in the last year.

IAG said that it goes into its fiscal year for 2021 with strong reinsurance cover in place, including access to significant protection under its existing calendar year 2020 aggregate reinsurance arrangement.

Taking into account all losses suffered to the mid-year, IAG said that it enters its new corporate calendar year with an estimated maximum event retention of $41 million (after taking into account its quota share reinsurance arrangements).

IAG still has its core quota share arrangements in place, which see reinsurance giant Berkshire Hathaway takes20% of its claims through one quota-share reinsurance arrangement, while Munich Re, Swiss Re and Hannover Re all share in another 12.5% of IAG’s losses through a second arrangement.

Adding to its protections for the coming fiscal year, IAG has secured a new aggregate catastrophe reinsurance cover providing 12 months of protection to 30th June 2021.

This new aggregate reinsurance will provide $350 million of gross protection, attaching at $400 million of losses ($236 million in excess of $270 million, post-quota share).

Part of the motive for adding this aggregate cover at this time is to move away from the January renewals which occur close to the wildfire season peak and a time when other perils are prevalent in Australia, to have its aggregate cover arranged at the mid-year.

IAG said this marks the, “Transition of IAG’s aggregate protection to a financial year format, avoiding the intersection with peak period catastrophe activity that can disrupt the renewal process at calendar year-end.”

The new aggregate cover will overlay the existing aggregate reinsurance for the rest of this calendar year and then that cover will not be renewed in January.

IAG has also added new stop-loss reinsurance protection for retained catastrophe losses, to run in line with its fiscal year.

The stop-loss offers $100 million of reinsurance protection in excess of $1.1 billion ($67 million in excess of $742 million, post-quota share) for the 12 months to 30th June 2021. After accounting for the quota share, this cover will attach approximately $84 million above IAG’s FY21 perils allowance of $658 million, the company explained.

After the experience of the last year of catastrophes and severe weather, it is no surprise to see the Australian primary insurance giants bolstering their reinsurance protection.

The aggregation of losses across wildfires, hail storms, severe weather, flooding and other events have all impacted the insurers significantly, so reliance on reinsurance protection is almost certain to increase.

Add in the impacts of the Covid-19 pandemic and how that affects insurer capital and reinsurance capital is certain to be a lever Australian carriers turn to.

IAG increased its catastrophe claims cost estimate for the year to $904 million, up from $850 million it reported in February, suggesting further impacts to its aggregate cover of the current year.

IAG put this down to “higher than anticipated attritional perils experience in the final quarter of the financial year,” which is the quarter to June 30th 2020 for the insurer.

IAG CEO Peter Harmer commented, “We have seen some softening in our underlying margin in the second half. This stems from the combination of lower investment returns from diminishing interest rates, an increased reinsurance expense as we bolstered our protection following heavy perils incidence early in the calendar year, and some deterioration in Australian commercial long tail loss ratios.

“We enter FY21 with a strong balance sheet and enhanced reinsurance protection, and are well-equipped to negotiate the challenges and opportunities that a post-COVID environment will present.”