IAG erodes aggregate deductible, wipes out stop-loss protection

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Catastrophes and severe weather events resulted in reinsurance capital providers helping Australian primary insurance giant IAG during the last fiscal year, as the company wiped out a stop-loss cover it had in-force and has now eaten more than half the way into the deductible of its aggregate reinsurance as well.

IAG reported that catastrophe losses cost the company A$627 million net, after it had also used the full $101 million benefit of its stop-loss reinsurance protection and the quota share reinsurance that went alongside that.

The stop-loss reinsurance layer, that floats above IAG’s natural catastrophe loss allowance, was first purchased at the mid-year 2018 and was eroded during 2019, as IAG went above allowance for catastrophe and severe weather losses.

As a result, the company has renewed that stop-loss coverage for the year ahead, with another $150 million layer, or $101 million of reinsurance coverage after the quota share is taken into consideration.

For the next fiscal year there is a slightly higher attachment for the stop-loss reinsurance, as there is a gap between the raised natural perils allowance of A$641 million, then a small gap meaning the renewed stop-loss reinsurance cover will attach at A675 million of losses for the year ahead.

The increased natural catastrophe losses suffered in the last fiscal year, that ran to end of June 2019, has also left IAG’s aggregate reinsurance tower looking more vulnerable.

The Australian insurer’s aggregate reinsurance cover, which runs on a calendar year basis, provides A$475 million excess of A$375 million of gross protection against loss events that cost at least A$25 million, but capped at A$225 million each.

At the end of June 2019, IAG had eroded roughly A$200 million of the gross deductible for this aggregate reinsurance contract, leaving A$175 million gross to go before it can begin to make recoveries from its reinsurance partners.

Given this erosion of the aggregate deductible, IAG is now actually better protected for the rest of the year, as the insurers maximum even retention (MER) has now dropped to A$135 million as at June 30th 2019, compared with A$169 million as at January 1st 2019.

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