IAG raises perils budget 19%, but extreme weather claims doubled

In reporting its fiscal year 2022 results this morning, Australian primary insurance giant Insurance Australia Group (IAG) has announced that it is lifting its natural perils budget by 19% to deal with “the increasing severity and frequency of extreme weather events.”

IAG, like the other major Australian insurers and those international carriers operating there, have taken significant losses from extreme weather and natural catastrophe perils in recent years, with corresponding and increasing use of reinsurance arrangements as a result.

IAG has reported a significant uplift in its provisions for reinsurance recoveries on its balance-sheet from the 2022 fiscal year, reflecting the significant reinsurance recoveries made.

The company renewed its main catastrophe reinsurance tower at $10 billion in size at the start of the calendar year, then recovered from its aggregate reinsurance after the storms and floods in February, more recently renewing its important catastrophe aggregate reinsurance arrangement but at a higher attachment point.

In announcing its results this morning, IAG CEO Nick Hawkins explained the significant effects of severe weather on the business.

“Climate change and its impact on our customers and communities is one of the most important challenges we face as a business. FY22 was one of the most significant peril years we have experienced, with multiple events in Australia and New Zealand, including the February 22 floods in northern New South Wales and along the east coast,” Hawkins explained.

He then gave a view of exactly how severe the weather claims environment was for Australian insurers over the last year.

“Across Australia and New Zealand, claim lodgements relating to extreme weather events in FY22, more than doubled over the prior year.”

That’s a stunning figure, as our readers will be well-aware that IAG and other Australian insurers had faced significant catastrophe and weather claims in the prior year that had also driven significant reinsurance recoveries.

So with claims more than doubling from extreme weather, it’s no surprise the company is trying to account for it.

Hawkins explained that, “To deal with the increasing severity and frequency of extreme weather events, we have put in place our largest to date perils allowance, increasing it by 19% to $909 million for FY23.”

Hawkins calls for a coordinated approach to boost resilience against natural hazards, saying, “Our strong view remains that we need a coordinated national approach from governments, businesses, and communities to build more resilient communities and reduce the impact of natural disasters.”

Insurers cannot reduce natural disasters, but they can play a critical role in societies mission to make itself more resilient to these events.

The increased frequency of severe weather claims, at more than double, is a significant wake up call and it’s perhaps surprising that IAG and other Australian insurers haven’t raised their catastrophe budgets more significantly, or purchased significantly more reinsurance.

Another year of losses like the last would see the Australian reinsurance market becoming very hard and costs rising significantly, meaning those would need passing on, causing large premium increases for Australian insurance consumers.

By the end of the fiscal year, IAG’s natural perils costs rose to $354m above the original allowance of $765m, broadly in line with the guidance of $1.1bn that the insurer announced in March.

Meaning the new budget of $909 million remains far below recent loss experience.

IAG said that losses in the 2022 calendar year are already eating into its reinsurance arrangements, with the February 2022 Queensland and New South Wales flooding event (net loss after reinsurance of $73m) and the March 2022 East Coast Low (net loss after reinsurance of $34m) seeing their ultimate losses reduced thanks to the financial protection provided by its main catastrophe and aggregate reinsurance covers.

Australian catastrophe and weather claims experience has elevated considerably in recent years, it seems, with a corresponding hit to reinsurance programs there.

Further years of losses are going to challenge the appetites of major reinsurance capital providers for risks in the country and it will be interesting to see how much harder rates become, if the recent weather experience continues.