IAG’s main cat reinsurance program triggered by hailstorm losses

Australian primary insurance giant IAG is set to make a claim under its calendar year 2020 main catastrophe reinsurance program that provides it with per-occurrence protection for the recent hailstorm events, signalling that the gross loss impact to this one insurer will surpass A$250 million.

As of the latest update, the insurance and reinsurance market losses from the recent severe and large hail storm outbreaks across southeastern Australia had risen to A$514 million (around US $355m) as of yesterday (Thursday 23rd Jan).

It’s now clear that around half of this will fall to IAG alone, suggesting the industry toll has further to increase.

IAG has delivered a profit warning to the markets, after the added impacts of recent catastrophe losses has dented its performance.

The insurer had already revealed that it expected to claim on its aggregate reinsurance arrangements for the recent bushfire disaster in Australia, but now the hailstorm from the weekend just gone is also set to dent its results and cause further losses to flow to its reinsurance markets.

IAG said that the hailstorms from January 19th and 20th, that struck parts of Melbourne, Canberra and Sydney, will be treated as a single catastrophe loss event.

The company said that it expects a pre-tax hit of A$169 million from this, after global reinsurance players take their quota share, in-line with the first-event retention trigger point of its main per-occurrence catastrophe reinsurance program for the current calendar year.

The retention level on the main catastrophe program is A$250 million and the quota share amounts to 32.5%, with reinsurance giant Berkshire Hathaway taking 20% through its quota-share reinsurance arrangement and Munich Re, Swiss Re and Hannover Re all sharing another 12.5%.

So, what IAG is effectively saying here is that its gross loss costs from the hailstorms will rise above the A$250 million retention, so it retains 67.5%, passes on the 32.5% to quota-share partners, and then however high above that trigger point the hailstorm losses extend will be shared between the quota-share partners and the rest of its per-occurrence reinsurance program counterparties.

IAG further explained that it does not expect the loss fromthe hailstorms to cause it to require the purchase of any reinsurance reinstatement, which suggests the gross loss will not extend too much above the trigger level, leaving plenty of the main catastrophe reinsurance program available for second or subsequent loss events.

After the hailstorms have triggered this per-occurrence reinsurance protection for IAG, the firms retention level drops down for second events, now sitting at A$135 million after the quota-share is factored in (around A$200m gross).

More details on IAG’s 2020 reinsurance program can be found in a previous article here.

IAG said that it has already received 28,000 claims from the hailstorm event, a figure the insurer said is expected to rise further over the coming days. Most of the claims are from damage to residential property and motor vehicles.

IAG Australia Division CEO Mark Milliner commented, “We are doing all we can to help our impacted customers get back on their feet as swiftly as possible.

“We are scaling-up our support for customers in the affected areas and have increased our call centre capacity to help those affected lodge claims easily. This follows on from increasing staff levels to respond to the devastating bushfire season.”

The bushfires are now seen as the costliest ever to hit Australia.

Because of the impacts from the bushfires and these hailstorms, IAG has increased its natural peril allowance for the year, which effectively suggests a reduction in profits due to these events.

IAG’s Managing Director and CEO Peter Harmer explained, “We are pleased with our underlying business performance, which continues to track in line with our expectations, both at the GWP and underlying margin levels, and in terms of the net benefits being realised from our optimisation program.

“We have, however, revised our reported insurance margin guidance for the full year, to reflect the recent heavy natural peril activity and a reduced expectation for prior period reserve releases following the lower than anticipated first half net reserve release outcome.”

The company has raised its net natural peril claim cost assumption to A$715 million, in light of the hailstorm losses, up from previous guidance of $641 million.

The current financial year run-rate puts these costs at A$608 million, including A$419 million for the six-month period to 31st December 2019, the A$169 million for the hailstorms and then some attritional impact from bushfire losses.

Interestingly IAG calls these “minimal net bushfire-related costs” suggesting that it expects its aggregate reinsurance and quota-share reinsurer partners to take the bulk of these claims.

IAG’s announcement today shows that the hailstorm event will eat into reinsurance provisions for the major insurers operating in Australia, so also suggesting losses for major reinsurers and some ILS funds as well.

Further announcements are possible from other major insurers and the combined impacts of the bushfires and the hailstorms may dent some reinsurers start to the year.