Australian primary insurance group Suncorp has bulked up on its catastrophe and weather reinsurance protection again, as the firm has increasingly suffered losses and its CEO states that the increased frequency of medium-sized catastrophe losses is hurting the firm.
Suncorp has purchased a new natural hazards aggregate reinsurance cover at recent renewals, as it looks to ward off the impacts of more frequent catastrophes and severe weather events. Additionally, and again focused on warding off higher catastrophe event frequency, Suncorp has also acquired second event reinsurance cover to minimise impacts.
CEO of Suncorp Michael Cameron explained the importance of reinsurance protection; “Reinsurance has traditionally protected our capital position but still allowed volatility in earnings, particularly from the accumulation of medium sized events.”
The focus on frequency is clear, and the new protection purchased for the 2017 financial year is all about protection Suncorp against the increasing number of medium-sized catastrophes and severe weather events that Australia has been experiencing.
Cameron explained some of the new arrangements; “A new aggregate cover for $300 million for events greater than $5 million is now in place. It applies after the total retained cost reaches $460 million.
“It’s important to note, this additional protection will result in the allowance reducing to $620 million. It will also drive lower earnings volatility.”
For Suncorp, what it calls its “enhanced reinsurance program” for 2017 is designed to “reduce the potential volatility of future natural hazards.”
The new Natural Hazards Aggregate reinsurance cover provides Suncorp with “$300 million of cover after the retained portion of natural hazard events greater than $5 million reaches a total of $460 million.”
The upper limit of Suncorp’s main catastrophe reinsurance program remains unchanged at $6.9 billion of losses covered, with a maximum event retention of $250m.
Suncorp has also purchased additional reinsurance cover to lower its maximum event retention for a second Australian catastrophe loss to $200 million and, for a third or fourth event, to $50 million.
For Suncorp’s New Zealand business, multi-year reinsurance protection lowers its first event retention to NZ$50 million and the second and third event retentions to NZ$25 million.
Again, these are designed to lower the risk of multiple smaller catastrophe and severe weather losses having an aggregated impact on Suncorp’s results. This trend, of buying more aggregate and drop-down aggregate protection, to reduce the impact of frequency events and lower retention levels on subsequent losses, has been seen in other regions of the world as well, as re/insurers come to terms with the expectation that our changing climate could drive catastrophe loss frequency upwards.
For Suncorp, the changes to the reinsurance program for the 2017 financial year have reduced its net natural hazard allowance for the 2017 financial year to $620 million, the firm says.
Additionally, Suncorp has a 30%, multi-year, proportional quota share reinsurance arrangement that covers its Queensland homeowner portfolio until 30th June 2018.
Suncorp said that over 85% of its business is covered by reinsurance firms rated ‘A+’ or better. We understand that there is some participation from collateralised markets such as ILS fund managers, in the Suncorp reinsurance program, either on a fronted or direct, fully collateralised, basis.
The new natural hazards aggregate reinsurance protection and the drop-down aggregate covers, designed to provide the multi-event protection, sit at the lower end of Suncorp’s reinsurance program, suggesting that the rates on-line will have been attractive to participating markets.
As this trend, of buying more protection to cover companies against the risk of more frequent catastrophe losses, continues, opportunities will grow for reinsurers and ILS markets to deploy more capacity at attractive pricing levels.
Often these arrangements to cover catastrophe frequency risk, or multiple event risk, sit at the lowest end of the program and therefore come with the higher rates-on-line that currently reinsurers and ILS markets will be keen to secure.
Suncorp paid out around $450m in claims for catastrophe and weather losses in the first-half of 2016 and it went over budget on cat losses for the full-year. CEO Cameron said that he changed the reinsurance program as an increased frequency of medium-sized catastrophe losses is the “new normal” according to a recent interview.
The new reinsurance arrangements would have paid for some of Suncorp’s losses in seven out of the last ten years, had they been in place, according to that interview.
For the ILS market and reinsurers, the growing demand for these types of frequency covers will mean paying more frequent losses. The last few months, with their higher loss frequency and payouts by ILS fund managers may be a reflection of this “new normal” and the resulting change in reinsurance buying habits.