Australian primary insurer Suncorp has restructured its reinsurance program at the July 1st renewals, adding a new A$400 million Aggregate Excess of Loss (XoL) cover, in place of its previous natural hazards aggregate and stop-loss protections.
Speaking this morning, Suncorp Group CEO Steve Johnston explained a company wide transformation plan, with reinsurance set to receive increasing focus as a capital management tool.
In addition, Suncorp wants to spend more effort on identifying innovative reinsurance solutions to assist its balance-sheet, working in complement rather than as purely an annual budgeted item to be completed.
Suncorp is aligning its reinsurance needs with Group Capital, with Group CFO Jeremy Robson now taking on responsibility for reinsurance and actuarial as well.
“The alignment of Reinsurance with Group Finance, in particular Group Capital, will enable a more strategic and innovative approach to the design of the program, while better utilising the skills of reinsurance partners in other finance areas such as climate risk and modelling,” the insurer explained this morning.
Robson said this morning that he expects Suncorp to report full-year natural hazard costs in-line with a budgeted A$820 million.
He went on to explain the reinsurance renewal completed in time for July 1st.
“Moving on to FY21, we have just completed the placement of the main catastrophe covers and dropdowns with a similar structure to previous years.
“The vertical limit on the main catastrophe program, which covers the Home, Motor and Commercial Property portfolios across Australia and New Zealand has reduced from $7.2 billion to $6.5 billion.
“The lower modelled vertical limit reflects a combination of reduced exposure, particularly in Commercial where we have exited unprofitable portfolios and in New Zealand where changes to the Earthquake Commission coverage has reduced the retained exposure,” Robson said.
The reduction in vertical limit is likely due to the realisation that aggregate coverage is very important for Australian insurers, as recent months of catastrophe losses have demonstrated.
Suncorp continues to have a maximum event retention of $250 million under its main catastrophe reinsurance program, while there has been no change to its dropdown covers, which provide an additional $450 million of protection against medium to large natural hazard events, Robson explained.
Robson noted that reinsurance market conditions have not been at their easiest this year, with the renewal being challenging in some areas in particular.
“We expected the aggregate profit and loss volatility covers to be the most challenging part of the program to replace. The global reinsurance market has been hardening with reinsurer capital being impacted by poor global loss experience, investment asset performance arising from COVID-19, and a hardening of the retro insurance market. The Australian industry has had materially worse than expected natural hazard event experience over three of the last four years, including the hail and bushfire experience last summer.
“For FY21 we have restructured our aggregate reinsurance protection and replaced the Natural Hazards Aggregate Protection (NHAP) and the Aggregate Stop Loss (ASL) with a new Aggregate Excess of Loss (AXL) cover. This provides $400 million of cover, for natural hazards events in excess of $5 million, once the total retained cost of these events reaches $650 million. We retain the first $5 million of these events,” he explained.
This does reflect a reduction in profit and loss volatility cover, Robson said, which means Suncorp is increasing its natural hazard loss budget somewhat, with the allowance likely to rise by between $90 million to $130 million.
While at the same time, retaining more risk under the reinsurance program means Suncorp is set to increase its General Insurance Common Equity Tier 1 (CET1) target.
Robson summarised, “We believe the FY21 program strikes the right balance of natural hazard volatility protection and increasing reinsurance costs. We will look to price for this increase over time, as well as improving performance in other areas of the business, including claims and costs, which are enabled by the changes to the operating model.”
CEO Johnston said that as part of the transformation changes announced today, Suncorp will have to “explore innovative approaches to reinsurance to reduce earnings volatility.”
He explained how the structural changes will make this possible, saying, “Another opportunity available through this changed structure is to align reinsurance and the Group balance sheet. I see reinsurance as another capital management tool rather than exclusively a tactical annual purchase for the Group, and hence aligning with our Group Capital team makes sense. The priority will be to leverage this Group perspective – drive innovation through the design of the program and better utilise the skills of our reinsurance partners in areas like climate risk and capital management.”
Suncorp has kept some consistency in its reinsurance renewal arrangements, with a dropdown aggregate protection that provides up to $450 million of coverage against medium and large natural hazard events, and by maintaining its quota share reinsurance arrangements for its Queensland home portfolio, South Australian Compulsory Third Party portfolio and for large global property risks.
As ever, collateralised or ILS fund markets will have participated in Suncorp’s renewal to a degree, with the company saying 85% of its program placed with A+ or better rated reinsurance entities.