Suncorp’s aggregate reinsurance buffer shrinks, losses erode deductible

A number of catastrophe losses throughout 2016 have eroded more than half of the deductible of Australian insurer Suncorp’s AUS$300 million (US$229mn) aggregate reinsurance coverage.

According to the insurer’s half-year to December 31^st, 2016 financial results, a number of catastrophe events throughout 2016, including flooding, storms and the Kaikoura, New Zealand earthquake, among others, has eroded AUS$232 million (US$178mn) of the AUS$460 million (US$352mn) deductible sitting beneath its aggregate reinsurance programme.

Broken down by event the two largest net claims witnessed in the period were caused by storms in South Australia and Victoria, with storms in the region during November incurring a net cost of AUS$57 million (US$43.6mn) and storms in the area in December resulting in a net cost of AUS$50 million (US$38.3mn).

Following storms in South Australia and Victoria, Suncorp’s latest financial release shows that the Kaikoura, New Zealand earthquake in November of last year resulted in an internal reinsurance net cost of $28 million for its Australian operations. All remaining events, which includes winds, flooding and a series of hail events incurred a net cost of below AUS$20 million each (US$15.3mn).

Combined, the net cost of catastrophe losses during the half-year period totalled AUS$350 million (US$268mn) for Suncorp Group, with the majority coming from its Australian business, which exceeded its catastrophe allowance by AUS$19 million (US$14.6mn).

The firm’s New Zealand segment exceeded its natural hazard cost allowance by AUS$22 million (US$16.8mn), driven by the Kaikoura quake.

The erosion of more than half of the deductible of Suncorp’s aggregate reinsurance programme highlights the impact an increased aggregation of losses can have on company balance sheets and the value reinsurance protection offers.

Artemis discussed last year that Suncorp bolstered its catastrophe reinsurance protection in response to a rise in the frequency of natural disasters, which, provides reinsurers and insurance-linked securities (ILS) players with an opportunity to deploy more capacity.

But while agreements to protect catastrophe frequency risk provides reinsurers and ILS players with an opportunity to deploy capacity, when losses mount the reinsurance and ILS markets will end up paying for more frequent losses.

Furthermore, it’s understood that there is a certain level of participation from collateralised reinsurance markets, which includes ILS fund managers, in the insurer’s catastrophe reinsurance programme, so it will likely be of interest to the ILS market that more than half of the deductible has been eroded at the half-year point.

Paying frequency losses is something that ILS players will have to get more used to as they increasingly look to participate on catastrophe reinsurance programmes, whether via a collateralised arrangement, or on a fronted or direct basis.

For the Group’s insurance segment reinsurance and other recoveries of AUS$1.273 billion (US$974mn) reduced the company’s net outstanding claims liabilities to AUS$7.172 billion (US$5.4bn). For its New Zealand business alone reinsurance and other recoveries of AUS$908 million (US$695mn) reduced its net incurred claims to AUS$354 million (US$217mn).

Suncorp’s purchase of additional aggregate reinsurance protection for 2017 looks to have been a wise choice, but with more than half of the deductible being eroded at the half-way point it will be interesting to see if catastrophe event frequency keeps in line with recent trends in 2017 and the impact this has on the insurer’s balance sheet and reinsurance needs.

Although potential loss figures are yet to come in, Southern Australia has experienced a number of storms already in 2017, so it’s likely that Suncorp’s aggregate cover buffer will erode further in the coming months as losses are calculated.