Australian insurer IAG has finalised its catastrophe reinsurance program for the coming year, having increased its coverage from $9 billion to $10 billion at the recent January 1 renewals.
Chief Financial Officer Nick Hawkins explained that the structure of the program remained similar to previous years, while the cost was in line with earlier assumptions thanks to the relatively stable reinsurance pricing environment.
At the same time, IAG revealed that it had tapped its 2019 reinsurance program to recover losses from the ongoing bushfires in Australia, which have devastated vast areas of New South Wales and other states.
The insurer said it is expecting to incur roughly $400 million of natural catastrophe losses in the second half of 2019 post-quota share, which is well above its corresponding allowance of $320 million.
IAG has received more than 2,800 bushfire-related claims since the beginning of September 2019, and has been affected by three ongoing bushfire events that have been capped by reinsurance recoveries under the aggregate cover, following full erosion of the associated deductible.
Overall bushfire events are anticipated to contribute over $160 million of net claim costs post-quota share for the six months ending December 31, 2019.
Notably, the bushfire events that commenced in December and have extended into January will continue to be covered by IAG’s 2019 reinsurance program, although the duration of that protection will depend on the inception dates of individual events and on subsequent weather patterns.
Returning to the newly-secured reinsurance for 2020, IAG explained that the program had been placed to the extent of 67.5% to reflect the company’s cumulative whole-of-account quota share arrangements.
Important features of the program include a main catastrophe cover for losses up to $10 billion, including one prepaid reinstatement, and IAG retaining the first $250 million of each loss.
The protection also includes three prepaid reinstatements secured for the lower layer ($250 million excess of $250 million) of the main program, a second event drop-down cover reducing the cost of such an event to $200 million, and an aggregate sideways cover which provides protection of $425 million excess of $450 million.
IAG continues to have a cumulative whole-of-account quota share position of 32.5% which comprises a 10-year 20% agreement with Berkshire Hathaway, which commenced 1 July 2015, as well as combined 12.5% agreements with Munich Re, Swiss Re and Hannover Re.
After allowing for the cumulative quota share arrangements, the combination of all catastrophe covers results in IAG having maximum event retentions (MERs) of $169 million for a first event, $135 million for a second event, and $17 million for a third event.
In addition, IAG has a reinsurance cover for retained natural perils that runs in line with the financial year (stop-loss cover) and provides post-quota share protection of $101 million in excess of $675 million for the 12 months to June 30, 2020. This attaches approximately $34 million above IAG’s FY20 natural perils allowance of $641 million.
“Our reinsurance program is an integral part of our capital platform,” said IAG’s CFO Nick Hawkins. “While the structure of the 2020 program is similar to prior years, we continue to expand our catastrophe reinsurance cover in a cost-effective manner, while providing additional protection above our modelled exposure.”
“We have also increased the multi-year arrangements we have with some of our largest reinsurance counterparties,” Hawkins continued.
“Combined with our existing quota share arrangements, this means around 70% of our gross main catastrophe program for calendar 2020 is protected by multi-year coverage, providing greater certainty of future reinsurance cover.”