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Industry needs to acknowledge new frequency & severity of events: AIG’s Zaffino

8th November 2021 - Author: Luke Gallin

Peter Zaffino, President and Chief Executive Officer (CEO) of global insurer AIG, expects any fourth quarter catastrophe losses to be limited by the company’s reinsurance protection, but warns that overall, the industry needs to acknowledge the dramatic shift in the frequency and severity of events.

peter-zaffino-aigLast week, AIG announced an impressive rise in net income to $1.7 billion for the third quarter of 2021, which was supported by a strong underwriting result in its General Insurance (GI) segment.

A combined ratio of 99.7% at GI for Q3 2021 reflected an underwriting gain of $20 million, a stark improvement on the underwriting loss of $423 million for the prior year quarter.

Furthermore, the impressive performance occurred alongside catastrophe losses, net of reinsurance, of $628 million, related mostly to the impacts of Hurricane Ida and the European floods.

In releasing its results for the quarter, the company said that, “Despite the elevated level of global catastrophic activity in the third quarter of 2021, AIG’s losses were mitigated by improved underwriting and enhanced reinsurance protections.”

AIG has been evolving and enhancing its use of reinsurance for several years now, and it appears as though its protection helped to reduce its hurricane Ida loss in Q3 to approximately $400 million, which seems relatively low given the size of the event and the scale of AIG.

Speaking during the firm’s Q3 earnings call, President and CEO Zaffino again praised AIG’s reinsurance use.

“We have put significant management focus into our reinsurance program which continues to perform exceptionally well to reduce volatility… Reinsurance recoveries in our international per occurrence, private client group per occurrence, and other discrete reinsurance programs also reduced volatility in the third quarter,” said Zaffino.

During the call, Zaffino also suggested that AIG’s reinsurance could come into play in the final quarter of the year, saying that the firm expects “any fourth quarter cat losses to be limited”, given that its North American and rest of the world, excluding Japan, aggregate covers are close to attaching.

“Our worldwide retention has approximately $175 million remaining before attaching in the aggregate,” said Zaffino.

Re/insurers’ underwriting results have been a mixed bag in the third quarter of this year. The impacts of catastrophe events, notably hurricane Ida in the U.S. and the flooding in parts of Europe in July, have pushed some into unprofitable territory.

But the reality is that insured losses from catastrophe events have been trending higher for some years now, with climate change increasingly being linked to greater impacts from secondary perils such as floods and wildfires.

Zaffino discussed this trend during the earnings call. “I want to acknowledge the frequency and severity of natural catastrophes in recent years since 2012, and excluding COVID, there have been 10 cats with losses exceeding $10 billion dollars, and nine of those 10 occurred in 2017 through the third quarter of this year.”

Over the last five years, he continued, cat losses have been up 30% on the 10-year average, and up 40% on the 15-year average.

“This will be the fourth year in the last five years in which natural catastrophes have exceeded this threshold ($100 billion). We’ve never seen consistent cat losses at this level. And as an industry, need to acknowledge that frequency and severity has changed dramatically, as a result of climate change and other factors,” said Zaffino.

On this point, Zaffino made three observations around the modelling of catastrophes.

“First, while cat models tended to trend acceptable over the last 20 years, that has not been the case over the last five years. Second, over the last five years, on average, models have been 20% to 30% below the expected value at the lower return periods. If you add in wildfire, those numbers dramatically increase.

“Third, industry losses, compared to model losses at the low end of the curve have been deficient and need rate adjustments to reflect a significant increase in frequency in cats,” he said.

He went on to explain that at AIG, they have invested heavily in their catastrophe research team in order to develop their own view of risk in this new environment.

“As a result of this work, we’ve made frequency and severity adjustments for wildfire, U.S. wind, storm surge, flood, as well as numerous other international perils. We will continue to leverage new scientific studies, improvements in vendor model work, and our own claims data to calibrate our views on risk over time to ensure we’re appropriately pricing cat risks,” said Zaffino.

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