IAG ups cat cover as Australia’s bushfires bust allowance

Insurance Australia Group (IAG) has increased its catastrophe reinsurance cover for 2020 in response to the devastating Australian bushfires that have already prompted huge insurance loss estimates.

As the insurer confirmed its catastrophe reinsurance program for 2020 calendar year, it said it had increased its gross reinsurance protection to up to A$10 billion (US$6.95 billion), from A$9 billion (US$6.25 billion) in 2019. The A$10 billion of protection (US$6.95 billion) has been placed to the extent of 67.5 percent to reflect IAG’s cumulative whole-of-account quota share arrangements.

The expanded cat protection is also a response to significant hailstorm events in November 2019 in Queensland and Timaru in New Zealand.

IAG said that as of January 2, 2020, it had received more than 2,800 bushfire-related claims since the beginning of September 2019, with the majority of them relating to residential properties. More than 1,500 of these claims have been made since the start of December 2019.

Initial estimates from the insurer put its net natural peril claim costs for the six months ending December 31, 2019 (1H20) at A$400 million (US$277.8 million), busting through the ceiling of the perils allowance of A$320 million (US$222.3 million) for the period. The allowance for the full year 2020 is A$641 million (US$445.2 million).

IAG said: “The perils estimate includes three ongoing bushfire events which 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 A$160 million (US$111.1 million) of net claim costs in 1H20, post-quota share.

“In addition to the bushfires, the period included significant hailstorm events on the Sunshine Coast in Queensland and at Timaru in the southern Canterbury region of New Zealand, both of which occurred in November 2019.”

The company said that under the definitions applied to bushfires, the current events which began in December 2019 and continue into January 2020 will be covered by IAG’s calendar 2019 aggregate reinsurance protection.

Nick Hawkins, IAG’s chief financial officer, said: “Our reinsurance program is an integral part of our capital platform. 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. Combined with our existing quota share arrangements, this means around 70 percent of our gross main catastrophe program for calendar 2020 is protected by multi-year coverage, providing greater certainty of future reinsurance cover.”

The company said it had experienced relatively stable reinsurance rates during renewals, adding that its overall expense outcome is in line with the associated assumption in its full year reported margin guidance. It added that the overall credit quality of the 2020 program is “strong, with over 92 percent placed with entities rated A+ or higher”.

The insurer continues to have a cumulative whole-of-account quota share position of 32.5 percent. This is made up of a 10-year 20 percent agreement with Berkshire Hathaway, which started on July 1, 2015. It also includes a combined 12.5 percent agreement with Munich Re, Swiss Re and Hannover Re which began on January 1, 2018, with an average duration of five years.

This leaves IAG with maximum event retentions (MER) - the highest level of loss the insurer will face from an accumulation of exposures - of A$169 million for Australia (NZ$169 million for New Zealand) for the first extreme event. Then A$135 million (NZ$135 million) for the second event, and A$17 million (NZ$17 million) for the third event as of January 1, 2020.

In addition to this cat cover, the company has reinsurance cover for retained natural perils which runs in line with the financial year (stop-loss cover) and provides post-quota share protection of A$101 million (US$70.2 million) in excess of A$675 million (US$469.2 million) for the 12 months to June 30, 2020. “This attaches approximately A$34 million (US$23.6 million) above IAG’s FY20 natural perils allowance of A$641 (US$445.2 million),” the insurer said.

IAG will report its results for the first half of the 2020 financial year on February 12, 2020.