IAG cuts cat reinsurance programme as rates climb

5 January 2018

Australian insurer IAG trimmed its reinsurance programme at the 1.1 renewals, as it restructured its coverage to rely more heavily on quota share arrangements.

IAG renewed its A$8bn ($6.29bn) catastrophe reinsurance programme and entered into a 12.5 percent whole-account quota share agreement with Munich Re, Swiss Re and Hannover Re.

The added dependence on proportional cover bolsters a 20 percent quota share arrangement that IAG already has in place with Berkshire Hathaway.

The insurer cited ‘modest upwards pressure on like-for-like reinsurance rates’ during the renewal process, but said the expense outcome was in line its expectations.

IAG’s main cat cover has been placed at 67.5 percent, down from 80 percent in 2017.

The insurers newly structured 2018 programme includes A$8bn of catastrophe cover, after a A$250mn retention.

However, that retention is limited by the combined 32.5 percent quota share, reducing IAG’s portion of a first loss event to A$169mn.

The programme also includes three prepaid reinstatements secured for the lower layer of the main programme.

In addition, an aggregate sideways cover provides protection of A$475mn excess of A$325mn – or A$321mn excess of A$219mn – after the quota share. Under the agreement, qualifying events are capped at a maximum contribution of A$225mn excess of A$25mn per event – or A$152mn excess of A$17mn post-quota share.

The cover reduces the maximum cost of a second event to A$125mn, which the quota share arrangement limits to A$84mn, and a subsequent event to A$25mn or A$17mn after the proportional cover.

In comparison to its 2017 programme, IAG said underlying aggregate exposure has increased modestly, with growth in short tail personal lines partially offset by reduced commercial portfolios, in both Australia and New Zealand.

However, it said that the new quota share deal reduced earnings volatility by ‘effectively’ exchanging 12.5 percent of insurance risk for a ‘more stable’ income stream.

The programme covers all territories in which IAG operates, with the exception of its joint venture interest in India which has its own reinsurance arrangements.

The renewal of IAG’s reinsurance programme demonstrates the rise – albeit modest – in rates across the market since the catastrophe events of the third quarter, even in non-loss effected regions. re