IAG faces higher reinsurance premium, pointing to higher prices ahead

The insurer has signalled that customers could be slugged with higher premiums after a tough reinsurance agreement will see it forced to bear more costs from natural disasters.

Insurance Australia Group will be forced to shoulder the costs from natural diasters after being dealt a reinsurance blow. Picture: NCA NewsWire/Samara Harris

Insurance Australia Group will bear more of the costs from natural disasters after landing a tough reinsurance agreement in a move which signals even higher premiums for its customers.

IAG, which operates brands including CGU and NRMA, told investors on Monday it was still seeking partners to split its catastrophe insurance risks.

The company said its new catastrophe reinsurance program would see it maintain its $10bn limit – with analysts welcoming the result, noting it came in well within the expected range.

IAG said it would now face a $236m maximum cost from the first catastrophe weather event to hit it in the coming year. This was a jump on the $135m maximum exposure signed with its reinsurer partners last year.

IAG chief financial officer Michelle McPherson said global reinsurance has become more challenging over the past year due to the impact of capital markets and Australian and international natural peril events.

“We have increased our first event retention reflecting inflation and global reinsurance market impacts,” she said. “This was a rational economic decision balancing the interests of all our stakeholders including minimising the impact of additional reinsurance costs on our customers.”

IAG said its total reinsurance expenses – excluding the share picked up by partners – had also risen and would likely fall within the range of $790m to $820m. This was up on $659m in 2022.

IAG said the overall credit quality of its 2023 reinsurance program was “strong” with 90 per cent of the program placed with entities rated A+ or higher “which is in line with 2022”.

As part of its reinsurance renewal IAG has also signed on Munich Re and Swiss Re, some 10 per cent of the insurer’s total quota share partners. But, 2.5 per cent of the total 12.5 per cent quota share remains outstanding ahead of its June expiry. These quota share partners pick up part of IAG’s premiums in exchange for sharing some of its losses in the event of a claim.

Ms McPherson said IAG and its quota share reinsurers had “engaged positively” in the renewal ahead of the expiry.

“The willingness of leading global reinsurers to renew their arrangements with us reflects their confidence in the IAG franchise and the strength of our financial outlook,” she said. “In an environment of constrained reinsurance capacity, the renewed agreements provide IAG with materially consistent financial outcomes and support our 15 per cent to 17 per cent medium-term reported margin target.”

Abrdn investment manager Shawn Lee said IAG’s reinsurance result was “the midpoint people were expecting”. But he said the renewal pointed the way to higher costs. “IAG have been talking about it for a little while, getting ahead on pricing, they should have assumed that prices were going to go up,” he said.

Originally published as IAG faces higher reinsurance premium, pointing to higher prices ahead