IAG facing unknown flood costs after locking in aggregate reinsurance budget

The insurance heavyweight has locked in its aggregate reinsurance cover, but is facing unknown costs from the latest floods in NSW.

Drone images taken at Chittaway Bay reveal extent of flooding on July 5.

Insurance Australia Group has locked in “better than feared” aggregate reinsurance cover, but industry watchers caution price rises are likely as a raft of disasters weigh on the insurer.

IAG, Australia’s largest insurer with such brands as NRMA and CGU, on Wednesday announced it had finalised its reinsurance cover for losses between $350m and $500m for the 2023 financial year.

However, IAG’s attachment point, after which reinsurers pick up the excess of losses from a particular event, worsened by $100m from the aggregate cover the insurer negotiated last year.

This comes as IAG, among other insurers, is being battered with a wave of new claims for costs from the latest flood disaster to hit NSW.

The Insurance Council of Australia has revealed more than 4360 claims have come in from residents of flood affected areas in the wake of inundating rains that lashed parts of Sydney and its surrounds.

IAG, led by Nicholas Hawkins, has been hit with 1983 claims for severe rains and floods in the past few days.

UBS analysts Scott Russel, Shreyas Patel, and Verdant Virmani, said IAG’s aggregate renewal was “better than we had feared” but the deterioration in the attachment point was concerning.

The Swiss-bank’s analysts warned that although the point at which IAG’s reinsurance kicked in was lower than fellow listed insurer Suncorp, which saw its ceiling lifted by $200m in its recent negotiations to $850m, the insurer was under pressure.

“No costs of reinsurance were provided and we expect this was expensive, in the order of 20%+ higher than last year,” UBS analysts said.

“Maximum event retention is $135m currently (up from $34m at March) and it is not yet clear whether the current floods in Greater Sydney will trigger this.”

IAG’s main catastrophe reinsurance program, which covers the insurer for massive losses triggered by major catastrophic events, remains unchanged ahead of its renewal on January 1.

The catastrophe program covers it for losses up to $10bn.

IAG’s 2021 results show its overall reinsurance expenses hit $657m in 2021, up 1 per cent on the prior year.

That was after $742m in claims for natural perils.

UBS analysts noted IAG had yet to provide its coming catastrophe budget or margin guidance, but tipped it would likely rise by almost $100m from its current $765m ceiling.

IAG had flagged in August 2021 it expected $765m in natural perils losses in 2022, but this rapidly ballooned after a summer of floods.

But by February, IAG was likely facing $1.1bn in losses from natural catastrophes in the full year.

This came after wild weather in the eight months to February hit it with $920m in losses, leaving just $180m to cover the remaining four months of the year.

IAG’s current aggregate cover, which kicks in on moderate loss events, will see the excess it is required to pay before reinsurance kicks in capped at $50m per event and individual qualifying events capped at $200m in cover.

Third and fourth event financial year occurrence covers have been purchased to provide $100m protection for events greater than $150m.

After allowing for quota share arrangements on losses IAG will hold a maximum exposure on events of up to $135m.

This is down on last year’s $169m maximum event retention.

IAG has also extended its deal that sees 2.5 per cent of losses shared for a further 12 months.

As part of its negotiations IAG has also secured a three-year extension on the quota share arrangement it holds with German reinsurer Munich RE for its compulsory third party motor insurance book.

IAG shares were up 1.3 per cent at $4.32 on the ASX in late trading, giving it a market value of $10.67bn.

Originally published as IAG facing unknown flood costs after locking in aggregate reinsurance budget