IAG locks in cover ahead of expected disasters

IAG is reporting a ‘modest’ increase in reinsurance rates for 2021, locking in main catastrophe cover for losses up to $10bn to help it navigate expected natural disasters.

Insurer’s are bracing for more natural disasters in 2021. Storms have already lashed the east coast, with hail hitting some areas including Broken Hill, NSW. Picture: Twitter

Insurance Australia Group has reported a “modest increase” in reinsurance rates for 2021, as it locked it main catastrophe cover for losses up to $10bn to help it navigate the fallout from expected natural disasters.

In a statement to the ASX, IAG said it had finalised its 2021 reinsurance program, maintaining gross protection cover of up to $10bn, in line with last year.

IAG -- which houses well-known insurance brands such as NRMA, CGU and Swann Insurance -- is like its rivals bracing for a string of natural disasters this year. Australia’s east coast has already been lashed with fierce storm activity in the first week of 2021.

Reinsurance is the process that sees insurers transfer portions of their risk portfolios to other companies, to spread risk and protect against having to pay out paying a large sum from an insurance claim.

IAG, led by chief executive Nick Hawkins, said it experienced “modest increase” in reinsurance rates during the renewal process, but the overall expense outcome would be in line with expectations.

“Around 65 per cent of the gross main catastrophe program for calendar 2021 is protected by multi-year coverage, providing certainty of future reinsurance cover. The overall credit quality of the 2021 program is strong, with approximately 90 per cent continuing to be placed with entities rated A+ or higher,” the statement said.

Overall the reinsurance protection cover had been placed at 67.5 per cent to reflect IAG’s quota share arrangements. The cover sees IAG retaining the first $250m of each loss, or the same proportion as last year.

After allowance for quota share arrangements -- where insurers and their reinsurers share premiums and losses at a fixed percentage -- IAG’s catastrophe cover for 2021 sees it pay out $169m apiece for the first and second events in Australia and $NZ169m in New Zealand. After that, reinsurance cover is drawn on.

A third event is paid out at $34m in Australia and $NZ34m across the Tasman.

IAG also highlighted stop-loss protection for retained natural perils which continues to align with the financial year.

“This provides protection of $100m in excess of $1.1bn ($68m in excess of $743m, post-quota share) for the 12 months to 30 June 2021,” the statement said.

On the controversial matter of business interruption insurance claims stemming from COVID-19, IAG said its first-half results would include a $1.15bn pre-tax earnings impact from those potential claims.

It is in line with a previous after tax provision of $865m outlined by the insurer November, regarding the NSW court ruling.

The Insurance Council of Australia last month confirmed it was seeking leave to appeal to the High Court after a defeat in the business interruption test case.

The judgment in November by the NSW Court of Appeal found businesses with policies that referred to the defunct Quarantine Act were not excluded from business interruption coverage. The insurance sector has argued policies do not cover pandemics.

IAG reports interim earnings February 10.

Rival Suncorp has set aside provisions of $195m regarding the potential fallout from the local business interruption test case.

In the Australian case, QBE Insurance estimates the net cost of business interruptions claims due to COVID-19 will amount to just $5m “per occurrence” after it draws on quota share and dips into catastrophe and other reinsurance arrangements.

QBE’s final dividend is in doubt after it last month signalled a full-year 2020 loss of $US1.5bn, due to its bottom line being hit by large writedowns, COVID-19 costs and elevated catastrophe costs.

The revised earnings expectations by QBE included the adverse impact of US wildfire and hurricane season where there was a record number of named storm landfalls. The insurer also highlighted storm activity in Australia as being worse than expected in the fourth quarter.

Shares in IAG closed up 5c, or 1.1 per cent on Wednesday, at $4.70.