IAG, one of Australia's biggest insurers, has purchased reinsurance protection to mitigate natural perils volatility for the next five years, alongside securing adverse development protection for its A$2.5bn ($1.7bn) long-tail reserves.
Berkshire Hathaway and Canada Life Reinsurance provide long-term natural perils’ volatility protection
IAG has entered into a comprehensive five-year natural perils reinsurance agreement starting from July 2024 with National Indemnity Company, a subsidiary of Berkshire Hathaway and Canada Life Reinsurance, providing up to A$680m of additional protection annually, and up to A$2.8bn over the entire five-year period.
In conjunction with IAG’s quota share and traditional reinsurance protections, this will effectively limit natural perils costs to A$1,283m in the financial year ending 30 June 2025 [FY25] (67.5% of gross claims costs of A$1,900m), an increase of approximately 17% on the FY24 natural perils allowance of A$1,098m.
The reinsurance against natural peril events provides material downside protection for future earnings volatility against extreme weather events and weather patterns. As a result, the expected FY25 net natural perils costs are capped at A$1,283m in over 90% of modelled scenarios. To exceed this cap, gross natural perils costs will need to exceed A$2.9bn (pre-quota share for events capped at A$500m).
Based on IAG modelling, in the majority of years of the agreement, a profit commission arrangement delivers a graduated premium offset. This is in addition to the financial benefit of any favourable natural perils experience, and as a result, the range of potential financial outcomes is weighted to the upside.
The annual cost of the protection will be flat for the five years, with the annual natural perils allowance (FY25: A$1,283m) only increasing relative to the underlying exposures.
IAG managing director and CEO Nick Hawkins said, “Australians and New Zealanders have experienced multiple extreme weather events over the past five years which has resulted in increased reinsurance costs and ultimately property insurance premiums. This long-term agreement will help to provide greater certainty over natural perils cost as extreme weather events become more frequent and severe.
Long-tail adverse development protection with Enstar
In addition to existing protections covering long-tail lines, IAG has also purchased an adverse development cover (ADC) which provides A$650m of protection for IAG’s long-tail reserves of approximately A$2.5bn at 1 January 2024.
The transaction, which is subject to regulatory approval, is with Cavello Bay Reinsurance Limited, a wholly-owned subsidiary of Enstar Group Limited. It applies to portfolios across Australia including Product & Public Liability, Compulsory Third-Party Motor, Professional Risks and Workers’ Compensation. The ADC includes explicit cover for Molestation and Silicosis up to a sublimit of A$50m.