IAG splits with rival Suncorp, faces higher costs from disaster cover

afr.com:

Insurance giant IAG will wear bigger upfront damage bills from wild weather strikes and earthquakes under new terms cut for its own reinsurance protection.

But, unlike Suncorp, it is still purchasing a special type of reinsurance – insurance for insurers against cumulative losses from disasters such as metro flooding – as its rival finds the rising price of such protection does not stack up.

Citigroup analyst Nigel Pittaway said on Friday that IAG “must have paid up for it”.

Wild weather such as hail in peak-hour traffic in a metropolis can trigger reinsurance limits.  Nick Moir

“IAG has clearly decided that the trade-off of paying up for an aggregate cover as opposed to running without one is worth making,” he told clients. Sydney-based IAG, one of Australia’s two biggest home and motor insurers with brands including NRMA and CGU, on Friday revealed the terms of its updated reinsurance cover.

But similar to a consumer paying excess before claiming on their motor policy, insurers face equivalent upfront payments for their reinsurance when disaster strikes.

IAG’s aggregate cover offers protection after an accumulation of wild weather events and will now kick in after $600 million in losses. That is higher than its previous year’s cover, starting at $500 million. And its updated cover only adds $250 million in protection, compared to $350 million a year earlier.

An IAG spokeswoman said the difference reflected the “challenging reinsurance market”. She said IAG had not used all of its aggregate cover last financial year.

The benefit of such cover is it helps reduce earnings volatility, but if the year ends up being benign the insurer still pays for protection that goes unused.

Citigroup’s Mr Pittaway said it appeared that