IAG erodes 73% of aggregate reinsurance deductible after NZ floods

Australian insurer IAG has reported its first-half results for the 2023 fiscal year, which runs to the end of June and has updated on its experience with the recent New Zealand floods, after which it now expects to have eroded roughly 73% of the deductible sitting beneath its aggregate reinsurance.

IAG had already reported that it expects at least a $114 million reinsurance recovery to help it pay claims from the recent severe flooding that struck the New Zealand city of Auckland.

The insurer has separate occurrence catastrophe reinsurance for New Zealand that will pay these claims.

IAG has now also revealed that at the end of its first-half, at Dec 31 2022, the erosion of its aggregate reinsurance deductible had reached $165 million, as a result of first-half natural hazard and severe weather loss events.

But, after the New Zealand floods in January 2023, the aggregate deductible erosion had reached roughly $365 million, putting aggregate natural hazard claims well on their way to reaching the $500 million trigger for that layer of reinsurance.

The aggregate reinsurance provides IAG $350 million of cover about a $500 million trigger point, running till the middle of this year.

No events in the first-half, to end of 2022, were covered by reinsurance, and the deductible erosion has more than doubled, with the New Zealand floods adding $200 million to this.

It suggests the NZ flooding in Auckland could have driven a roughly $250 million gross loss to IAG, as the aggregate cover has a $50 million per-event retention to account for as well.

IAG’s first-half, to the end of calendar year 2022, catastrophe losses reached $524 million, which was $70 million above budget for the period.

The insurer said that the La Nina weather pattern was a key driver of storms and floods that have contributed to this bill.

Because of this and factoring in the New Zealand floods at the beginning of its second-half, IAG has now increased its fiscal-year natural perils allowance to $1.145 billion, up from $909 million.

In addition, IAG has also reported a significant increase in reinsurance expense, with its non-quota share reinsurance expense rising 22% year-on-year, reflecting the growth of its business as well as the reinsurance hard market.

For IAG, the cost of the Auckland NZ flooding is sufficient to reduce its overall margins, with the firm’s CEO Nick Hawkins forecasting today that its insurance margin is now expected to be around 10%, down from the previously forecasted 14% to 16%, on the back of higher catastrophe and weather losses (including NZ).

IAG’s experience closely follows that of competitor Suncorp, which also revealed going over catastrophe budget and an additional erosion of its aggregate reinsurance deductible, on the back of the floods in NZ.