IAG has revamped part of its reinsurance through a simplified five-year program that aims to better protect earnings from volatility caused by extreme weather. 

The agreement with Berkshire Hathaway subsidiary National Indemnity Company and Canada Life Reinsurance starts next month and provides up to $680 million of additional protection a year and up to $2.8 billion over the entire period. 

IAG says in conjunction with its existing quota share and traditional reinsurance protections, the program will cap natural perils costs at $1.283 billion next financial year under more than 90% of modelled scenarios. The natural perils allowance this year was $1.098 billion. 

The annual cost of the protection will be flat for the five years, with the annual natural perils allowance only increasing relative to underlying exposures. 

“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,” CEO Nick Hawkins said today. 

“This long-term agreement will help to provide greater certainty over natural perils costs as extreme weather events become more frequent and severe.” 

IAG has also purchased, subject to regulatory approval, an adverse development cover that provides $650 million of protection for long-tail reserves. 

The transaction with Cavello Bay Reinsurance, a subsidiary of Enstar Group, applies to Australian portfolios including product and public liability, compulsory third-party motor, professional risks and workers’ compensation. It includes cover for molestation and silicosis up to a sublimit of $50 million. 

“We are confident that our long-tail liabilities are appropriately provisioned, complementing the improved underwriting risk profile of our intermediated business,” CFO William McDonnell said. 

“This reinsurance protects against deterioration due to the inherent uncertainty of long-tail insurance risks such as adverse judicial developments and superimposed inflation.”  

As a result of the additional protections, IAG expects a reduction in its prescribed capital amount of about $350 million, subject to Australian Prudential Regulation Authority approval. 

IAG’s catastrophe reinsurance continues to include long-dated quota share arrangements and a main catastrophe program, locked in annually at the start of the calendar year. 

The new five-year program replaces a complicated arrangement of extra covers that had provided protection for additional events, including more frequent weather disasters. 

“Our strong view was that we could replace all of that with what we’ve got, for a modest cost and a lot more protection,” Mr Hawkins told a briefing. The new arrangement is simpler, and the combined new reinsurance diversifies counterparties, he says. 

IAG said today it is on track to reach the upper end of guidance ranges for reported insurance profit and margin this financial year. Gross written premium is expected to be consistent with the “low double digit” guidance. 

June perils in line with seasonal expectations would result in about $1 billion in net perils costs for the financial year, which would be about $100 million below allowance. 

Mr Hawkins says motor inflation is easing from double digit levels as parts and labour cost pressures improve. Property is still at the “low double digit level”, but coming down compared with six to 18 months ago. 

“As a seller of insurance through our commercial business, we definitely see a slowing down of that hardening market. It’s still favourable, but it is definitely just slowing down a little bit,” he said. 

The company will provide formal guidance for next financial year and when it releases its fiscal 2024 results on August 21.