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NZ consumers soak up doubling in reinsurance costs

Tuesday 23rd April 2013

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New Zealand's largest insurance group, IAG, has slightly improved its underlying profit margins on insurance products while passing on a doubling in the cost global reinsurance because of the Canterbury earthquakes.

In a presentation for investors in Sydney, IAG's New Zealand chief Jacki Johnson said reinsurance costs had risen to 15 percent of gross written premiums (GWP) in the first half of 2013 from around 8 percent in 2010.

Underlying margin in IAG's insurance lines has risen to 11.5 percent in the first half of the current financial year, compared with 11.2 percent before the Canterbury quakes, in 2010.

Underlying margin fell to 8.5 percent in the 2011 financial year, when the brunt of quake claims was borne, but bounced back to be even stronger last year than at present, at 11.8 percent.

IAG's managing director and chief executive Mike Wilkins said in a statement outlining IAG's New Zealand growth strategy that the local unit sought "an underlying margin of around 10 percent over the longer term.

"We anticipate the underlying margin will be slightly higher in the short to medium term, consistent the business's recent performance," said Wilkins.

New Zealand now constitutes 17 percent of the total GWP written annually by Australian-based IAG, having grown from just 4 percent 13 years ago, when it entered the New Zealand market with the purchase of State Insurance in 2001, NZI in 2003, and its post-quake rescue for AMI in 2012.

Annualised premiums, based on the first half of the current financial year, will come in at $1.9 billion.

Since 2009, IAG has experienced around 35 percent growth in the $5 billion a year New Zealand GWP pool, "driven by significant rate increases to recover post-earthquake increase in reinsurance costs."

However, IAG notes reinsurance cover "continues to be available" at these higher rates. Fears at the time of the quakes were that some parts of New Zealand might struggle to attract global reinsurers, who offer risk-sharing arrangements with individual insurance companies. AMI faced commercial failure because its reinsurance provisioning was inadequate.

Johnson said IAG was still targeting $30 million in annual savings by merging the back office operations of State and AMI, and would be offering a wider range of products to AMI customers. The company will continue to run both general insurance brands.

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