Weeks after Suncorp completed its reinsurance renewal program for the next 12 months, speculation out of London is that the general insurer will have to add as much as $400 million to a reinsurance claim for the second New Zealand earthquake.
The rumours first appeared in the online insurance bible, Insurance Insider yesterday and were confirmed by a well-placed reinsurance broker in London overnight. They effectively lift Suncorp’s claim to $2.6 billion from a previous $2.2 billion for that second Christchurch temblor.
While the increased cost will not make a big dent on Suncorp, it begs the question why are its claims still increasing in New Zealand. The rest of the market has been largely static and rivals haven’t moved their reserves for 12 months.
The upshot is while the cost will be borne 100 per cent by Suncorp’s reinsurers, it might have a long-term impact on their negotiations, with some suggestions that reinsurers might decide to load Suncorp with an added cost for any potential unknown factors.
It is not hard to understand why given Suncorp made a similar discovery last year when it completed its reinsurance renewals and then 12 days later revealed that the loss was worse than expected by $400 million. The reinsurers were not impressed.
This time around, it is believed that Suncorp handled the process differently by giving prospective reinsurers the heads up that the second New Zealand earthquake claim would be higher than previously expected.
Suncorp recently announced it had reduced its top-layer reinsurance cover by $500 million after entering a “quota sharing” arrangement to reduce its exposure in flood-prone Queensland.
Under the arrangement, Suncorp will hand over 30 per cent of the home insurance premiums it collects in Queensland to a third-party insurer owned by Warren Buffett’s Berkshire Hathaway. The billionaire’s company has agreed to cover 30 per cent of Suncorp’s claims and handling expenses.
According to Insurance Insider, Berkshire Hathaway’s intervention in Suncorp’s July renewal transformed the reinsurance renewal process.
It said Berkshire’s deals “sucked $1.5 billion of event limit out of the open market, taking the heat out of a renewal that was initially expected to be both difficult and expensive.”
Sources said that the placement had resulted in a program-wide rate rise of 20 per cent, which is well below initial estimates of as much as 50 per cent.
Berkshire Hathaway role
Berkshire Hathaway intervened in the renewal in a number of ways.
Firstly, it agreed a multi-year deal to write a 30 per cent quota share of Suncorp’s loss-hit Queensland homeowners’ book, with London underwriting sources putting the annual premium at roughly $300 million.
The overall reinsurance season worked out well for general insurers, after so many calamities hit the insurance industry in 2010-11 – including earthquakes in New Zealand and Japan, floods in Queensland, storms in Victoria and eight big tornadoes in the US.
This year has been relatively benign but any insurers with exposure to crop programs in the US will be exposed given so much of midwest is in the grip of the region’s worst droughtsince the Great Depression.
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