III. Reinsurance risk
Reinsurance is used to limit exposure to large single claims as well as an accumulation of claims that arise from the same or similar
events.
Risks underwritten are also reinsured in order to stabilise earnings and protect capital resources. Each controlled subsidiary that is an
insurer has its own reinsurance program and determines its own risk tolerances, subject to principles set out in the REMS. To
facilitate the reinsurance process, manage counter party exposure and to create economies of scale, the Group has established a
captive reinsurance operation comprising companies located in Australia, Singapore and Labuan. This operation acts as the reinsurer
for the Group by being the main buyer of the Group’s outwards reinsurance program. A key responsibility of the reinsurance operation
is to manage reinsurance and earnings volatility and the Group's exposure to catastrophe risk. The operation retains a portion of the
intercompany business it assumes and retrocedes (passes on) the remainder to external reinsurers. The REMS outlines the Group's
reinsurance retention for catastrophe must not exceed 4% of net earned premium.
While the majority of business ceded by the Consolidated entity’s subsidiaries is reinsured with the Group's captive reinsurance
operation, individual business units do purchase additional reinsurance protection outside the Group. This generally relates to
facultative reinsurance covers.
The use of reinsurance introduces credit risk. The management of reinsurance includes the monitoring of reinsurers’ credit risk and
controls the exposure to reinsurance counterparty default. Refer to the financial risk section of this note for further details.
a. CURRENT REINSURANCE PROGRAM
The reinsurance operation purchases reinsurance on behalf of Group entities to cover a return period of at least APRA’s minimum of a
1:200 year event on a whole of portfolio basis but is authorised to elect to purchase covers up to a 1:250 year event. Dynamic
financial analysis modelling is used to determine the optimal level at which reinsurance should be purchased for capital efficiency,
compared with the cost and benefits of covers available in the market.
The external reinsurance programs consist of a combination of the following reinsurance protection:
a Group catastrophe cover which is placed in line with the strategy of buying to the level of a 1:250 year event on a modified
whole of portfolio basis. The catastrophe program is negotiated on an annual calendar year basis. Covers purchased are
dynamic and the ICRC changes as total requirements change and as the reinsurance purchase strategy evolves;
an aggregate cover which protects against a frequency of attritional event losses in Australia, New Zealand and Asia and operates
below the Group catastrophe cover;
excess of loss reinsurances which provide 'per risk' protection for retained exposures of the commercial property and engineering
businesses in Australia, New Zealand, Thailand, Malaysia, Vietnam and Indonesia;
excess of loss reinsurance for all casualty portfolios including CTP, public liability, workers’ compensation and home owners
warranty products;
excess of loss reinsurance for all marine portfolios;
adverse development cover and quota share protection on the CTP portfolio;
excess of loss reinsurance cover for retained natural peril losses; and
a 20% whole-of-account quota share arrangement, commencing 1 July 2015 for losses occurring after that date.
b. CHANGES DURING THE YEAR
The limit of catastrophe cover purchased was increased to $7.0 billion. Should a loss event occur that is greater than $7.0 billion, the
Group could potentially incur a net loss greater than the ICRC. The Group holds capital to mitigate the impact of this possibility.
At 30 June 2015, the Group ICRC from a catastrophe event was $200 million.
The Group has entered into a ten-year, 20% whole-of-account quota share arrangement, commencing 1 July 2015 for losses occurring
after that date. The application of the quota share results in all of IAG's net retentions being reduced by 20% with effect from 1 July
2015.
IV. Financial risk
Financial risk focuses on the unpredictability of financial markets and potential adverse effects on financial performance. Key aspects
of the processes established to mitigate financial risks include:
having an Asset and Liability Committee comprising key Executives with relevant oversight responsibilities that meets on a regular
basis;
having Board Risk Management and Audit Committees with Non-Executive Directors as members. These committees support the
Board in the discharge of its responsibilities;
monthly stress testing undertaken to determine the impact of adverse market movements and the impact of any derivative
positions;
maintenance of an approved Group Credit Risk Policy, Group Liquidity Policy and Group Foreign Exchange Policy which are
reviewed regularly;
maintenance of Board approved Strategic Asset Allocation and existence of Investment Management Agreements;
capital management activities. For further details refer to the capital management note; and
implementation of a Derivatives Risk Management Statement that considers the controls in the use of derivatives and sets out
the permissible use of derivatives in relation to investment strategies.
56 IAG ANNUAL REPORT 2015
