Insurance Australia faces higher reinsurance expenses

SYDNEY (Reuters)—Insurance Australia Group Ltd., Australia’s top car and home insurer, said while reinsurance expense would rise for 2012 it would not affect its 10%-12% insurance profit forecast for the year.

IAG, which dominates the Australian market along with QBE Insurance Group Ltd. and Suncorp Group Ltd., has seen record claims from floods and storms in Australia and earthquakes in New Zealand forcing it to raise reinsurance cover to up to $4.7 billion Australian ($4.80 billion) from $4.1 billion Australian ($4.19 billion) a year ago.

The insurer forecast in a statement total reinsurance expenses of $700 million Australian ($714.6 million) to $720 million Australian ($735.0 million) for the 2012 financial year. That compared with $620 million Australian ($632.9 million) for the previous year.

"In challenging market conditions, we are pleased to have concluded a program which provides us with increased coverage and the additional security of some multi-year protection," CEO Mike Wilkins said in the statement.

Australian insurers were among the worst hit in 2011, a year which saw global disaster losses of more than $100 billion, and look set to struggle to keep a lid on reinsurance costs.

Insurers have sought to contain a blowout by spreading the risk and arguing to reinsurers that while 2011 was a record-breaking disaster year, the floods and earthquakes were probably one-offs.

Under the program, IAG would be covered for losses up to $4.2 billion Australian ($4.3 billion) and it retains the first $250 million Australian ($255.2 million) of each loss.

It also encompasses an upper layer cover from $4.2 billion Australian ($4.3 billion) to $4.7 billion Australian ($4.8 billion), providing earthquake loss protection in respect of Australia and New Zealand for a period of three years at agreed prices, IAG said.

IAG shares were up 0.7% in morning trade, against a broader market trading up 2%.