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AIG chief sees need to reassess cat risks amid climate change

Peter Zaffino

The insurance sector needs to adjust its modeling and pricing of catastrophe risks as losses surge because of climate change, American International Group Inc.’s top executive said Friday.

Since 2012, excluding losses from COVID-19, there have been 10 catastrophes with losses exceeding $10 billion and nine of those catastrophes occurred since 2017, said Peter Zaffino, president and CEO of AIG, on a conference call with analysts to discuss the insurer’s third-quarter results.

Average cat losses for the past five years were $114 billion, up 30% from the 10-year average and 40% from the 15-year average, Mr. Zaffino said.

“We’ve never seen consistent cat losses at this level and as an industry need to acknowledge that frequency and severity has changed dramatically as a result of climate change and other factors,” he said.

While cat models have “tended to trend acceptable” over the past 20 years, the estimates have been less accurate over the past five years.

AIG has made frequency and severity adjustments in its underwriting for wildfire, U.S. wind, storm surge, flood and numerous international perils, Mr. Zaffino said.

“We will continue to leverage new scientific studies, improvements in vendor model work and our own claims data to calibrate our views on risk over time and ensure that we are appropriately pricing cat risks,” he said.

AIG, which has seen significantly improved results since it began its 2017 turnaround strategy, reported a sharp increase in profit for the third quarter.

Net income was $1.66 billion, compared with $281 million in the same period last year. The increase was largely due to net realized investment gains and improved property/casualty underwriting results, according to AIG’s results statement.

Catastrophe losses for the quarter fell to $628 million from $790 million in the prior-year quarter.

General insurance gross premium written increased 13% to $9.31 billion, and net premium written rose 11% to $6.59 billion. North America commercial lines net premium written rose 18% to $2.58 billion, and international commercial lines rose 15% to $2.07 billion.

In North America commercial, the growth was driven by excess casualty, which increased more than 50%; Lexington wholesale – AIG’s surplus lines business – which rose more than 30% for property and casualty, and financial lines, which increased more than 20%, Mr. Zaffino said.

In international commercial, financial lines grew 25%; its Lloyd’s operations Talbot grew more than 15%; and liability grew more than 10%, he said.

“In addition, gross new business in global commercial grew 40% year-over-year to more than $1 billion,” Mr. Zaffino said.

Rates also increased, with global rate increases averaging 12%, he said. “In many cases, this is the third year where we’ve achieved double-digit rate increases on our portfolio,” he said.

North America rate increases averaged 11%, led by excess casualty and financial lines, which both increased more than 15%, and Canada, where rates increased 17%, he said. International commercial rates were up 13%.

The insurer’s general insurance combined ratio improved to 99.7% in the third quarter from 107.2% in the year-earlier period. The North America commercial lines combined ratio deteriorated to 120% from 107%, largely due to reserve strengthening related to an adjustment in 2018 reinsurance recoveries after the insurer received subrogation payments, according to the results statement. The North America accident year combined ratio improved to 90.5% from 94.2% in last year’s third quarter.