Insurers are set to face a situation in which they are holding more of their exposures to the claims arising from COVID-19 then they have anticipated.
Broker Willis Re has published its COVID-19 Impact Report, which concludes insurance companies will end up holding more risk than expected relative to their balance sheets.
The situation is likely to leave them with three options: retain current strategy, de-risk, or hedge. The report added the solvency reduction may take some companies below their desired minimum capital threshold, and Insurers have already moved to begin adjusting their plans to suit a range of economic scenarios.
James Kent, (pic) Global CEO, Willis Re, said: “With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely. The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward. Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers.”
The report added reinsurers have showed that the systemic shock of COVID-19 is manageable so far, but the future strength of the sector depends on the severity of the pandemic’s continuing impact on health and economies.
“The industry retains sufficient capital buffer for extreme events, but the extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen,” stated the report. “Reinsurers have started to de-risk their balance sheets by holding cash, which will have a significant impact on investment returns. Willis Re currently estimates a 5% hit to the global reinsurance capital base, roughly $30 billion pre-tax. Additional pressures may emerge should economic conditions further deteriorate with a consequent impact on investments.”
Andrew Newman, President, Willis Re said: “The impact of COVID-19 on global reinsurer capital is broad enough that it may exacerbate non-life reinsurance market hardening, particularly in commercial lines. We may see supply and demand imbalances in some areas, so insurers should be taking steps to reduce the risk of being on the wrong end of any market hardening.”
In general, reinsurance claims are likely to be manageable, according to the broker. For example, assuming most event cancellation claims fall to reinsurers, their impact would be about 1% of the capital base, equivalent to a midsize hurricane.
However, it warned the risk from business interruption claims presents an existential threat to the entire industry, given growing calls to revise coverage retroactively and the “colossal, if notional, aggregate limits deployed irrespective of contract agreements in place”.
“Overall, the industry is facing formidable practical, operational, legal, and technical reserving challenges,” the report stated. “The good news is that global reinsurers entered the crisis strongly capitalised. The four European majors are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels remains comfortable. Willis Re estimates a total 7% hit to US reinsurers’ statutory capital.”
In combination, the pressures across multiple fronts are inauspicious, taking place at a time when the Industry was securing improved pricing across most business lines and geographies after several years of natural catastrophe losses around the world as well as prior-year deterioration in several liability classes.
Printhan Sothinathan, Co-Head of Global Analytics, Willis Re, said: “In all but a worst-case scenario we expect claims to be manageable overall, although obviously some carriers, based on their circumstances, will find the crisis much more difficult to weather than others.”