COVID-19 claims a negotiation between insurers and reinsurers

Striking the balance between becoming more disciplined on pricing while looking to maintain and even grow market share—that is the challenge facing the reinsurance market now as organisations strive to remain profitable in a tumultuous economy and as they still grapple with the fallout from COVID-19.

That is according to Carlos Wong-Fupuy, senior director, AM Best, who was speaking in an interview on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are available on demand.

While reinsurers have managed to shoulder the effects of losses and investment volatility, stemming from the pandemic, uncertainty remains around the extent to which they will be liable for claims triggered by the pandemic, Wong-Fupuy said.

Certainty has started to emerge for primary insurers, with the UK Supreme Court ruling in favour of policyholders being a potential bellwether on this issue, but for reinsurers the situation is less clear. While there is transparency around claims stemming from quota share agreements, it remains unclear whether insurers could aggregate separate COVID-19 claims to trigger excess-of-loss treaties.

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Talking therapy
Wong-Fupuy said that it is likely this issue will come down to a negotiation as opposed to a legal battle—but the outcome will still be important for reinsurers.

“It is important to bear in mind that primary insurance is far more reliant on the legal system, while the reinsurance sector tends to resolve issues more through negotiation and arbitration.

“I am sure that many of these issues are probably going to remain confidential and that the relationships between cedants and reinsurers are going to be very important,” he said.

He added that reinsurers have significant reserves and that many reinsurers are trying to get as close to an ultimate loss estimate as possible, but there is still a great deal of uncertainty around some covers and other lines of business in terms of how they may be impacted by COVID-19.

He noted that in the January renewal, the issue was largely put to one side in order to get deals done.

“We saw this issue ahead of the January renewal season but these matters were mostly put aside to allow for an orderly renewal process,” said Wong-Fupuy
“These factors may potentially impact future renewal cycles, but that is something that companies are still discussing.”

Aside from the UK Supreme Court ruling in January, other international courts are still deciding how to respond. It is still uncertain how other jurisdictions will move forward but there are a number of ongoing cases.

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Hardening rates and ratings
On a related note, COVID-19 has accelerated the hardening of reinsurance rates, but time is still needed before the impact of the pandemic on the insurance and reinsurance markets can be fully comprehended.

“Before COVID-19 we had already seen a number of these trends starting to develop,” said Wong-Fupuy.

“These included pricing improvements that were firming up the market, and there was also more caution in the deployment of capital.”

Regarding ratings, he said AM Best applied a stress test for most companies at the beginning of 2020 mainly based on their capital position. This was done to measure the impact of market volatility because of what he called a couple of cases which were of concern, but that situation recovered significantly towards the third or fourth quarter.

“The industry remains very well capitalised, and the underlying performance of many companies has been improving,” he said. “This demonstrates a market which has become more and more disciplined in recent years so we don’t see a negative action on the ratings side.

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“With increased discipline we are confident that the pricing conditions we have seen in the recent renewals will continue, and gradually margins will continue on the same trend that they have shown recently.

“It is a challenge to remain a relevant market player in this turbulent economy and the biggest challenge for the industry going forward will be trying to get the balance right between being disciplined and pricing risk,” Wong-Fupuy concluded.

To view the full Re/insurance Lounge session click here.