COVID-19 not a capital event for reinsurance industry: Willis Re

Willis Re's half-year analysis shows that the global reinsurance capital declined only modestly in the first six months of 2020, while COVID-19 has not been a capital event for the industry. The total capital dedicated to the global reinsurance industry was $587 billion at 30 June 2020, reflecting a 3 percent decline since year-end 2019, according to the latest reinsurance market report. Willis Re, however, noted that the half-year figure masks an approximate fall of 30 percent up to late-March, following the impact of COVID-19 on investment markets. But that deficit was largely restored in the following months. It said that the total capital remains 12 percent higher than at the end of 2018, suggesting that, based on current investment market levels, COVID-19 has...

...not been a capital event for the industry.

Willis Re conducted an analysis of 18 reinsurers whose combined ratio worsened from 94.9 percent in the first half of 2019 to 104.1 percent, due to COVID-19 losses which added 11.1 percentage points to combined ratios on average. However, it said on an underlying basis, i.e. normalising COVID-19 and catastrophe losses and excluding prior year reserve development, the combined ratio improved from 100.5 percent to 98.6 percent.

The broker stated that while underlying underwriting performance improved, it did not improve enough to boost return on equity (RoE), which remains well below the industry’s cost of capital of roughly 7-8 percent.

James Kent, global CEO of Willis Re, said: “This half-year analysis shows a reinsurance market understandably in a state of change. While reinsurers have so far resiliently shouldered the combined effects of COVID-19 losses and investment market volatility, underlying profitability remains challenging. Uncertainty therefore remains, particularly over the potential impact of COVID-19 on long-tail lines, which is driving reinsurers to deliver additional improvement in underwriting returns. We expect to see further reinsurance market discipline as well as continued differentiation between regions and clients based on past performance and underlying risk.”