How COVID-19 insured losses map across to company exposures

​“Our sense is that the main risk falls on non-US property lines, where we understand around 50 percent of policies embed BI that could cover infectious diseases.” Jonny Urwin, UBS analyst.

· Estimates for insured losses rise substantially on back of bellwether figures
· Business interruption of $7bn to $22bn losses remain "wild card"
· Non-US property flagged as vulnerable to COVID-19 BI claims
· SME hit will mean above market share loss for London Market, data finds

Coronavirus continues to show us just how vulnerable our global economy is, as re/insurers assess potential claims around the world.

More than a million people have been infected with the virus, while eye-watering figures are being touted for insured losses. It leads to the question “could COVID-19 be the biggest insured loss ever”. It’s certainly shaping up to be a contender.

Last week, industry analysts at investment bank UBS upped their estimates for COVID-19 insured losses to between $30 and $60 billion, from a previous estimate of $20 to $40 billion, for the global P&C re/insu​​rance industry.

In the UBS research, published April 24, 2020, analyst Jonny Urwin explains that the estimates increased based, partly, on changes reported by Hiscox and Beazley. Initial loss estimates from these two companies “point to a higher industry loss”, he says.

This is pivotal to the revised estimates because Hiscox and Beazley typically take 20 to 25 basis points (bps) of industry insured losses, he says. On top of this, Urwin says, more generally the “industry narrative on potential COVID-19 claims has deteriorated sharply in the last two weeks”, suggesting others are also watching potential exposures increase.

Bellwether companies

Urwin’s research states that Hiscox has estimated $150 million of COVID-19 claims (net) from event cancellations, media, entertainment, travel and others, although this estimate does not include business interruption (BI), where uncertainty remains high.

“Should the shutdown last less than six months Hiscox’s non-BI loss would rise to $175 million,” says Urwin.

Beazley estimates it will see a $170 million net loss, says UBS, which covers all first-order impacts including property, marine, reinsurance, political risk, accident & health and contingency. But, Urwin adds: “This estimate does include BI, which we understand drives around $100 million of this loss estimate. This is the key difference versus Hiscox.”

By applying Hiscox and Beazley’s insured loss share to UBS’s existing COVID-19 estimate, the analysts saw that the industry loss estimate needed to be higher—hence the updated top figure of $60 billion.

While large companies are more likely to be able to weather this crisis, Urwin thinks the real impact will be on small and medium-sized enterprises (SMEs).

“We expect COVID-19 to be more of an SME event than a typical nat cat type scenario, in which case we would expect the London Market insurers to take an above-average market share of the loss.

“Were we to assume a 35 bps share, the industry loss would reduce to $45 to $50 billion,” he explains.

He adds that “the major swing factor on insured losses” is based on the fact that Hiscox’s loss estimate does not include BI.

The BI wild card

Across lines of business, UBS estimates that BI will represent around $7 to $22 billion losses related to COVID-19. The next biggest loss-affected line is estimated to be trade credit insurance, with $8 to $16 billion, followed by event cancellation with losses of around $5 to $7 billion.

Workers’ compensation is not far behind with losses estimated at $4 to $6 billion, followed by travel insurance losses of $2 to $3 billion, personal lines (D&O/E&O) $2 to $3 billion, and other lines also $2 to $3 billion.

Urwin says that most of the BI claims associated with property insurance policies will be international, as the take-up rate of infectious disease coverage in North America is limited.
“We sense most uncertainty revolves around BI and how this will map to individual company exposures,” he says.

“We expect trade credit to be a material driver of the loss, although government backstops could help control the tail risk. In recent days, market commentators have also turned somewhat more bearish on workers’ compensation.”

With such large losses estimated for BI, it is worth stating that Urwin still refers to this line as “the wild card” because company exposure will depend on how policy wording in property insurance policies is interpreted.

The precision of policy wording will be pivotal. Certain policies may explicitly cover epidemic, but exclude pandemic. While policies that cover pandemic could include a list of the specific diseases covered, COVID-19 might not be one of them. In addition, BI sub-limits are likely to be low, even in the low single-digit million range for the larger policies, according to UBS.

“Our sense is that the main risk falls on non-US property lines, where we understand around 50 percent of policies embed BI that could cover infectious diseases,” Urwin says.
“In the US, we understand coverage is lower (around 10 percent), and we believe potential legal challenge is still a remote risk.

“The important point here is that even if potential retrospective changes to BI coverage do not materialise in the US, COVID-19 is still likely to be a significant property loss on international (non-US) lines.

“This is because the sub-limits are low and as a result this could be more of a primary event, but risks remain to reinsurers.”

Company exposures

To find out which re/insurers have the greatest potential BI property exposures, analysts looked at the 2018 solvency financial condition reports by geography and line of business.

This research showed that for European P&C re/insurance coverage, an average of 30 percent of premiums comes from property lines, although this includes personal lines, which is not affected. Therefore, researchers estimate, around 10 to 20 percent of premium is commercial property with potential exposure.

Reinsurer SCOR has the largest proportion of property business accounting for 45 percent of its non-life gross earned premiums (GEP), according to the UBS analysis.

London Market firm Lancashire also has a substantial proportion of property business, which accounts for 44 percent of its non-life GEP. UK insurer RSA and reinsurer Hannover Re are not far behind with 36 percent and 34 percent, respectively, of their GEP represented by property.

Commenting on the market more generally, Urwin says: “We suspect those with most international commercial property in our coverage are London Market (20 percent of premium), reinsurers (18 percent), UK P&C (14 percent), and multilines (10 percent).

“While the reinsurers have commercial property on their books, our sense is this is more of a primary issue given low sub-limits on BI.”

By digging a bit deeper into the data, the analysts are able to estimate that London Market firm Lancashire has the largest potential exposure through international commercial property, with about 31 percent as a percentage of total P&C premium.

Reinsurer SCOR also has a relatively large potential exposure, with international commercial property making up around 27 percent of total P&C premiums.
However, analysts emphasised again that when it comes to BI claims “policy wordings will be key”.

“Ultimately, BI exposures at the company level will be down to how robust or tight policy wordings are, how much re/insurers explicitly exclude from coverage, the sub-limits deployed and any reinsurance protections,” says Urwin.

“Our sense is that this issue could be a key test of underwriting quality, and will likely define track records for years to come.”

Secondary loss driver

Credit & surety and trade credit could be another major driver of losses, the research finds, highlighting that the $12 to $13 billion market is heavily reinsured, with the trade credit market representing “the lion’s share” ($10 billion) of credit & surety.

Urwin estimates a potential $8 to $16 billion insured losses for this line, with less than 50 percent of this going to reinsurers, given the relatively low retentions of the big three trade credit players: Euler Hermes, Atradius, and Coface, who together control about 60 percent of this market.

“SCOR looks most exposed of the reinsurers, and Allianz of the primaries, given its ownership of Euler Hermes,” Urwin says.

“Loss ratios for credit & surety spiked by 45 percentage points (ppt) in the 2008/09 global financial crisis. Given our expectation for COVID-19 to bring a much bigger corporate impact than the global financial crisis, which was mainly a financial crisis, we believe the loss ratio spike this time around could easily be double that (90 ppt). Potential government backstops could help limit the tail risks here.”

As a percentage of P&C premium, the research shows Lancashire and SCOR have the highest exposure to credit & surety re/insurance with 9.7 percent and 6.7 percent, respectively.

Using the same methodology, UBS says Allianz, Swiss Re and Hannover Re have exposures of 4.4 percent, 4.4 percent and 4.3 percent, respectively.

Lancashire’s exposures “relate purely to sovereigns” as the firm does not sell credit & surety reinsurance to corporates, Urwin explains.

At SCOR, “the most exposed of the reinsurers”, the researchers say credit & surety represents 8 percent of SCOR Global P&C. The global reinsurer offers treaty protections to Euler Hermes (owned by Allianz) among others, and Urwin says: “We expect this to be a material source of SCOR's COVID-19 losses.”

Snapshot scenario

UBS researchers took a snapshot view of potential company exposures using the scenario of a $45 billion industry loss (the mid-point of its $30 to $60 billion range). It looked at the impact on earnings per share (EPS), tangible net asset value (TNAV) and solvency.

“The key message is that the underwriting losses would likely be contained to profit and loss volatility for a $45 billion loss. That said, investment market volatility deepens the losses and ensures some could be modestly loss-making for 2020.

“We still do not expect a material balance sheet event,” Urwin explains.

In the snapshot model, London Market firm Lancashire has the highest COVID-19 “sensitivity”, with an 87.1 percent hit on EPS for 2020. Its TNAV impact for the same period was also the highest, at 11.5 percent.

Hiscox and Beazley also show relatively high sensitivity, with EPS at 61.7 percent and 44.7 percent, respectively, and TNAV at 6 percent and 7.4 percent, respectively. However, for the three firms the expected solvency capital impact for 2020 (based on full year 2019) was negligible.

Urwin says: “The key risk at the company level is if a re/insurer takes a large, outsized market share of the ultimate COVID-19 industry insured loss. Here we believe BI policy wordings remain key.”

Pricing cycle extension

With many lockdowns in Europe, Asia and the US still in place, the industry’s focus remains on the potential losses. But, Urwin says, once the industry has a clearer picture of losses, he expects its focus to switch rapidly to repricing.

Before the crisis, pricing was already firming and concerns about pandemic losses are likely to extend the cycle, he says, possibly even into 2021.

“We expect pricing to accelerate across primary commercial and reinsurance lines, and for durability of repricing to extend.”

Urwin says that a consistent theme during UBS’s calls with industry experts was that concerns over pandemic exposure were likely to further drive price firming. This, in turn, would drive the prospect of lower net investment income yields, giving companies an additional incentive to improve underwriting margins.

“Our sensitivity analysis highlights that as long as companies don’t take an above-average share of industry losses, balance sheets will remain intact.

“Risks remain on BI, however, specifically whether companies have left policy wordings open to challenge.”