Ongoing COVID-19 losses could make pandemic a capital event

While COVID-19 is certainly an earnings event, there remains the possibility that it could become a capital event, according to panellists speaking in a Re/Insurance Lounge live broadcast titled “Europe’s changing reinsurance landscape: a panel debate in lieu of Baden-Baden”.

Christian Kreutzer, market head of Austria and Central and Eastern Europe (CEE) and transaction lead Northern CEE at Swiss Re, said that a crucial factor in how events will unfold is the speed with which economies recover.

“We can all conclude that COVID-19 is going to be a major earnings event for the re/insurance industry overall, and not only earnings on the insurance business.

“We also see impacts on the asset side—corporate spreads are volatile and are something we all need to monitor,” Kreutzer said.

“The low yield environment is going to stay with us for longer, and we see a steep recession in many parts of the world comparable with the post-2008 slump.

“The big question is, how quickly will economies recover and get out of this recession? I recall how in the initial days we were all thinking this was going to be a V-shaped recovery—once the lockdown is over, economies would quickly recover.

“As we see it now, we can already conclude the recession is going to stay longer and last at least well into 2021 in a number of economies in the world.”

Addressing the question of whether COVID-19 will become a capital event Johannes Martin Hartmann, chairman of the board of directors at VIG Re, said that a lot of reinsurance companies have lost a third of their own funds and equity and the danger is not over yet.

He noted that the capital markets are disconnected from the real economy and questioned whether that is sustainable.

“We will have to live even longer on very low or no interest rates,” Hartmann said.

“This puts even more pressure on the underwriting side. We don’t have interest income and have to make money in other areas—it’s a big challenge for the industry.

“Talking about a V-shaped recovery, we might have to live with a very long recession, and that will have an impact on the industry.”

He added that COVID-19 has ushered in a period of rapid change in the industry in terms of its digital activities.

“The re/insurance industry tends to be a bit slower than other industries with digitisation but COVID-19 is an accelerator. It’s not the real cause—it’s the same with the hardening of the re/insurance markets,” he said.

The executives were speaking during a panel discussion held on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members.

Policy terms
Simon Wigzell, chief underwriting officer at UnipolRe, said that looking at the UK market, and to a lesser extent the French market, the pressure currently being felt by insurers arises primarily from the fact that policy wordings originated from third parties—the insurers were not using their own policy wordings.

“This has caused a lot of pressure. One of the by-products is that you’ll see a greater standardisation of policy wordings going forward and a tightening of terms and conditions,” Wigzell said.

“You’ll see much more clearly defined policy conditions which should negate the losses of this type going forward.”

He noted that loss ratios are improving in motor liability, and reinsurance excess of loss business is also improving.

“The question is whether these benefits will be able to offset the liability arising directly from the business interruption,” he said.

Ali Karakuyu, director at S&P Global Insurance Ratings, gave an analyst’s perspective on the current state of the reinsurance market, noting that S&P changed its outlook for the global reinsurance sector outlook from stable to negative in May, not just because of COVID-19, but also because the sector had been struggling to meet its cost of capital for the past few years.

“If we boil it down to the top 20 global reinsurers, they posted about $12 billion of COVID-19 losses and there is a lot of uncertainty around what the actual claims amounts might be. There are industry loss estimates of about $100 billion, so there is a lot of uncertainty.

“We have heard in discussions with C-suites that they have already seen additional COVID-19 losses during Q3, particularly on the event cancellation side,” Karakuyu said.

On top of that there are nat cat events to consider, plus manmade losses such as the Beirut blast, for example.

On the positive side, however, he said capital has been a big strength, with a combination of risk management practices and investment gains in 2019 meaning reinsurers went into this year with good levels of capital.

“What will take the outlook back to stable? We need to see enough evidence that the sector will reverse to a level where it will meet its cost of capital, meaning that it would be able to continue with the pricing increases it has been leveraging on in the last few years, even more so with COVID-19,” he said.

“If those translate to reasonable levels of returns, then we would consider a stable outlook,” he concluded.

To watch the full video panel discussion on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge.