P&C re/insurers well positioned despite COVID-19, and other reasons to be cheerful

Despite the trials and tribulations of the COVID-19 pandemic, P&C re/insurers in the US are in a strong position, according to Stefan Holzberger, chief rating officer at AM Best.

He said that about six months ago, AM Best ran a balance sheet stress test to look at how the volatile environment would affect its rated insurance companies.

“We found from that financial stress test that the P&C insurance industry in the US is very strong from a risk-adjusted capital standpoint,” Holzberger said.

“The majority of our rated clients in the US saw a capital decline on a risk-adjusted basis of less than 10 percent, which is a testament to the strength of those balance sheets.”

Holzberger was speaking 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.

He added, however, that one of the main takeaways was that although the industry is proving very resilient to the current environment, it is not out of the woods yet.

“The financial markets for the most part have hardened, but let’s not forget the ’flu season is coming up and a lot of the claims we expect to come through in the casualty classes are going to take months or years to fully develop, so it’s not a time to assume that things are fine and we can go back to normal,” he said.

With regard to the extent of COVID-19 losses, Holzberger said that AM Best is allowing the modelling companies and the brokers to take the lead on those estimates—which are currently ranging between $40 billion and $80 billion.

“It’s an informed guessing game at best with all the uncertainty around a second or third wave of the pandemic, but we do feel the range is appropriate based on what we know today.

“The good news is it’s a range the industry is capable of handling from a solvency standpoint,” he said.

An earnings event
Holzberger added that the optimistic view is that, unless there a real deterioration from the claims side, COVID-19 is expected to be an earnings event in 2020.

From a ratings point of view, AM Best has taken very few negative ratings actions.

“It’s the outliers, the very small concentrated companies on the P&C side—companies that had a weakness in their balance sheet or their performance and profile coming into 2020,” Holzberger said.

“For the vast majority of our coverage of P&C companies in the US, those ratings are stable, and the balance sheets are resilient.”

While COVID-19 has undoubtedly contributed to the hardening market, he noted that things were already moving in that direction before the pandemic hit. With the addition of factors relating to COVID-19, he expects that hardening to continue, with the positive trends around rates and terms and conditions that were seen leading up to 2020 carrying through into next year based on the continued uncertainty in the market.

“The hard or hardening market conditions will be sustained through 2021 and in large part that’s because that rate activity is needed,” Holzberger said.

“If you look at where we are in terms of rate adequacy on many casualty classes, we are way under where we should be so it’s going to take compounded rate increases across several renewals to get those rates back to where they need to be to have a reasonable return on capital.”

He noted that when it comes to new capital entering the market, there is real optimism and some significant activity. In terms of the startup companies coming through the ratings process, he said they are well capitalised and run by well-respected, experienced management teams.

“The other aspect of the business is the reinsurance piece,” he added.

“There is good rate momentum on the reinsurance side so several organisations rated by AM Best have gone to the market, successfully added capital to their balance sheet, or partnered with large capital providers in some cases, to increase their scale and scope and product offerings.

“There is also a not insignificant number of startup reinsurers coming through the rating process. They are not up and running yet and the ratings have not been assigned, but again, they are looking to make a pretty big splash into the market for January 1,” he concluded.

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