Reinsurance capital squeeze highly likely as COVID-19 hit looms: Willis Re

Reinsurers are facing formidable practical, operational, legal, and technical reserving challenges due to the shock of global COVID-19 pandemic, even though they entered the crisis strongly capitalised.

Willis Re, the reinsurance broking arm of Willis Towers Watson (WTW), believes that while the reinsurance claims are likely to be "manageable", most carriers will end up holding more risk than anticipated relative to their balance sheets, and some will find the crisis much more difficult to weather.

"They are likely facing three options - retain current strategy, de-risk, or hedge," it said. Wills Re warned that the solvency reduction may take some companies below their desired minimum capital threshold.

It noted that although the industry retains sufficient capital buffer for extreme events, the extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen.

Insurers have already begun adjusting their plans to suit a range of economic scenarios, and reinsurers have started to de-risk their balance sheets by holding cash, which, the company says, will have a significant impact on investment returns.

“With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely," according to James Kent, global CEO of Willis Re, who noted that "the most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward."

Kent added that "reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers.”

Willis Re currently estimates a 5 percent hit to the global reinsurance capital base, nearly $30 billion pre-tax, but noted that additional pressures may emerge if the economic conditions further deteriorate.

"For example, assuming most event cancellation claims fall to reinsurers, their impact would be about 1% of the capital base, equivalent to a midsize hurricane," the company said. "However, the risk from business interruption claims presents an existential threat to the entire industry, given growing calls to revise coverage retroactively and the colossal, if notional, aggregate limits deployed irrespective of contract agreements in place."

According to the report, the four major European reinsurers are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels "remains comfortable". Willis Re estimates a total 7 percent hit to US reinsurers’ statutory capital.

Printhan Sothinathan, co-head of global analytics at Willis Re, said: “In all but a worst-case scenario we expect claims to be manageable overall, although obviously some carriers, based on their circumstances, will find the crisis much more difficult to weather than others.”

Andrew Newman, president of Willis Re, added: “The impact of COVID-19 on global reinsurer capital is broad enough that it may exacerbate non-life reinsurance market hardening, particularly in commercial lines. We may see supply and demand imbalances in some areas, so insurers should be taking steps to reduce the risk of being on the wrong end of any market hardening.”