Reinsurers will grapple to earn cost of capital in 2020, warns S&P

The global reinsurance sector will fail to earn its cost of capital this year amidst the intense market volatility caused by the COVID-19 pandemic, while some of the top 20 reinsurers could suffer a capital event, suggests latest reports by S&P Global. The ratings agency said that entering 2020 the expectation was that the reinsurance industry was on the right path to improve their results, after struggling to earn its cost of capital for the past three years. However, the insured losses and investment volatility related to the COVID-19 pandemic have already...

...eroded much of the global reinsurance industry's earnings buffers for 2020.

In the first six months of 2020, the top 20 global reinsurers reported COVID-19 losses of about $12 billion, which are an earnings event for the industry on a stand-alone basis. "But, when combined with other insurance losses, notably natural catastrophes, potential additional COVID-19 claims, and capital market volatility including investment losses, the sector could swing to a loss for the year," said S&P Global Ratings credit analyst Taoufik Gharib.

S&P further noted that 2020 could turn into a capital event for the sector if it matches 2019, which was fairly average and saw global insured losses of $59 billion. "If 2020 sees insured catastrophe losses of $60 billion-$70 billion, an average level, at least eight of the top 20 reinsurers could suffer a capital event," it said, adding that certain reinsurers could even find an average catastrophe year testing.

"As a mitigating factor, property and casualty reinsurance pricing has been hardening during the past 18 months in reaction to natural catastrophe and pandemic losses, as well as alternative capital and retrocession capacity constraints," S&P noted.

The agency expects the reinsurance pricing positive momentum to carry into 2021.