The pandemic is further accelerating the hardening of reinsurance rates and tightening of terms and conditions, making it more difficult for insurers to find appropriate protection.
The impact on reinsurers
The top 20 global reinsurers reported about $12 billion in COVID-19 losses in the first six months of 2020, according to S&P (opens a new window), which is likely to generate a combined ratio of 103%-108% in 2020. In addition to an underwriting loss, investments are expected to only generate a return on equity (ROE) of between 0% and 3%.
A recent survey by Reinsurance News suggested (opens a new window)that it may take up to five years to fully understand the impact that the pandemic will have on the insurance and reinsurance markets.
What is clear is that COVID-19 is proving to be longer lasting than originally imagined. Understanding the impacts is no easy task, but critical for carrier strategies in the immediate and medium term.
A new dynamic
Due to a reduction in economic activity following the lockdown, traditional property and casualty claims have been subdued, but this was outweighed by an increase in COVID-19 related claims notifications. At the forefront was the entertainment industry as organizers cancelled live events, as well as the movie and other film productions, which were severely disrupted due to the pandemic.
Courts are still in the process (opens a new window) of deciding on the extent business interruption (BI) policies should respond to the pandemic, but there is also potential for traditional property damage and business interruption claims to occur as factories and businesses restart operations. Global supply chains have also been affected during the pandemic, causing further disruption to businesses.
The life reinsurance sector has not remained unscathed, with the top 20 global reinsurers reporting about $1 billion of COVID-19-related underwriting losses in the first half of the year, according to S&P. The losses arise mainly from a higher mortality rate due to the outbreak, with the majority of the claims from the US.
Product lines, from Excess Casualty to Directors and Officers (D&O) to Workers Compensation to Property, all have different COVID-19 profiles. The sensitivity to a carrier’s book-of-business, particularly their industry mix within a given product, is essential to understanding COVID-19’s impacts. On the one hand, some exposures are going down, vis-à-vis, less people physically on-site for work, or fewer people on the road driving. On the other, some exposures are going up, with concerns about increased hacking activity, and the continued rise in social inflation, for example.
Reinsurance pricing has been hardening during the past 18 months, with tightening terms and conditions, more recently supported by COVID-19 losses. We are experiencing underlying rate increases not seen in years, if not decades. S&P analysts expect the upwards pressure on reinsurance pricing to remain in place well into 2021.
Although it is still early in the process, the coronavirus outbreak could trigger claims against D&O, consultants and professionals, as investors and other stakeholders look to hold them accountable and seek to recoup losses.
Losses in the casualty market (opens a new window) are difficult to predict at this stage but they may become substantial. In case of a second lockdown, companies and public services will be expected to have learned their lessons from the first one. Chances that a claimant will be successful in court when arguing that defendants did not offer appropriate protection are likely to increase. This could trigger claims on D&O, Employment Practice Liability, General Liability and Workers’ Compensation.
Either way, societies are increasing their reliance on technology because of the crisis, further heightening the cyber risk exposure. Due to the rapid change of the risk landscape, insurers, captives or even individual companies may want to look for additional protection through reinsurance by applying analytics tools that facilitate the decision-making.
Lockton Re has focused very early on analyzing how COVID-19 affects our clients’ exposures and underwriting by applying technology and analytics. This new practice has the potential to transform the reinsurance industry. It was born digital, and therefore has the advantage of being free of legacy IT architecture to deconstruct.
One key example is the development of our SAGE™ analytics platform (opens a new window), an interactive, intuitive, web-based application that provides deeper analytical insight to our clients. It provides a very transparent view of how options were created and allows users to dynamically make changes to reinsurance structures so that they can understand the impacts on financial performance.
It’s the beginning of something new for reinsurance and puts us more in the realm of other industries where modern technology has already pushed forward.
For more information, please contact: Claude Yoder, Global Analytics Leader Lockton Global Re E: firstname.lastname@example.org (opens a new window) M: +1 (860) 670-8478