Ongoing COVID-19 loss uncertainty to fuel reinsurance rates: Berenberg

One of the factors fuelling reinsurance rates as we move towards the end of year renewals and the key January 2021 contract signings is the ongoing uncertainty over COVID-19 and just how high the industry loss from the pandemic will rise.

Analysts at Berenberg said highlighted that, for now, COVID-19 losses reported by insurance and reinsurance companies remain far below the industry loss estimates published by market participants.

They expect to see some further pandemic related losses revealed by re/insurers during the upcoming third-quarter reporting season, but there remains significant uncertainty over just how the toll will be, as well as how quickly they will be reported.

With almost $22.5 billion of losses currently reported from COVID-19, but industry loss estimates seemingly centring on a $50 billion to $75 billion expected range, there is still some way to go before the industry’s COVID-19 loss experience settles.

The uncertainty over where COVID losses will fall is helping to fuel reinsurance rates and this is likely to persist right through the January 2021 renewals, as it’s unlikely the industry will get a clear view of the eventual pandemic industry loss until into next year, perhaps beyond.

“There are still some key areas where losses could continue to accumulate and the extent or severity of these is still very much unknown,” Berenberg’s analyst team explained.

“While we remain of the view that the pandemic is a manageable event from the perspective of insurers’ solvency ratios, COVID-19 has accelerated the rate rises that were showing green shoots prior to the outbreak,” they continued.

The analysts believe that rate increases achieved will be “sustainable”, also calling them “very attractive” and “very high”.

Insurers are expecting to recoup losses from COVID-19 particularly quickly, faster than is typically seen with catastrophe events, the analysts suggest.

But on top of this, the major players all believe that with the rate increases seen as sustainable they believe higher profits will be available into the future as well.

Uncertainty is helping to drive this trend, with the industry concerned over the potential for losses from local lockdowns and repeat waves of the pandemic.

Business interruption is an area of focus, given the ongoing legal action, the fact a share is already falling to reinsurance capital and now with major economies facing rising coronavirus cases which is likely to drive more shuttering of parts of the economy, it’s expected a steady flow of losses will come through business and property programs.

Solvency levels have declined at the big European insurance and reinsurance players and this means greater discipline is to be expected, Berenberg’s analysts said.

“It is true that Solvency II is down and this means that insurers will be forced to be more disciplined. We believe this is another positive for pricing, and will help ensure that the new higher pricing levels stick and are sustainable,” they explained.

While the analysts say that “COVID-19 is like a very large natcat” this isn’t to unprecedented levels.

“Even the impact for reinsurers is not exceptional, as their business is to cover large but infrequent events and to absorb the volatility in their balance sheets. We believe this will still be the case even with additional COVID-19 losses,” the analysts said.

COVID-19 is expected to drive losses through lines of business such as event cancellation and contingency for a time, but these are seen to be slowing. Business interruption claims flow will persist, but as lockdowns become better controlled and implemented this too is expected to slow. Both these areas are thought to have peaked already.

Credit and surety related losses are an interesting area to watch. These are typically “back-end-weighted” in a crisis, Berenberg’s analysts said, meaning they will only start to flow as the true impact to the economy, businesses and trade unfold.

Some reinsurance carriers have significant trade credit books, for example and so there could be escalating impacts for some reinsurers that start to be reported as the pandemic drags on.

A final area that losses may begin to emerge is in the mortality books of life insurers and reinsurers, with the U.S. a likely source of growing claims for some.

All of this uncertainty could drag on some areas of the insurance-linked securities (ILS) market, to a degree. As uncertainty can elevate the chances of collateral being held or trapped for any collateralised reinsurance or retrocession that is deemed potentially exposed to the pandemic.

There’s also a chance of further sidecar or quota share exposure, although likely restricted to a handful of larger sponsors we’d imagine.

The uncertainty adds further fuel under the fire of reinsurance rates, likely helping to accelerate them into the end of this year, perhaps beyond.

There are a number of major insurance carriers that have said COVID claims are pushing their aggregate reinsurance closer to the trigger point. With catastrophe losses from recent hurricanes and severe weather events also on the rise, the chances of some further losses falling to the reinsurance market through such programs appears likely to increase.