Second wave of Covid-19 to eat into re/insurer capital: S&P

The emergence of second waves of the Covid-19 coronavirus pandemic could create another meaningful hit to the capital bases of insurance and reinsurance companies, as both investment market volatility and insured losses will mount.

S&P Global Ratings warns that even without a second wave, the Covid-19 pandemic is destined to further erode re/insurers capital buffers as we go through the second-half of 2020, with insured losses likely to “pile up” especially for industrial insurers, while financial market losses persist.

But, as global insurance and reinsurance company ratings have remained relatively stable through the first wave of Covid-19, S&P warns that the capital strength that helped re/insurers stave off downgrades may be eroded by the pandemic as waves continue.

“The risk of insurers’ invested assets losing value still outweighs the risk of rising insurance claims, particularly for life insurers and those with thin capital buffers,” explained S&P Global Ratings credit analyst Dennis Sugrue.

“Nevertheless, a second wave of COVID-19 infections that disrupts the economic recovery or necessitates the widespread reintroduction of lockdown measures could disrupt the financial markets further, deepen the recession, and increase asset losses and insurance claims,” Sugrue added.

As insurance and reinsurance capital buffers decline, there could be a need for companies to better protect themselves.

Without the strong capital buffers they have enjoyed over recent years, global re/insurers could turn to other forms of capital to help them maintain capital strength and adequacy, with reinsurance and also insurance-linked securities (ILS) capital two forms that may be of value.

The threat of second waves of Covid-19 has caused S&P’s expectations of re/insurer growth in 2020 to be diminished, with the persistent financial effects of the pandemic and insured losses set to erode earnings through this year.

But, if waves of Covid-19 can be controlled, the forecast does look brighter for a recover. S&P explains, “Yet for many sectors, we expect top lines and earnings to recover during 2021-2022 as we expect non-life pricing to continue to improve and demand to remain stable for non-discretionary lines of business. Capital buffers at most insurers are healthy enough to support ratings, particularly those in North America and EMEA.”

Business interruption remains an unknown factor and this is still playing out around the globe.

However, S&P said that, “Although losses from business interruption could rise if insurers face legal action, we see retroactive legislative or regulatory changes as unlikely.”

That may be encouraging for those exposed to property insurance and reinsurance where business interruption has not been well-worded or excluded in coverages.

With second waves of Covid-19 now evident in a number of countries and some of the largest economies such as the United States seemingly unable to control the first wave at this time, re/insurers seem set to suffer greater erosion of their capital buffers through the rest of 2020, all of which should play into reinsurance market dynamics at the end of this year renewals.

Capital is going to be key to enable insurance and reinsurance companies to be ready to take advantage of any resurgence in the economy once the pandemic is under greater control.

Which could make reinsurance capital solutions, debt issuances and also other contingent capital structures even more in-demand later in the year.