Riding the shock waves

For reinsurers, COVID-19 is shaping up to be one of the largest events to impact the sector in living memory. 

The global effects of the pandemic, its potential for long-tail claims and its hit to both sides of the balance sheet all point to unprecedented losses.

Investment bank UBS predicts re/insurance losses in the range of US$60 billion, while analysts at equity research and brokerage firm Dowling & Partners estimate property and casualty claims related to the virus could amount to US$80 billion.

Meanwhile, the G20 has committed US$5 trillion in domestic stimulus and US$8 trillion overall in fiscal stimulus packages to support communities and businesses. Central banks have also cut interest rates to promote liquidity in financial markets. And there’s likely more to come.

‘The full nature and size of COVID-19-related industry losses may not be completely known for years to come and presently changes day to day, if not hour by hour,’ says Joy Langford, a partner at Norton Rose Fulbright in the United States. 

‘Nevertheless, now is the time for cedents and reinsurers to assess how reinsurance may or may not respond to the multi-line exposure presented by COVID-19.’

CLAIMS ‘LIKELY TO BE MANAGEABLE’

According to Willis Re, ‘the consensus appears to be that claims themselves are likely to be manageable from the standpoint of the sector’s financial strength’.

‘Event cancellation claims could produce insured losses of US$4 billion to US$6 billion,’ the reinsurer notes in its recent COVID-19 Impact Report. 

‘Assuming most of these fall on the reinsurance sector, this would be equivalent to a midsize hurricane and about 1 per cent of the global reinsurance sector’s capital base (US$559 billion, from Willis Re’s half-year 2019 reinsurance market report).’

Dr Gordon Woo, a catastrophist at RMS, says life and health insurers will suffer direct losses from COVID-19, but he concedes that to date, ‘it has been challenging to associate specific claims to COVID-19 for life reinsurers’. 

‘ICD-10 [medical classification] codes for COVID-19 have been established, but no special guidance for the selection of the underlying cause of death where COVID-19 has been reported have been established,’ he says.

OUTLOOK FOR REINSURERS: IMPACT ACROSS MULTIPLE LINES

The insurance industry unanimously predicts high claims volumes for contingency event cancellation insurance as large events — such as the Tokyo Olympics — are postponed, though some policies may have infectious disease exclusions.

‘For life, accident and health insurance, COVID-19 mortality disproportionately affects older people, and governments are largely funding health care,’ says Woo.

‘Claims are expected for workers compensation and employer liability, while directors and officers insurance claims are likely where potential negligence causes infection. 

'Personal accident and travel insurance availability has already been affected, with travel insurers largely withdrawing from the market.’  

According to Willis Re, there will be a focus on credit risk, specifically whole turnover (or structured) trade credit, surety and mortgage insurance.

Its impact report also highlights coverage available in primary policies for business interruption (BI) and how that might flow into the re/insurance market.

‘The reserving challenges for re/insurers — practical, operational, legal and technical — are formidable,’ the report says.

‘The threat from BI is exacerbated by growing vocalism from various US state legislators seeking to revise actual coverage granted into something that they wish had been granted retroactively. 

'This action represents an existential threat to the entire industry, never mind the consequences of unilaterally changing contract law.’

Woo says the final industry exposure will be dictated by individual policy terms, conditions and exclusions. ‘Government action, such as the declaration of notifiable events, could also trigger policy coverage or exclusions.’

ASSET SIDE RISK TO REINSURANCE

With equity markets crashing and interest rates falling because of the pandemic, volatility and losses on the asset side of the balance sheet could create a much bigger problem for re/insurers than insurance claims.

‘If we see a spike in policyholders willing to surrender their policies because they need the money happening at the same time as a crash in equity markets, that could create liquidity issues for insurers and could force them to sell some of their assets,’ says Pierre Vende, head of accident, health and life, Asia Pacific, at Aon Reinsurance Solutions.

Willis Re points to ‘lower investment yields, potential for deteriorating underwriting results, possible reduction in premium growth … or inability of re/insurers to manage similar levels of risk because of depleted shareholder equity and the possibility of adverse reserve development’ as factors that will drive pressure on re/insurers’ capital base.

STRATEGY REASSESSMENT

There’s no doubt that reinsurers must revise their plans in preparation for a range of economic scenarios that will affect customer bases, investment returns and balance sheets.

‘The uncertainty over cost and access to capital in all forms will compound the need for judicious evaluation of and adjustment to underwriting strategy at the core of every re/insurance business,’ states the Willis Re impact report.

‘Many insurers may be holding more risk relative to their balance sheets than they had anticipated, which suggests three options: ride it out, de-risk or hedge,’
the report adds.

‘Whatever decision leaders adopt, there is work to be undertaken to determine the landscape first and then quantify all of the internalities and externalities that will support a decision in one direction or another.’

APRIL RENEWALS SPEAK VOLUMES

This year’s April renewals were a good indication of the pulse of the market, with reinsurance rates rising by as much as 50 per cent and the largest risk-adjusted rate increases occurring on loss-hit catastrophe reinsurance programs.

Vende says there was a defensive, self-protective reaction from the industry during the April renewals, with several reinsurers seeking COVID-19 exclusions later in the cycle.

‘I think it’s still very early days in terms of these discussions,’ he says, ‘and there’s a lot of work to be done to make sure that COVID-19 coverages, definitions and exclusions are clearly defined.’

PANDEMIC INSURANCE POOL ON THE CARDS

The risk of a serious pandemic has always been on the agenda for life and health insurers and reinsurers, with various measures in place to prepare for such an event.

But Vende says less time has been spent exploring the possible impact of a pandemic on the asset side of the balance sheet or potential operational risks.

‘The way COVID-19 has placed restrictions on the operation of entire businesses is a key aspect to include in future modelling,’ he says.

Vende points to future pandemic coverage as a matter of public-private partnerships.

‘The private insurance industry alone is not sufficient to absorb such a financial impact,’ he says. 

‘I also think it’s the right time to create some form of pandemic insurance pool similar to other risk pools that cover natural catastrophes like earthquakes or terrorism.’

To that end, as reported by insurancenews.com.au, Convex CEO Stephen Catlin will chair a steering group to examine ways for the United Kingdom’s insurance industry to respond to future pandemics. 

The group, which includes executives from top companies like Aon, Guy Carpenter and Willis Re, aims to work closely with terrorism reinsurer Pool Re.

In the US, the Risk Management Society (RIMS) has written to the US Congress to recommend a pandemic or epidemic loss-sharing program along the lines of its existing Terrorism Risk Insurance Act (TRIA), formed after 9/11.

Meanwhile, ratings agencies such as AM Best are conducting balance sheet checks to examine risk-adjusted capital levels and investment portfolios, looking at both the claims impact and falling stock values.

‘Pressure for businesses to take out pandemic-related coverage could come from governments reluctant to fund furloughed businesses in the future,’ says Woo.

‘In terms of reference events for the life sector, regulators could include this pandemic as a benchmark, alongside well-used scenarios such as the 1918 pandemic, with implications for how excess mortality is calculated.’

COMING OUT THE OTHER SIDE

Despite the continuing fallout, Munich Re is one insurer that is confident of emerging ‘comparatively stronger’ from the corona crisis.

It points to prudent reserving, cautious investment and excellent risk management systems as just some of the measures that have helped it counter this unparalleled situation.

‘In times like these, when the whole industry is struggling with high uncertainties, it is of paramount priority for insurers to have a precise understanding of their portfolios and corresponding exposures,’ says a Munich Re spokesperson.

Willis Re adds that the ‘robustness and future health of the sector will depend on the severity of the emerging health scenarios and longevity of the various national governmental actions and their associated impact on their respective economies’.

‘Enough buffer capital has been built up over the recent relatively benign loss period for extreme asset-side events such as this. The extent to which the industry can withstand the volatility in equity markets over a longer period remains to be seen.’

CASE STUDY: RESTAURANT SERVES FIRST LAWSUIT FOR BUSINESS INTERRUPTION CLAIM

A popular New Orleans restaurant, Oceana Grill, was reportedly the first business in the United States to sue its insurer, Lloyd’s of London, for business interruption (BI) losses incurred as a result of restrictions imposed by the COVID-19 pandemic.

The restaurant can accommodate up to 500 guests, caters for weddings and other private events and — in normal times — operates from 8.00 am to 1.00 am every day of the year.

Oceana Grill is arguing that under its ‘all risk’ policy, which does not exclude losses that arise as a result of a virus or global pandemic, the restaurant is entitled to coverage.

The National Law Review website reports that this includes ‘any future civil authority shutdowns of restaurants in the New Orleans area due to physical loss from coronavirus contamination’.

‘One of the key issues in the Oceana Grill lawsuit will be whether the restaurant incurred “direct physical loss or damage” as a result of COVID-19. Typically, “all risk” policies only provide coverage for physical property damage,’ the website notes.

It adds that New Jersey businesses ‘seeking coverage under similar types of policies may be in luck’ as ‘several recent decisions have broadly interpreted the term “physical damage” in favour of coverage’. 

However, it remains to be seen what the courts in Louisiana decide.