Although likely to be more challenging for the reinsurance sector than any other market event since 1986, the COVID-19 pandemic represents enormous opportunities and possibilities for the industry, according to Peter Mills, Chief Executive Officer (CEO) and Founder of Pyrrhic Re.
A pure-reinsurance Managing General Agency (MGA) writing a diverse book of treaty, retrocession and facultative reinsurance business, Pyrrhic Re embraces the “new normal” reinsurance market.
As the company prepares for (opting to sit out a very active US Cat season) a January 1st, 2021 launch, Reinsurance News spoke with CEO and Founder, Mills, about the challenges and opportunities facing the reinsurance industry as a result of the pandemic.
“I would call COVID-19 an unprecedented event for this industry. I say that because it is impacting both the asset and liability side of re/insurers’ balance sheet. On the asset side, investment portfolios will be slow to recover. And on the liability side, losses will be incurred on virtually all classes of business,” said Mills.
First-quarter 2020 results have shown that reinsurers are exposed to the pandemic through both their underwriting and investments. Financial market volatility has been significant, and while certain classes of business will clearly be hit harder than others, COVID-19-related claims are arising in many areas of re/insurance business.
Of course, the pandemic is ongoing, and much uncertainty remains surrounding the ultimate reinsurance industry exposure and whether this will be weighted more towards the asset or liability side of the balance sheet.
“I would say investment side principally because the combination of the scale of unrealized loss, in combination with recession like conditions that will likely suppress stock and equity recovery,” continued Mills. “The liability side of the balance sheet loss contains a manageable market loss on what is clearly covered. It is the ‘what may be’ covered that could have a severe impact on re/insurers.”
Expanding on the well-documented business interruption issue and potential litigation, Mills told Reinsurance News that the tail from COVID-19 has the potential to be significant.
“We saw Hurricane Katrina litigation lasting over a decade. I think some of the questions that will be raised by industry claims action groups on multiple of classes of business will likely drag on for years. One would hope that adversarial parties will reach a compromise.”
Additionally, warned Mills, the pandemic is likely to result in a trapped collateral issue at a scale and magnitude far beyond that of Typhoon Jebi.
“Insurers and claimants spent 10 years arguing about debris removal clauses post-Katrina. There is no reason to believe that we are not at the start of a protracted argument. Reinsurers will likely reserve their rights to collect in order to be prudent.”
Undoubtedly, the current crisis is a challenge for the industry, but as explained by Mills, the disruption also provides the industry with a chance to emerge in a stronger position, characterised by enhanced efficiency, technological advancements, and a new way of working.
“The opportunities and possibilities are huge once we have our collective industry house in order. Where shall we begin?” said Mills.
“Let us start off with the impact on the way we work. The answer to that is more remote, with better technology assisting our work processes and more efficiency in our industry. It will challenge those in the transaction chain who add frictional cost to deliver a value added that ensures their future in transacting re/insurance.
“It presents the opportunity for a tidying up of our collective underwriting process and a renewed focus on technical risk evaluation. It offers us another chance as an industry to demonstrate our ability to develop public and private partnership to provide protection to those most affected by pandemic.
“The last and most important opportunity is to enhance the industry’s reputation with its clients, regulators, and industry peers. To show that when our world faced a pandemic crisis, that our industry stepped up to the challenge and helped people and industry.”
As evidenced by the recent establishment of numerous, pandemic-related collaborative re/insurance schemes around the world, the risk transfer sector has an important role to play throughout the current crisis.
The systemic nature of a pandemic means that often, the risk is viewed and talked about as uninsurable, a notion Mills disagrees with.
“I think there is scope to cover pandemic risk and we must offer coverage solutions. We have classes of business (most notably workers’ compensation) where it cannot be excluded. In other classes it is the quintessential coverage (e.g. Event Cancellation) that insureds are buying. So, we must provide coverage. On non-obligatory classes, I think that the risk must be properly underwritten and sub limited. On classes where there is no scope for pandemic coverage, the exposure must be clearly and expressly excluded. If necessary, by warranting the exclusion by signature of the counterparties to the contract,” he said.
While Mills feels that the industry should look to cover pandemic risk, he continued to note that insurers and reinsurers cannot do it alone and that public sector involvement is critical.
“With pandemics, there is a strong need for public and private partnership to find a solution to help those businesses impacted by the Covid-19 pandemic. What the market can do is better work on its wordings. To make our clients understand what is and is not being covered.”