Analysts at JMP Securities have said they expect to see “very little impact, good or bad” on property catastrophe reinsurance lines due to the coronavirus (COVID-19) outbreak and the resulting recession.
Looking at property and casualty (P&C) lines more generally, JMP Securities believes COVID-19 and its accompanying economic volatility will be very manageable for the industry.
However, it added that several factors will determine which companies are best and worst positioned.
While analysts do not expect direct losses to amount to much outside of a few niche coverages, such as event cancellation and trade credit, they warned that the ensuing recession will likely have a more modest impact on the broader industry at large.
The P&C industry in particular will likely see more impact from the ensuing recession than it will from direct losses related to COVID-19, as the market is inherently economically sensitive, and grows rough in line with GDP over time.
JMP Securities considers the sub-sectors most exposed to a slowdown in economic activity to be workers’ compensation and CMP/BOP for small businesses, while those more insulated include property catastrophe reinsurance, some specialty commercial lines, and personal lines.
That said, despite some likely fall-off in demand due to slowing economic conditions, the firm believes that the current firming pricing cycle has legs and will continue to drive positive pricing momentum.
For property catastrophe reinsurance especially, recent loss activity has been driving pricing higher and this trend is not expected to be halted by an economic slowdown.
In fact, JMP Securities asserts that a slowdown in economic activity generally has little impact on companies’ catastrophe reinsurance purchases unless the recession were to be deep/long enough such that primary insurers’ books shrink enough to reduce PMLs.
On this note, analysts think that wind rate increases in the 40-50% range are still likely at the Japan market renewals, although band outcomes could be a bit wider, with more significant differentiation amongst individual buyers
Looking at other re/insurance lines, business interruption has been most in focus, but JMP Securities argues that coverage is broadly non-existent due to terms and conditions as coverage requires a triggering property damage claim and ISO forms specifically exclude viruses.
Event cancellation, on the other hand, is a small market but one that will likely be heavily impacted by COVID-19, with significant losses anticipated for many companies.
The understanding is that the standard contingency policy excludes epidemic/pandemic, but some portion of buyers pay an additional premium to buy back coverage.
And trade credit is another area likely to be heavily impacted by COVID-19, having already taken heavy losses in late 2019 from areas such as aircraft manufacturing and tour operators, in particular Boeing and Thomas Cook.
Given what has transpired in recent weeks, JMP Securities believes there is likely to be more pain in these areas, and potentially in new areas, with the most vulnerable sectors including aviation, hospitality, and retail.