According to analysts at Berenberg, COVID-19 insurance claims to date only add up to around half of industry loss estimates, meaning the pandemic may be more comparable to a very large natural catastrophe event rather than an extraordinarily large one.
Berenberg previously estimated that insured losses due to COVID-19 claims would total between $50 billion and $70 billion, while reinsurer Swiss Re put the range slightly wider at $50 billion to $80 billion.
But Berenberg believes that the total value of claims reported to date by insurers and reinsurers is just $25 billion, indicating that losses will have to double even to meet the lower end of the industry consensus.
“If, as we believe, investors are valuing insurers on the basis of the $50bn figure, they have a very comfortable margin for error, around $25bn,” analysts explained. “If losses deteriorate only modestly from here, there could be a significant positive surprise for investors.”
However, what makes the COVID-19 crisis different from a large nat cat event, Berenberg notes, is how drawn-out it is, meaning losses will still be at the forefront of underwriters’ minds come the January 2021 renewals.
In addition, interest rates are down sharply, so re/insurers will be looking for even higher rate rises to offset the drop in investment income.
“As a result, rates are rising sharply and are set to stay at these new higher levels, while new profit levels in nonlife insurance and reinsurance appear sustainable,” Berenberg continued.
“This looks a little like a repeat of the 9/11 insurance crisis, when margins and profits stayed high for over four years afterwards.”
Berenberg believes that nonlife re/insurers could see a tick-shaped recovery in underwriting due to the combination of low interest rates leading to lower investment income, higher claims from COVID-19 losses, and historical underpricing causing rates in commercial lines and reinsurance to rise sharply.
“This means that payback periods are short, and the new higher pricing levels are sustainable,” analysts concluded. “As a result, insurance and reinsurance underwriting margins are set to bounce to higher levels than before.”