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Covid-19 claims manageable, but reinsurers face formidable challenges: Willis Re

23rd April 2020 - Author: Luke Gallin

Willis Re, the reinsurance broking arm of Willis Towers Watson (WTW), has said that while reinsurance claims from the global COVID-19 pandemic are likely to be manageable, the industry is facing some formidable challenges.

In a recently published COVID-19 Impact report, reinsurance broker Willis Re says that so far, reinsurers have showed that the systemic shock of the ongoing pandemic is manageable.

However, over the longer-term, the strength of the industry will be dependent on both the duration and severity of the pandemic on health and economies, warns Willis Re.

The novel coronavirus continues to spread and is having a serious impact on economies and societies in all corners of the world, and the fact of the matter is that in these unprecedented times, widespread uncertainty looms around the outbreak and no one knows how detrimental and lasting the impacts will be.

For insurers and reinsurers, there’s potential for pain to be felt on both sides of the balance sheet, as elevated claims hit underwriting results and financial market volatility and equity market stress challenges investments and lowers valuations.

James Kent, Global Chief Executive Officer (CEO), Willis Re, commented: “With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely. The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward.

“Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers.”

With the exception of a worst-case scenario, Willis Re expects that reinsurance claims related to COVID-19 will be manageable. As an example, the reinsurance broker says that assuming the majority of event cancellation claims fall to reinsurers, their impact would only be roughly 1% of the capital base, which is equivalent to a mid-size hurricane.

At the same time, Willis Re has warned that the risk from business interruption claims presents an existential threat to the whole industry. The comments refer to the well documented business interruption issue that has arisen from the COVID-19 fallout, underpinned by legislative actions designed to force insures to retroactively cover business interruption claims from the crisis.

Such legal action has been scrutinised and rejected by the industry, and it’s expected that if any of the measures progress then insurers would fight this hard in the courts.

“Overall, the industry is facing formidable practical, operational, legal, and technical reserving challenges,” warns the reinsurance broker.

On a more positive note, Willis Re finds that the global reinsurers entered the current crisis strongly capitalised. The four major European players, SCOR, Hannover Re, Munich Re, and Swiss Re are all expected to retain solvency ratios above self-imposed minima, while the capital levels of the US reinsurance sector remain in comfortable positions.

The broker has said previously that the ongoing pandemic has highlighted just how sensitive re/insurers are to equity market volatility, with the global reinsurance capital base anticipated to take a 5% hit from the financial impacts of the event. In the US, Willis Re estimates a total 7% hit to reinsurers’ statutory capital from the crisis.

“The impact of COVID-19 on global reinsurer capital is broad enough that it may exacerbate non-life reinsurance market hardening, particularly in commercial lines. We may see supply and demand imbalances in some areas, so insurers should be taking steps to reduce the risk of being on the wrong end of any market hardening,” said Andrew Newman, President, Willis Re.

For primary players, Willis Re warns that many will likely end up holding more risk anticipated relative to their balance sheets, which means that insurers will either need to retain current strategy, de-risk, or hedge. Of course, this could result in some increased demand for reinsurance protection.

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