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COVID-19 looking more like an earnings event than a capital event: David Flandro

24th August 2020 - Author: Charlie Wood

Speaking during a recent second quarter earnings update, Hyperion X’s David Flandro outlined a belief that COVID-19 is looking more like an earnings event than a capital event, despite the sizeable difficulties remaining for the re/insurance sector as a result of the pandemic.

David Flandro, Hyperion X RKHFlandro, noting how reinsurers have taken a larger proportion of claims than was perhaps initially anticipated, underlined how the hardening property and casualty market is unfolding against a backdrop of continued economic headwinds.

But despite these challenges, which include the spectre of higher than expected catastrophe losses, Flandro explained how going into the post-COVID era with higher pricing and opportunistic capital deployment provides some positives.

“So far, COVID losses look manageable. In terms of points on the combined ratio, across the composite average, it looks like it’s between 4% and 5%,” Flandro said. He added that, broadly speaking, losses appear to be manageable and conservative.

In fact, while expecting a dip in average re/insurer return-on-equity (ROE) in 2020, Flandro expects recovery in 2021 as rates rise and create more chances to deploy capacity opportunistically.

“About $16 billion of new capital raising in the first-half, which is roughly $10 billion higher than we normally have in the first-half of the year,” he explained.

“This is signifiant and it shows that the sector is able to recapitalise rapidly to take advantage of rising prices and to remain solvent in a big crisis.”

Flandro also described the purchase of reinsurance as crucial, that strategic purchasing alongside contingent capital use is the “new norm,” and highlighted the increasingly prevalent role technology plays in lower administrative and acquisition costs.

As for the ongoing issues surrounding Business Interruption, Flandro explained how early signs show contract law will be honoured and extra-contractual claims will not be required.

“During the first-quarter some very large COVID loss estimates were being thrown around, including in the hundreds of billions,” he said.

“It looks clear now that that isn’t going to happen, all other things staying equal. In terms of the quantum of the loss, it’s hard to say so far that it’s unprecedented.

“COVID losses don’t appear yet to be existential for the sector anyway and it looks like the sector is going to trade through this very well indeed.”

One trend in the sector that has been accelerated by COVID, Flandro said, is the increase in rates-on-line across multiple lines of business, which has resulted in higher premiums written for most companies.

“It’s important to know that all companies are increasing premiums in the second-quarter of 2020, from the first-quarter of 2020.

“Some of this is rate driven, some of it is opportunistic, companies are writing more business at these rates because they’re higher.”

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