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COVID-19 reinsurance recoveries could be lower than historical hurricanes at Lloyd’s

15th May 2020 - Author: Luke Gallin

The reinsured proportion of Lloyd’s of London’s estimated $3 billion to $4.3 billion of COVID-19 losses could be lower than for historical hurricanes, according to analysis by Jefferies.

lloyd'sThe specialist insurance and reinsurance marketplace said yesterday that in 2020 alone, non-life underwriting losses for insurers and reinsurers as a result of COVID-19 could amount to around $107 billion.

At this size, it would be the largest single market loss in history, but it’s important to remember that this is just for non-life losses in 2020. When considering the potential losses within life insurance and reinsurance markets, and the potential for the tail to stretch into 2021 and beyond, it seems likely that this figure will rise considerably.

In addition, Lloyd’s warned that in 2020, COVID-19 related financial market volatility would dent re/insurers’ investment portfolios to the tune of $96 billion, which takes the total expected market loss for the year to more than $200 billion.

The Lloyd’s market itself expects to pay customers between $3 billion and $4.3 billion in claims due to the current crisis, stating that this was on a par with its loss experience from 9/11 in 2001, and the combined impacts of Hurricanes Harvey, Irma, and Maria in 2017.

Following the announcement from Lloyd’s, analysts at Jefferies have looked at the reinsured segment of the potential Lloyd’s market loss under two scenarios.

Jefferies explains that Scenario A only covers losses up to and including 16th March 2020, and Scenario C includes loss estimates where affirmative coverage is provided and assuming that social distancing restrictions persist globally until June 30th 2020.

According to Jefferies, under the more severe COVID-19 Scenario C, just over 50% of the Lloyd’s market’s losses would be covered by reinsurance, suggesting reinsurance recoveries of around $2.15 billion at the higher end of the range.

With a reinsurance recovery ratio of just over 50%, even under the more severe loss scenario, the reinsured segment of the Lloyd’s market loss is estimated to be lower than the level seen from the trio of hurricanes in 2017, the trio of hurricanes in 2005, and roughly the same as that seen following the Japanese tsunami and earthquake in 2011.

For the less severe Scenario A, the analysis puts the reinsurance recovery ratio at under 50%, which is around the same level of reinsurance recoveries the Lloyd’s market experienced from the New Zealand earthquake in 2011.

The wide-reaching, systemic nature of pandemic risk means that the loss experience for Lloyd’s participants is likely to vary significantly, as has been evidenced by first-quarter 2020 results. At the same time, uncertainty surrounding the duration of the pandemic and the subsequent economic fallout remains, as does the potential for a second wave and the challenges this would bring.

As noted by Jefferies, across the Lloyd’s marketplace, the average capital erosion has been 9%, which analysts say makes this an earnings event rather than a capital event. Some 95% of Lloyd’s syndicates have lost <20% and just two have lost >30%.

“This reassures us that the listed Lloyd’s insurers Hiscox and Beazley have no suffered material losses beyond those that are already known by investors. Moreover, amongst the listed conglomerates and reinsurers, most have a Lloyd’s syndicate, where the only two that concern us are Munich Re (as a market leader in event cancellation) and AXA (through Catlin),” explain analysts.

Only time will tell just how costly the current crisis will ultimately be for the Lloyd’s market and the wider insurance and reinsurance industry. Primary insurers are experiencing losses in most classes of business and as the losses rise here, the reinsurance industry’s loss will follow suit.

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