The global reinsurance capital base is expected to take a hit of approximately 5% from the financial impacts of the Covid-19 coronavirus pandemic, reports Willis Re, the reinsurance arm of global brokerage Willis Towers Watson (WTW).
The reinsurance broker’s Strategic and Financial Analytics teams’ 5% estimate is a marked improvement on the 20% hit cited in its March 24th publication, and reflects the recovery of investment markets.
Over the past three to four weeks, equity markets in both the U.S. and Europe have recovered from year-to-date declines of around 30% to declines of approximately 15%. While this improvement will be welcomed by insurers and reinsurers, Willis Re feels that it shows just how sensitive re/insurers are to investment market volatility.
Although some debate and widespread uncertainty remains around the volume of claims that will ultimately come in from the pandemic, some in the market are anticipating fairly sizeable insured losses from the COVID-19 pandemic.
But as well as the premium exposure, re/insurers are also exposed to the pandemic on their investments and the fluctuation in the estimated capital base hit for the sector, shows how vulnerable the industry is to volatile financial and equity market conditions.
At the same time, the broker highlights the recovery of corporate bond markets and also high yield bonds, all of which has contributed to the company’s significantly improved estimated hit to the global reinsurance capital base.
Ultimately, says the report, companies’ strong starting points of capital strength continue to provide insulation to the shocks caused by the coronavirus pandemic. Furthermore, those companies with increased sensitivity to investment markets tend to be the same reinsurers with the stronger credit ratings.
As noted by Willis Re, both S&P and A.M. Best have affirmed their stable outlooks on the reinsurance sector, although whether or not these are revised is largely dependent on the duration and severity of the current crisis.
Willis Re estimates that the volume of available capital in the U.S. P&C industry will decline by 7.2% and 5.5% after-tax on a statutory and economic basis, respectively. In Europe, analysts estimate that Solvency II ratios fell from 210% at the beginning of the year to around 190% as of late March.
“Although average sector solvency positions and rating model scores remain healthy, some companies will have seen material erosion of their capital buffers.
“Although average capitalization remains robust some companies may need future support to solvency, particularly in the event of further stresses. Reinsurance can be an important tool to bolster solvency or rating agency capital scores,” says the report.
