While total insured COVID-19 losses still remain substantially below the consensus industry loss estimates, analysts at Berenberg expect the figures to begin to converge over the Q3 reporting season.
Insurance losses reported to date stand at around $25 billion, which is far short of the lower end of Berenberg’s estimate ($50-70 billion) and a similar range from Swiss Re ($50-80 billion).
Berenberg believes that investors are valuing insurers on the basis of the $50 billion figure, which in return will leave them a very comfortable margin for error.
In addition, the uncertain claims environment created by the pandemic is likely to add momentum to the hardening pricing environment and Munich Re, SCOR and Zurich continue to be our preferred stocks on this theme.
Analysts also believe that business interruption (BI) losses likely peaked during Q2 in the midst of the first wave of global lockdowns.
Berenberg has reported that subsequent losses in this line of business should be lower given the current political preference for local rather than national lockdowns.
However, if governments return to stricter measures, more material reserves could well be needed, although they believe this to be a relatively unlikely outcome.
Event cancellation has been a significant driver of COVID-19 related losses. For the H1 2020 period, most insurers and reinsurers will have reserved for all known events that had either been cancelled or postponed.
However, during Q3 2020, there have undoubtedly been further developments in this line of business.
At its Monte Carlo press conference, Munich Re highlighted that the overall the momentum of claims would have diminished since the interims. Berenberg anticipates that there will be a further round of reserves required for any of the companies exposed to this business line.
To date, BI claims are largely within the preserve of contracts with non-property damage BI coverage. The market concerns about the potential scale of losses from this line of business have largely reduced as the prospect of regulatory or political intervention (especially in the US) have also become more muted.
However, the ongoing legal action in the UK, France and Germany between claimants and their insurers is still creating some uncertainty about how these losses will develop, and in particular, how much will be retained at the primary level and how much will be passed on to the reinsurers.
Although SCOR highlighted at its investor day in September, that so far several court decisions have confirmed adherence to policy wordings and hence its view of potential losses has not changed since H1 2020.
Throughout 2020, losses from credit and surety lines have been relatively contained. However, as in previous crises, Berenberg doesn’t expect the full extent of these losses to be known until further into the crisis.
Nevertheless, there is the potential for significant losses, in particular for trade credit insurers. This could in part be offset by the fact that the shorter tail nature of the product means that providers will be able to re-price and de-risk portfolios relatively quickly, while government intervention, as it has been seen so far during the crisis, might also help mitigate losses.