There’s been a notable rise in demand for pandemic re/insurance and a subsequent hike in rates, however, there’s currently limited capacity in the marketplace for pandemic cover, according to Dan Malloy, Chief Executive Officer (CEO) of Third Point Re.
These are unprecedented times for the industry, and it will undoubtedly be quite some time before the ultimate impact of the COVID-19 crisis is fully understood.
Against this backdrop, Reinsurance News spoke with Third Point Re’s CEO, Malloy, about the impact the coronavirus outbreak is having on both the company and the broader reinsurance industry.
“The reinsurance market is a financially stable sector that is well capitalised and diversified, so the general consensus is that it can take a hit on the investment side, as well as weather any underwriting losses. The market was already hardening pre-COVID-19, with rate increases across most business lines and we are seeing the market hardening further now.
“That said we don’t yet have a complete picture of the long term implications – the full scale of human loss, the scale of economic impact, or the possible changes in legislation that could be pushed through as a result of the virus. These could retrospectively change contract terms and conditions for insurance companies,” said Malloy.
As evidenced by re/insurers’ Q1 2020 results, the current crisis is hitting both the underwriting and investment side of balance sheets. Depending on which business lines companies operate in and to what extent, as well as the composition of investment portfolios, the financial implications have varied.
While COVID-19-driven losses are being seen in various lines of business, the reality is that for the most part, companies have been reluctant to purchase stand-alone pandemic protection owing to the price.
However, as companies look to avoid similar implications in the future, it appears that demand for pandemic cover is on the rise.
“At Third Point Re, our phones have been ringing off the hook as a result of a surge in demand for pandemic reinsurance. Pandemic insurance has always been available as a stand-alone cover or as an extension to an existing cover, but companies have historically been reluctant to purchase it at the going rate.
“The pandemic itself isn’t a black swan, but the societal reaction to it certainly is, and companies are now racing to obtain pandemic insurance, looking not only for coverage of the potential next wave of COVID-19 but also to ensure that in the future they are not as exposed to a pandemic in the way that they are now,” said Malloy.
He continued to stress that pandemic risk is a “global risk with global exposure”, and that a lack of geographic segregation means that ultimately, “insurers and reinsurers will have one single global aggregate they can deploy.”
While pandemic risk isn’t a black swan event, the reality is that there’s a real lack of data, which makes it more challenging to underwrite.
“There is currently limited capacity in the market for pandemic cover. We are already seeing a marked increase in demand, and as a result, rates are increasing dramatically.
“Whilst there are some underwriters who have been writing the cover for many years at the rates being offered, we suspect there will be some new players, but because of the restrictions on deploying multiple aggregates, it is unlikely there will be enough capacity to meet the demand,” continued Malloy.
“Also, while our team has written pandemic-specific covers for many years, it appears the insurance community is waking up to the fact that there is “hidden pandemic” embedded into some covers where consideration was not given to the effect of a pandemic on a truly global scale.”
As is the case across the re/insurance industry, Bermuda headquartered reinsurer Third Point Re has shifted to remote working as a result of the COVID-19 pandemic. Discussing the shift, Malloy explained that while there have been challenges, Third Point Re has been fully operational and had a smooth transition.
“We’ve had the technology in place to support our staff working at a distance for a long time. We expanded our footprint last year to include property catastrophe low frequency business, which has meant that we can continue to transact business fairly efficiently and remotely.
“However, the shift from face-to-face communication to virtual interaction takes some getting used to, particularly in an industry such as reinsurance, which has historically relied on personal contact. Getting comfortable with a new potential client who you do not know personally or have had no contact with, requires a rethink of how you approach the process. As a result, we’re finding our way through refining our due diligence and underwriting processes in a remote world to ensure that we’re still transacting and delivering innovative solutions.
“At Third Point Re, we continue to provide the same efficient service during this unprecedented time. Our employees were already set up to work remotely, which meant we’ve been fully operational throughout and had a seamless transition from office to home working,” he said.
Third Point Re continues to build and evolve its underwriting platform, and recently entered the property catastrophe arena as it looks to take advantage of improving market dynamics.
Commenting on the company’s expansion, Malloy said: “Over time property catastrophe is a great business and is an attractive diversifying line of business for us, as are the various speciality lines that we have begun underwriting, such as Workers’ Comp, PA and Life. AM Best has us scored at the highest level of capital adequacy, so we can deploy more capital into these lines or look at new opportunities if the market offers an attractive return. However, COVID-19 has taught us that correlations emerge in stressed times.”
Of course, Third Point Re is also exposed to COVID-19-related financial market turmoil and declining equity markets, and to conclude, Malloy offered some thoughts on the potential implications for its investment portfolio.
“We are less exposed to the movements in the market than we would have been a year ago because when took on more underwriting risk, we de-risked the investment portfolio. But having said that in Q1, 2020 we were not immune from market volatility.
“We published our investment results and our portfolio was down 7.1% in Q1, but it has rebounded significantly in April, such that our overall investment portfolio is down 4% for the year-to-date – in other words we gained back half of the loss in April. We believe this validates our strategy of balancing risk/reward across both underwriting and investments.
“The rapid market downturn has created opportunity for Third Point Re to be a liquidity provider in this stressed situation,” said Malloy.