In the first half of 2021, major property and casualty (P&C) reinsurers were on track for a record year, but despite the improved performance, analysts at DBRS warn of uncertainty around pandemic-related business interruption (BI) losses and the impacts of natural catastrophes.
Estimated global insured catastrophe losses stood at $42 billion for the first half of 2021, representing a year-on-year increase of around $11 billion.
But despite the rise in nat cat losses in H1, analysts say that reinsurers were on track for a record year based on the strength of their underwriting profitability and overall net earnings.
However, the occurrence of multiple catastrophic events, including Hurricane Ida, which has been estimated at a cost of $30 billion for the industry, reinsurers’ bottom lines could come under pressure during the second half of this year.
Furthermore, warns DBRS, there remains numerous legal actions related to the COVID-19 pandemic that are ongoing and emerging in different jurisdictions, which could also affect firms’ results if court decisions are unfavourable.
Nevertheless, “a review of half-year results for a selection of large reinsurers shows that the companies performed significantly better compared with the same period in the prior year. Investment income was also strong, partly reflecting the recovery of global equity markets from losses caused by pandemic-related volatility in 2020,” say analysts.
While catastrophe losses have been elevated this year, the impact of the pandemic, notably on the P&C side, has declined considerably. The financial burden of hurricane Ida, the severe flooding in Europe in July and other events in H2 is by no means trivial, but it is expected that current losses from natural disasters won’t drive a capital event for the industry but will hit earnings.
Analysts at DBRS note the impacts of hurricanes, floods, and wildfires around the globe, warning that climate change and growing populations in coastal areas are likely to worsen this trend over time.
“However, we estimate that, in the absence of multiple extreme weather events during the remainder of 2021, underwriting losses should be limited to manageable earnings events for most reinsurers this year,” say analysts.
Alongside insured nat cat losses, DBRS feels that one of the major challenges ahead for P&C reinsurers is the treatment of pandemic-related BI losses by courts around the world.
“Although the original intention of most business interruption policy wording was to exclude losses caused by pandemics, there continues to be debate about the interpretation of these policies, which could have consequences for reinsurers. This may have a material impact on the reinsurers backing those policies written by primary insurers, depending on the decisions of the courts and the likely legal appeals that ensue,” explains DBRS.
