Analysts at Moody’s have outlined a broadly optimistic forecast for the largest European reinsurers in 2021, even as pockets of risk remain.
In aggregate, Hannover Re, Munich Re, SCOR, Swiss Re suffered a 69% fall in net income over 2020 compared to the prior year period.
Pandemic-related business interruption (BI) and event cancellation claims in particular weighed on their P&C underwriting performance, and rising mortality claims held back their life reinsurance results.
At the same time, these reinsurers suffered a further decline in investment returns amid persistently low interest rates, although their capital adequacy remained strong overall.
Moody’s further notes that reinsurers in general have accounted for a high share of coronavirus-related losses, in both their P&C and life businesses, on an “incurred but not reported” (IBNR) basis.
The final cost of the pandemic is therefore subject to change and will be dependent on discussions and legal disputes of primary insurers with their policyholders and of reinsurers with cedants.
During the recent P&C contract renewals, both reinsurers and insurers introduced explicit pandemic exclusion clauses, which should limit the potential for additional claims.
In life business, reinsurance claims also increased over the year, driven principally by US mortality claims, whereas losses in other regions and in other risk categories remained very moderate.
However, when adjusted to exclude the impact of the pandemic, the reinsurance industry’s 2020 P&C results actually strengthened year on year in 2020.
Moody’s also reported that P&C reinsurers benefited from meaningful price increases and better terms and conditions during recent policy renewals, and expect further improvements in the months ahead.
But analysts believe the industry needs to improve its underwriting results to offset weaker investment returns amid persistently low yields, particularly as more frequent natural catastrophes and rising liability claims due to litigation will likely pose additional profitability challenges.
Currently, reinsurance prices remain well below the levels they reached during the last hard reinsurance market in 2012/13.
That said, Moody’s feels that the positive outcome of the latest contract roll-overs, which comes on top of price increases in earlier renewal negotiations, suggests that positive price momentum will support reinsurers’ underlying underwriting performance in 2021.
And the largest European reinsurers have themselves been optimistic about their outlooks for 2021, anticipating significant improvements in underlying earnings and combined ratios towards the mid-nineties.
SCOR, Munich Re and Hannover Re also used the positive pricing environment to grow their premium revenue during recent renewals, although Swiss Re opted to reduce its exposure to natural catastrophe risk, in particular to less well-modelled secondary perils.
