Reinsurance News

P&C industry has entered into a “new era of catastrophe losses” – KBRA

10th June 2020 - Author: Luke Gallin

The ongoing COVID-19 pandemic, coupled with the recent wave of civil unrest and the looming cyber risk threat, has altered the risk landscape for property and casualty (P&C) insurers and reinsurers, reports Kroll Bond Rating Agency (KBRA).

As explained by KBRA, for the global P&C sector the definition of “catastrophe” has, for the most part, focused on natural events such as hurricanes, earthquakes, and tornadoes.

However, the significant and still unknown financial implications of the ongoing COVID-19 pandemic, the recent wave of rioting and civil unrest, most notably in the U.S. but which has spread to other parts of the world, as well as the growing cyber threat, signals the entry into “a new era of catastrophe losses”.

This, warn analysts, is expected to further challenge the insurance sector’s enterprise risk management (ERM).

First-quarter 2020 results have shown that the pandemic is hitting both the liability and asset side of company balance sheets, and while financial markets have recovered somewhat from the initial shock, the ultimate hit to the industry’s underwriting remains unclear, but is expected to be significant.

“While we acknowledge that coronavirus (COVID-19) pandemic losses may reach a significant level, in our opinion, these amounts should be manageable,” says KBRA in a recent research note.

Ignited by the death of unarmed George Floyd in police custody in Minneapolis, initially peaceful protests in some parts of the U.S. turned violent as groups clashed with police, resulting in damages to buildings, looting and subsequent curfews across many states.

Following the commotion, PCS declared the riots and civil unrest in Minneapolis, Minnesota as a catastrophe event. Just two days later, PCS, for the very first time in its history, designated the rioting and civil commotion across the U.S. as a catastrophe event in multiple-states. The industry loss data aggregator designates an event as a catastrophe once defined projected damages reach $25 million or more.

While concerning, KBRA states that losses from the recent civil unrest are “unlikely to have a meaningful impact on the overall capital position of the industry,” but does warn that any resulting property damage could further cloud claims for business interruption cover.

“In our view, this catastrophe can be added to a growing list of such events in a new era for P/C insurers. Pandemic events were historically only of concern for life and health insurers. But COVID-19 has changed that, as the P/C industry may suffer significant but manageable losses across almost all lines of business as well as further challenges from investment losses,” says KBRA.

But it’s not just the social unrest in the U.S. and the ongoing global pandemic that has altered the risk landscape for the P&C industry, with KBRA highlighting the rise in wildfire losses in recent years and importantly, the very real threat of a substantial cyber attack and subsequent billion dollar industry loss.

“Further, KBRA believes the first billion-dollar cyber loss event is also well within the realm of possibility in the near term,” explain analysts. The firm draws on a recent Lloyd’s of London report that suggests a cyber attack on Asian ports could cost as much as $110 billion in economic losses, of which $10 billion could be covered by re/insurance.

In addition to cyber, KBRA also notes that it’s been almost two decades since the 9/11 terror attacks, when the industry incurred the first multibillion-dollar loss from terrorism.

“If the first half of 2020 has taught us any lessons, insurers need to acknowledge the new realities emerging across the globe and continue to evolve their risk management frameworks accordingly,” says KBRA.

According to KBRA, at the end of 2019, the P&C industry’s surplus amounted to $890 billion, which includes state funds and residual market carriers. At the end of Q1 2020, KBRA estimates industry surplus of $810 million, and notes that based on these figures, a $45 billion loss (5% of surplus), would be considered as a “significant event for the industry.”

But despite this, the company says that it expects industry surplus to remain above 2018 levels ($780mn) and sufficient in the near term.

As the risk landscape evolves, KBRA urges insurers to effectively and appropriately leverage reinsurance and insurance-linked securities (ILS) capacity and structures to protect their balance sheets.

For some, purchasing additional reinsurance coverage at this time might be somewhat of a challenge, considering the fact rates are trending upwards across the majority of lines following a prolonged softened marketplace, underpinned by consecutive heavy loss years and low investment returns, exacerbated by the COVID-19 pandemic.

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