Once the current Covid-19 coronavirus pandemic crisis is largely behind us and economies begin to recover, Hyperion X, the data and analytics specialist unit of the Hyperion Insurance Group, sees a risk that most re/insurers may fail to earn their cost-of-capital over an extended period.
Looking at the potential recovery scenarios for a world after this coronavirus pandemic, Hyperion X highlight the most likely scenario as one they term “muddling through” which is akin to the United States recovery from the financial crisis.
This scenario, which is seen as the most likely outcome with a roughly 70% probability, would be characterised by global economic growth at its lowest level since the immediate post-war period of 1946, with a slow recovery as restrictions are gradually lifted.
Hyperion X highlights the chances of a “lost decade” during which “growth returns to a positive trajectory, but without reaching its previous trend level.”
“This scenario is likely in the event that Coronavirus restrictions remain in place until well after the reported caseload begins to diminish, which will mean much higher levels of unemployment as many businesses, especially in the SME sector, close permanently,” they explain.
The implications for the insurance and reinsurance industry are seen as significant.
Hyperion X notes that the scenario above could result in less top-line growth across re/insurance, as well as for insurance cedents themselves which naturally would impact their buying appetites.
In addition they would expect to see lacklustre insurance pricing as well, likely translating to lacklustre reinsurance rates too, across pro-cyclical lines.
Claims trends related to the coronavirus would also be expected to continue rising beyond the pandemic itself, increasing the burden for the market.
On top of this, Hyperion X notes that the reserving picture could become increasingly worrying as well, in particular if social inflation is exacerbated by government stimulus.
As a result, financing costs would be expected to rise, while investment yields for higher-grade fixed income securities would fall.
The upshot of which would be an inability of most re/insurers to earn their costs-of-capital over an extended period, Hyperion X warns.
As the most likely scenario, one where growth returns but at a notch below where it was prior to the pandemic, this insight should be concerning for re/insurers.
A better scenario would be an immediate snap back of the economy to normal levels, with a much more steady return to business as usual on all counts, but this is seen as much less likely to occur now given the global and worsening nature of the coronavirus outbreak.
A worse scenario would be a “Greek tragedy” where economies would contract at unprecedented rates, while inflation would rise on the back of government fiscal and monetary action.
With this worst scenario, “The insurance industry would be devastated,” Hyperion X warns, but notes that “Thankfully, this scenario is currently viewed as highly unlikely.”
