While the COVID-19 pandemic will undoubtedly have an influence on upcoming renewals for insurers and reinsurers, for the latter, the broad structural factors that have been in place prior to the outbreak cannot be ignored, according to David Flandro, Managing Director at Hyperion X.
In a recent video interview with our sister publication, Artemis, available here alongside other live discussions with leaders and experts from across the industry, Flandro of Hyperion X offered some thoughts on the potential impact of the pandemic on the risk transfer industry.
As evidenced by companies’ first-quarter 2020 financial results, both primary insurers and traditional reinsurers are exposed to the COVID-19 pandemic through their underwriting and investment portfolios.
Of course, the financial implications will vary for individual companies for numerous reasons, and the stark reality is that the ultimate loss from claims and the total impacts from the economic fallout remains widely uncertain.
Speaking with Artemis, Flandro noted this uncertainty across the marketplace but also pointed out that there’s certain areas where losses are inevitable for reinsurers.
“There’s no doubt that trade credit is going to be very important and trade credit reinsurance is an important line for many specialty reinsurers, so that’s certainly an area that will experience losses, I have no doubt about that.
“And, if you have reinsurers that are underwriting proportional coverage with insurers in pro-cyclical or affected lines, obviously those lines of business will be among the first to be affected, and trade credit is one of them.
“Aviation, particularly airlines is another, construction and engineering is another. These are all specialty lines. D&O is another, and Workers’ comp is one we are thinking about carefully. That is all true. Also, E&S markets in the U.S. are interesting to review,” said Flandro.
For primary players, Flandro explained that COVID-19 brings multiple impacts.
“Almost any line that can be affected by contingent business interruption – especially where there’s public liability or civil authority covers – environmental lines, construction and engineering, energy, aviation, surety, trade credit, D&O, in addition to life and accident and health, there are going to be effects obviously in all of those lines, and they are going to be large.”
For both insurers and reinsurers, the question is how large will the losses be and exactly how will they play out on both sides of the balance sheet. But when considering the COVID-19 pandemic and its influence on the recent April 1st renewals and the upcoming mid-year renewals, Flandro suggested that reinsurers might endure a more typical experience.
“The broader picture though, is that if you had to compare the two (insurance and reinsurance) directly, reinsurance is still more counter-cyclical than primary insurance. And, I think that you could see this at the 1/4 renewals. Clearly, people were talking about COVID-19 and of course people will talk about it at the 1/6 renewals. But, there are still broad structural factors, big tectonic plates that are in place in the reinsurance sector,” said Flandro.
These forces include the catastrophe loss experience of 2017 and the subsequent development, the recent spate of Japanese typhoons and their development, and everything that has been happening with dedicated reinsurance capital in the ILS market and elsewhere. All of this, “cannot be ignored and set to one side,” continued Flandro.
“Those will also play a big factor in upcoming renewals and I think that reinsurance renewals will look more similar to how they would have done than perhaps some pro-cyclical insurance renewals.”
The full video interview is embedded below, but can also be viewed in full, along with other Artemis Live video interviews, here.