The initial shock of the COVID-19 pandemic is in the rearview mirror for most re/insurers, but analysts at KBRA note that the market must now manoeuvre a changed landscape with many heightened challenges.
As part of a quarterly report, KBRA observed that investment markets largely rebounded during Q2 2020, reversing much of the mostly unrealized mark-to-market losses reinsurers posted at the end of Q1.
While the restoration of significant amounts of capital was welcome news in the run-up to midyear renewals, reinsurers also began establishing initial loss reserves for potential COVID-19 claims during the quarter.
While KBRA expects COVID-19 losses to emerge over an extended period of time, it warned that spreading loss reserves over multiple financial reporting periods may be a potential drag on earnings that fuels continued rate hardening into 2021 and beyond.
Midyear reinsurance renewals generally saw rates increase at between 15% and 35% depending on exposure, territory, layer and loss experience of the ceding company.
In general, reinsurers were willing to shed business not perceived as being adequately priced, and pulled back on some programs due to adverse prior-year reserve development and social inflation.
In addition to price increases, KBRA noted that reinsurers also tightened terms and conditions, given continued uncertainty surrounding COVID-19 losses and the extent to which they might filter through to the reinsurance and retrocessional markets.
The retrocessional market, heavily dependent on ILS, contracted at midyear with available capacity offered at rates up to 40% or more over expiring.
This forced some reinsurers into reducing capacity, while others looked for alternative ways to manage exposures and balance sheets.
Interest in offloading old liabilities and raising new capital to support growth in a hardening market increased dramatically with roughly $16 billion in new capital raised since the onset of the pandemic.
KBRA expects the ILS market, including collateralized reinsurers, to be constrained in the near to intermediate term due to reduced capital inflows, trapped collateral, and demands by investors for more transparency in reporting and terms and conditions.
