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“Substantial portion” of pandemic losses still not reported: Fitch

24th March 2021 - Author: Matt Sheehan

Analysts at Fitch Ratings anticipate that payment of pandemic-related claims will accelerate in 2021, and have noted that a “substantial portion” of losses in the re/insurance industry are currently carried as incurred but not reported.

COVID-19In particular, settlement of claims in areas such as business interruption and multiple liability segments will likely include lengthy litigation, Fitch warned.

A large portion of incurred pandemic losses in the second half of 2020 were attributable to liability coverages, such as workers’ compensation and financial lines, including directors and officers (D&O) and errors and omissions.

Fitch also observed that several reinsurers increased reserves for pandemic losses in Q4 last year as they learned more about underlying exposure from cedants during the Jan. 1 renewal period.

The rating agency predicts that pandemic loss estimates will rise further as new information materializes, but 2021 additions will be substantially less than 2020 reported figures.

However, potential remains for larger losses in the event cancellation business, including the Tokyo Olympics, and large class action suits may yet emerge in a number of professional liability products, including D&O.

Last year, re/insurance operating results were affected by both underwriting deterioration and a decline in investment earnings tied to the pandemic and ensuing economic repercussions.

Reinsurers’ underwriting results had by far the largest impact from coronavirus losses, Fitch reports, with the pandemic adding 7.4 points to the segment’s combined ratio, far in excess of the next closest group, which was diversified commercial insurers at 2.8 points.

Fitch expects loss estimates for reinsurers to be subject to higher variability than primary insurers, due to exposure to event cancellation losses, business interruption outside of the US and longer-tail liability lines.

Personal lines insurers were the only segment to report an improved operating performance in 2020, with the annualized operating ROE rising to 20.2%, as the group largely benefited from a drop in auto claims frequency as a result of reduced driving during the pandemic.

While personal lines profitability in 2020 was negatively affected by a pandemic-related premium returns and a slowdown in new business, the segment benefited from having zero exposure to direct pandemic-related losses given the nature of coverage.

“Underwriting results were negatively affected by heightened catastrophe activity and losses related to the coronavirus pandemic in 2020,” explained Fitch Ratings Director Christopher Grimes.

“Margin improvement is expected in 2021 as commercial lines insurers continue to achieve rate increases in excess of current loss trends.”

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