Willis Re, the reinsurance business of leading global advisory, broking and solutions company Willis Towers Watson (NASDAQ: WLTW), has published a COVID-19 Impact Report. Many insurance companies will end up holding more risk than anticipated relative to their balance sheets, the report states. They are likely facing three options: retain current strategy, de-risk, or hedge. The solvency reduction may take some companies below their desired minimum capital threshold, and Insurers have already moved to begin adjusting their plans to suit a range of economic scenarios.
Reinsurers have showed that the systemic shock of COVID-19 is manageable so far, but the future strength of the sector depends on the severity of the pandemic’s continuing impact on health and economies. The industry retains sufficient capital buffer for extreme events, but the extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen. Reinsurers have started to de-risk their balance sheets by holding cash, which will have a significant impact on investment returns. Willis Re currently estimates a 5% hit to the global reinsurance capital base, roughly US$30 billion pre-tax. Additional pressures may emerge should economic conditions further deteriorate with a consequent impact on investments.
In general, reinsurance claims are likely to be manageable. For example, assuming most event cancellation claims fall to reinsurers, their impact would be about 1% of the capital base, equivalent to a midsize hurricane. However, the risk from business interruption claims presents an existential threat to the entire industry, given growing calls to revise coverage retroactively and the colossal, if notional, aggregate limits deployed irrespective of contract agreements in place.
Overall, the industry is facing formidable practical, operational, legal, and technical reserving challenges. The good news is that global reinsurers entered the crisis strongly capitalised. The four European majors are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels remains comfortable. Willis Re estimates a total 7% hit to US reinsurers’ statutory capital.
In combination, the pressures across multiple fronts are inauspicious, taking place at a time when the Industry was securing improved pricing across most business lines and geographies after several years of natural catastrophe losses around the world as well as prior-year deterioration in several liability classes. The report offers insurers guidance on:
- Evaluation of post COVID-19 capital adequacy
- Adjustment of risk tolerance and appetite and the importance of planning
- Evaluation of the new underwriting environment and the impact on secondary (reinsurance) market dynamics post COVID-19
- Guidance to navigate reinsurance markets and identify areas where COVID-19 will shape negotiations for 2020 and beyond
James Kent, Global CEO, Willis Re, said: “With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely. The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward. Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers.”
Printhan Sothinathan, Co-Head of Global Analytics, Willis Re, said: “In all but a worst-case scenario we expect claims to be manageable overall, although obviously some carriers, based on their circumstances, will find the crisis much more difficult to weather than others.”
Andrew Newman, President, Willis Re said: “The impact of COVID-19 on global reinsurer capital is broad enough that it may exacerbate non-life reinsurance market hardening, particularly in commercial lines. We may see supply and demand imbalances in some areas, so insurers should be taking steps to reduce the risk of being on the wrong end of any market hardening.”
Download the full report: Moving on from the initial assessment phase of COVID-19, A Willis Re Impact Report, First Edition will be updated as the COVID-19 crisis evolves.