2021 a transition year, with reducing COVID-19 P&C exposure: RBC

The insurance and reinsurance industry is likely to experience a “transition year” in 2021, as its recovery from the impacts of the COVID-19 pandemic continues, alongside reducing exposure to it from property and casualty (P&C) contracts, analysts at RBC have explained.

The analysts highlight that the threat to insurance and reinsurance markets, including insurance-linked securities (ILS), from the pandemic will run-off over the course of this year in P&C.

As a result, insurance and reinsurance company results are not expected to bounce back significantly, or quickly, but rather, aligned with the world as a whole, a slower and more transitional recovery is expected.

Property and casualty (P&C) claims from the pandemic will continue, the analysts warn, “but to a far smaller extent than in 2020.”

“Exposure is running off as contracts renew with far tighter exclusions before covering pandemic-related causes of loss,” they explain.

This means a steady reduction in property business interruption claims from the pandemic, the main source of any losses that have flowed into reinsurance, retrocession and collateralized reinsurance structures.

Uncertainty remains over how much more of these losses could flow though, as legal action around the world continues and there are also increasing market concerns over other kinds of loss perhaps finding their ways into catastrophe reinsurance programs.

In recent weeks we’ve heard of re/insurers that are seeking to recover contingency, or event cancellation type losses under a catastrophe program.

We understand cases like this are not widespread, but that any success they have, right now its being strongly disputed by their reinsurers we hear, could push more COVID-19 claims into cat reinsurance, with the potential to hit some third-party capital.

Summarising their outlook for 2021, RBC’s analysts wrote, “Looking to 2021, the fortunes of the sector are likely to mirror those of the real world. In some ways, things should be better for the sector in 2021. In our view, P&C claims will reduce as exposure runs off from the largest areas such as business interruption and event cancellation with only some residual exposures remaining.

“L&H reinsurance claims however will continue for as long as excess mortality trends occur, with a particular focus on the US and other developed markets. We assume in our forecasts that excess mortality continues into 2021 with Q121 claims built into our estimates.

“As a result, the reinsurers as a group are less likely to see their full earnings power following a good set of renewals come through immediately in 2021.

“Capital has been deployed into better pricing, but we will not yet see the full fruit of this investment in 2021, especially with some it being put to work at the 1 January 2021 renewals, with further to go at the April and mid-year renewals.”

The analysts expect that the positive pricing trends seen will continue through 2021 and perhaps beyond, but they feel specialty lines are likely to outpace reinsurance.

“We anticipate that specialty insurance will continue to prove the area of greatest excitement in 2021 but remain positive on reinsurance overall given good pricing trends and undemanding valuations,” they explained.

The January renewals were seen as positive, and importantly they highlight that terms and conditions may actually prove just as much a driver of better performance, in reinsurance, as pure rate increases.

“The positive impacts of a hard market are often underestimated,” they explained, saying that margins may be better than consensus.

Margin improvement is anticipated to come over a number of years and this may be what many commentators mean when saying that improvements are required over multiple years.

It may not be that reinsurance rates keep rising steadily, but rather as the effects of recent work to improves terms, adds to the rate increases achieved and work to hone portfolios, the improvements on margins may increase over the coming years as reinsurers and ILS fund portfolios begin to recognise the real benefits here.

It’s always really important to consider terms and conditions and how they factor into return potential of reinsurance portfolios, as well as how accelerating primary pricing may continue to push rates in the reinsurance and retrocession sector.

While January’s renewal season may have disappointed some, who felt they still haven’t been rewarded for taking the losses of recent years. It’s perhaps more important to look at how the overall risk adjusted and term adjusted returns of their portfolios have improved, as well as what improvements may yet be to come over the course of this transition year.

Read all of our reinsurance renewal coverage here.