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Covid-19 a headwind for reinsurance capacity, trapping ILS capital: AIG’s Zaffino


The Covid-19 pandemic is unlike anything else ever encountered by the re/insurance industry and will be a headwind for future reinsurance capacity, according to AIG’s Global Chief Operating Officer and CEO of General Insurance Peter Zaffino.

peter-zaffino-aigWith the effects of the Covid-19 coronavirus pandemic sweeping across the insurance, reinsurance and insurance-linked securities (ILS) market, as well as every other area of finance, it’s no surprise that AIG, one of the largest global re/insurer composites, would have a view.

CEO of AIG Brian Duperreault called Covid-19 a “very unique catastrophe” during the insurers earnings call yesterday, saying that “forecasting the impact of COVID-19 in future quarters is difficult” and as a result AIG has removed all guidance for the moment.

Despite this, Duperreault hopes that AIG will continue to improve its General Insurance combined ratio, ex-catastrophes, for the year ahead, as it continues to focus on improving its core underwriting result.

Part of the improvements seen so far for AIG have been thanks to significant changes across its reinsurance program, as the insurer has ceded much more of its attrition and catastrophe exposure to third-parties.

Zaffino then commented on the state of global insurance and reinsurance in light of the impacts of Covid-19, saying that the near and long-term impact of the pandemic remains “unclear.”

“In contrast to other catastrophes like wildfires, hurricanes and earthquakes, this event is not confined to any specific geographic region and has already impacted over 200 countries and territories,” Zaffino explained.

Highlighting the unprecedented nature of the pandemic, Zaffino said, “In addition, the duration is not limited, as is typically the case with traditional Cats. While the insurance industry manages risk of all kinds, it’s fair to say that the profound impact and global nature of Covid-19 is something we have never encountered.”

“There’s no playbook” for Covid-19, Zaffino said, pointing out that it looks likely that the ultimate insurance industry loss impact from the pandemic will eclipse events such as hurricane Katrina and the Tohoku earthquake.

“We believe Covid-19 will result in the largest individual Cat loss the insurance industry has ever seen,” Zaffino said.

Which has obvious ramifications for the future of the insurance, reinsurance and ILS market, which Zaffino laid out the AIG view on.

“Going forwards, Covid related losses will impact all aspects of underwriting insurance. From absolute limits available, limits deployed to certain lines of business, terms and conditions, co-insurance and structure of coverage just to name a few.

“With respect to the reinsurance market, unlike traditional named peril catastrophes Covid was not modelled and therefore it will be a headwind for future capacity,” he explained.

He went on to say that AIG believes “the retro market will contract” and that “in the ILS market there will be trapped capital which will lock up collateral, therefore restricting capacity on a go-forward basis.”

“We’re already seeing this,” Zaffino stated.

This is a reflection of the news that some ILS funds have already begun marking positions in their portfolios for potential losses due to Covid-19, as well as the understanding that some property risks will drive Covid-19 losses through to the reinsurance and retrocession market, so hitting some ILS strategies as well.

As a result the trapping of some ILS collateral is a given with this unprecedented catastrophe loss event, but the scale of this remains uncertain and so the impacts it will have on reinsurance capital availability and the state of the market also uncertain at this time.

Zaffino also implied that AIG is expecting to make reinsurance recoveries from across its program for losses from Covid-19, including for losses to its property book where they occur.

“Our reinsurance program will help protect our portfolio from Covid-19 losses,” he explained. Saying that, “Depending on the line of business, geography and size of loss, our net exposure will be significantly limited.”

Later in the earnings call he further explained, “We have really comprehensive reinsurance. Whether it’s on a property per risk basis, we have low attachment points on a per occurrence basis that’s regional and we also have global aggregates that attach to reduce volatility on a frequency and severity basis.”

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