Covid-19 has parallels with WTC, adverse reserve development a risk: Fidelis

The impacts faced by insurance and reinsurance markets from the ongoing Covid-19 pandemic has some parallels with the 2001 World Trade Center bombing, with challenges expected to be faced and the possibility of adverse reserve development further down the line, executives at Fidelis have said.

In a discussion with equity analysts from Morgan Stanley, senior execs from Fidelis Insurance Holdings Limited, the specialty insurance and reinsurance firm launched by Richard Brindle, explained that the industry loss from the coronavirus outbreak would be significant.

Jonny Creagh Coen, Head of Strategic Relationships, and Charles Mathias, Group Chief Risk Officer, told the analysts that Covid-19 would be a sizeable event for the insurance and reinsurance market, with similarities in terms of complexity and impacts to 9/11.

It’s similar as it brings multiple pressures to bear all at the same time and so we see insurance and reinsurance companies dealing with financial market dislocation, alongside rising losses across multiple lines of business and correlation between business lines.

The pair explained that it currently remains very difficult to calibrate the share of losses between insurance and reinsurance carriers.

Differences in contractual terms and conditions across the reinsurance industry mean that precisely how much in the way of Covid-19 losses are ceded to reinsurance structures will differ on a case by case basis.

There is the potential for the uncertainty over reinsurance coverage to drive some disagreement as well, it seems.

Mathias of Fidelis explained to the analysts that reinsurers who decline to “follow the fortunes” of their cedents on business interruption claims, could find their trading relationships more challenging in future.

In addition, some lines of insurance business are less heavily reinsured than others, making it difficult to define precisely what the reinsurance market share of the Covid-19 industry loss will be.

Differences in coverage terms and wordings across regions are also a factor that makes the Covid-19 loss challenging to follow.

The pair from Fidelis said that some countries have much stricter exclusions and it’s clear pandemic risk is not covered. But in the UK and the U.S. they expect the challenges to be greater, with the UK perhaps the source of more uncertainty as the ISO forms approach in the U.S. is much clearer on excluding pandemic coverage.

Finally, the pair raised the spectre of the tail risk associated with the Covid-19 pandemic, which they cautioned could be an issue for reinsurers.

Those that face unexpected business interruption claims could find themselves subject to adverse reserve development further down the line.

As insurers set loss picks based on their policy wordings, unexpected claims have the potential to drive the need for reserve strengthening further in the future, something the ILS market should perhaps bear in mind.

With the potential for some insurance-linked securities (ILS) fund collateral to be trapped over Covid-19 potential claims, the litigation risk and uncertainty around wordings may lead to creeping collateral retention requirements as well, which would not be a good situation to get into for driving investor confidence.

As ever, this means reserving accuracy is key. Reserving early, accurately and trying to minimise the risk of loss creep could not be more important, especially as the prospect of pandemic claims in third-party capital vehicles may surprise some investors in the first place.

Of course, Fidelis has itself got third-party capital relationships under the Socium brand and a quota share sidecar vehicle in Socium Re, as well as other pro-rata reinsurance and retro relationships, so there is always the chance a little of its exposure to this event could fall to its ILS investor relationships.