Covid-19 impacts likely to enforce ongoing reinsurance firming: Schroders

The ongoing Covid-19 coronavirus pandemic is expected to have an impact on future reinsurance renewals, with the volatility it has caused expected to enforce ongoing firming of rates and pricing, according to executives at Schroders.

Reinsurance rates have been on the rise anyway, as the industry on both traditional and alternative sides have been pushing for higher returns after consecutive years of heavy catastrophe losses.

In a discussion with Stephan Ruoff the Deputy Head of specialist ILS asset manager Schroder Secquaero and Beat Holliger the Head of Product Management ILS at Schroders, the pair explained that the coronavirus outbreak is likely to have an effect on the renewal cycle even if it doesn’t cause significant losses immediately.

“After years of losses, especially in 2017 and 2018, we have finally seen some significant rate increases in the January 2020 renewals. This has resulted in very attractive yield levels for our ILS strategies,” Ruoff explained to us.

Adding, “We continue to expect further increases in the upcoming April/June and July renewals, specifically in Japan & Florida.”

The expectation of firming has been apparent in recent catastrophe bond issues, which have largely priced above prior year deals, in some cases much higher.

It’s also been evident in some of the earlier renewals entered into by Floridian insurers, providing a glimpse of the potential rate increases to come.

Holliger noted, “This will have a positive effect on yields again, obviously impacted by the recent reduction of interest rates by central banks, e.g. the FED.”

The mention of central bank action is incredibly pertinent at this time, given the response of governments to the Covid-19 coronavirus pandemic has been to shutter their economies while printing money to support the financial markets, businesses and people.

But there are ramifications for these kind of actions and the massive declines seen in equities and other asset classes, while not affecting ILS and cat bonds which have demonstrated their low correlation once again, will have a knock-on effect when it comes to the reinsurance renewals, Schroders believe.

Ruoff told us, “The huge corrections in the aforementioned financial markets will impair the asset side of the balance sheet for insurance and reinsurance companies, reduce flexibility with regard to capital management, and enhance pressure on asset / liability matching.

“We expect this to further enforce the hardening of rates and reinsurance pricing in the upcoming renewals.”

Holliger further explained that the renewals will once again likely see a variation in pricing and terms, dependent on performance, size and now also the impact of the financial market decline due to the coronavirus pandemic.

“It really comes down to what their buying position is, the current position of those with smaller balance-sheets, the economic volatility and how that influences the buying patterns of insurance and reinsurance companies,” he said.

Adding, “In the past, the renewals haven’t even priced in the events of recent years. But this current crisis will help to demonstrate the importance of ensuring that losses and other impairment factors are included in renewal pricing much more quickly.”

How much of an influence the coronavirus outbreak has on reinsurance pricing at the renewals remains to be seen, but it’s clear that some effects will be felt and the shrinking of the investment side, as these executives point out, alongside persistent volatility and uncertainty could be a key driver for firming rates.

Also read: Coronavirus effect clear in cat bonds, but private ILS outperforms: Schroder Secquaero.