The capital buffers of some of the largest reinsurance companies have been significantly shrunken by the financial market declines seen in the last few weeks because of the Covid-19 coronavirus outbreak, potentially reducing their ability to weather any major catastrophe events that occur.
With stock markets around the globe generally down 20% or more over the last two or three weeks and other asset classes also significantly impaired in terms of value, the capital buffers of reinsurance companies have become smaller as a result.
We highlighted this the other day with Lloyd’s of London, who’s solvency measure is down because of the impact of declines in its investment portfolio.
For Lloyd’s itself, this isn’t a huge deal as it remains very well-capitalised at this time.
But for less well-capitalised reinsurance companies, especially those with larger catastrophe exposures, the shrinking of their capital buffers could present an issue if hit by major losses before the market reverses some of the declines.
Ratings agency S&P raised this recently, saying that for North American reinsurers the hit to capital buffers could exacerbate the stresses of major catastrophe losses.
“The North American reinsurers are carrying thinner capital buffers relative to the past few years because of the current financial market turmoil. Therefore, those with outsize natural catastrophe exposure maybe further exposed if 2020 ends up being an above average catastrophe year, which any additional drops in market values could exacerbate,” the rating agency explained.
Stress tests show that most of these U.S. focused reinsurance companies should be able to maintain a sufficient level of capital adequacy, S&P said, with even those who’s capital has become deficient thanks to the market losses expected to be able to replenish over time.
But, “For the few negative outliers, we will likely take rating actions if we believe that they won’t be able to rebuild their capitalization over the next 24 months,” S&P said.
This financial market volatility has hurt some reinsurers and now they await the extent of claims they may face as a result of the Covid-19 coronavirus outbreak.
It remains uncertain just how large the losses for the reinsurance market may be from this coronavirus pandemic, but the expectation is that there will be some significant losses and a broad aggregation across numerous lines of business.
These losses will likely further dent capital buffers and for some reinsurers this could result in greater attention from the rating agencies.
S&P explained, “The recent COVID-19 outbreak exposed the North American reinsurers to potential losses from aviation, travel insurance, credit insurance, contingent business interruption, event cancellation, mortgage reinsurance, and mortality risk. In addition, these companies could see spillover to other lines of business such as errors and omissions, as well as directors and officers.”
Reinsurers remain largely well-capitalised and have robust retrocession programs in place, as well as their increasing use of third-party capital structures to share risk with the capital markets and ILS investors.
This, along with disciplined underwriting and the fact the market is firming are all seen as mitigating factors for the market volatility impacts and the expected losses to come from Covid-19.
But even so, there is a possibility that the combined hit from to the investment side and the underwriting side of the reinsurance business at the same time may tip some reinsurers into a more challenging situation.
More positively though, the impacts are expected to stimulate further firming of reinsurance rates.
S&P noted, “The realized and unrealized capital losses and low interest rates depressing investment yields, along with potential reinsurance claims due to the outbreak, could further harden reinsurance pricing and maintain the momentum during the upcoming 2020 renewals.”