Global reinsurance capital recovers ~15% since initial Covid-19 hit: Willis Re

Global reinsurance capital levels have made a significant recovery broker Willis Re estimates, as the improvements in investment markets in recent weeks leads the company to believe that reinsurance capital is now only down roughly 5% since the beginning of 2020.

The initial financial and investment market volatility created by the Covid-19 coronavirus pandemic had a significant effect on the amount of global reinsurance capital that could have been available at the time.

In fact, Willis Re estimates that reinsurance capital fell roughly 20% by late March, as the financial market declines, in particular in equities, clobbered re/insurers and effectively reduced their financial strength and the capacity that would have been available to meet cedent needs.

Since late March though, financial markets have gradually become less volatile and a recovery of sorts has been seen.

This has been sufficient to boost global reinsurance capital as well, given the much better picture of reinsurers investment portfolios.

“Our current estimated hit to the global reinsurance capital base is approximately 5%. This is a much improved position versus the 20% hit cited in our 24 March publication, as investment markets have recovered, but it also demonstrates how sensitive (re)insurers are to investment market volatility,” Willis Re explained in a report to its clients.

The broker’s Strategic and Financial Analytics teams said that reinsurers entered the pandemic from a position of particular capital strength, which has helped them to recover more quickly as well.

“Strong starting points of capital strength continue to provide insulation. And, importantly, the reinsurers with the greater sensitivity to investment markets tend to also be the ones with the stronger current credit ratings,” the report states.

As well as capital, solvency metrics have also bounced back for the European reinsurers, with Solvency 2 ratios that had declined from 210% to around an average of 190% now likely recovered somewhat through the first-half of April.

But Willis Re warns that while the average position looks healthy for re/insurers, “some companies will have seen material erosion of their capital buffers.”

“Some companies may need future support to solvency, particularly in the event of further stresses,” the broker explained.

We’re hearing reports of some increase in demand for reinsurance protection in early Firm Order Terms for the mid-year renewals and many of our sources believe this will continue to be the case as the renewal approaches.

Reinsurance capital is one of the quickest and most accessible sources of capital right now, particularly as investment markets remain jittery.

As a result there could be an opportunity for some reinsurance capital providers, including ILS funds, to provide increased support to cedents at the renewals.