PCS’ Johansmeyer expects capital availability could be a major issue

The implications of the ongoing Covid-19 pandemic on the re/insurance market suggests that the availability of capital is going to be a major issue, according to Tom Johansmeyer, Head of PCS.

Yesterday, Johansmeyer delivered a thought-provoking keynote to open the penultimate day of the annual re/insurance and insurance-linked securities (ILS) conference, Prospectus 2021.

Titled, ‘The Four Horsemen of 2021 (key reinsurance risks that won’t go away)’, the session explored the potential implications for the industry from Covid-19; strike, riot, civil commotion (SRCC); cyber risks; and natural catastrophes.

During the section on Covid-19, the focus turned to the upcoming Jan 1^st reinsurance renewals and specifically, the availability of capital.

“Capital availability, I think, is going to be the big issue, right. We’re trying to figure out the loss situation and there’s a lot of uncertainty, there are issues on trapped collateral. But at the end of the day, we’re still early days on figuring out where the insured losses across classes of business for Covid-19 are going to come from,” he explained.

“But, you don’t need to know that, to know that there is trapped collateral, there is volatility in financial markets, there are risk issues that may consume capital even if that capital hasn’t been truly consumed yet – put it aside, reserving, dry powder, estimated future impacts, and so on. These are all important and, uncertainty about longer tail classes of business could be a really big deal,” he continued.

Of course, there have been a number of capital raises ahead of Jan 1^st and it remains to be seen what influence this has. But, as noted by Johansmeyer, the uncertainty being caused by Covid-19 and the subsequent tendency to keep some dry powder on hand, for whatever reason, will reduce capital availability come 1/1.

Another implication of the pandemic, noted Johansmeyer, concerns the re-evaluation of books and portfolios.

“For underwriters who are starting to think about programmes they really need to be on, versus want to be on, versus have been on because they needed to deploy, but didn’t really like it, there might be some opportunities now to scale some of that back.

“How you generate returns may be different relative to the amount of capital you’re deploying, that will depend on the rate environment, of course. And, you could have some issues around choosing what makes sense. Some classes of business that looked good before, may not now. Some classes of business that you desperately wanted to leave until now, but for reasons of momentum or other forms of commitment you haven’t, this may be the opportunity,” said Johansmeyer.

Additionally, Johansmeyer told the audience that somewhat frustratingly, he expects to see a fair amount of refocusing on the core lines of business (LOBs).

“We were making great progress with the cyber market in 2017, until that trio of hurricanes hit. The refocus on the core is probably the biggest impediment to adoption of innovation out there right now. But it’s the nature of the beast, right. You’ve got to focus on what pays the bills, and what fuels your ability to innovate later. You’ve got to focus on where the losses are as well, especially as you’re paying claims. So, we do see a certain amount of refocus on core LOBs coming in 1/1, it just makes sense.”

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