Portfolio composition limits Covid-19 BI exposure for Leadenhall: CEO Albertini

London headquartered insurance-linked securities (ILS) and reinsurance related investments manger, Leadenhall Capital Partners LLP, is keeping a close eye on potential direct exposures to the Covid-19 coronavirus outbreak, with the key focus for the firm being the business interruption issue.

In light of the unfolding Covid-19 pandemic and its potential impact on ILS portfolios, Artemis spoke with the Chief Executive Officer (CEO) of Leadenhall Capital Partners, Luca Albertini.

The ongoing pandemic is having an impact on a wide variety of insurance classes and reinsurance linked investments, with exposures being seen in life and health, travel, event cancellation and beyond, not to mention uncertainty surrounding business interruption and subsequent legislative efforts.

Discussing the firm’s direct exposure to the coronavirus pandemic, Albertini explained that around 50% of Leadenhall’s business is invested in life insurance linked opportunities.

“The key risks in the portfolios include a combination of mortality, lapse and persistency, morbidity/health insurance loss ratios and market risk.

“Unlike the 1918 Spanish Flu pandemic, which would create a loss to some of the cat mortality transactions in the market, mortality from Covid-19 has impacted predominantly older generations.

“Our mortality book and most cat mortality bonds, with the noticeable exception of one transaction sponsored by the World Bank, are predominantly exposed to working age insured population,” said Albertini.

The World Bank issued pandemic catastrophe bonds and pandemic risk-linked swaps have now been triggered and will pay out a combined $195.84 million as a result of the Covid-19 coronavirus pandemic.

For cat bond investors and ILS fund managers that held these notes, the loss had been anticipated since the notes had been marked down for some time, although the effectiveness of the trigger will likely continue to be debated and scrutinised.

Albertini told Artemis that Leadenhall has not invested in the World Bank pandemic bonds, and as of now, has witnessed no material impact from the pandemic on its life insurance-linked securities investments.

“Although, this loss is clearly still developing as the emergency is at its peak in many areas of the world,” he added.

For both Leadenhall and the wider market, the key focus is on the business interruption covered by commercial insurance property policies, continued Albertini.

“In some of the policies, the inability of using premises because of a pandemic is covered but in many cases it is not or has a small sub-limit added to the policy.

“As well, covered in the press there is some political pressure on insurers to pay business interruption claims regardless of policy wording, and this could create a material loss to the primary insurance market and could hit some reinsurance layers.

“The large majority of Leadenhall’s exposure is on residential property insurance linked investments (not impacted by the pandemic), and we have not directly backed MGAs focused on small commercial clients, but of course we are following these developments closely,” said Albertini.

The issue surrounding business interruption and related litigation that is designed to enforce insurers to retroactively cover business interruption claims regardless of policy wordings or exclusions, will impact the traditional reinsurance market and also the ILS space.

Albertini explained that litigation inflates loss adjustment expenses and so any mass litigation would materially amplify losses for the sector, while at the same time delay payments to those who are entitled to it.

“This is why we look favourably at solutions where governments work with the insurance industry rather than against the insurance industry in supporting those who have not purchased a valid BI cover which includes pandemic.

“To be clear, we believe that when pandemic is covered the claims should be paid promptly by the insurer,” he said.

While the current crisis is creating clear challenges and uncertainty for insurance, reinsurance, and ILS players, over the long-term, heightened pandemic risk awareness and the issues surrounding business interruption could result in greater demand for protection from cedants.

“In terms of cedant demand, we have promoted specific pandemic cover for years, and recent experience shows the vast insurance gap for pandemic risk. If the core principle that a pay-out follows a specific cover for which a premium has been paid is upheld, risk managers will be thinking a lot more about the implication of pandemic risk for their business and this could lead to a major shift in demand (and pricing) for the risk.

“Of course, if governments will demand payments regardless of terms, this will be a disincentive for risk managers to pay a premium for it in the future. But overall I do expect an increase in pandemic risk being transacted going forward with more opportunities for the ILS market and investors,” concluded Albertini.