Re/insurance & ILS has “fared quite well” during Covid-19: Prospectus 2021

While much uncertainty remains around both the ultimate economic and insured loss from the ongoing Covid-19 pandemic, the industry loss appears to be trending lower than initial projections and actually, the re/insurance and insurance-linked securities (ILS) sectors have fared quite well, according to industry experts.

During the opening panel of Prospectus 2021, the new annual reinsurance and insurance-linked securities (ILS) conference brought to you by Artemis in collaboration with sister title Reinsurance News, in association with Kroll Bond Rating Agency (KBRA), panellists discussed the Covid-19 outlook for the re/insurance and ILS industry.

To start, Peter Giacone, Managing Director, Global Head of Insurance, KBRA, noted the very unique situation that the markets are in many months after the arrival of the global crisis.

“I think back to how we were looking at it and trying to grapple with the issues back in March and April. I think now, with the benefit of six months of hindsight, I think the industry has actually fared quite well. From a credit risk perspective, I think there was an awful lot of hand wringing that was going on at the time, there was a lot of concern around how assets and liabilities would behave,” said Giacone.

At KBRA, he continued, the firm tried to keep a very steady hand with regards to taking rating actions, which Giacone said has proven to be the correct course of action.

“I think the asset side of the balance sheet has sort of stabilised a little, obviously with quite a bit of volatility and uncertainty continuing. So, some of the short-term concern on that front, I think, has somewhat subsided, but we will obviously have new challenges, in terms of low interest rates,” he said.

Adding, “On the liability side, I think also, again, lots of uncertainty. But, some of the very large numbers that had been bantered around initially, which I think made sense at the time, certainly I think we’re at a point now where perhaps some of those are not where we’re going to land. And, so, I think that’s good news for the industry overall.”

Fellow panellist David Flandro, Managing Director of Analytics at HX, also noted that so far, reported industry Covid-19 losses do appear to be trending lower than initially feared.

“I would just say that, as we have seen the real data coming in in some areas, for example claims data for Covid-19, the last tally that I’ve seen of publicly reported claims data, still has the total under USD 30 billion. I don’t want to be sanguine about this, but I’m old enough to remember when people were predicting USD 200 billion on the asset and liability side,” explained Flandro.

The insightful discussion then switched focus to the potential tail of Covid-19 and panellist Linda Johnson, Head of Legacy Practice at re/insurance broker TigerRisk Partners, explored both the insurance and social economic tail of the current crisis.

“The tail, I would say, on many emerging longer tail losses, as a rule, is always longer than initial prediction projections. And, as David said, in this case, the initial ultimate seems to be shorter than the initial projection.

“The event will be extended with things like the vaccine and different treatments, and certainly there will be winners or losers in that, that will extend the tail. I think, for any illness, you also have the long-term ramifications and consequences, you know, 20 years from now. Post-illness, how does this loss impact children or certain parts of the demographic? I think we need to be prepared for just the unknown unknowns,” said Johnson.

Adding, “I think in terms of mental health issues, one of the early symptoms is a severe headache, what does that mean long-term? You hear about brain fog associated with the illness, so how does that impact children versus young adults, versus nursing home residents?

“So, I think that the tail will certainly go into the future of our children. That said, the insured loss tail, could be quite a bit shorter.”

The opening panel of the conference also featured Joanna Syroka, Director of New Markets, Fermat Capital Management, LLC, who offered some insights into the potential Covid-19 tail for the ILS market.

“In terms of ILS and the overhang of Covid, obviously the ILS market is very broad and it depends which segments of the market you’re talking about. The less liquid part of the market, investments that back collateralized reinsurance or sidecars or retrocession agreements, those are the ones that have been most impacted by potential Covid claims,” she explained.

Continuing to note that, “The more liquid part of the ILS market, the catastrophe bond market, has emerged relatively unscathed. Cat bonds are, in general, named peril transactions and apart from very specific examples where these bonds target pandemics and excess mortality, they generally didn’t cover pandemic risk.

“So, in terms of overhang, there is no overhang on the cat bond side of the ILS market, we see investor interest is very strong. On the less liquid side of the market, I think there investors are focused on exclusions, if only to make sure that this time next year, we’re not in the same situation if there’s another wave of pandemics and another wave of lockdowns.

“But at the end of the day, the ILS investor interest is still very high in the space, and we believe investors can be forward looking on issues like this.”

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