Reinsurance could take brunt of COVID second wave losses: Barclays

Reinsurance capital could find itself on the hook for the largest share of COVID-19 losses from second waves of the virus sweeping Europe, with primary insurers largely happy with their loss-picks so far, analysts at Barclays have said.

As Europe entered its second wave proper of the COVID-19 coronavirus pandemic in recent weeks, the analysts explain that the impacts on companies they cover is expected to be “minimal” for the primary insurers and “manageable” for reinsurance firms.

The insurance impact of second waves of the pandemic is expected to be mitigated by the increasing prevalence of strong contract wording around pandemic risk and exclusions, that have been rigorously applied to renewals taking place since April.

The Barclays analysts estimate that this could have reduced the exposure to second wave losses by as much as 50% for primary insurers.

However, reinsurance firms may still find themselves still on the hook for potential second wave claims, given the bulk of European business is renewed at the start of the year.

Another mitigating factor is the fact business revenues at-risk will be lower right now, given the impacts of the pandemic already and the lockdowns in progress in Europe.

How much reinsurance limit is at-risk of second wave business interruption losses depends on the coverage offered, so comes down to individual arrangements, the analysts believe.

“Some uncertainty remains with respect to how much of the gross claims from second lockdowns will be covered by the reinsurers,” the analysts wrote.

But added that, “In the UK the BI test court case initially ruled that the government advice to enter lockdown on 24 March was the trigger, therefore a second lockdown starting (in UK’s case) on 4 November would be a second event, necessitating primary insurers to exhaust retention first. However, many have purchased and/or reinstated aggregate covers, which would make extra net impact minimal in 2020.”

Many of the largest reinsurance firms have already set aside significant loss provisions for classes of business like event cancellation through the rest of this year, but business interruption may not have been reserved for as robustly given predicting second waves and how the government’s of Europe would react is particularly challenging.

Wording changes will now filter through into reinsurance renewals for the end of this year, with pandemic exclusions expected to be the norm at January 2021 contract signings.

So reinsurance will help to mitigate second wave losses for some primary insurers, with perhaps a larger share of certain classes of business loss falling to the reinsurance market from the second waves of COVID-19.

But it’s to be expected that these will not be particularly meaningful, based on current second wave experience and that going forwards subsequent waves of COVID-19 may fall on reinsurance treaties that have pandemic exclusions built-in from the off.

There is also an expectation that reinsurance capital takes a reasonably significant share of losses from the Australian primary insurers after the recent test case ruling on business interruption there.

So we should perhaps expect to see higher increases in COVID reserves for some reinsurance firms when they report their Q4 results, as well perhaps as slightly higher cessions through to some of their third-party capital vehicles and retrocession arrangements.

As we understand it, many ILS funds have already set aside provisions for reinsurance and retro treaties they felt could have been impacted by business interruption claims through the end of 2020.

So, while some increases in ILS fund IBNR reserves from the pandemic is possible through the final quarter of this year, it will be hoped that this signals the end of the exposure as new wordings come into force at the January 2021 renewals.