Reinsurers took larger than expected share of COVID claims: Flandro, Hyperion X

The impact of the COVID-19 coronavirus pandemic on the insurance and reinsurance industry looks like it will be more of an earnings event than a capital event, according to David Flandro, Managing Director, Analytics at Hyperion X.

Speaking during an update briefing on the second-quarter earnings season, Flandro explained that his firms view is that insurers have “taken a relatively prudent and conservative stance on their losses,” which perhaps explains why reinsurance capital has been called into action more than anticipated so far.

“Reinsurance companies have taken a larger proportion of COVID claims, than perhaps was anticipated by some,” Flandro said.

This suggests the share of losses taken by insurance-linked securities (ILS) funds and investors in some sidecar vehicles and quota shares may also be larger than anticipated, as many of the major reinsurance firms do expect their sidecar investors to take a portion of their losses from COVID-19.

Flandro noted that this is all leading to “subsequent hardening in the P&C market” which is happening during a time of economic headwinds and when natural catastrophe losses have generally been higher than anticipated so far this year.

But still, “It looks to us like COVID is more of an earnings event, than a capital event,” Flandro explained.

Adding that, “Indeed, going into the post-coved era with higher pricing and opportunistic capital deployment there are some positives for insurance companies to look for in the sector.

“So far, COVID losses look manageable. In terms of points on the combined ratio, across the composite average, it looks like it’s between 4% and 5%.

“Broadly, the losses appear to be manageable and conservative.”

He noted that the uncertainty over business interruption and the potential for litigated COVID claims persists, but that, “The early signs are that contract law will be honoured and extra-contractual claims will not be required.”

Commenting on the early loss estimate pronouncements on the coronavirus pandemic, some of which were in the hundreds of billions of dollars, Flandro said, “It looks clear now that that isn’t going to happen, all other things staying equal. In terms of the quantum of the loss, it’s hard to say so far that it’s unprecedented.”

In fact, “COVID losses don’t appear yet to be existential for the sector anyway and it looks like the sector is going to trade through this very well indeed.”

Flandro went on to discuss market conditions under the shadow of COVID-19, saying that a trend in the sector that has now been accelerated by COVID-19 is, “The increase in rates-on-line across multiple lines of business.”

“This in turn has resulted in higher premiums written for most companies,” Flandro continued.

Saying that, “It’s important to know that all companies are increasing premiums in the second-quarter of 2020, from the first-quarter of 2020.

“Some of this is rate driven, some of it is opportunistic, companies are writing more business at these rates because they’re higher.”

He said that while the expectation is that the insurance and reinsurance industry in general sees a decline in returns-on-equity (ROE) for 2020, right now the forecast is for this to recover into 2021, “as rates rise and there are more chances to deploy capacity opportunistically.”

Flandro noted that roughly $16 billion of new capital has been raised by re/insurers in the first-half of 2020, which is more than $10 billion above a typical first-half of the year.

“This is signifiant and it shows that the sector is able to recapitalise rapidly to take advantage of rising prices and to remain solvent in a big crisis,” he explained.

Looking further ahead, Flandro noted the importance of reinsurance capital for the sector at this time, as it grows its portfolios opportunistically and is likely to leverage capital to support that.

“Reinsurance purchase is crucial and strategic purchasing alongside contingent capital use is the new norm,” Flandro said, also explaining that alongside this, “Use of technology to lower administrative costs and acquisition costs is becoming far more prevalent.”