Global reinsurance capital is likely to be eroded by around $30bn due to market movements as a result of Covid-19 pandemic, according to a report by Willis Re, the reinsurance unit of broker Willis Towers Watson.
This represents a capital hit of around 5% of a $559bn global reinsurer capital base before the pandemic, according to the report.
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According to the report, several insurance firms will end up holding more risk than anticipated compared to their balance sheets.
They are likely to face three options: retain current strategy, de-risk, or hedge.
The solvency reduction is likely to take some firms below their desired minimum capital threshold, and insurance firms have already moved to commence adjusting their plans for a range of economic scenarios.
Reinsurers have indicated that the systemic shock of COVID-19 is manageable so far, but the future strength of the sector lies in the severity of the pandemic’s impact on health and economies.
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By GlobalDataThe report stated: “In general, reinsurance claims are likely to be manageable. For example, assuming most event cancellation claims fall to reinsurers, their impact would be about 1% of the capital base, equivalent to a midsize hurricane. However, the risk from business interruption claims presents an existential threat to the entire industry, given growing calls to revise coverage retroactively and the colossal, if notional, aggregate limits deployed irrespective of contract agreements in place.”
The industry, on the whole, is facing formidable practical, operational, legal, and technical reserving challenges.
The report, however stated that that global reinsurers entered the crisis strongly capitalised, which is good news.
The four majors of Europe are likely to retain solvency ratios above their self-imposed minimal, while capital levels of the US reinsurance industry capital are comfortable. According to Willis Re estimation, a total 7% hit to US reinsurers’ statutory capital.
The report offers insurers guidance on evaluation of post COVID-19 capital adequacy; adjustment of risk tolerance and appetite and the importance of planning; evaluation of the new underwriting environment and the impact on secondary (reinsurance) market dynamics post Covid-19; and to navigate reinsurance markets and identifying areas where Covid-19 will shape negotiations for 2020 and beyond.
Willis Re Global CEO James Kent said: “With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely. The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward.
“Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers.”
