COVID-19 leads to negative outlook for global reinsurers

By Ranamita Chakraborty

Pandemic-related losses combined with volatile capital markets and lower investment returns mean that 2020 is expected to be a difficult year for global reinsurers.

According to an analysis published by S&P Global Ratings, the global reinsurance sector is unlikely to meet the agency’s earnings expectations for 2020. Its outlook has therefore been revised to negative from stable considering that business conditions are becoming increasingly difficult.

The agency said the reinsurance sector will not earn its cost of capital this year once again after struggling over the past three years to do so as result of large Nat CAT losses and fierce competition.

Currently, it is also assumed that the global reinsurance sector will deliver a combined ratio of 101%-105% in 2020 or more if global insured COVID-19 losses accelerate beyond $30bn for the wider (re)insurance sector.

The agency also believes that COVID-19-related claims on the property and casualty reinsurance side are rising and have started to affect reinsurers in the first quarter negatively.

In fact, data shows that coronavirus-related losses for the top 20 reinsurers amounted to about 10 percentage points on average of the combined ratio for the quarter. These losses are said mainly to include event-cancellation claims but, selectively, reserves set aside for business interruption, directors and officers, credit and travel – which were mostly first-order impacts from the outbreak.

However, the agency notes that there is not much of consistency in the figures because the reinsurers recognise the losses using different approaches.

“We expect additional direct COVID-19-related losses to be recognised in the second quarter and for indirect impacts of COVID-19 to emerge over the coming quarters,” said S&P Global Ratings.

The agency also expects to take negative rating actions on reinsurers whose COVID-19 losses wipe out their earnings and become a capital event. It believes that such reinsurers would not be able to sufficiently rebuild capitalisation over the next 12 to 24 months. The same applies to those reinsurers that entered 2020 with an already historical weaker operating performance.

Meanwhile the agency noted that while property and casualty reinsurance pricing is hardening, life reinsurance earnings remain stable so far and capital for the sector remains robust, though lower, than at year-end 2019.

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