COVID-19 claims so far likely to be manageable; reinsurers de-risking

Willis Re COVID-19 Impact Report

LONDON, April 23, 2020 (GLOBE NEWSWIRE) -- Willis Re, the reinsurance business of leading global advisory, broking and solutions company Willis Towers Watson (NASDAQ: WLTW), has published a COVID-19 Impact Report. Many insurance companies will end up holding more risk than anticipated relative to their balance sheets, the report states. They are likely facing three options: retain current strategy, de-risk, or hedge. The solvency reduction may take some companies below their desired minimum capital threshold, and Insurers have already moved to begin adjusting their plans to suit a range of economic scenarios.

Reinsurers have showed that the systemic shock of COVID-19 is manageable so far, but the future strength of the sector depends on the severity of the pandemic’s continuing impact on health and economies. The industry retains sufficient capital buffer for extreme events, but the extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen. Reinsurers have started to de-risk their balance sheets by holding cash, which will have a significant impact on investment returns. Willis Re currently estimates a 5% hit to the global reinsurance capital base, roughly US$30 billion pre-tax. Additional pressures may emerge should economic conditions further deteriorate with a consequent impact on investments.

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. Overall, the industry is facing formidable practical, operational, legal, and technical reserving challenges. The good news is that global reinsurers entered the crisis strongly capitalised. The four European majors are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels remains comfortable. Willis Re estimates a total 7% hit to US reinsurers’ statutory capital.