The first six months of the world absorbing the impacts of the coronavirus pandemic haven’t been pretty, but, at least for insurers, the tide appears to be turning.
Rewind back to January 2020, and the insurance industry was already facing many challenges, with hardening markets occurring across a number of lines in global markets, from property to directors and officers insurance. Then, COVID-19 began its deadly spread, and challenges seemingly multiplied overnight.
“The widespread impact of the global lockdown added to this challenging market and created the potential for even greater volatility,” said David Priebe, executive chairman of Guy Carpenter during a webinar hosted by the reinsurance broker and risk consultant on September 10, called “The Changing Nature of Risk.” He continued, “We are now grappling with the implications of the first global systemic insurance loss. In trying to assess the loss of unprecedented scope, more than one educated guess put the potential for claims to develop in excess of $100 billion, along with financial market volatility wreaking havoc on the asset side of the balance sheets, followed by a lockup of the retrocession market and widespread trapping of alternative capital.”
A couple of months into the pandemic, the impact of the crisis became clearer, with mid-year renewals acting as the epicentre of market uncertainty, according to Priebe, in turn impacting pricing and leading to the tightening of capacity. During this time, the Guy Carpenter global property rate index increased by 6.2% after incorporating mid-year placements. However, in spite of this environment, all covers were placed and sufficient capital was available, noted Priebe.
Now, the road to recovery is more certain. “As we look forward to the first January renewals, some areas of uncertainty are diminishing. Primary rates are increasing and new capital is entering the market,” said Priebe, adding that nonetheless, “The need for primary insurers to generate underwriting returns in a low interest rate paradigm has created a tightening of capacity in certain classes of business and increased rate across the board.”
In terms of COVID-19 related losses, some market commentators have reassessed downward their view of the potential impact of loss, though insureds did recently win a victory with the Financial Conduct Authority’s test case in the UK. Priebe pointed to ongoing uncertainty in this arena, admitting that though some early rulings have upheld contractual exclusions, the ultimate outcomes need to be better understood. In the meantime, global markets have bounced back, with the S&P 500 hitting new records in August, and Guy Carpenter has seen signs of recovery first-hand.
“At the half year, while dedicated reinsurance capital estimated by Guy Carpenter in conjunction with A.M. Best was down just over 2%, we have already seen $28 billion of capital raised by the insurance and reinsurance market participants,” said Priebe. “We expect the alternative capital markets to evolve and adapt more broadly as capital seeks new ways of accessing risk. With specific regard to the retrocession market, there is increasing activity and interest from both new capital and also from existing rated balance sheets looking to deploy new capital into the market.”
Looking ahead, the impacts of the coronavirus will stay with the insurance industry over the long-term. How to insure the pandemic risk will be at the top of risk managers and insurers’ agendas for the coming years, as will the risks brought on by the rapid technological changes that companies have had to introduce during the past half-year. The value of intangible assets also continues to increase and will require insurance solutions, alongside other developments that are creating challenges, like the intensifying fallout from the climate crisis, evidenced by the wildfires burning on the west coast of the US and Canada.
“It’s important to remember that transformative events have led to product innovation many times before,” said Priebe. “We expect a similar playbook this time around, [and] reinsurance will be crucial in supporting insurers in this endeavour by supporting capital positions and reducing volatility.”
