2020 will be remembered by almost everyone for one reason: COVID-19. The legacy of COVID-19 will be felt by the Insurance and Reinsurance industry for many years to come, due to how it has changed the way many of us are operating and the discussions being held around the world regarding the definition of coverage. Currently, the market is experiencing the impact of COVID-19 on insurance policies but it still remains to be seen the effects of potentially aggregating together COVID-19 losses within the definitions of Reinsurance clauses and the subsequent effect on that market.
Managing a no-deal Brexit
With most people’s main focus being on COVID-19, Brexit seemingly had been consigned to the background, however the issues of a No-deal Brexit for the Insurance and Reinsurance industry remain and become ever more focused as we near the end of the year. Most large reinsurance underwriting companies and brokers have already implemented a strategy to continue to trade into 2021 in the event of a no-deal Brexit, however it remains to be seen how smaller entities on both sides of the business are prepared for the challenges this scenario will present.
It is clear that, in the short-term, there will be economic impact on both sides of the Channel regardless of whether the EU or the UK Government agree to a deal or not, as a result of the changes in the rules that are going to be implemented. Again, whilst this will change the way Reinsurance business is transacted, it will not overly impact long-term relationships built-up over many years.
The possible economic downturn as a result of leaving the EU and COVID-19 will have a knock-on effect on the Reinsurance sector but is harder to predict the immediate severity of this due to other variables such as investor appetite, impact on investment returns, competition, and many more.
Nat cat exposures
However, with regard to investor confidence, on the back of the catastrophe losses in 2017, 2018 and 2019, as well as recent multiple smaller events triggering losses in 2020, entities both established and new have been able to raise substantial new investment this year. However, smaller companies with less history and poorer loss records will find it challenging to attract new capital going forward.
As noted above, the reinsurance market has suffered over the last four years from the well documented property catastrophe losses of 2017, 2018 and 2019, as well as further losses in 2020. Whilst prices are increasing and continuing to increase heading into 2021, the market can only charge so much.
As a result, in 2021 the property catastrophe reinsurance market will likely tighten up the terms and conditions that it offers particularly with regard to pandemic exclusion, as well as looking at the overall coverage offered. Aggregate capacity will be available but at an increased cost, which to some will be just too high, resulting in purchasing more occurrence based limit. The ILS markets will need to contend with further ‘locked-in’ capital resulting from Hurricane Laura as well as potential COVID-19 claims.
Low interest rates continue
Interest rates will continue to have a major effect on the degree of profitability. With most insurance companies historically leaning towards holding long-term AAA bonds / gilts for investment purposes, low interest rates continue to offer lower profits. Typically, lower interest rates also mean that re/insurance companies will have lower levels of equity investment, leading to lower levels of assets for these companies.
In order to counteract these low interest rates, companies may look for more creative solutions (albeit as a small overall percentage of their investment portfolio) within the derivative market place, to increase their profits.
No one can yet accurately predict where the Reinsurance market will be in 12 months’ time, or longer, not only due to COVID-19, Brexit, and/or a potential recession, but also due to the ongoing effects of climate change and its role in evolving new loss patterns. Whilst all of the above factors will influence the reinsurance market to a lesser or greater extent, one fundamental principle remains, which is to run the business well.