AM Best expects any covered losses to be manageable and believes relevant policy exclusions will hold up.
Adverse impacts from the pandemic may act to restrain capacity, which will further support positive pricing trends that were already in motion.
Therefore, in AM Best’s view, the global reinsurance segment is well positioned to withstand this temporary setback.
However, the ratings agency continues to monitor the situation closely and, if the pandemic causes an extended economic recession or governments impose draconian legislation or if other unforeseen developments emerge, it will adjust analysis and conclusions accordingly.
For the non-life reinsurance industry, AM Best considers the underwriting risk from COVID-19 manageable at this time.
To a large extent, analysts note that the degree of losses will be dictated by the duration of the pandemic.
The carriers with the greatest potential for insured losses are in the specialty classes of business such as event cancelation, travel, credit/surety/mortgage, agriculture, D&O, and business interruption (BI).
However, BI coverage is typically tied to loss or damage to an insured’s physical property. Policies that cover contingent BI (CBI) are generally triggered by physical damage to the property of the business on which the insured depends AM Best also sees a potential negative near-term impact on premium revenue, which will exacerbate the impact from reported losses and expenses.
However, this will be somewhat mitigated by lower attritional losses that are ordinarily incurred in a normal operating environment, as loss frequency decreases and the economy slows.
AM Best notes how the global reinsurance segment’s overall risk-adjusted capital has been exceptionally robust in recent years, driven primarily by relatively low levels of underwriting leverage.
Investment quality also remains conservative, with the industry maintaining relatively low exposure to below investment-grade bonds and equities.
That said, AM Best expects a significant level of unrealised losses to dampen near-term earnings and reported shareholders’ equity.
The global life reinsurance market is generally more concentrated than the non-life reinsurance market is, with a smaller number of players holding the majority of the marketshare.
The main life reinsurers have traditionally avoided the investment risks associated with several products on the primary life insurance side.
AM Best adds that asset portfolios tend to be dominated by longer durations, fixed-income securities of high credit quality, and tight asset liability matching are key elements in the companies’ ERM frameworks.
The life reinsurance segment started the year strongly capitalised, but, as is also the case for non-life reinsurers, unrealised losses will negatively impact their near-term earnings.
Mortality risk is a critical factor. Currently, even the most conservative estimates still suggest that, given the currently available information and resulting trajectories, the number of COVID-19 fatalities will be well below a 1-in-200 year pandemic—the scenario that most reinsurers use for capital stress testing.
AM Best expects the actual numbers to depend on how effective government actions are at containing and slowing the spread of infections and the local ability to treat severe cases.