Rating agency Moody’s has flagged concerns over the ultimate impact of coronavirus-related claims and rising liability claims on the performance of the leading four reinsurers: Hannover Re, Munich Re, Scor and Swiss Re.
Releasing its latest ‘Issuer-In-Depth’ assessment of the carriers, Moody’s noted that the companies themselves have been upbeat in their outlooks for 2021, anticipating significant improvements in underlying earnings.
It said that this is reflected for example in their expectation that combined ratios will decrease towards the mid-nineties in 2021. However, it added that a further expected decrease in investment results will partly offset any improvement in underwriting results.
Crucially, the agency said that coronavirus has taken a toll on FY 2020 results as, in aggregate, the 4 major reinsurers suffered a 69% fall in net income compared to the prior year period. Pandemic-related business interruption (BI) and event cancellation claims in particular weighed on their P&C underwriting performance, and rising mortality claims held back their life reinsurance results.
At the same time, they suffered a further decline in investment returns amid persistently low interest rates. However, Moody’s added, their capital adequacy remained strong overall.
According to the report, reinsurers have accounted for a high share of coronavirus-related losses, in both their P&C and life businesses, on an “incurred but not reported” (IBNR) basis.
“The final cost is therefore subject to change and will likely be subject to discussions and legal disputes of primary insurers with their policyholders and of reinsurers with cedants,” it said, adding that in the recent P&C contract renewals, reinsurers and insurers alike have introduced explicit pandemic exclusion clauses, which should limit the potential for additional claims.
In life, Moody’s said, the volume of additional claims will depend on the future trajectory of pandemic-related mortality rates in the US.
Liability lines remain a concern, however: “While there is currently a strong focus on the coronavirus pandemic, other pockets of risk remain. Natural catastrophe losses were significant in 2020, driven particularly by secondary perils in the US. There is also some uncertainty around reserving levels, especially for US casualty business, where there was some strengthening of reserves last year due to litigation-fuelled claims increases, or ‘social inflation.’”
As Moody’s notes, renewals point to better 2021, but pockets of risk remain. Although P&C reinsurers have also benefited from meaningful price increases and better terms and conditions during recent policy renewals, “the industry needs to improve its underwriting results to offset weaker investment returns amid persistently low yields”.
And there are other dangers hidden in the underwriting forest: “More frequent natural catastrophes and rising liability claims due to litigation will likely pose additional profitability challenges.”