Covid-19 disclosures lower than expected but credit and casualty claims remain uncertain

Covid-19 has been the defining event of 2020 and one of the most significant societal and economic disruptors of most of our lifetimes

For the (re)insurance sector, Covid-19 now looks set to represent a substantial, but manageable loss event, with H1 P&C reserving related to the pandemic of close to $20bn.

In many cases, (re)insurers have reserved for full year 2020 impacts within H1, meaning industry losses incurred in the second half of 2020 are unlikely to match those reported in the H1.

Disclosed losses to date are far below many of the projected industry losses as the event first began to develop, which projected an industry loss of $80bn to $100bn, and in some cases higher.

Several commentators have started to reassess those estimates.

Berenberg analysts have described Covid-19 as “more like a very large natural catastrophe event than an extraordinarily large one”.

To date, disclosed losses are a long way from reaching the $50mn bottom end of the range of estimates put forward as the pandemic started to unfold.

S&P Global Ratings has suggested the industry loss would now more likely fall in the $35bn to $50bn range during recent commentary, a range which allows considerable room for further claims to emerge in the second half of 2020 and into 2021.

The big uncertainty remains how indirect claims from the pandemic, predominantly in casualty and credit classes, evolve in the coming quarters.

During a recent media briefing, Lloyd’s CEO John Neal suggested it is still possible Covid-19 claims could reach the previous top end of industry estimates as these claims emerge over forthcoming reporting periods.

Lloyd’s is an outlier, estimating industry-wide P&C losses of ~$100bn from the pandemic.

How the anticipated ‘second wave’ of Covid-19 plays out will also impact the industry loss bill. Covid-19 remains an ongoing event and will do so for the foreseeable future.

Covid-19 claims impacts

The Insurer’s analysis of non-life Covid-19 claims disclosures has identified $16.7bn of P&C reserves booked by global (re)insurers during H1, with an additional $3.1bn of losses reserved within the Lloyd’s market.

This brings the industry total to $19.8bn, although it is likely there is some overlap between losses within Lloyd’s and those disclosed by companies operating in the market.

Several industry commentators are now converging around an H1 Covid-19 P&C loss of around $20bn.

The likes of Swiss Re and Hyperion X have also referenced H1 industry disclosures of around $20bn while providing their own market analysis.

Swiss consultancy PeriStrat now lists public disclosures at around $22.4bn, although this figure also includes forward-looking statements about future reporting periods from the likes of Lloyd’s and QBE, as well as $1bn of life losses from Swiss Re.

PeriStrat had earlier listed the total at around $25bn but reduced this figure as it included $3bn related to FM Global which had not been disclosed.

With several companies having booked their expected full-year impacts in H1, particularly for losses such as event cancellation, the industry’s Covid-19 claims bill is expected to be lower in the second half of 2020.

Lloyd’s, for example, has said it expects a further $780mn of Covid-19 claims to be booked in H2, in addition to the $3.1bn H1 total.

Munich Re said this month it had received additional pandemic losses on the contingency side during the third quarter, but with reduced momentum compared with H1.

The reinsurer has not disclosed a quantum for those additional losses.

Beazley has disclosed a more significant H2 impact, this morning announcing it had increased its estimated Covid-19 impact to $340mn from its previously announced $170mn, driven by anticipated event cancellation losses brought about by further conference cancellations impacting its contingency book.

Covid-19 losses bring unprecedented uncertainty given the high proportion of reserves that are for incurred but not reported (IBNR) claims.

Lloyd’s said 80 percent of its $3.1bn H1 Covid-19 reserves were for IBNR, with IBNR accounted for 72 percent of Swiss Re’s group-wide H1 Covid-19 losses and 80 percent of those at Hannover Re.

As of 28 August, Scor said it had paid just Eur3mn in claims of the Eur248mn reserved in its P&C reinsurance division during H1. Munich Re said just 11 percent of the Eur1.4bn P&C claims it booked in H1 had been notified at the half-year stage.

The outcome of business interruption claims litigation also has potential to increase the industry’s exposure to the event.

Following the initial verdict in the UK test case on Covid-19 claims, Hiscox, RSA and QBE all disclosed additional expected claims impacts from the event. In each case, the impact was manageable.

Hiscox said it expected a net impact of less than £100mn, with RSA’s claims impact capped at £85mn and QBE at £70mn. Each of these totals are after reinsurance recoveries.

Reinsurance response

How reinsurance contracts respond to claims from the event is another factor that will ultimately shape the industry loss picture is how reinsurance contracts respond to claims from the event.

Several insurers disclosed during H1 earnings commentary that they were in discussion with their reinsurers about reserve recoveries.

Allianz, for example, said it had started talks on recoveries which could total hundreds of millions of euros, but conceded these discussions will be a “long process” amid uncertainty about how contracts will respond to claims related to the pandemic.

Similarly, Axa said it had started discussions with reinsurers on its property catastrophe per event programme, with talks “complex and ongoing”. Reinsurers, who by nature are a step removed from claims and have less visibility when setting reserves, have issued several statements which suggest they will be robust in ensuring cedants terms and conditions cover Covid-19 claims before paying out.

During earnings commentary, several reinsurers have suggested they would be disciplined in applying contractual terms and conditions in responding to Covid-19 claims.

In a recent interview with The ReInsurer, Swiss Re chief executive Christian Mumenthaler said the reinsurer was now reviewing its catastrophe excess of loss policies to ensure wordings explicitly include or exclude non-physical damage business interruption cover in response to lessons from the pandemic.

The extent to which cedents are successful in recovering claims from reinsurers will determine how industry losses are split between primary and reinsurance layers.

Fitch Ratings has suggested it is likely reinsurers will ultimately take around half of the industry’s loss bill.

To date, S&P said the 20 largest global reinsurers had reported $12bn of Covid-19 losses, of which 78 percent is for IBNR.

Retro covers, in contrast, appear to have escaped relatively unscathed although there remain concerns about trapped collateral related to Covid-19 claims.

“For collateralised reinsurance, there were major concerns in the first quarter but the level of BI losses that we are beginning to see percolate does not seem likely to put the retro market in a deep state of loss,” Michael Millette, founder and managing partner at Hudson Structured Capital Management, told The ReInsurer’s latest virtual debate.