Global reinsurance capital may be eroded by some $30 billion as a result of market movements in the wake of the coronavirus outbreak, according to a report released Thursday by Willis Re, the reinsurance arm of broker Willis Towers Watson.
That represents “capital destruction” of about 5% of a
$559 billion global reinsurer capital base before the outbreak, the report found. The calculation was based on applying a 15% decline in equities together with a 10% hit to high-yield credit instruments.
The report noted, however, that with so many situations so fluid, values and variables can change quickly.
“Illustrating how volatile the situation is, this estimate had been 20%, or US$110 billion, as of late March,” the report said.
Claims are likely to be “manageable” from a reinsurance industry financial strength standpoint, the report said, adding that trade press reports have put insured loss claims at between $4 billion and $6 billion.
“Assuming most of these fall on the reinsurance sector, this would be equivalent to a midsize hurricane, and about 1% of the global reinsurance sector’s capital base,” the report said.
Greater shock could come from the investment market, where a Willis Re analysis of 24 major global reinsurers showed these companies on average hold 24% of their investments in corporate bonds, including 2% in high yield, and 8% in equities.
The report also foresees less money coming in as “reduced economic activity will almost certainly lead to lower written premium volumes.”
The COVID-19 outbreak may also bear upon a retail market in which rates had begun to rise in many lines over the past few quarters, with Willis Re noting that “evidence suggests that the market was starting to harden across all classes and most regions.”
The current crises could affect these movements as well, the report said.
“The emergence of COVID-19 is broad enough that it is now more than merely conceivable that it might exacerbate market hardening in the non-life segment, probably weighted more toward the commercial than the personal lines segment — the extent to which for both will depend on how severe the loss burden ends up being.”
More insurance and risk management news on the coronavirus crisis here.
