S&P: 2020 Is A Difficult Year For Global Reinsurance Companies
S&P: The statutory pressure to pay compensation affects the increased probability of greater corporate volatility
S&P expected credit rating agency S&P to be likely 2020 as a difficult year for global reinsurance companies in light of the emerging Corona Virus pandemic, and with higher claims for property and liabilities (P/C) branches and lower returns on investment.
The agency said in a report on the impact of the Corona Award on the global reinsurance industry that the large global reinsurance companies lost between 20% and 30% of their average solvency ratios during the first quarter of 2020 mainly driven by the increased prevalence of the pandemic impact and market fluctuations Stocks.
Insurance losses and investment losses led to a reduction in the return on capital to the sector from about 7.4% at the end of 2019 to about 3.5% in the first quarter of 2020. At the same time, the cost of capital increased by about 7.7%.
As a result, S&P believes that the sector’s ability to earn capital cost in 2020 has decreased significantly and is virtually non-existent given that the sector is still suffering from the effects of natural disasters such as the North Atlantic hurricane and Pacific hurricane seasons, and taking into account Of the high cost of capital in the first quarter of 2020.
The report pointed out that the losses related to COVID-19 in the first quarter of 2020 added 10% on average to the combined ratio of this sector losses along with investment losses, which led to a decrease in the sector’s return on capital from 7.4% at the end of 2019 to about 3.5 % In the first quarter of 2020, while the cost of capital increased from 5.9% at the end of 2019 to about 7.7% at the end of the first quarter of 2020.
S&P initially estimated return on equity (ROE) between 7% and 9% and return on capital between 6% and 8% for 2020 which companies will not be able to achieve this year if the sector suffers from a natural disaster loss burden between 8% and 10% of the combined ratio.
The agency also believes that claims related to COVID-19 in reinsurance – liabilities and property P / C – are rising and beginning to negatively affect reinsurers in the first quarter as losses related to COVID-19 for the top 20 reinsurance companies amounted to about 10% on average Of the combined ratio of a quarter.
According to the report, these losses mainly include claims to cancel events, business interruptions, professional liability of managers, credit and travel, and these were mostly first-order impacts due to the pandemic. However, there is not much matching in the numbers as reinsurers assess losses using different methods. We also expect that the additional direct losses related to the second quarter will be recognized and the indirect effects will appear during the coming quarters (the following periods).
She said that in the first quarter of 2020, the main burden of reinsurers was in the case of cancellation or postponement losses such as the postponement of the Tokyo Olympics and the cancellation of other major sporting events and mainly the largest proportion of compensation for such events is concentrated in major global reinsurance companies. Small events also increase the value of the bill.
And other Standard and Poor’s believe that other disturbing insurance branches that will experience greater losses worldwide will include business interruptions, aviation and credit branches including collateral, mortgage, professional liability of managers, errors, omissions and workers compensation, in line with the expected economic slowdown.
According to the agency’s report, it is not excluded that the regulatory or legal pressure to pay compensation may arise, which affects the increase in the probability of greater fluctuations in reinsurance companies, and it is expected that the expenses of adjusting losses / compensation will increase with the increase in cases of litigation around the world against the insurance industry.
In a related context, the agency stated that the most disciplined initial underwriting and pricing of the most accurate terms, conditions and provisions with clear exceptions and appropriate risk management in general are essential if reinsurance companies are to defend their competitive positions and maintain profits and capital strength.