Moody’s: What more will COVID cost?

Two new reports from Moody’s predict rising prices but a negative outlook for reinsurance.

By Marc Jones, Associate Editor

Reinsurance prices are set to rise amid the COVID-19 pandemic and rising natural catastrophe risk, Moody’s said in a new report unveiled in London. Most respondents to Moody’s annual survey of P&C reinsurance buyers expect reinsurance prices to rise by at least 5% in 2021 as the fallout from the coronavirus, more volatile natural catastrophe losses and capacity constraints take a toll on reinsurers profitability.

According to Moody’s over 90% of respondents expect price increases in 2021 across all lines, while none foresaw a decrease. By comparison, less than 50% of respondents expected price rises in the 2019 survey, while some had expected prices to fall.

“Some respondents commented that price increases could move even higher next year if financial market conditions deteriorated in the second half of 2020, or if this year's U.S. hurricane and wildfire seasons result in higher than expected losses,” said Brandan Holmes, a Vice President and Senior Credit Officer at Moody’s.

Price increases this year are expected to be strongest for cat-exposed property reinsurance, reflecting rising capacity constraints, with over 80% of buyers expecting prices to rise by more than 5% across most lines, compared with just 16% last year. Price increases in loss affected lines will be higher.

While some buyers expect to purchase more reinsurance in 2021, the increase will be smaller than in the last two years, as higher prices dampen demand. A significant majority of buyers expected loss cost trends on casualty business to continue rising, although the responses suggest that demand for casualty reinsurance will remain steady, after increasing over the past two years.

According to the survey the deteriorating risk environment has made reinsurers' financial strength and reputation a more important consideration for some buyers, with these attributes increasing in importance over past years. Some of the larger insurers that responded to the survey also named bespoke services and support for new product offerings as key features of their core reinsurers.

In addition in a new report unveiled in New York the day before the London survey results, Moody’s Investor Surveys said that its outlook for the global reinsurance sector has changed to negative from stable as a challenging operating environment in the wake of the pandemic weakens profitability.

“Uncertainty around ultimate coronavirus-related losses, along with low interest rates, shrinking reserve releases and more expensive retrocessional coverage will all be a drag on reinsurers’ profitability in the next 12 to 18 months, despite stronger reinsurance pricing,” said James Eck, VP and Senior Credit Officer at Moody’s. “Coronavirus-related losses and other catastrophe events have already depleted the annual catastrophe-loss budgets of many firms.”

According to Moody’s the ultimate impact of the coronavirus pandemic on the reinsurance sector is difficult to estimate. The crisis affects multiple lines of business and geographic regions. Many business interruption coverage issues have yet to be resolved and there are still significant downside risks to the economic recovery.

The rating agency also pointed out that although losses associated with the economic shutdowns that began in March, primarily arising from event cancellation, property (with affirmative business interruption), travel and accident and health coverages, are likely to be fairly clear at this point, reinsurers will take additional charges in coming quarters as the impact of the pandemic continues to unfold and the extent of the economic downturn becomes more certain.

Finally, Moody’s added that climate change is a longer-term challenge for the sector. Weather-related catastrophe events have become more frequent as temperatures have increased and sea levels have risen. For reinsurers, this creates risk management challenges associated with assessing, measuring and mitigating catastrophe risks, and has heightened the volatility of firms’ results.


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