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The Insurer In Full: P&C Covid-19 reserves tick up by ~$4bn as casualty warnings grow

P&C aggregate Covid-19 reserve disclosures rose by around $4bn during the most recent reporting period, largely driven by...

...additions to provisions for event cancellation and business interruption (BI) claims.

  • Disclosed Covid-19 P&C reserves now top $21.5bn
  • BI and event cancellation impacts likely to slow in coming quarters
  • But major concerns over casualty claims potential from recessionary impacts
  • Bruce Carnegie-Brown and Stephen Catlin both say total industry bill will top $100bn

P&C reserve disclosures within company earnings announcements now total around $21.5bn for Covid-19, still significantly below the bottom end of forecasts for the overall industry claims bill from the event.

The complex nature of Covid-19 reporting makes it difficult to draw a precise picture of the industry’s losses to date. While some firms have broken out their P&C claims impact from the event, others have factored in benefits from reduced claims frequency in certain classes within the total.

In addition to the companies tracked by The Insurer in our table below, Lloyd’s reserved for £2.4bn ($3.2bn) of losses during the first half of the year, with an additional £600mn to come. There will likely be significant overlap between reserves included within the Lloyd’s estimate and the reserves accounted for by company disclosures.

Life reserves related to the pandemic to date will likely add a low to mid-single-digit billion-dollar amount to the P&C total. HX Analytics has put the industry’s total Covid-19 claims at the nine-month stage at $26bn, while Swiss consultancy Peristrat has tracked reserving at around $28bn. This figure includes life reserves for Europe’s big four reinsurers, Allianz and Berkshire Hathaway as well as some forward-looking statements about future loss impacts.

 

Covid-19 9M P&C loss estimates

 

Q3 loss drivers

Event cancellation reserve increases among European reinsurers – principally Munich Re – and loss disclosures from the international operations of Japan’s big three insurers were the main drivers of additional Covid-19 losses incurred during the most recent reporting period.

Munich Re added a further €700mn ($818mn) of Covid-19 reserves in its P&C reinsurance segment during the third quarter, while MS&AD, Sompo International and Tokio Marine have now booked in excess of $1.1bn of losses between them in relation to the pandemic.

Rating agency Fitch has said it expects Covid-19 reserving to slow at the three Japanese insurers in subsequent reporting periods.

Many major (re)insurers did not adjust their reserving for P&C claims related to the pandemic, with any movement in claims expectations contained within their earlier estimates.

In Bermuda, only Everest Re saw a significant increase, lifting its Covid-19 reserves by $115mn in the quarter.

Inconsistency in the reporting methodologies used makes it challenging to draw direct comparisons among companies or to assess the ultimate industry loss burden.

Zurich, for example, disclosed a Covid-19 reserve total of $750mn at the end of H1, but shifted towards publishing a net total – including frequency benefits – during Q3. The insurer said its net impact was unchanged at $450mn at the end of the most recent reporting period. For the purpose of this analysis, we have referenced the gross total in our tally of industry losses.

Several companies are now reporting totals that include frequency benefits – last week, Aviva reduced its net Covid-19 P&C impact to £100mn from its previous total of £165mn, based on frequency benefits in Q3.

Generali has not disclosed an estimate of its Covid-19 claims bill as frequency benefits mean the pandemic will likely have a net positive impact on its P&C operations of €94mn for the year to date.

Others have provided more detailed breakdowns of P&C impacts including disclosures by class of business.

Industry commentary to date has highlighted the extent to which event cancellation and BI claims have driven Covid-19 P&C reserving.

Europe’s big four reinsurers have accounted for $5.2bn of Covid-19 P&C reserves in the first nine months of the year, roughly one quarter of total industry disclosures.

This has been driven by the significant event cancellation exposures underwritten by Munich Re and Swiss Re.

Both have said they will incur additional losses as government restrictions lead to further event postponements and cancellations in the new year.

However, these losses are likely to be at a significantly lower level than those booked in during 2020.

BI losses are also expected to diminish in the year ahead. As Swiss Re CEO Christian Mumenthaler recently noted, the upcoming 1 January renewals will serve as a risk mitigant from a reinsurance perspective, with widespread exclusions expected to be introduced. Mumenthaler said exclusions had already been widely implemented in all renewals since April.

Recent BI test cases have largely had only limited impacts on reserves, with many companies having already booked potential losses in earlier provisions or only modestly increasing their estimates in light of recent rulings.

Swiss Re, for example, said it had not yet seen reason to change its previously established reserving for Covid-19 BI claims following recent test case rulings in the UK and Australia.

One notable exception is IAG, which announced an additional A$865mn ($637mn) provision following the recent Australian test case ruling which went against insurers.

 

Casualty uncertainty

Looking ahead to 2021, the Covid-19 claims focus will likely shift towards recessionary impacts and the extent to which these drive trade credit and casualty claims.

Insolvencies, to date, have been largely limited by government interventions. Trade credit insurers have participated in government-backed schemes in several major economies, which have ensured continuity of cover. It is likely these mechanisms will continue into 2021, as demonstrated by ongoing talks in Germany regarding a six-month extension to its trade credit backstop.

The duration of government-support measures will play a significant role in determining the ultimate extent of trade credit claims.

Casualty claims are a major industry concern for the year ahead. While only very limited casualty reserves have been established across the industry to date, several senior industry figures have voiced concern about claims potential in 2021 and beyond.

Notably, Lloyd’s CEO John Neal has said the Corporation will introduce an additional business plan review during the first quarter of 2021, largely to ensure casualty exposures are under control. Neal has said Lloyd’s has identified 13 different casualty lines that could be impacted by Covid-19 claims, including directors’ and officers’ liability, employers’ liability and public liability.

Lloyd’s chairman Bruce Carnegie-Brown has in recent weeks said total claims related to the pandemic will exceed the Corporation’s previous top-end industry estimate of $107bn.

Convex chairman and CEO Stephen Catlin warned last week he was still of the view the industry impact from the pandemic would be somewhere between $100bn and $200bn.

Given that P&C losses to date – even if the Lloyd’s total is added to company disclosures – are only around $25bn, this would suggest the insurance world remains in the early stages of understanding the full extent of the impacts it faces from the pandemic.

 

The Insurer comment

Covid-19 is the most complex loss event the (re)insurance sector has faced. Different levels of disclosure, the unknown duration of the pandemic and legal uncertainty over coverage all make it difficult to present clarity around the loss event.

Based on disclosures and commentary to date, it appears that the industry is relatively comfortable with its reserving position on the classes of business which have driven losses to date – event cancellation and BI.

Although there will be further losses from these coverages in 2021, they are expected to be below the level experienced in 2020. As HX AnalyticsDavid Flandro has described, Covid-19 to date has been a moderately large catastrophe event for the industry.

The P&C cost is significantly below the early market estimates, which mostly suggested a range of between $50bn and $100bn for total industry losses.

But the losses to date may only tell part of the story, according to the likes of Bruce Carnegie-Brown and Stephen Catlin.

At Lloyd’s, there is enough concern about the potential for casualty losses to emerge that a further review of business plans has been introduced in the first quarter of next year to ensure syndicates are on top of their exposures.

Carnegie-Brown and Catlin do not envisage the total industry bill falling below $100bn. Covid-19 may yet prove another industry loss event with a sting in its tail…

 

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