Global reinsurers face $30bn hit to capital base

Written by Adam Cadle

23/04/2020

Global reinsurers are facing a 5% hit to their capital base, around $30bn pre-tax, as a result of COVID-19, estimates have shown.

A report published by Willis Re said reinsurers have started to de-risk their balance sheets by holding cash, which will have a significant impact on investment returns.

“Many insurance companies will end up holding more risk than anticipated relative to their balance sheets,” it added.

“They are likely facing three options: retain current strategy, de-risk, or hedge. The solvency reduction may take some companies below their desired minimum capital threshold, and insurers have already moved to begin adjusting their plans to suit a range of economic scenarios.”

Willis Re said in general, reinsurance claims are likely to be manageable.

“For example, assuming most event cancellation claims fall to reinsurers, their impact would be about 1% of the capital base, equivalent to a mid-size hurricane. However, the risk from business interruption claims presents an existential threat to the entire industry, given growing calls to revise coverage retroactively and the colossal, if notional, aggregate limits deployed irrespective of contract agreements in place.

“Overall, the industry is facing formidable practical, operational, legal, and technical reserving challenges. The good news is that global reinsurers entered the crisis strongly capitalised. The four European majors are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels remains comfortable. Willis Re estimates a total 7% hit to US reinsurers’ statutory capital.”

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