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Where next for the post-pandemic market?

The article below, by Rachel Cohen, Senior Treaty Broker at New Dawn Risk, was originally published in the Middle East Insurance Review in September 2020.

Prior to the global pandemic and subsequent lockdown that occurred towards the end of March, the reinsurance sector had certainly seen some hardening of rates in the 1 January 2020 renewals, compared to what had been experienced in the past.

In the international casualty treaty sector, this hardening was more prevalent on loss affected programmes. Reinsureds were enjoying more and more increases in underlying rates, in particular on D&O and the professional lines of business, where increases were anything between 25% and 200%, even where accounts were claims-free. However, it could still be argued that rates were still not quite where they should be, mainly due to the excessive capacity in the market. As has always been the case, there was still a gap between the hardening of rates on the underlying business and the increase in the reinsurance pricing, although this gap was certainly becoming smaller.

Deteriorating results

In addition to this, the spotlight in the last six to 12 months before the pandemic had been shining brightly on the casualty lines of business, especially on the reinsurance side, which was never the case in the past. Lloyd’s was starting to voice its concerns over the long-term profitability of this sector.

In 2015 and 2016, the softening of terms and conditions in the international casualty market was paramount. There was an abundance of capacity and an absence of any severity or systemic losses, which meant that rates were at the bottom of the cycle or were approaching bottom. Fast forward to 2019/2020 and it became very clear that there was a plethora of under-reserving of claims in the past years and the prices charged by reinsurers were unsustainable, meaning the profitable results in many reinsurers’ casualty books were fast deteriorating.

Shifting sentiments

Although it is still very early days in terms of quantifying the impact of the pandemic on the underwriting results, it can certainly be said that reinsurers are more nervous than ever before. Their concerns over the challenges of insufficient reserving on casualty lines of business and inadequate pricing still remain, but now there is much more caution from reinsurers on writing any new business on their books, regardless if the casualty class in question is deemed to be potentially impacted by COVID-19 or not. This is because closer scrutiny by internal management is now even more prevalent across all reinsurance teams. There is not just scrutiny in terms of price, but much more close attention is now being given to wording coverages and more questions are being asked over any existing clauses in contracts that could be construed as ambiguous. It is still difficult to predict how the reinsurance rates will move as a result of the pandemic; in the next few months this will become much more apparent as reinsurers slowly begin to assess any potential pandemic losses.

Looking at the casualty treaty programmes for New Dawn Risk’s UAE clients that have been placed in the last four months, the main challenge is to make sure reinsurers are comfortable with the reinsureds’ assessment of COVID-19. Many questions have been posed to the client, for example are COVID-19 exclusions being put on the original policies? What exposures do they think they may have to COVID-19? Have there been any loss notifications so far? The main concern that reinsurers currently have is about picking up any additional exposures to COVID-19. Certainly, in the UAE, the majority of clients are imposing a COVID-19 specific exclusion or the communicable disease exclusion, both of which have been published by the Lloyd’s Market Association. There are also questions being raised as to whether insureds will see this as an opportunity to pursue claims where they would not necessarily have pursued previously, as a way of attempting to recoup money lost as a result of the pandemic.

Increasing rates

In the Middle East, there has been an increase in the number of casualty losses in the last couple of years, and it remains to be seen if these losses will increase post COVID-19. For the first time in a very long while, independent of the pandemic, there are underlying rate increases being seen in the UAE on bankers blanket bond and D&O business, which may be a sign of things to come if reinsurers start to feel the impact of the pandemic.

For the major part, it seems the reinsurance industry has been largely unaffected by the lockdown. One of the most integral features of the insurance and reinsurance market is the relationships between brokers, reinsurers and clients. However, the lockdown has proven that business can just as effectively be placed in the market with all parties working remotely. Brokers have probably been impacted by the lockdown more than underwriters as negotiations are much harder to carry out effectively over a video call rather than face-to-face at the Lloyd’s box or in a meeting room.

In addition, brokers who started 2020 very successfully with new business forecasts being met have now been faced with a big challenge in being able to meet their new business budgets for the next few months. Many businesses across the world will undoubtedly no longer be able to operate and others are no longer able to afford the big insurance capacity they previously purchased. In addition, premiums paid by clients to brokers and reinsurers are being delayed as businesses struggle with their cash flow.

Evolving loss picture

Business interruption cover given in property reinsurance covers is predicted to make up the majority of pandemic-related losses, while event cancellation and medical malpractice risks will also be impacted. There are also other policies, in particular cyber insurance, general liability or environmental policies, which may be available to meet third-party claims and therefore need to be considered.

Since the intention of D&O insurance is to protect a company’s board of directors and senior officers against claims, investigations and associated defence costs in relation to their actions in the course of managing
the company, this means that many COVID-19-related claims are expected to fall within the insuring clause of the policy. In the US, securities class actions have already been filed against corporations and their senior management in relation to COVID-19. As an example, it is alleged by investors that Norwegian Cruise Line Holdings misled customers with unproven or false statements about COVID-19, enticing them to buy cruises. In addition, Inovio Pharmaceuticals made false and misleading statements about a COVID-19 vaccination that it was producing. In both actions, it is alleged that the value of the company’s shares fell dramatically because of disclosures about the company’s true positions.

The knock-on effect of these pandemic-related claims is that all underwriters will be considering policy wordings carefully going forward and the need for specific exclusions for COVID-19-related (or more generally virus-related) losses. Certainly in the D&O space, both in the UAE and on a global scale, insurers and reinsurers are imposing more restrictions, but more concerning is that they are already drastically reducing capacity, looking to push rates even further, and squeezing commission rates. This may be the sign of things to come at the 1 January 2021 renewals, particularly in those classes of business mentioned above that are potentially facing the most serious impact from the virus. As everyone knows, reduced capacity is a catalyst for a hard market. The heightened scrutiny on renewals will continue and there will certainly be some reinsurers who will be reserving their capacity for renewals only.

Continuing uncertainty

The extent to which reinsurers can withstand continued asset-side volatility and increased claims emergence remains to be seen. Reinsurers have started to de-risk their balance sheets by holding cash, which will have
a significant impact on investment returns. The two biggest Indian insurance companies, GIC Re and New India, have already been downgraded in the wake of the pandemic, and this possibly could mean a bleak future for other currently A-rated insurers and reinsurers across the world. These downgrades may certainly pave the way for opportunities for other prominent players in the market, as well as a chance for brokers to capitalise on their relationships with London and other leading international reinsurers.

The original article can be viewed here