Reinsurance and insurance markets are changing rapidly in assisting travel and health insurers to meet their obligations when an event like the Covid-19 pandemic occurs.
The catastrophic event saw millions of cancellation claims come in for travel insurers and millions of treatment claims for health insurers.
As a result, insurers and reinsurers need to become increasingly sophisticated in managing their capital and risks.
Evolving regulations and consolidation are driving a trend of reinsurance buying by insurance companies to enable them to steer a path in these uncharted waters, enable growth and manage risks across health and travel.
Brad Ellis, US health insurance and managed care sector head at Fitch Ratings told ITIJ: “We have a neutral outlook on this sector for 2022. It’s been quite remarkable how well the health sector has offset the claims related to Covid-19. We’re feeling calmer this year than we did going into 2020.
“What we didn’t foresee, neither did the insurance companies themselves, was the effect of this deferral of healthcare. People were afraid to go into medical facilities for fear of catching Covid-19. We had around 31 states in the US who placed moratoriums on elected procedures – and those are very expensive procedures. All of that in the second quarter of 2020 more than offset the claims related to Covid-19.”
A collaborative approach to reinsurance
Described by the Reinsurance Association of America as 'insurance for insurance companies', reinsurance is the process by which several insurance firms share risk by purchasing insurance policies from other insurers.
This is done for four reasons: to limit liability on a specific risk in case of a catastrophic event; to stabilise loss experience; to dually protect themselves and the insured against catastrophes; and to increase capacity. By spreading risk, individual insurance companies are then able to onboard clients whose coverage would be too great a responsibility to handle alone.
Reinsurance programmes can provide more efficient risk protection and assist insurers to optimise their capital structures to develop long-term strategy and growth performance.
Reinsurers give insurers more stability when unusual or major events occur. They can also provide insurers with solutions such as releasing capital and monetising expected cash flows on long-term business. They also provide substantial liquid assets available for insurers in case of exceptional losses. Effectively, reinsurance acts as a flexible and cost-efficient alternative to a letter of credit.
This allows insurance companies to pass on risks greater than their size and for the reinsurer to absorb larger losses. As Aaron Hillebrandt, Principal and Consulting Actuary at Pinnacle Actuary Resources notes, reinsurance will ‘limit the impact of large losses, or conversely implications on surplus’. It also acts to ‘smooth out financials, transferring risk and taking advantage of economies with regards to writing higher limits’.
Jeff Kenneson, President of Davies Captive Management, characterised the current situation by saying: “As we moved through the pandemic to the point where companies started to realise that the world was not going to end, this pent-up demand for captives with the hardening market unleashed.”
The most common reason for insurers to use reinsurance is because they are risk averse. It can stabilise their losses as even if an insurance company can pay for a large number of claims made in a short period of time, paying out all of those claims may leave it in a dire financial situation and extremely unstable.
The European Insurance and Occupational Pensions Authority (EIOPA) released results of the 2021 Insurance Stress Test. The report assesses the resilience of insurance undertakings to adverse scenarios to see if they can withstand the shock. A key finding was that exposure to market shocks was one of the major vulnerabilities.
In recent years, the major event is the Covid-19 pandemic that resulted in above-average major claims activity.
Lloyd’s of London reported a market loss of GB£400 million (US$517.8 million) for the first half of 2020. This result was driven by £2.4 billion ($3.1 billion) of Covid-19 claims.
According to Munich Re figures, Covid-19 accounted for losses of around €170 million in life and health reinsurance for Q3.
A backstop for insurers paying big claims
Insurers often need reinsurance when hundreds of claims come in at once. Even if insurers are able to pay for a big number of concurrent claims, it does leave them in a vulnerable financial position, so reinsurers can help keep insurers stable when times are economically tough.
The main downside of insurers purchasing and entering into long-term deals with reinsurers is that it is costly. The pros and cons of buying a pricey insurance policy need to be weighed up, even if the risk is small or overestimated.
However, Kenneson suggests a way forward. “Because of market pressures, a company may feel that they are overpaying for a certain part of their reinsurance programme. So, if they are able to fund their own captive to retain risk for certain sections of their reinsurance programme, they can potentially lower costs and fees.”
By law, an insurer must have enough equity to be able to pay all potential future claims related to its policies. However, the insurer can reduce its responsibility or liability by transferring a portion of liability to a reinsurer. In this way, a benefit is freeing up capital so the insurer can support larger insurance claims.
Nevertheless, according to the SCOR Activity and Corporate Social Responsibility (CSR) Report 2020: A World in Turmoil, the Covid-19 phenomenon was underrated. This was despite pandemic risk always having been well-known to reinsurers. Infectious diseases figure highly in risk maps and their study is an integral part of risk-management policy.
As the saying goes, hindsight is good, foresight is better; but second sight is best of all. Nevertheless, the global reach of the Covid-19 phenomenon was underestimated. There were also other unforeseen factors such as decisions made by governments to contain the spread of the virus, which heavily impacted the insurance industry’s exposure to the crisis.
This was a multi-faceted crisis, with health-related, economic and financial implications for the travel industry. It affected reinsurers and insurers, both assets and liabilities. Howden summed up the report by calling it a year of change and challenge.
Anne-Marie Cical, Regional Chief Underwriting Officer Europe at SCOR, goes even further in her summary. “Pandemics are considered by the insurance community as hardly insurable or even uninsurable. Why? Because the principle of insurance is based on risk pooling and diversification (in terms of space and time). When the economy is collapsing everywhere, you cannot address the issue.”
She adds on the future measures that will be carried out. “Since the advent of the Covid-19 crisis, we have been working on our guidelines, pulling together our legal, underwriting and risk management teams in order to clearly exclude pandemic risk as far as property lines are concerned. We have warned our clients that pandemic risk does not fit with our risk appetite, as we can only write risks we can assess, measure and price.”
Bruno Latourrette, Chief Knowledge Officer at SCOR Global Life, acknowledges that many people 'didn’t foresee the potential ramifications and interconnections of the pandemic. Reinsurers need to be able to put a price tag on risks, to charge for insuring against them. We need to estimate how much it will cost before the event occurs'.
Recommendations concluded that more research was needed to estimate the frequency of such events and how lethal each would be if it were to happen again. There also needed to be an adjustment for factors like medical advances, increased air travel and non-pharmaceutical interventions like lockdowns and masks.
A financial reprieve from market pressure?
Reports suggest that the Omicron variant is less severe compared to the Delta variant, according to the World Health Organisation. This is restoring confidence in the market.
Global reinsurer underwriting performance is forecast to continue an upward trend into 2022. This is as a result of surviving these nigh-on unprecedented times of catastrophe losses, low interest rates and increased premium rates, according to Fitch Ratings.
“We are seeing a lot of new formation activity right now,” notes Kenneson. “As we moved through the pandemic to the point where companies started to realise that the world was not going to end, this pent-up demand for captives with the hardening market unleashed.”
Many analysts and experts are optimistic for the future. Howden’s renewal report Times are a-changin’ expects to see continued demand for reinsurance. José Manuel González, CEO, Howden Broking, says he will be ‘working closely with insurance and reinsurance companies in this endeavour, and to supporting clients in managing change and securing the best coverage available in the marketplace’.
Around $44 billion is what the coronavirus pandemic has cost reinsurers, according to the Howden report. While this is a considerable sum, it is far less than the early figure of a $100 billion loss for the market.
The pandemic phenomenon shone a spotlight on the importance of monitoring the external risks as well as for new, unknown risks – which can give rise to unexpected and devastating consequences.
Other elements, such as changes to the climate and environment, also have a huge impact on risk. These factors could lead to the emergence of further pandemics and new health issues.
Adapt to survive is the message that has come out of these unprecedented times. Insurers need to work closely with the reinsurance sector to innovate, advise and offer sufficient capacity during one of the most significant periods of change and chaos in recent history.