How COVID-19 could mean forecast losses, premium declines and longer-term liability issues.
While the impact of COVID-19 won’t be fully realised for some time, the anticipated surge in bankruptcies, decline in employment and increase in consolidation activity is expected to drive a drop in overall premium levels as economies contract.
In this blog, we delve into the initial estimates of the direct cost to P&C insurers — which unsurprisingly show considerable variation.
Key industry leaders are publicly declaring their forecasts, for example:
Lloyd’s of London estimates 2020’s global underwriting losses resulting from COVID-19 at approximately $107bn. The market added that it expected to pay out $3bn to $4.3bn globally due to the pandemic (in line with the pay-out post-9/11 in 2001).
Moody’s estimates the potential financial cost to P&C insurers at €50bn-€80bn (in the range of a large-scale natural catastrophe). The agency added that while pandemic-related losses will have a severe effect on earnings, it is unlikely that it will have a detrimental impact on capital.
However, many commentators believe the industry may well face a “capital crunch”.
Individual insurers/reinsurers are also counting the claims resulting from COVID-19:
- Swiss Re’s first-half results were negatively impacted by $1.5bn in claims/reserves related to the crisis, reflecting “affirmative non-damage business interruption, cancelled/postponed events, casualty and credit/surety losses”.
- Munich Re puts the impact for the period at €1.5bn, with approximately €1.4bn attributable to property/casualty reinsurance and the remainder to life/health reinsurance.
- QBE attributes $335m to a COVID-19 underwriting impact on its first-half performance, including net incurred claims of $150m — with its ultimate losses from the pandemic expected to be $600m.
- Hiscox has $232m reserved for COVID-19 related claims, including $150m for previously reported claims relating to segments such as event cancellation and travel.
- Zurich UK’s first-half results include £182m for notified/expected claims relating to the pandemic, where its policies provided cover.
Another significant market concern is the expected liability claims due to increasing crisis-related class actions. According to a recent Lex Machina study, insurance, contracts, and employment filed 424, 397, and 102 cases respectively (between March-July), that would not have been filed if not for COVID-19 and/or have claims substantially exacerbated by the pandemic.
Pat Van Bakel, president, Canada, comments,
“During the early stages of the first COVID-19 wave we were learning new things about the virus daily, so proving negligence in cases where employees and the public may have been put at risk was challenging. However, as we see the second wave develop and lockdown restrictions are relaxed to restart economies, companies now have a much clearer idea of what they are dealing with, so if employees are put at risk the potential for litigation is much greater.”
Decline in GWP
The insurance market is also predicted to experience a marked decline in GWP, reflecting a drop in insurance demand. A recent Swiss Re Sigma report forecasts that global life premiums will contract by 6% in 2020, with savings products likely to be worst affected — and trade, marine, aviation and credit lines the hardest hit.
Benedict Burke, chief client officer, Global Client Development says,
“Increased instances of insolvency, reduced level of employment and an uptick in potential M&A activity will inevitably lead to diminished exposures across a number of lines, and may result in companies seeking a return on premiums due to changes in their risk profile.”
To read more about how COVID-19 is shifting the insurance dial on multiple fronts, please read our detailed report called Responding to a market in flux.