Willis Re says BI claim risks pose ‘existential threat to the entire industry’

Reinsurance broker Willis Re, part of Willis Towers Watson, has revealed that the risk from business interruption claims as a result of the Covid-19 pandemic poses 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”.

This insight, published within Willis Re’s Covid-19 Impact Report yesterday, appears to be an anomaly, however. The firm further found that reinsurance claims on the whole will be manageable. For example, if event cancellation claims fall to reinsurers, the impact would be about 1% of the capital base – equivalent to the spend on a mid-size hurricane.

Printhan Sothinathan, co-head of global analytics at Willis Re, said: “In all but a worst-case scenario, we expect claims to be manageable overall, although obviously some carriers, based on their circumstances, will find the crisis much more difficult to weather than others.”

Sector strength

The report also emphasised that although the initial shock of Covid-19 has proved manageable, the future strength of the reinsurance sector depends on the severity of the pandemic’s continuing impact on health and economies.

A press release detailing the report explained: “The industry retains [a] sufficient capital buffer for extreme events, but 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. Willis Re currently estimates a 5% hit to the global reinsurance capital base, roughly US $30bn pre-tax.

“Additional pressures may emerge should economic conditions further deteriorate with a consequent impact on investments.”

The report added that many insurers will end up holding more risk than anticipated, relative of their balance sheets. This will leave them facing three probable options: retain their current strategy, de-risk or hedge. Willis Re predicted that the solvency reduction many take some companies below their desired minimum capital threshold, noting that some insurers have already begun to adjust their plans to suit a range of possible economic scenarios.

Andrew Newman, president at Willis Re, continued: “The impact of Covid-19 on global reinsurer capital is broad enough that it may exacerbate non-life reinsurance market hardening, particularly in commercial lines.

“We may see supply and demand imbalances in some areas, so insurers should be taking steps to reduce the risk of being on the wrong end of any market hardening.”

Industry challenges

Willis Re’s report stated that the insurance industry is “facing formidable practical, operational, legal and technical reserving challenges” as a result of the coronavirus pandemic.

However, the broker added that global reinsurers entered the current crisis strongly capitalised – four European majors are expected to retain solvency ratios above their self-imposed minima, while the US reinsurance industry capital levels remain comfortable. Willis Re estimated a total 7% hit to US reinsurers’ statutory capital.

James Kent, global chief executive at Willis Re, said: “With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely.

“The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from its advisory partners and articulate to relevant stakeholders an appropriate route forward.

“Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental facet in supporting the recovery efforts of its customers.”