Covid-19 Pandemic:Global reinsurnace capital shrinks by 6 % to $590 bn,tightening of reinsurance capacity expected:AON

Many reinsurers reported losses for the first quarter, driven by asset write-downs and the first installment of claims associated with the effects of the pandemic. The combined pre-tax loss for the 18 constituents of Aon’s Reinsurance Aggregate (‘the ARA’) that reported was USD3.8 billion.The average combined ratio was 103.2 percent, with USD3 billion of COVID-19 related losses recognized.

 

London:

Aon,in its latest``Reinsurnace Market Outlook''((for the period of June & July), released on Tuesday,estimated that Q1(Jan-Mar, 2020) total global reinsurance capital stood at USD590 billion, a decrease over 2019 of USD35 billion, or 6 percent. This result was comprised of a 6 percent drop in traditional reinsurance and a 4 percent drop in alternative capital ending the quarter at USD499 billion and USD91 billion, respectively.

On global reinsurnace capacity outlook, the report has said COVID-19 has exacerbated many of the pressures that were already in the market and added a whole new layer of uncertainty. There are still many variables between now and the year-end, not least the ultimate timing, scale and distribution of pandemic-related losses, the reaction of the capital markets to any further major waves of the virus and the extent of any additional major loss activity.

``In this environment,the “modest but progressive” tightening of reinsurance capacity that we forecasted at the beginning of the year has been accelerated. It remains to be seen whether the volume of new capital that enters the market between now and the year-end is sufficient to influence these dynamics,'' said the report..

The report has explained that despite a rough start to the quarter,capacity was generally available for June and July renewals,albeit with a range of outcomes for insurers driven by timing, structure,and peak zone capacity constraints.

Demand remained relatively stable as many governmental-related covers were pulled from the market offset by some insurers electing to secure additional capital to reduce volatility heading into a predicted, above average hurricane season.

Despite different market dynamics than in many past renewals,insurers were able to secure needed limit in the face of already reported COVID-19 related claims, future uncertainty regarding macroeconomic trends and premium volume impact from COVID-19 for the longer term, added the report.

While traditional reinsurers saw impacts of COVID-19 that affected capital results at the end of Q1,alternative capital remains impact by approximately USD15 billion in trapped capital.

Aon estimated that global reinsurer capital fell by 6 percent to USD590 billion over the three months to March 31, 2020. This calculation is a broad measure of the capital available for insurers to trade risk with.

Traditional equity capital fell by 6 percent,or USD31 billion, to USD499 billion, reflecting the impact of COVID-19 on both sides of the balance sheet.Risk-based capital adequacy has declined,but solvency ratios generally remain strong across the reinsurance sector. Partial recovery of the asset side losses is expected in the second quarter,while claims relating to the pandemic are expected to ramp-up.

Headline assets under management in the alternative capital sector are estimated to have fallen by 4 percent, or USD4 billion, to USD91 billion. At least USD15 billion of collateral is believed to be trapped as a result of recent major losses,now including COVID-19.

The reduction in the amount of capacity actually available for deployment continues to affect the retrocession market in particular, aid the report.

According to the report, COVID-19 has already undermined earnings for 2020. Many reinsurers reported losses for the first quarter, driven by asset write-downs and the first installment of claims associated with the effects of the pandemic. The combined pre-tax loss for the 18 constituents of Aon’s Reinsurance Aggregate (‘the ARA’) that reported was USD3.8 billion.The average combined ratio was 103.2 percent, with USD3 billion of COVID-19 related losses recognized.

Losses resulted in reported capital positions coming under downward pressure.From a strong position at the beginning of the year, leading reinsurers in Europe saw average reductions in their regulatory solvency ratios of around 20 percentage points at March 31.

However,they continue to trade well within their target ranges.

Incumbents raised significant volumes of new capital in the second quarter to counteract the impacts of COVID-19 and position themselves for potentially better market opportunities ahead. Equity issuance in the specialty markets totaled around USD7 billion. In addition, there have been reports of several potential capital expansion plans and/or new company formations. 

Alternative capital
Recent years have represented a significant test of investor appetite for insurance risk.Many supporters of sidecars and collateralized reinsurance transactions have experienced significant losses, with returns further diluted by the trapping of collateral. Concerns around model credibility, loss creep and climate change have caused some to leave and others to pause, resulting in an overall reduction in assets under management.

Some new inflows of alternative capital have been seen, but they have tended to favor established managers with strong track records. The perceived lack of correlation with broader capital markets remains the main driver, with the expectation of higher returns now added to the mix. 

However, this rationale may be challenged if investors see additional collateral becoming trapped as a result of COVID19.

One bright spot is the property catastrophe bond market, where the liquidity of the product and the perilspecific nature of the coverage continues to attract strong interest. Around USD6.5 billion of limit was placed in the first half of 2020, nearly matching the maturities. In addition, a lot of activity has been seen in the industry lost warranty (ILW) market, given the more limited availability of ultimate net loss coverage.


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