Howden: Reserve releases likely if Covid-19 IBNR remains high in 12 months’ time

Reinsurers continue to maintain a “healthy buffer” to withstand any adverse development on Covid-19 claims, according to a study by Howden, with reserve releases likely to become more prevalent in around 12 months’ time.

Covid-19 was an unexpected and largely unpriced loss for P&C reinsurers, with government actions to impose lockdowns pushing the bulk of losses from life to P&C carriers.

In a report on the reinsurance sector released ahead of this year’s Rendez-Vous in Monte Carlo, analysis by the broker showed an outsized portion of Covid-19 P&C claims are still booked as incurred but not reported (IBNR).

Analysis by the broker shows the majority of Covid-19 claims were booked in 2020, with 90 percent of the ~$35bn reported coming from the P&C market.

Roles reversed in 2021 with life losses surging by $8bn while P&C carriers incurred just $1.5bn of additional reserves.

For a composite of European reinsurers, Howden said Covid IBNR levels stood at 68 percent 12 months after the event, compared with 49 percent for overall P&C portfolios.

While disclosures for H1 2022 provided less detail, the broker estimated that Covid IBNR even at sub-45 percent would remain significantly above the expected level of 33 percent for normal P&C development within a 24-month timeframe.

Should IBNR levels remain elevated in a year’s time – with 20 percent typical for P&C portfolios after three years’ development – Howden said this would likely spur an increase in reserve releases.

“There have already been some isolated instances of P&C Covid-related reserve releases, with the potential for more to come should loss trends develop favourably from here,” the broker said.

Systemic perils

While the pandemic looks set to be an eminently manageable loss for the (re)insurance market, Howden said it had demonstrated the vast loss potential associated with systemic perils.

“Recent events have shown that risks emanating from what appear to be distinct perils like pandemics, cyber, business interruption, supply chain failures, price shocks or war are often connected and can strike simultaneously,” the broker said.

“They straddle multiple classes of business and bring sizeable loss accumulation potential by flouting traditional controls around correlations, boundaries and duration.”

Howden said the shock of the Russia-Ukraine war so soon after Covid, alongside several warnings of the systemic threat of cyber, had contributed to the transitioning reinsurance cycle in 2022.

“Concomitant effects on capital, risk perceptions and pricing have been significant, as the market adjusts to a new world order,” the broker said.