Sirius and Swiss Re take largest Covid-19 combined ratio hits in H1

Analysis by Fitch Ratings has shown Sirius and Swiss Re were the two reinsurers to take the largest Covid-19 combined ratio impacts during the first-half of the year.

Fitch said the pandemic had added 11.2 percentage points to the reinsurance sector’s H1 combined ratio, which rose to 105.8 percent during the first half of 2020.

This compared with a global reinsurance combined ratio of 94.5 percent during the first half of 2019. But within this market-wide trend, there remained significant disparity among the performance of individual reinsurers. 

Sirius, with a 19 percentage point impact from Covid-19, and Swiss Re, with a 15 point impact, were hit harder by the pandemic than their peers.

Arch Capital, PartnerRe, Munich Re, TransRe (Alleghany) and Berkshire Hathaway also saw double-digit percentage point impacts from the pandemic on H1 combined ratios.

With some companies booking all losses as they go and other booking ultimate expected losses up front, the H1 reserving may not reflect the company’s ultimate share of industry-wide Covid-19 losses.

The Fitch analysis showed P&C reinsurers incurred $6.1bn of Covid-19 reserves during the first half of 2020, most of which was IBNR.

The impact on reinsurers is naturally more uncertain than for primary carriers, given that they have less visibility of the direct claims impacts.

Fitch has forecast reinsurers will ultimately take around half of the total industry bill. Brian Schneider, senior director and global head of reinsurance at Fitch, said it was likely P&C reinsurers would incur an additional $3bn of Covid-19 claims in the second half of 2020.

The majority of reserves to date have been established for event cancellation and postponement, business interruption, and trade credit related covers. It is expected liability claims may start to emerge from the fourth quarter onwards, although this remains highly uncertain.

Among the group of reinsurers tracked by Fitch, all reported a higher reinsurance combined ratio than the prior-year period. These ranged from a market leading 85.4 percent at RenaissanceRe to a 115.8 percent combined ratio at Swiss Re.

“Terms and conditions are also becoming more favourable to reinsurers, with reductions in ceding commissions and less availability of multi-year contracts”

As well as one of the highest combined ratio impacts from Covid-19, Swiss Re also saw higher natural catastrophe losses than its peers in the first half of the year, as well as reserve additions for prior year claims.

Reserve additions were also high at Berkshire Hathaway Reinsurance Group and PartnerRe. Across the cohort, reserve additions, largely casualty driven, contributed 0.4 percentage points to the reinsurance sector’s combined ratio.

Catastrophe losses added 3.3 percentage points to the market-wide combined ratio across the group of reinsurers, modestly higher than the 2.7 point impact in H1 2019.

Stripping out these impacts, the group saw an improvement in its underlying ratio by 0.7 points, driven by premium rate increases and the expansion of reinsurance operations across most of the companies.

Net written premiums across non-life reinsurers rose to $61.2bn in the first half of the year, up from $56.4bn in the opening six months of 2019.

PartnerRe and Axis Capital were the only two to post double-digit declines in reinsurance net written premiums, of 17 and 10 percent respectively. Both firmshave been working to optimise their portfolios and reduce volatility.

Looking ahead to renewals

Brian Schneider, senior director and global head of reinsurance at Fitch, said he anticipated double-digit rate increases to follow at the 1 January renewals.

Schneider said almost all classes had seen increases at this year’s April, June and July renewal periods.

This was driven in part by an estimated $15bn of adverse development in 2019 from recent catastrophe events such as hurricanes Irma, Michael and Dorian and typhoons Jebi, Faxai and Hagibis.

“Terms and conditions are also becoming more favourable to reinsurers, with reductions in ceding commissions and less availability of multi-year contracts,” he said.

In addition, Fitch said reinsurance treaties have removed insurer-friendly cascading and top and drop features and added loss adjustment expense caps and communicable disease exclusions, particularly in property and also in some liability business.

“Reinsurers are also seeing greater demand as insurers push to better manage increased volatility.”

Schneider said he did not expect these increases to be significantly dampened by alternative capital at the 1 January renewals.

“I don’t expect alternative capital to be a strong influence,” he said. “We have seen the amount of alternative capital decline in recent periods, and I expect that will continue in January.”

“Collateralised reinsurance has been having some difficulties while investors decide whether they want another year of trapped capital.

“Catastrophe bonds, in contrast, have been very strong – there is a different dynamic where contracts are more specific as to what losses might be.”

He said the market can anticipate low double-digit rate increases at 1 January, with increases likely higher in the US than Europe reflecting the level of lossactivity in the respective markets.