We Can Fix the Problem: Likely Negotiations Over COVID-19 Reinsurance Losses


While cedants and reinsurers can often disagree about how reinsurance contracts are applied, reinsurers cannot afford to let this disrupt their relationships with their long-term clients, according to Joseph Brandon, president of ‘Alleghany Corp. and president of the TransRe subsidiary of Alleghany. , speaking at an S&P Global Ratings insurance conference.

“It reminds me a lot of trying to adjust business interruption claims for a hurricane or earthquake. Across the world, there have been many more canceled events than adjusters. “

“Cedants would naturally like to pool as many claims as possible to maximize assignments. On the other hand, contracts are limited in terms of time, geography and scope. This will lead to interesting questions and negotiations as reinsurers seek an appropriate compromise with their ceding clients, ”he said.

“It’s easy to say, you can always take this to arbitration,” but in Brandon’s opinion, going through this long and protracted process doesn’t make sense for COVID claims where customers have long. date seek to be recovered. Unlike insurers who have hundreds of thousands or even millions of policies, the customers of reinsurers number in the hundreds or thousands.

“An important dispute is not healthy for the relationship, or in the best interests of either party.” This means that contractual disputes will likely be “resolved through negotiated compromises over time.”

“Our approach is not to take general positions but rather to work with our clients, one at a time,” he said. “Ultimately, business people will have to come to a resolution. “

Before Brandon took part in a virtual fireside chat with Taoufik Gharib, Senior Director and Senior Analyst at S&P Global, John Iten, P / C Sector Leader at S&P, kicked off the day’s events with some background on the industry finances, noting that global reinsurers have been hit the hardest. losses linked to the COVID-19 pandemic.

Last April, S&P estimated that the U.S. P / C market would suffer losses of $ 15 billion to $ 30 billion from the pandemic – an estimate that several risk directors speaking at last year’s conference were considering. like light. Iten said that to date, however, US primary insurers rated by S&P have only taken about $ 6 billion in charges for COVID. Also noting that several US carriers have reported that most of the reserves they have are in IBNR (Reserves for Suffered But Unreported Losses), Iten said: “There is potential for the release of reserves if anticipated claims do not materialize. . “

Globally, Iten said, primary insurers and reinsurers have recorded nearly $ 37 billion in COVID losses in total. “It’s fair to assume that a good portion of the $ 31 billion difference between these numbers relates to US losses which are recouped by reinsurers and also by foreign insurers with operations in the United States.”

“Obviously, companies have an incentive to tell rating agencies and investors that most of their COVID reserves are IBNRs,” Brandon told Gharib when the analyst then asked the executive what percentage of the losses Industry-wide COVID he believed to have been paid to date against case backlogs and IBNR. Brandon explained that there isn’t a lot of comparability between companies in how they classify reserves.

Giving the example of event cancellation requests, he said that a company taking an event-by-event approach would build more case reserves than a company that estimates its overall liability number as a percentage of limits.

The biggest surprise

Breaking down the losses by coverage, Brandon said, the event cancellation line was the biggest surprise. “In hindsight, the industry generally missed the fact that these contingency or event cancellation covers could systematically bundle over 18 months,” he said.

He explained that event cancellation underwriters who considered potential exposure for the NCAA Final Four, were used to thinking about how terrorism or a weather hazard might postpone a single event, but they didn’t. failed to aggregate this loss by linking this event to a canceled Super Bowl or Tokyo Olympics.

“The online rates for the cover were woefully slim and the loss amounts are incredibly large, especially compared to the premium that was collected,” he said, echoing remarks made at the S&P conference from last year by TransRe’s Chief Strategy and Risk Officer, Greg Richardson. , who commented that the event cancellation losses were “a nice little pop in the jaw” for TransRe.

At this year’s conference, Brandon said resolving event cancellation requests has proven to be much more subjective and difficult than expected, in part due to an “increase in the demand for event cancellation experts ”.

“It reminds me a lot of trying to adjust business interruption claims for a hurricane or earthquake,” he said. “Around the world, there have been many more canceled events than adjusters. So the payment process was slow to get started, ”he said, noting, however, that the industry is moving in a more orderly fashion today.

Brandon told the S&P Virtual Audience that about 35-45% of TransRe’s COVID losses are related to event cancellations, with an additional 35% related to real estate business disruption, and the rest span across lines like accidents and health, mortgage and trade credit. He also estimated that about 15% of the $ 412 million in net losses suffered by TransRe had been paid as of March 31, 2021, with 15-20% of the total in case reserves, leaving 65-70% in the IBNR.

Returning to Gharib’s question and extrapolating from the TransRe experience, he assumed that around 25% of COVID losses were paid worldwide in the insurance and reinsurance industries, noting that the payments reinsurance losses lag behind primary insurance.

Uncertainties related to business interruptions

Big question marks remain for insurers and reinsurers, he said, stressing that the ultimate resolution of operating losses in continental Europe is an area of ​​uncertainty.

“In the United States, for the most part, we have a fairly standardized covering language, thanks to the long history of rating offices,” he said, referring in particular to the Insurance Services Offices, or Verisk.

“It never occurred to me, well, where exactly does political language come from in France, Germany, South Africa? Who takes the responsibility of making sure this is rational and that the provision of coverage is what the industry intended, ”he continued, without risking guessing how it might turn out or how the losses of Europe could end up being split between insurers and reinsurers.

In Australia, Brandon shared his understanding of a unique situation in which primary insurers are unable to recover from reinsurers. According to the reinsurance manager, some primary policies had an exclusion that would void coverage, but the wording of the exclusion refers to a law that lapsed a few years ago.

Reinsurers, he said, “also had exclusions in their disaster treaties that referred to the relevant and recently updated law.”

Around the world, he said, business disruptions are likely the biggest source of coverage losses, but there is more certainty about how coverage litigation will play out in the United States and the United States. UK than elsewhere, he said, noting that while case trends continue to develop favorably for insurers in US federal courts, the UK Supreme Court’s decision on the test case of the FCA at the start of the year was largely unfavorable to the insurance industry.

He also referred to a “bad decision in South Africa from an industry perspective,” but said the unfavorable decision would not have a significant impact on the global reinsurance industry.

The subjects
Reinsurance of COVID-19 Profit Losses


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