Why COVID-19 marks the start of a new era for re/insurance in Bermuda
Too many re/insurers have been “harvesting risk, not underwriting risk,” according to Ryan Mather, CEO of Ariel Re and global head of reinsurance at the Argo Group.
Mather was speaking as a guest male voice on a Bermuda’s Women in Reinsurance group panel discussion, chaired by Peta White, head of North American property reinsurance at Markel and the chair of Women in Reinsurance (WiRe).
He warned that many re/insurers will suffer the consequences of this trend as the fallout from the COVID-19 crisis plays out over the coming months.
The majority of insurance contracts appear to have unambiguous wordings, Mather noted, which either exclude pandemic coverage, or offer some protections with sub-limits, the losses from which the industry can easily absorb. However, in some cases carriers that were “harvesting” rather than underwriting risk were careless in the language used in their policies, leading to ambiguity that will have to be litigated. Defence and loss adjustment costs will eat into insurer profits this year, Mather warned.
He predicted that re/insurers will avoid being forced to provide retrospective business interruption coverage for their clients’ COVID-19 losses, given the US has long upheld the rule of law and the sanctity of contracts. If the US did force insurers to pay, “the insurance industry would be broken, and the reinsurance industry would be close behind,” he warned.
However, Kirsten Beazley, head of healthcare broking for North America at Willis Towers Watson, warned that “the tsunami of litigation that is coming will be felt for many years to come.”
The industry must learn the lessons of the crisis and be much clearer and more transparent in its policy wordings in the future, added Tracey Gibbons, senior vice president at Third Point Re.
Maintaining relationships
Mather argued that it is in the industry’s interests to willingly share the cost of the crisis, even if it leads to losses among carriers, in order to maintain strong relationships with customers and regulators.
“The re/insurance industry is a social industry that is there to help the community,” he said, urging re/insurance executives to consider the reputational and brand damage that will be done if the industry does not share the burden of the cost of the crisis. If the insurance industry is paying, the reinsurance industry should stand behind it, he added.
Gibbons noted that the high levels of uncertainty about how the COVID-19 crisis will develop make it impossible to predict ultimately how the industry will cope, but said decreased business activity will surely lead to lower premiums. For re/insurers, loss and cost ratios will rise, although this could be partially offset by reduced travel and entertainment budgets.
Given that the hurricane season has not yet started, the picture could deteriorate significantly over the rest of the year, Gibbons warned.
Different lines of insurance are being impacted differently by the pandemic. The healthcare industry has been particularly exposed to the crisis, having already been distressed before COVID-19 hit, said Beazley. Healthcare had been reeling from the impact of the opioid crisis, which had been devastating for the industry, she said.
Rates for healthcare coverage are now increasing again, while coverage terms are getting tighter and capacity smaller. The industry is now in the fourth year in which its aggregate combined ratio was above 100 percent, she noted.
Beazley warned that COVID-19 will have a permanent impact on the healthcare industry, acting as a catalyst for trends that were already playing out.
“Digital healthcare will come to the fore,” she predicted. “We have already seen it in areas such as record-keeping, but the crisis will make it central in main care provision as well. That will have an impact on how we insure the business.”
Life matters
The impact of COVID-19 on the life industry has been relatively manageable so far, said Jelena Strelets, actuarial advisory lead at EY Bermuda, because the virus has been more serious for older people who are less likely to have life insurance coverage. However, the industry faces a much higher risk of claims, she noted.
In many business lines the extent of losses re/insurers will experience related to COVID-19 remains unclear, especially in specialty lines that are prevalent in Bermuda. Some, such as credit surety bond reinsurance, may have a significant indirect exposure, the extent of which will become fully clear only once the extent of the impending recession is understood, said Gibbons.
She warned that the pandemic could over time lead to a breakdown in law and order and increased looting, as populations struggle to make ends meet or vent their frustrations. Re/insurers providing property or political violence coverage could see an uptick in claims in coming months which, coupled with reduced premium volumes, will increase pressure on reserves, she said.
Future strength
Overall, the re/insurance industry is well positioned to emerge from the COVID-19 crisis stronger than when it went in, said Mather. He argued that the industry had not fully recovered from the financial crisis when COVID-19 hit, with too much capital chasing too little risk, driving down prices and leaving many providers with combined ratios that are unsustainable.
The industry should use this opportunity to “think harder about how we work”, embrace innovation and charge more realistic prices for the products it offers, Mather said.
COVID-19 marks the beginning of a new era for the re/insurance industry, he added, representing an opportunity to move on from practices that have dominated the industry since around 2002.
Mather pointed to the emergence of captives in the 1970s, the liability insurance crisis in the 1980s, Hurricane Andrew in the 1990s and terrorism in the 2000s as challenges that Bermuda has overcome.
“Bermuda always comes out of crises stronger,” Mather concluded.
