Global reinsurance capital could be slashed by around $30bn (£24bn) as companies look to de-risk their balance sheets by holding cash during the coronavirus crisis.
That is according to a new report from Willis Re – the reinsurance arm of Willis Towers Watson – which forecasts a 5% hit to the global reinsurance capital base.
The company warned that holding more cash on balance sheets would have a “significant impact on investment returns”, and that deterioirating economic conditions could further impact investments.
With the prospect of growing risk on reinsurers' accounts, the report states that companies are likely to have three options: retain their current strategy, de-risk, or hedge.
“With uncertainty on both sides of the balance sheet, a capital squeeze is becoming increasingly likely,” said Willis Re global CEO James Kent.
“The most successful strategies will see executive teams assimilate the current trading environment as it relates to them directly, respond with clarity and direction with support from their advisory partners, and articulate to relevant stakeholders an appropriate route forward.”
Despite this likely capital hit, the report suggests that reinsurers are currently finding COVID-19 claims managable, with the sector strongly capitalised at the start of the crisis.
However, it warns that business interruption claims present “an existential threat” for the industry given growing calls to revise coverage retroactively and aggregate limits deployed irrespective of contract agreements in place.
Overall, the report states that the sector is facing formidable practical, operational, legal, and technical reserving challenges.
It offers guidance on navigating reinsurance markets, evaluation of post-coronavirus capital adequacy, adjustment of risk tolerance and appetite, and evaluation of the new underwriting environment and impact on secondary market dynamics.
“Reinsurance capital will play a key role in supporting this future direction as companies seek to support the rehabilitation of the global economy, with the insurance industry continuing to be a fundamental element in supporting the recovery efforts of its customers,” Kent said.
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