There is undoubtedly significant uncertainty concerning the impact of COVID-19 as this is the proverbial “black swan” event which we are still in the middle of - both personally from the point of view of the lockdown and financially from the point of view the global (re)insurance industry. The actual financial and societal consequences will unfold over the forthcoming year, and as a result, it is difficult - if not impossible - to accurately predict what the ultimate result will be to Lloyd’s and the syndicates we support.
It is therefore interesting to read the recent comments of the head of Chubb, Evan Greenberg, and of John Neal, CEO of Lloyd’s, as to their insights of the possible impact of COVID-19 on the entire global (re)insurance industry. Lloyd’s CEO, John Neal made his observations to the FT, as reported today, 24 April, and Evan Greenberg, chairman and CEO of Chubb, gave his views whilst presenting Chubb’s first quarter results on 22 April.
The impacts on the global (re)insurance industry can be split into three different areas:-
- Direct claims – which will take time to come through;
- Reduced value of (re)insurance capital – affected Q1 2020 values;
- Reduced premium income – which will also take time to come through.
Size of likely claims
It is too early to be certain about the size of the losses in any meaningful way. Bruce Carnegie-Brown, the Lloyd’s chairman, remarked to the FT on 26 March that he expected that total COVID-19 claims might “aggregate into something similar to the larger natural catastrophe claims we have had through the past few years” and John Neal said to the FT that COVID-19 is “no doubt the largest insurance challenge the industry has ever faced” and it will be “tens of billions, if not hundreds of billions of loss that will be discussed over time.” The eventual sum which, as he says, will take a long time to resolve, will be shared very widely amongst the global (re)insurance industry, not just Lloyd’s.
Evan Greenberg stated that “In sum, from what we know now, this will be a manageable cat-like event.”
Evan was adamant that BI insurance doesn’t cover COVID-19 where intended to be excluded and John Neal urged “Let’s get mechanisms in place quickly so that if there is a dispute it doesn’t go on for months if not longer” adding that insurers need to come to an agreement with the Government about how any second wave of coronavirus cases could be covered. “We’ve got weeks, not months to resolve some of these immediate issues.”
Reduced value of (re)insurance capital
Lloyd’s syndicates tend on the whole to have a prudent stance with their investment strategies and as an example Beazley’s trading announcement yesterday revealed just a 1% drop in its portfolio worth over US$5bn as at end March 2020.
Evan Greenberg mentioned in his call to analysts that whilst Chubb’s earnings will be dented, it will be the asset side of the business that will be impacted and summarised the position saying “It’s an earnings event, not a balance sheet event, as I said. And I do think it will be the largest loss, single loss in industry history when you add up both sides of the balance sheet when looking at the capital impact to the industry.…both asset side and liability side of the balance sheet.”
Fortunately, the (re)insurance industry enters the COVID-19 situation with a very healthy amount of capital which will enable it to weather the likely impacts.
Reduced premium income
As John Neal remarked today to the FT, “Lots of insurance policies adjust economically . . . based on turnover or wage roll or utilisation” which will lead to return premiums as a result of the reduced economic activity but hopefully this will be offset by lower claims in some classes. Evan Greenberg similarly mentioned that “earnings will be impacted by a reduction in premium revenues for a period of time.”
The combined effects of these three areas, leads John Neal to conclude that 2020 calendar year will see a “notable loss.” We believe that claims from COVID-19 will effect both the 2019 and 2020 years of account, probably the 2019 year more significantly. Syndicates have reported to Lloyd’s their initial estimates which we will receive shortly via the solvency data that will be included in the mid-year Coming into Line calculations.
The consequences of COVID-19 are clearly significant enough to create industry dislocation which will boost the current trend of hardening in the market probably in all classes affected directly or indirectly. As the situation is so fluid our forthcoming presentations will give an opportunity for us to update Members and provide greater depth on these areas.