While Swiss Re’s $2.5 billion estimate of COVID-related insurance and reinsurance losses stands above most others around the industry, the situation is destined to change, according to the group CEO.

Reporting that the $2.5 billion pretax provision for COVID-19 claims paid and reserves booked for the first half of 2020 meant a $1.1 billion loss on the bottom line for the half-year—a figure that would have been $865 million of net profit for the group in the absence of COVID losses—Group Chief Executive Officer Christian Mumenthaler gave a line-by-line rundown explaining how the reserves were derived during a media call on Friday.

While nearly $1 billion in estimated losses for the business interruption component is setting the reinsurer’s overall estimate apart from competitors, there isn’t actually much difference in the reinsurance treaties Swiss Re wrote or the underlying contracts that the reinsurance covers, he maintained.

“This is the bucket that seems to be, from what we see, the one that sets us apart most from our competitors,” Mumenthaler said, referring to what is actually a $973 million provision for nonphysical damage business interruption, which also exceeds Swiss Re’s own estimates for other business lines—event cancellation ($484 million), credit and surety ($129 million), mortality ($544 million) and other lines ($411 million). “Obviously, as [competitors] publish results we will see if that [remains] true, but that seems to be the biggest one. And that probably just reflects a very high uncertainty that exists around this particular bucket,” he said.

In May, Lloyd’s has estimated higher COVID losses than Swiss Re, putting its exposure in the range of $3 billion to $4.3 billion
“I think the most important thing to understand is that we haven’t come across anything that would set us apart ultimately from our competitors. These are standard treaties. We all have the same wording, the same market. So, basically, we have to expect that over time, the market—the views of the different reinsurers—will converge in one way or the other. Only time will tell whether we have been too conservative here or not.”

Mumenthaler explained how the figures for each line were derived noting the requirements of GAAP accounting. “The GAAP philosophy means that we have to try best efforts to really put up reserves for every claim that has occurred or might have occurred,” he said, not indicating any particular attempt to be conservative.

“These are standard treaties. We all have the same wording, the same market. So, basically, we have to expect that over time, the market—the views of the different reinsurers—will converge in one way or the other.”

Christian Mumenthaler

To determine the $973 million estimate for business interruption losses—$863 million for Swiss Re’s property/casualty reinsurance business and $110 million for Corporate Solutions insurance business—Swiss Re professionals contacted as many clients as they could to get the clients’ assessments of their underlying exposure in situations where there was sublimited coverage for nonphysical business interruptions in place, Mumenthaler said. He explained that, for the most part, policies require physical damage to trigger business interruption coverage. Stressing the magnitude of the undertaking for Swiss Re and clients alike—”they are in many different countries; they have many different languages, many different lines of business”—he said the group then aggregated the information, reviewing it against the reinsurance treaties and the strength of the language and the definitions in those treaties for the P/C reinsurance portion.

“That led us to a figure of $973 million, which is very high compared to what is paid and actually reserved. There’s a very high uncertainty,” he said, referring to the fact that the bulk of the figure is for incurred but not reported loss reserves.

Media representatives on the conference call pressed Mumenthaler and Chief Financial Officer John Dacey about other potential sources of uncertainty—namely an adverse ruling for the insurance industry from the U.K.’s Financial Conduct Authority in a test case to resolve questions related to nonphysical damage business interruption claims or a second round of COVID-19 lockdowns in the second half of the year.

Mumenthaler actually addressed the second-wave question in his opening remarks when he stated that he believes COVID-19 is a second-quarter event from an insurance loss standpoint. While the United States, Europe and Latin America—most of the world outside of Asia—were unprepared and had to react to the virus outbreaks “in a quite massive way with very severe lockdowns,” learnings have accumulated throughout the world at this point. “Now that we have several months experience, all the data that we have from all the different countries indicates that it is actually possible, as you can see in Asia, to keep it under control.”

“To have a more or less operating economy, at a very high level, you have to exclude a few extreme activities in terms of risk of spreading the virus. But it is possible to manage the virus, live with the virus, until we have a vaccine without…extreme lockdowns.”

“This would be a complete failure of leadership if you have to get there…Some countries now for weeks and weeks, with a certain subset of measures, are totally able to control the virus.”

Christian Mumenthaler, Swiss Re Group

Reiterating his point in response to a media question about how a second wave of lockdowns would impact Swiss Re loss estimates, Mumenthaler stressed how unlikely he believes that a “copy-paste” of the first lockdown is going to happen later this year. “This would be a complete failure of leadership if you have to get there because there’s ample evidence—some countries now for weeks and weeks, with a certain subset of measures, are totally able to control the virus,” he said.

He contrasted some rising rates of infection in Switzerland against a much more disciplined environment in Italy where infection rates are more under control and said that for countries whose illness rates rise, “It’s clear [that] with a small set of measures, you can bring it back under control.”

“I really see this as unlikely,” he said, referring to the prospect of massive shutdowns of economies, “which is also why we haven’t done the full calculation [of] what would it mean.” The group CEO also noted that some mitigating factors would mean a second one would not be as expensive for reinsurers, including the absence of reinstatements in some contracts.

As for the FCA test case, Dacey said Swiss Re is counting on “rational” behavior. “What we’ve tried to do is take a realistic estimate from an underwriting side of what these decisions will bring,” and there is no expectation that “everything goes in the insurer’s favor” baked into the estimates. “But we do expect rational behavior and the contract language to actually matter as decisions are made,” he said.

Dacey also said that the large IBNR component of the business interruption provision means “there’s some room to absorb adverse judgments up to a point.” He added, however, that if the judgments “are radically adverse to the industry, then Swiss Re, like others, will have to re-evaluate the reserving.” Indeed, Swiss Re would also have to re-evaluate the low end of a range of industrywide losses that Swiss Re puts at $50-$80 billion.

Mumenthaler compared Swiss Re’s $50-$80 billion of ultimate COVID losses for the industry to losses for Hurricanes Harvey, Irma and Maria trio together in 2017 and for 2005’s Hurricane Katrina, which both exceeded the top of the COVID range in 2020 dollars. So, COVID “is entirely manageable for the insurance industry overall,” he said. He also noted that Swiss Re’s $2.5 billion total for COVID losses, compared against the industry range, “reflects a normal market share of Swiss Re for such a loss.”

Mumenthaler endorsed the idea of public-private partnerships between the industry and governments, noting that the Swiss Re Institute estimates the economic loss from COVID-19 will be $12 trillion. The fact that the industry covers only a “tiny fraction of the economic loss [is] not surprising because the insurance industry knows about this type of risk. It’s a risk that hits everything at the same time and is, therefore, borderline insurable because it doesn’t have the diversification effect, which is what we’re all about—diversifying risk on the global balance sheet.”

Swiss Re does not think that the insurance and reinsurance industry can be the solution. That’s why months ago the firm approached governments all across the world. “And we’re not alone. A lot of our peers, colleagues, other reinsurers, insurers [are doing] the same with their respective governments because for all of us, it’s clear that there must be a better way than what has happened now, which is it hits the insurance industry, it doesn’t cover it, governments have no agreed mechanism by which they distribute that which creates huge amounts of inefficiencies.”

There’s been momentum in the U.S. and in multiple European countries to work toward public-private schemes for pandemics “where it is clear from the beginning who does what in such a case,” he said.

“I can see the role of insurance as a distributor of the monies, for example, to the restaurants…You can use reinsurers as risk assessors for the risk. And then the majority of the claim would be paid by government. The insurance and reinsurance industry can only take a fraction of that.”

He said he believes the insurance and reinsurance industry together with governments can come up with “something significantly better than what we have gone through now” and “hopefully, many of these governments will actually go all through and implement something like that, so that when we have the next pandemic, we can react much better, much faster, more coordinated with less waste, which will be a big improvement for all of us.”