Moody’s downgraded its outlook for the global reinsurance sector to negative from stable, citing a challenging operating environment hampered by the coronavirus pandemic and its adverse impact on profitability.
Adding to the pressure, the situation likely won’t improve for the next year or more, the ratings agency said.
“Uncertainty around ultimate coronavirus-related losses, along with low interest rates, shrinking reserve releases and more expensive retrocessional coverage will all be a drag on reinsurers’ profitability in the next 12 to 18 months, despite stronger reinsurance pricing,” James Eck, VP-Senior Credit Officer at Moody’s, said in prepared remarks. “Coronavirus-related losses and other catastrophe events have already depleted the annual catastrophe-loss budgets of many firms.”
Uncertainty is the word of the moment for reinsurers dealing with the unprecedented nature of the ongoing pandemic. Moody’s said that the resulting environment makes the ultimate impact of the coronavirus pandemic difficult to estimate. The crisis affects multiple lines of business and geographic regions, Moody’s noted. Many business interruption coverage issues have yet to be resolved and there are still significant downside risks to the economic recovery.
As Moody’s pointed out, losses associated with economic shutdowns that began in March – mostly from event cancellation, property (with affirmative business interruption), travel and accident and health coverages – are likely to be fairly clear at this point. But reinsurers will take additional charges in coming quarters as the impact of the pandemic continues to unfold and the extent of the economic downturn becomes more certain.
Beyond a pandemic, reinsurers will also confront other challenges ranging from climate change to weather-related catastrophe events in the coming months.
Climate change is a longer-term challenge for the sector. Weather-related catastrophe events have become more frequent as temperatures have increased and sea levels have risen. For reinsurers, this creates risk management challenges associated with assessing, measuring and mitigating catastrophe risks, and has heightened the volatility of firms’ results.