The potential of increased need for reinsurance, driven by loss experience over recent years and the downturn in financial markets post-COVID-19, is expected to provide positive momentum for rate increases, which could in turn attract new capacity.
COVID-19 provided us with the opportunity to test the operational resilience of our company in the remote working environment and our business continuity plans based on a once-in-a-lifetime scenario. Thanks to our technological capabilities, as well as our highly experienced and flexible workforce, we managed to have a smooth transition to working remotely.
As far as the industry is concerned, the market consensus on COVID-19 loss ranges between $30b and $130b. This points to a relatively high probability that 2020 could be a more severe year than 2018 and 2019 in terms of CAT losses, considering the hurricane season which has just started. Even though there is uncertainty surrounding how much of this industry loss will be paid out by reinsurers – putting aside any regulatory or legislative actions that could exert additional pressure according to studies conducted by various stakeholders – the capital base of the industry is robust enough to absorb underwriting losses and investment volatility stemming from COVID-19.
Nevertheless, contracting capital for the global reinsurance sector, although constrained, has inevitably shifted the focus to underwriting profitability. The potential of increased need for reinsurance driven by loss experience over recent years and the downturn in financial markets post-COVID-19 is also expected to provide positive momentum for rate increases, which could in turn attract new capacity. In conjunction with rate corrections, contract wordings clarity and communicable disease exclusions are the other key issues that will shape the renewals going forward.
Market forces
Looking at the renewals during 2020, while the firming of the market has become apparent globally, its extent seems to vary on the back of the prevailing approach of most players of not only segmenting territories/perils and lines of business, but also clients with respect to changes in terms and conditions. Given the sufficient level of capacity, if market players become too adamant to align buyers with favourable market terms, this could facilitate private placements and differential terms.
On the other hand, looking at the retrocession markets, which have become increasingly dependent on alternative capital, the tightening seems to be more tangible due to the reduced capital available and appetite of ILS funds, mainly in consequence of the trapped collaterals coupled with loss creep in respect of prior years’ events, as well as concerns around potential COVID-19 losses.
Strategy
As for Milli Re, our well-diversified underwriting portfolio comprises mainly traditional products. For the large majority of the reinsurance capacity we provide, epidemic/pandemic diseases are excluded. Business interruption is not provided unless it is caused by a physical damage. Contingent business interruption cover is given selectively and with very small sub-limits. We can potentially pick up minor losses from a limited number of treaties, which are written from emerging markets and are either silent or do not explicitly exclude epidemic/pandemic diseases. On the other hand, the total COVID-19 losses we expect to sustain through our modest-sized global retrocession book are unlikely to dent our targeted profit for the year.
Reflective of our strategy to generate maximum return at optimum risk level, our investment portfolio is similar to the underwriting portfolio in the sense that it is composed mainly of conventional assets. For this reason, the volatility in the financial markets triggered by the coronavirus is not anticipated to create a notable pressure on our investment income.
Taking our usual proactive stance to align with market dynamics and to have a more agile structure, in 2019, Milli Re started our digitalisation project, which is deemed to be fundamental in terms of both cost mitigation and seamless transition of operations to remote working. As we look ahead, we know that all the investments made to re-engineer business processes and optimise the IT structure have already been instrumental in securing an improved flexibility of our organisation while easing its navigation to the new reality.
Having a resilient business model backed by robust capital base as well as long-standing relationships established and extensive experience built during our history of more than 90 years provide competitive advantage to Milli Re during these most challenging of times. In line with our sustainable growth strategy and profit-oriented risk management, we will continue to successfully manage the cycle while we focus on the needs of our existing clients and explore opportunities to support new ones. M