The (re)insurance industry entered 2020 with a strong balance sheet, pricing tailwinds and abundant capital. The impact of COVID-19 was sudden and violent and even though the equity markets have recovered from the depth of the crisis, the Standard & Poor’s (S&P) property & casualty (P&C) index (down 13 percent year-to-date) still lags the broader S&P 500 (up 2.4 percent) recovery. Despite that, (re)insurers have raised approximately USD 28 billion in debt and equity so far this year and approximately USD 4 billion of capital is waiting on the sidelines to be deployed, according to John Trace, CEO, North America, Guy Carpenter, and Jay Dhru, Global Head of Business Intelligence, Guy Carpenter.
What Got You Here Won’t Get You There
Reserve releases have buoyed (re)insurer earnings for over a decade now. History has shown us that such an extended period of reserve releases usually ends in tears. On top of that, the Federal Reserve has communicated its desire to maintain lower interest rates for an extended period and rating agency S&P has been sounding the alarm on (re)insurers’ inability to meet their cost of capital for a number of years now. Going forward, in order to meet their cost-of-capital hurdles, companies will need to maintain combined ratios in the low 90s to account for a decline in reserve releases and investment income. At the same time, rating agencies continue to expect companies to hold significant excess capital in the face of macro-level uncertainties.
In response to these challenges, prices are rising and companies have the opportunity to develop innovative products to address emerging risks.