August 13, 2020 by Jason Contant
Months into the COVID-19 pandemic, reinsurance industry observers are seeing a mixed forecast ahead and it’s too early to tell how the pandemic will affect rating actions, according to a recent A.M. Best webinar.
“Obviously, the situation has gotten complicated with COVID prices,” said panellist Carlos Wong-Fupuy, senior director of global reinsurance ratings with ratings firm A.M. Best. “Definitely, there is increased expectation of improvement in pricing terms and conditions. But on the other hand, we have the uncertainty about the ultimate claims from COVID. We see all these factors really playing in opposite directions.”
A.M. Best has kept its outlook on the global reinsurance market as stable, while several other ratings firms have moved the outlook to negative. A.M. Best TV moderator Meg Green asked what were the main reasons behind this decision.
“This doesn’t mean we don’t think nothing has changed in the last year,” Wong-Fupuy said during the State of the Global Reinsurance Market webinar Tuesday. “Despite this stable outlook that we are assigning to the market, we don’t think that all companies are going to respond in the same way. Some are much better-positioned than others to respond to the challenges. I think this situation is going to exacerbate those differences.”
Does that mean that negative rating actions are likely for the rest of the year?
“No, not necessarily,” said panellist Scott Mangan, A.M. Best’s associate director of global reinsurance, noting that the rating firm’s outlook is a market outlook, not necessarily a ratings outlook. While the two are related, market conditions can help some companies more than others, Mangan said. “There’s generally a lag from when we see market conditions translating into rating actions, both positively and negatively.”
Reinsurers have been dealing with challenging and competitive market conditions over the past five to 10 years, and reserve issues or social inflation “take a little while to flush off balance sheets and really translate into rating actions,” Mangan said.
“There’s a lot of uncertainty particularly around COVID losses,” he said. “If a company were to have an outside COVID loss, I’m not sure if we’d know for sure what exactly an outside COVID loss looks just yet. If so, that could translate into negative rating actions.
“If a company outperforms our expectations and their own, that could potentially translate into positive rating actions. It can cut both ways. It’s yet to be determined which direction rating actions will go.”
Feature image by iStock.com/Ig0rZh