Munich Re braces for more losses despite pausing COVID-19 commercial coverage sales

November 5, 2020.
A view of Munich, Germany, where reinsurer Munich Re is headquartered. (Photo by Philipp Bachhuber on Unsplash)

A view of Munich, Germany, where reinsurer Munich Re is headquartered. (Photo by Philipp Bachhuber on Unsplash)

expects a continued sizable impact from event cancellations through the end of the year, notwithstanding a recent decision to suspend the sale of pandemic-related coverage for business losses in new property and casualty insurance contracts that the reinsurer’s financial chief stated Thursday affects “pretty much all lines of business.”

In property and casualty reinsurance, the world’s second-largest reinsurer saw EUR 700 million ($826.2 million) in claims related to COVID-19 in the third quarter, with contingency business again accounting for the largest share, and business interruption having the second-biggest impact.

Contingency claims posed the biggest risk to the business in the first half of the year, and Munich Re again increased reserves accordingly in the third quarter as the company became aware of more cancellations and postponements.

“Obviously we have an exposure which has been underwritten in the last couple of years,” Chief Financial Officer Christoph Jurecka said. “Most of the policies are one-year policies but there is an exposure beyond that, which is some multiyear contracts, which we also have. So therefore it is an exposure that will also affect 2021.”

The German reinsurer sets aside contingency reserves as soon as it becomes aware of a claim, Jurecka explained. He said the company is expecting fewer disruptions in the fourth quarter, but noted that if events planned for early next year are affected, Munich Re will have to establish reserves for those ahead of time.

“The exposure will decrease over time,” Jurecka said, “but also it’s not gone in 2021. It will still be there, to some extent, at least … As long as there is a second wave, or potential third wave, we will continue to incur claims.”

A new round of lockdowns went into effect in France, Germany and England this week as Europe saw a steep rise in COVID-19 cases and deaths.

Munich Re CEO Torsten Jeworrek revealed in September that COVID-19 losses slowed down in July and August, while noting that the implications for the rest of 2020 were unclear and the company still expected further losses, particularly on the contingency side.

On a call with analysts Thursday, Jurecka said, “For this single year I would expect less in the fourth quarter, but then there will be the need to set up reserves for 2021 already, and there I would expect also a very significant number.”

Jeworrek said in September that the Munich Re was “currently examining whether we will offer new contracts that include pandemic protection in property and casualty insurance in the future … For the moment it has been suspended, for example, with respect to event cancellation.”

That decision came after COVID-19 exposures driven by event cancellations slashed the company’s second-quarter earnings and squashed its annual profit ambitions.

Jurecka elaborated on the exclusions Thursday, saying the stoppage was “pretty much across all lines of business.”

On Oct. 30, Munich Re’s larger rival, Zurich-based Swiss Re, predicted that the pandemic will make event cancellation cover more difficult to obtain, as companies sharpen their contract wording to be clearer about exclusions for pandemic-related losses. Swiss Re, too, believes that COVID-19 losses for commercial lines will stretch into at least 2021.

Munich Re also suggested last month that insurance covers will become more expensive, especially for long-term risks in third-party liability and other lines, as low interest rates that are likely to stay low for quite some time due to the pandemic hit at the profitability of reinsurers.

As expected, Munich Re disclosed Thursday that its net profit plunged 77% year over year to EUR 199 million ($234.9 million), dragged down by claims related to COVID-19 as well as major catastrophes in the U.S. In total, about EUR 800 million ($944.2 million) in quarterly losses was attributed to COVID-19.

Net profit for the first nine months of the year stood at EUR 999 million ($117.9 million), compared with EUR 2.5 billion ($3 billion) a year ago. Munich Re’s losses related to COVID-19 reached EUR 2.3 billion ($2.7 billion) through the nine months ended Sept. 30.

Despite previously noting a significant rise in cyberattacks during the pandemic, stemming from companies relying more heavily on remote technology, Munich Re’s profitability has not been impacted from increased cyber losses, especially in the third quarter.

“We do not have any indication in our book of this development, neither on the primary side or the reinsurance side,” Jurecka said. “There might be potentially a delay, so maybe there is something we don’t see yet, but even if there was something, I think the profitability of our book overall would be fully intact.”

The cyber insurance market could exceed its current growth forecast of approximately $7 billion this year to about $20 billion in 2025, Munich Re has said, calling the market for cyber risks one of its “most important strategic growth areas.”