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Law360, London (September 9, 2020, 3:12 PM BST) -- Heavy financial losses caused by COVID-19 in the first half of the year mean that reinsurers could have to dip into their capital reserves if claims for natural catastrophes hit even average levels this year, S&P has warned.
The ratings agency said in a report released on Tuesday that the sector could face a "capital event" if this year's hurricane season matches the $59 billion in insured losses in 2019. Losses resulting from COVID-19 have eroded profit that would usually have acted as a buffer against claims for natural disasters such as storms, wildfires and earthquakes.
"Although the sector remains resilient to extreme events, it is clear that the COVID-19 losses have eaten into the reserves that would otherwise be available if a major catastrophe loss were to occur," S&P said in its report.
The ratings agency said that eight of the world's biggest 20 reinsurers would experience a drop in the capital levels they are required to retain under Europe's Solvency II Directive if the industry suffered a $60 billion loss
The warning comes on the day that Swiss Re said that reinsurance companies expect to put up their prices at the next renewal season after seeing increased demand. The insurance giant said it was a "positive" development for the sector.
S&P said that would provide a "temptation" for reinsurers to expand their risk exposure. But, although that meant they would see higher earnings from premium, they ran the risk of greater losses from extreme weather.
"As the uncertainty regarding COVID-19-related losses expands into 2021, many reinsurers will face difficult strategic decisions," S&P said. "Overexposure could imperil their balance sheet and earnings, but over-protection will cause them to miss out on the higher returns offered by the property catastrophe space."
The report comes a day after another ratings agency, Moody's, shifted its outlook for the reinsurance market to "negative." Moody's said that, even though reinsurers could see a bounce from higher prices, persistently low interest rates threatened to undermine any profit they would see.
--Editing by Ed Harris.
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