Catastrophe excess of loss reinsurance contracts “never anticipated an event like a pandemic” when written but cedents can still expect compromises from reinsurers, an industry executive said Thursday.

Speaking at 37th Annual Insurance Conference presented by S&P Global Ratings, Joseph Brandon, president of Alleghany Corp. and chair of Alleghany’s TransRe subsidiary, suggested that while cedents and reinsurers may disagree about how the reinsurance contracts apply, reinsurers can’t afford to let that drive a wedge through their relationships with long-term clients.

“Ceding companies understandably would like to aggregate as many claims as they could to maximize cessions. On the other hand, the contracts are limited in terms of time, geography and scope. That’s going to lead to some interesting questions and negotiations as reinsurers seek an appropriate compromise with their ceding company clients,” he said.

“It’s easy to say, you can always take this to arbitration,” but in Brandon’s view, going through that long, protracted process doesn’t make sense on COVID claims for which longtime clients are seeking recoveries. Unlike insurers that have hundreds of thousands or even millions of policies, reinsurers’ clients number in the hundreds or low thousands.

“A substantial dispute is not healthy for the relationship, or in the interest of either party.” That means contract disputes will likely be “worked out through negotiated compromises over time.”

“Our approach is not to take any general sweeping positions but rather to work with our clients, one at a time,” he said. “Eventually business people will have to reach a resolution.”

Before Brandon’s participated in a virtual fireside chat with Taoufik Gharib, an S&P Global senior director and lead analyst, John Iten, S&P’s P/C sector leader, led off the day’s events with some insights on industry financials, noting that global reinsurers took the brunt of losses related to the COVID-19 pandemic.

Last April, S&P estimated the U.S. P/C market would have $15-$30 billion in losses—an estimate that several chief risk officers speaking at last year’s conference thought was light. Iten said that to date, however, U.S. primary insurers rated by S&P have only taken about $6 billion in charges for COVID. Also noting that several U.S. carriers have reported that most of the reserves they have are in IBNR (incurred-but-not-reported loss reserves), Iten said, “There is the potential of reserve releases if anticipated claims don’t materialize.”

Globally, Iten said primary insurers and reinsurers have recognized close to $37 billion of COVID losses overall. “It’s fair to assume that a good portion of the $31 billion difference between those numbers is for U.S. losses that are being picked up by reinsurers and also by foreign insurers with U.S. operations.”

“It reminds me very much of trying to adjust business interruption claims for hurricane or earthquake,” he said. “Across the world, there were many more events cancelled than adjusters.”

“Obviously, companies are incented to tell rating agencies and investors that most of their COVID reserves are IBNR,” Brandon told Gharib when the analyst later asked the executive what percentage of industrywide COVID losses he thought has been paid to date vs. case reserves and IBNR. Brandon explained that there isn’t a lot of comparability across companies in how they classify reserves.

Giving the example for event cancellation claims, he said that a company taking an event-by-event approach would put up more case reserves than one that estimated its bulk liability number as a percentage of limits.

Breaking down losses by coverage, Brandon said the event cancellation line was the biggest surprise. “With the benefit of hindsight, the industry by and large missed the fact that these contingency covers or event cancellation covers could systematically aggregate over 18 months,” he said. Event cancellation underwriters considering potential exposure for an event like the NCAA Final Four were accustomed to thinking about how terrorism or a weather risk that might postpone a single event, he said, suggesting they weren’t connecting that risk to the cancellation of the Super Bowl or the Tokyo Olympics.

“The rates on line for the coverage were terribly thin, and the loss amounts are stunningly large, particularly compared to the premium that was collected,” he said, echoing remarks made at last year’s S&P conference by TransRe’s Chief Strategy and Risk Officer Greg Richardson, who remarked that event cancellation losses were “a nice little pop in the jaw” for TransRe.

At this year’s conference, Brandon said that resolving event cancellation claims turned out to be much more subjective and difficult than he anticipated, in part because there was “demand surge for event cancellation adjusters.”

“It reminds me very much of trying to adjust business interruption claims for hurricane or earthquake,” he said. “Across the world, there were many more events cancelled than adjusters. So, the payment process was slow getting launched,” he said, reporting, however, that the industry is moving in more orderly manner today.

Brandon told the S&P virtual audience that roughly 35-45 percent of TransRe’s COVID losses relates to event cancellation, with another 35 percent from property business interruption, and the remainder spread across lines like accident and health, mortgage, and trade credit. He also estimated that roughly 15 percent of TransRe’s $412 million in net incurred losses have been paid as of March 31, 2021, with 15-20 percent of the total in case reserves, leaving 65-70 percent in IBNR.

Returning to Gharib’s question and extrapolating from the TransRe experience, he guessed around 25 percent of the COVID losses have been paid globally across the insurance and reinsurance sectors, noting that reinsurance loss payouts lag behind primary insurance.

Some big question marks remain for insurers and reinsurers, he indicated, highlighting the ultimate resolution of business interruption losses across continental Europe as one area of uncertainty.

“In the U.S., we have, for the most part, fairly standardized coverage language, thanks to the long history of rating bureaus,” he said, referring in particular to the Insurance Services Offices, or Verisk. “It never occurred to me, well, where exactly does the policy language come from in France, in Germany, in South Africa? Who’s taking responsibility for making sure that’s rational and the coverage grant is what the industry intended,” he continued, without hazarding a guess about how that might play out or how Europe’s losses might end up being split between insurers and reinsurers.

In Australia, Brandon reported his understanding of a unique situation that has primary insurers unable to recover from reinsurers. According to the reinsurance executive, some primary policies had an exclusion that would negate coverage but the language of the exclusion references a law that lapsed a few years ago. The reinsurers, he believes, also “had exclusions in their catastrophe treaties that referenced the proper and newly updated law.”

Across the globe, he said, business interruption is likely to be the largest source of coverage losses but there is more certainty about how coverage disputes will play out in the U.S. and UK than elsewhere, he said, noting that while case trends continue to move favorably for insurers in U.S. federal courts, the UK Supreme Court decision on the FCA test case early this year, was largely unfavorable for the insurance industry.

He also referenced a “poor decision in South Africa from the industry perspective,” but said that adverse decision won’t have any large impact on the global reinsurance industry.