COVID-19 Testing the Industry Warns S&P

Ratings firm Standard & Poor’s has warned the ongoing COVID-19 pandemic is increasingly likely to test the resilience of the insurance industry.

The firm issues an advisory which said it expects that the insurance industry’s robust capital position and limited exposure to loss-affected lines of business will enable most insurers to absorb the impact of financial market volatility and manage the marginal increase in claims. However, there may well be some underwriters and risk centres which feel the impact more than others.

S&P cautioned the rate of infection is accelerating globally and the centre of the pandemic has shifted from China to Europe and the U.S. The World Health Organisation designated the outbreak a pandemic on 11 March. It has therefore forecast that the global economy will be in recession in 2020 as a result.

It added the economic disruption associated with the pandemic, combined with the collapse in oil prices and resultant extreme volatility in the capital markets, will have severe implications for global credit markets.

“That said, average rating across the industry is ‘A’, the highest average rating for any corporate or financial services industry we rate,” said the firm. “As with other investment-grade issuers, we don’t anticipate widespread downgrades across the industry.”

Nevertheless, S&P warned some ratings will be affected. To date, it has downgraded one insurer and placed two insurance ratings on a negative outlook or CreditWatch. In each case, the ratings firm said the implications of COVID-19 had compounded other factors, causing creditworthiness to deteriorate.

S&P added: “The pandemic has had far-reaching implications for the global economy, disrupting supply chains; changing demand for goods, services, and commodities; and, most importantly, causing fundamental changes to the daily lives of people in the affected countries.

“Insurers’ credit worthiness is likely to be more affected by the stress on financial markets than through their insurance risk. The trifecta of unprecedented low or negative interest rates, credit deterioration, and a declining equity market will chip away at insurers’ financial strength, particularly for life insurers, by eroding capital and earnings. If the situation worsens, or lasts for a prolonged period, we expect that these factors will lead to more rating actions.”

The report added that there may well be a bigger impact to risk centres where there is a focus on specialty and face to face meetings.

“The insurance-related risks, such as increased claims and top-line pressures, are less significant risk factors for the industry as a whole,” it said. “That said, specialist writers of loss-affected lines and those dependent on face-to-face sales could experience earnings deterioration or reduced market presence, respectively, as a result of the pandemic.”

However, it added life insurers are more at risk, particularly those with relatively thin capital buffers and significant exposure to financial market volatility through their asset portfolios or product offerings.