Economic scars will linger warns Fitch

US healthcare  insurers are in danger of being exposed to long-lasting economic scars from the coronavirus pandemic, which could affect ratings in the longer term.

Fitch Ratings  has warned financial institutions are set to  carry long term scars from the economic crisis and it is likely to be negative for the credit profiles of most banks and for US health insurers but will be less significant for non-bank financial institutions (NBFIs) and funds.

It added that the ongoing uncertainty over business insurance coverage will potentially need state-sponsored solutions for future catastrophic BI events.

“We expect increased unemployment and economic weakness to pressure asset quality, particularly for lenders with high exposure to SMEs,” added Fitch. “Weak credit demand and reduced capital market activity will suppress earnings. Conditions are likely to be credit-negative for all but the largest global and domestic systemically important banks and could catalyse industry consolidation.”

Economic scars could lead to more sovereign downgrades in the aftermath of the pandemic. This would put pressure on bank ratings that reflect potential sovereign support – a common feature in emerging markets. Banks whose ratings are clustered around the sovereign rating of their domicile could also be affected if that sovereign rating is downgraded.

NBFIs also face adverse operating conditions. However, they are less constrained by regulation than banks are. NBFIs may be able to grow in the riskier, but potentially more profitable, segments that banks are likely to avoid in anticipation of asset quality deterioration. NBFIs have good growth opportunities in many emerging markets despite the economic effects of the pandemic, due to still-low credit penetration and limited banking presence.

US health insurers could be particularly affected by the pandemic’s longer-term ramifications. The health crisis may have set a precedent for increased government involvement in the health insurance market and made regulatory intervention that favours customers over insurers more likely.
“Business interruption insurance may be redefined in the wake of the pandemic so that businesses can have more clarity on what they are covered against,” said Fitch. “Several insurers rejected pandemic-related business interruption claims on the grounds of policy wording, arguing that coverage did not apply in the context of a pandemic. However, a test case in the UK led to a court ruling that largely went against insurers.

“Given the scale of pandemics and the difficulty of precisely defining related losses due to business interruption, it may be that government-funded solutions will be developed in readiness for future pandemics, perhaps similar to those that apply in some jurisdictions for natural catastrophe losses.”