European insurers well prepared to deal with coronavirus but credit market likely to take hit and harden

The European insurance sector is well positioned to deal with the impact of the coronavirus (Covid-19) on both the asset and liability sides of its balance sheet by using exposure management, reinsurance or other mechanisms, according to credit ratings agency AM Best. The agency issued a report late last week that says Covid-19 has the potential to “challenge” European insurers on both the asset and liability sides of their balance sheets, but it believes the biggest impact will come as a result of the economic fallout, as governments and markets react to the virus’s rapid spread, rather than from direct coronavirus exposures. “Despite considerable uncertainty about the ultimate cost to insurers in terms of claims, the insurance industry has long recognised the potential exposures a pandemic poses,” states AM Best. “Thus, although the ultimate losses may not yet be quantifiable, AM Best expects the European insurance industry to be in a good position to understand and manage the potential exposure to pandemic risk, whether through exposure management, reinsurance or other mechanisms,” adds the credit ratings agency. AM Best notes that European insurance companies in general remain well capitalised. But it also says that volatility in the wider financial markets could affect insurers’ results and their financial strength. The agency points out that the exposure of the insurance industry as a whole to the equity markets is relatively modest. A major shock in the equity markets should not have a huge impact on the capital position of most European insurers, although some will have greater exposure, it adds. AM Best says that it believes the more pressing question is how central banks will react in terms of monetary policy and interest rate cuts, as they seek to support the economy. On 3 March, the US Federal Reserve implemented a 50-basis-point emergency cut in US interest rates. AM Best says that, in the short term, rate cuts support bond prices, but adds that it also increases the likelihood that the low interest rate environment will persist and this will dampen insurers’ longer-term investment expectations. “The prospect of the coronavirus spread contributing to a global economic slowdown is another significant concern. A global recession would likely lead to a global decline in demand for insurance – particularly commercial insurance. However, periods of lower economic activity typically present fewer claims, which could prove positive for insurance company results,” adds the credit ratings agency. Credit insurance is clearly one of the areas likely to feel an impact from coronavirus-induced disruptions to global trade, particularly if economies around the world slip into recession. But, as AM Best points out, claims will take some time to materialise because policies generally are not triggered until payments fall outstanding. Credit insurers are already taking a “proactive” approach, which will help, but rising bankruptcies that would come with a global recession would still hurt the sector, states AM Best. “Credit underwriters continuously monitor exposures and are ready to cut limits when they identify an issue. They are in the process of reviewing limits in China and affected industries around the world. If a global recession takes hold, there will likely be a spike in bankruptcies beyond the affected areas and therefore in credit insurance claims,” it states in the report. The main direct claims exposure will come from contingency and event cancellation insurance, says the credit ratings agency. A number of high-profile events have already been cancelled or postponed and the future of other major international events such as the Tokyo Olympics and the UEFA Euro 2020 Championships is being questioned. Football matches have already been cancelled in Italy and France because of the virus. The women’s international rugby match between Scotland and France planned for Saturday was cancelled because one of the Scottish players has the coronavirus. It is not clear, however, how exposed the insurance industry is to such contingency losses because pandemic is not typically covered by contingency policies, except by endorsement. AM Best also points out that there is also some discrepancy about triggers for contingency policies. Organisers that choose to cancel an event as a precaution are unlikely to be covered by most policies, it notes. AM Best says pressure on asset values and therefore earnings and solvency ratios will probably bolster and maintain the current hardening in the non-life markets and definitely in loss-hit lines such as trade credit. “A deterioration on the asset side of insurers’ balance sheets, such as investment losses leading to lower earnings and lower solvency ratios, could put more force behind the current rate hardening in some areas of the market. Furthermore, any pockets of claims in specialised lines of business like trade credit insurance or event cancellation could very quickly lead to hardening markets in those areas. However, based on current analysis, that is the extent to which AM Best expects coronavirus to have an impact on the insurance cycle in Europe,” it states.

European insurers well prepared to deal with coronavirus but credit market likely to take hit and harden

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