No immediate market reaction to pandemic but likely to reinforce hardening

Credit: iStock/RomoloTavani

The commercial insurance market remains difficult for buyers but has not immediately reacted to Covid-19, however experts say it will likely reinforce hardening in the longer term.

Aon’s global chief broking officer, Hugo Wegbrans, told Commercial Risk Europe that the insurance market has not immediately reacted to Covid-19 at 1 April renewals and, although still tough for insureds, has stabilised during the first three months of this year.

“We are seeing that the market is a continuation of what we saw at year-end. There has not been a spike and it is not worsening for buyers. We had a spike at the year-end when people really saw drastic premium increases. But we have seen a normalisation, as we were hoping for, in the first three months of 2020. It is still a difficult market with increased rates, but it is generally more reasonable in terms of surprises than at year-end,” he said.

Speaking on current conditions immediately ahead of 1 April renewals, Mr Wegbrans said: “Casualty rates are plus 10%, property is plus 5% to plus 20%, unless you are in food or waste, or one of the more difficult occupancies that are really difficult as in December. Motor is fairly flat, especially in the UK. D&O is plus 10%, unless you have US exposure where it is a lot more than that. PI is still difficult as it was at the end of last year.”

He said it is hard to predict how coronavirus will impact the market in the medium to long term because of uncertainty over the economy, insured losses and the investment environment. But while these forces play out, the broker is sticking to his prediction back in February that there will be at least two years of hard market conditions.

Mr Wegbrans also said the insurance market coped well operationally with the turmoil thrown up by Covid-19 during 1 April renewals, predominantly focused on the UK and London market, and things are relatively smooth for buyers.

This was also the message from Airmic. It told CRE there is no real evidence that Covid-19 caused problems for 1 April renewals, but added that buyers are still facing difficulty from continuing “harsh market” conditions.

Insurance contract consultant Mactavish called for a range of emergency measures to support the insurance industry and its customers hit by the coronavirus, including a temporary freeze on insurance rates and automatic renewals.

But Airmic’s technical director and deputy CEO Julia Graham said, given that “harsh market conditions” faced by buyers at year-end are continuing, such moves seem unlikely.

GVNW and Airmic previously warned that the hardening insurance market will be a long-term, seismic shift, after recent membership surveys revealed big changes in the price, scope and availability of cover.

The surveys also showed widespread dissatisfaction in the way insurers and brokers are handling the changing conditions, and the associations were keen to let the market know it could lose whole swathes of business for good if things do not improve.

Mactavish has warned that without government support, coronavirus could have a significant impact on insurers over the medium to long term. Investment losses suffered by insurers could lead to premiums rising dramatically and insurers pulling out of sectors and classes of business, it said. The firm also fears more claims being rejected and slower settlement.

Meanwhile, ratings agencies have explained to CRE how they believe Covid-19 is likely to impact the insurance industry and predict it will likely harden the market yet further.

They said that coronavirus claims for P&C insurers are likely to be manageable and equivalent to a mid-sized catastrophe event. However, insurers and reinsurers are also being hit by potentially large investment losses from financial market volatility and falling premium volumes, as demand declines with the economic slowdown.

“We will most likely see a rise in claims linked to event cancellation policies, which partially cover for pandemic risk. Individual insurers and reinsurers may be affected substantially by this line of business, but the impact on the whole industry is manageable in our view,” said Robert Mazzuoli, a director in the insurance team at Fitch.

“The far more important issue is the impact that a recession and the downturn in financial markets may have on the industry. A recession will dampen demand, but is likely to have a positive impact on claims frequency as well, as economic activity slows down. Capital and solvency are negatively impacted by the downturn in financial markets,” he said.

Fitch Ratings has already placed the sector outlooks for global reinsurance, US P&C and the London market on negative watch, reflecting increased concerns over the Covid-19 disruption and impact on carriers’ credit quality. The ratings agency is now in the process of reviewing individual ratings and warned downgrades are a possibility. AM Best said it is developing stress testing that it will conduct on rated insurance companies’ balance sheets to gauge the impact of the coronavirus. However, the ratings agency said the effects of the outbreak may not be understood fully for some time.

The insurance industry has the capacity to absorb moderate shocks, however sluggish growth and market volatility will be challenging, according to Moody’s. During the next 12 to 18 months, Europe’s insurers face the dual risks of low interest rates and coronavirus-related market volatility, it said.

“Financial market fluctuation driven by the coronavirus outbreak will erode insurers’ capital in the short term,” said Helena Kingsley-Tomkins, an analyst at Moody’s. “Low interest rates, with bond yields dropping to record lows in March, will further pressure European insurers’ profitability and economic solvency over the coming quarters,” she added.

The greatest impact on the P&C segment is likely to come from recessionary conditions coupled with financial market volatility, said Stefan Holzberger, senior managing director and chief rating officer at AM Best. Investment classes like equities and real estate have been hard hit, and are not likely to recover in the near term. On the fixed income side, there could be an increase in write-downs as bankruptcies increase, he said.

“These forces will negatively affect insurers’ balance sheets more than demand. That said, the reduction in economic output will put a strain on P&C premium volumes and profits. Some lines of business will be affected such as travel insurance, trip cancellation, business interruption, surety and trade credit,” said Mr Holzberger.

“Beyond these niche lines, we do not expect a major spike in the loss ratios for the main segments within personal lines, commercial lines and reinsurance. One caveat to this is the potential for unexpected interpretations of contract language driven by the unprecedented nature of these events,” he said.

The recent downturn in financial markets will most likely limit the available capacity and risk appetite in the short to medium term, which could accelerate market hardening. Even in the catastrophe bond market, deals have been harder to complete at higher prices, while one transaction was pulled due to a lack of investor support. And ratings agencies ultimately think the coronavirus could see more market hardening.

“Fitch expects the P&C insurance and reinsurance market to continue to harden, possibly at a higher pace than before the current outbreak of Covid-19. After the outbreak of SARS, pandemic risk was excluded from most business interruption policies. We cannot exclude a similar action for other types of policies as a response to Covid-19,” said Mr Mazzuoli.

Mr Holzberger also believes that recent events could well result in further market hardening. “The reduction in excess capital due to financial market losses, together with a continued decline in investment income in the low rate environment, could add fuel to the hardening market seen in late 2019, and further tighten terms and conditions,” he said.

“As primary companies deal with a reduction in capital and a tightening credit market, they may seek capital relief from their reinsurance partners. This would benefit the global reinsurance segment. That said, based on the likely economic conditions in 2020 and beyond, we could see a reduced demand for P&C insurance,” Mr Holzberger added.

The economic and financial market conditions likely to result from the coronavirus pandemic would most likely support underwriting discipline, he continued.

“With data analytics taking hold across the P&C segment, we feel the peaks and troughs of the market cycle would be flatter under normal economic conditions. The unprecedented nature of current events could produce a deep economic contraction, a tight credit market offering limited liquidity, and a prolonged low interest rate environment,” he said.

“All these factors would support the need for strong underwriting discipline – creating a hard market – as the only means to produce reasonable operating earnings and restore lost capital,” said Mr Holzberger.

While Moody’s expects a material decline in insurers’ Solvency II ratios because of the current market volatility, it expects a more limited impact directly on P&C underwriting conditions. “Notwithstanding claims exposure within certain lines of business such as travel, workers compensation, general liability, D&O and contingency, we do not expect a significant rise in claims for P&C insurers across the board,” said Ms Kingsley-Tomkins.

“While commercial P&C insurers underwrite significant volumes of supply chain and business interruption cover, infectious diseases are typically excluded from such policies, meaning that insured losses will be low. Furthermore, there could be some offset impact in motor claims, as more people stay off roads during this period,” she said.

“As such, we do not expect a meaningful impact on market dynamics including pricing conditions or underwriting capacity for the P&C sector,” she added.

Longer term, it is difficult to predict the direction of the insurance market, according to Mr Mazzuoli. “It is still too early to assess the long-term impact of Covid-19 on the insurance market cycle. This will be a function of the length and depth of the current crisis,” he said.