P&C insurers will take underwriting hit from virus but investments far more exposed: DBRS Morningstar

Coronavirus (COVID-19) will hit property and casualty (P&C) insurers' investment books much harder than their underwriting books, despite rising claims for specialty lines such as events cancellation and travel insurance, while the underwriting blow will be softened by the hardening markets, according to credit ratings agency DBRS Morningstar. “We consider the coronavirus to be largely an economic event for now, which will not result in significant underwriting losses for the P&C industry overall. However, some lines such as events cancellation and travel insurance will experience an increase in claims,” states the agency in its latest analysis of the impact of the virus. “P&C insurance companies around the world have been increasing their pricing significantly since 2019, and the trend seems to have continued through to 2020, because of the reduction in capacity and increasing catastrophe losses since 2017. The resulting positive impact on underwriting profitability may help mitigate some of the effects of the coronavirus-driven financial market volatility on investment portfolios, as companies may offset investment losses or depressed investment income with higher underwriting revenues,” it adds. The main impact on P&C insurers for now will be equity market fluctuations and cuts in interest rates by central banks as they try to limit the economic fallout from the virus. This will hit investment income because of the fluctuations in realised and unrealised market losses, says DBRS Morningstar. “As the virus continues to spread across the globe, the most immediate impact for P&C insurance companies will be in the valuation of equity investments and fixed-income assets, which are affected by equity and bond market volatility. Underwriting results may not be affected materially for the time being. However, claims will start to manifest in some niche industries like hospitality, tourism, transportation and entertainment, as trips and events get cancelled or more people become infected,” says the credit ratings agency. Event cancellation insurance is clearly highly exposed to the virus as organisers face a loss of revenue and incremental unforeseen expenses, points out DBRS Morningstar. The ability of this coverage to respond to the virus will, however, depend upon exclusions and whether organisers bought extensions for this type of loss. Workers compensation insurance is another line that could be affected, says the agency. A claim could occur if an employee contracts the virus from an infected co-worker and the employee claims for income replacement or medical benefits, it says. “We may start seeing these type of claims emerge for assembly line workers, call centres, hotel staff, etc,” it points out. Travel insurance is a line that is offered by both P&C (in some jurisdictions) and life insurance companies. This insurance generally covers flight cancellation; trip interruption; and stolen, lost or damaged luggage. It also provides cover for delays, medical evacuation and emergencies. DBRS Morningstar says that it expects a significant number of travel insurance claims to be reported because of coronavirus-related cancellations. Supply chain insurance could also be on the hook. The credit ratings agency explains that this cover essentially covers business interruption from delay or disruptions in receiving parts, products, components, or services from suppliers. “Companies that rely significantly on third-party providers for critical components or service may be able to make claims to recoup losses as a result of the interruption,” says DBRS Morningstar, though again it is likely that exclusions will apply in many cases. “Other policies that could trigger payouts include (but are not limited to): business interruption, general liability, directors and officers, and pollution liability coverage. However, these would depend heavily on policy wording and any exclusions that may be embedded within the wording,” comments the ratings agency. For now, however, it is investment income that will most likely be affected, says DBRS Morningstar. “P&C insurance companies are major investors in equity and bond markets. The most significant impact of coronavirus in the short term could be in the reporting of investment income as a result of the equity market shocks on the market values of invested assets. The application of fair-value accounting standards would result in material movement in realised or unrealised gains because of changes in fair-market values of invested assets. Interest-rate fluctuations would also have an impact on the valuation of fixed-income assets, as various central banks reduce their benchmark rates to try to stimulate economic activity,” it states.

P&C insurers will take underwriting hit from virus but investments far more exposed: DBRS Morningstar

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