A global pandemic like COVID-19 could further stress balance sheets, not only for our clients, but for insurers worldwide.
The reality is there will be a sharp rise in payouts of claims for certain lines of coverage simultaneously, at a time where the industry is experiencing both ultra-loss interest rates and big investment losses. Falling yields require insurers to set aside more capital for future loss payments, putting some pressure on the insurer solvency ratios. Two of the world’s largest reinsurers, Munich Re and Swiss Re (who support most every insurance company in the world as a “backstop” for large losses) are reporting large losses in their cancellation covers as well as a rise in claims in life insurance policies as the death toll climbs.
The other side of this equation is that 1) insurers and reinsurers are extremely well capitalized and 2) direct insured losses from the COVID-19 outbreak are expected to be relatively low overall. The “wild card” is if insurers are forced to respond favorably due to regulatory changes at the state or federal level, and/or courts reinterpret the policies to consider COVID-19 a form of physical damage, thereby triggering business interruption coverage (both relatively remote scenarios). The magnitude of losses absorbed by the industry would be many order larger and threaten the solvency of some insurers and reinsurers. This is a moving target right now as to the financial impact to the insurance industry, over and above the losses currently being absorbed, as well as the pressure of ultra-low interest rates and a sharp downturn of the financial markets. Specific commentary from the credit rating agencies include:
- Moody’s stated in a March 2, 2020, report that insurers are exposed both to the coronavirus outbreak through a potential spike in claims, as well as “second order” effects such as financial market volatility and lower bond yields, (which may) have a bigger impact on the insurers’ capital and volatility (Global Insurers to Feel Coronavirus Impact Through Financial Markets Volatility)
- Ratings firm AM Best said it is developing stress testing that it will conduct on its rated insurance companies’ balance sheets to gauge the impact of the COVID-19 virus fallout on their risk-adjusted capital levels, investment portfolios, reserve adequacy and other aspects of the risks borne by rated entities.
- Fitch Ratings (March 20, 2020) has revised its outlook for the underlying fundamentals of the US property/casualty insurance sector to negative from stable (sector outlook). The sector outlook revision is due to increased concerns over COVID-19 and related impacts on near term performance and the credit quality of insurers. Claims experience from these events is not anticipated to significantly increase loss ratios in the near term but as the duration and severity of the crisis increase, due to uncertainty regarding future sources of underwriting losses.
- S&P Global Markets Intelligence (March 16, 2020) said negative impacts from the coronavirus outbreak are expected to hit the US in the second and third quarters, but the economy should recover going into 2021. Insurers are expected to be resilient in the face of a downturn, especially because, in part, there were not as many systemic imbalances as there were during the financial crisis in 2008.