Coronavirus Downgrades Insurers Rating

The global coronavirus pandemic is “not only one of the most significant credit events” in most of our lifetimes, it’s also “unquestionably the fastest developing”. The global credit ratings agency, which provides insurance sector and company outlooks, is in the process of analysing the potential impact of COVID-19. But the speed at which events are unfolding and changing are creating “tremendous uncertainty,” making forward-looking analysis an immense challenge. These elements manifest themselves in the insurance sector in several ways. 

Strain On Asset - There’s going to be strain on the asset side of the balance sheet as investments suffer losses, and/or there’s just market value volatility. 

Higher Claim - There will be direct claim costs tied to the pandemic - and that could come from heightened health insurance claims to cover hospitalizations for people who are infected by COVID-19, or life insurance claims for death. It could also include claims on the non-life side for indirect losses such as from event cancellations, related to trade credit, some for business interruption, some for various liability exposures, among others.

Low Interest Rate - Interest rate levels will come into play, and here we’re seeing somewhat contrasting indicators, with government risk free rates on a downtrend, but spreads widening on corporate and other debt. Interest rate levels can not only impact earnings on new money invested, but they can impact reserving assumptions, especially on long duration products. Ironically, there could also be some theoretical benefits for insurance, such as reduced claim experience from slowed activity due to lockdown, such as driving or around life products where reduced longevity can help. An example here would be annuities that have annuitized and are paying a fixed periodic benefit for a policyholder’s remaining life.”

Given the significant pressure on the underlying fundamentals of the global insurance industry as a result of the coronavirus pandemic, Fitch has moved all insurance sectors globally to a negative outlook. That includes life and non-life insurance globally, US health insurance, global reinsurance, and title insurance. 

The life sector negative rating outlook is because life insurers have much higher asset leverage than other insurance sectors, and thus, asset shocks will be felt harder relative to capital. Life businesses also tend to be more sensitive to interest rates, plus we think some companies too will suffer in earnings hit from increased mortality. 

Fitch’s analysis mid-March is subject to change given the fast-evolving nature of the coronavirus situation, was that the non-life and reinsurance sectors globally should have enough capital to absorb asset losses, especially given the lower asset leverage for most non-life companies relative to their life counterparts. The firm also projected that claim costs resulting from COVID-19 will be more of an earnings event versus a capital event for a vast majority of companies.