Most Covid-19-related losses such as business interruption and event cancellation will be picked up by reinsurers, according to S&P Global Ratings.
As a result, primary insurers’
technical performance is unlikely to deteriorate materially, but the real
impact of Covid-19 on global insurance markets is largely felt through asset
risks, notably capital markets volatility, and weaker premium growth prospects,
said the ratings agency.
In a presentation, Top Risks
For The Global Insurance Industry: Could COVID-19’s second wave shake up the
sector?, S&P notes that developed markets, particularly life ones, are
likely to shrink in real terms as a result of the economic slowdown, while
developing markets will likely experience more declines in return on equity
(ROE) than developed markets because of their riskier asset allocation.
“We expect insurance ratings to
continue to show resilience, but risks remain from: investment portfolio
exposure, business lines most acutely affected by the pandemic, wider pressures
on investment returns, low interest rate, and lower economic growth,” states
S&P. It points out that since second-quarter 2020, the US, Canada,
Australian mortgage insurance, global reinsurance, APAC life and Latin America
have all carried negative sector outlooks.
Looking at the impact on
regions, S&P says that developed EMEA property and casualty (P&C)
insurers will be affected by the low interest rate environment, which will
likely impact investment yields and consequently ROE. It notes that the intense
competitive environment translates into weaker technical earnings, particularly
on motor and medical lines in the UK and Ireland, and says that the countries’
litigious legal system has also increased product risk, and consequently
unpredictable claims settlements.
As for developing EMEA P&C
insurers, country risk, particularly sovereign rating caps and geopolitical
risk, is pronounced for many, notably in the Middle East and north Africa. It
also points to “foreign exchange risk and currency devaluation in non-pegged
regimes, which increases the cost of claims for the dominant motor and medical
lines; this is particularly the case in Turkey, South Africa, and Angola”.
In the APAC P&C sector,
S&P expects to see some segments producing reasonable returns, resulting in
increased competition, while exposure to natural catastrophes, notably
tsunamis, earthquakes (Japan and New Zealand), and flooding (Taiwan and
Thailand) will be a major risk. S&P also points to rising compliance costs
and government policy changes (Hong Kong and Malaysia), which make the
operating environment uncertain.
For North American P&C
insurers, the weaker investment environment, namely due to low interest rates
and volatile equity markets, will continue to suppress investment performance,
says S&P. Other risks include the US legal system, which is generally
litigious, resulting in unpredictable claims settlements and related reserve
volatility arising from unanticipated spikes in claims severity or frequency
trends. And there is material exposure to natural perils, especially
hurricanes, tornadoes and wildfires, the latter becoming more prevalent in
recent years.
For Latin American P&C
insurers, S&P says the main risks are weak technical results due to a high
cost base and aggressive competition, with insurers relying on investment
returns to produce overall net profits, together with exposure to currency
devaluation. S&P adds that the economic downturn caused by Covid-19 will
have an adverse effect on potential premium growth for the sectors, while
unstable political environments also pose a drag on insurance sectors.
CRE
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