09 March 2020

Commercial Risk Europe: European insurers well prepared to deal with coronavirus but credit market likely to take hit and harden

The European insurance sector is well positioned to deal with the impact of the coronavirus (Covid-19) on both the asset and liability sides of its balance sheet by using exposure management, reinsurance or other mechanisms, according to credit ratings agency AM Best.

The agency issued a report late last week that says Covid-19 has the potential to “challenge” European insurers on both the asset and liability sides of their balance sheets, but it believes the biggest impact will come as a result of the economic fallout, as governments and markets react to the virus’s rapid spread, rather than from direct coronavirus exposures.

“Despite considerable uncertainty about the ultimate cost to insurers in terms of claims, the insurance industry has long recognised the potential exposures a pandemic poses,” states AM Best.

“Thus, although the ultimate losses may not yet be quantifiable, AM Best expects the European insurance industry to be in a good position to understand and manage the potential exposure to pandemic risk, whether through exposure management, reinsurance or other mechanisms,” adds the credit ratings agency.

AM Best notes that European insurance companies in general remain well capitalised. But it also says that volatility in the wider financial markets could affect insurers’ results and their financial strength.

The agency points out that the exposure of the insurance industry as a whole to the equity markets is relatively modest. A major shock in the equity markets should not have a huge impact on the capital position of most European insurers, although some will have greater exposure, it adds.

AM Best says that it believes the more pressing question is how central banks will react in terms of monetary policy and interest rate cuts, as they seek to support the economy.

On 3 March, the US Federal Reserve implemented a 50-basis-point emergency cut in US interest rates. AM Best says that, in the short term, rate cuts support bond prices, but adds that it also increases the likelihood that the low interest rate environment will persist and this will dampen insurers’ longer-term investment expectations.

“The prospect of the coronavirus spread contributing to a global economic slowdown is another significant concern. A global recession would likely lead to a global decline in demand for insurance – particularly commercial insurance. However, periods of lower economic activity typically present fewer claims, which could prove positive for insurance company results,” adds the credit ratings agency.

Credit insurance is clearly one of the areas likely to feel an impact from coronavirus-induced disruptions to global trade, particularly if economies around the world slip into recession. But, as AM Best points out, claims will take some time to materialise because policies generally are not triggered until payments fall outstanding.

Credit insurers are already taking a “proactive” approach, which will help, but rising bankruptcies that would come with a global recession would still hurt the sector, states AM Best.

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