03 June 2020

Commercial Risk Europe: European insurers and reinsurers stand up to pandemic test, say ratings agencies

The Covid-19 pandemic has tested European insurers’ capitalisation but the sector has weathered the biggest shock since Solvency II was introduced in January 2016, said Standard & Poor’s (S&P). Fitch, meanwhile, said Europe’s reinsurance sector has also proved resilient to its pandemic stress test, and results will only be negatively affected in the short term.

 

Taos Fudji, S&P credit analyst, said European insurers have held up “thanks to strong ratios going into 2020 and features of Solvency II that cushion shock from equity price drops and widening credit spreads”.

However, S&P said Europe’s insurance sector does not measure up as well under its own model. “That doesn’t rule out a more severe impact under our capital model, depending on the individual profile of each company,” said Mr Fudji.

S&P said it does not anticipate financial strength rating actions, but added that financial markets and insurers’ investments could weigh further on solvency levels.

“We expect that recent market volatility will erode capital buffers under our model, but this is unlikely to lead to widespread rating actions,” Mr Fudji said.

S&P said a change in its assessment of an insurer’s capital adequacy will not prompt a ratings downgrade in itself. “We still have stable outlooks on most of the insurers we rate based in the European Economic Area. We [believe that] solid capital positions and the broad diversification of insurers in the region will continue to support the creditworthiness of many of them,” Mr Fudji said.

Fitch said Europe’s largest reinsurers will be hit by Covdi-19 claims from higher mortality, event cancellation and credit/surety defaults, which might only peak in the first half of 2021. But it said reinsurance rates will harden as lower capacity levels coincide with a spike in demand. “Higher margins may largely offset lower investment income due to falling interest rates,” Fitch said.

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