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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.