London re/insurance market outlook negative on Covid-19, says Fitch

The London market insurance and reinsurance sector is at-risk due to the Covid-19 coronavirus pandemic, causing Fitch Ratings to revise its outlook on this core marketplace to negative.

Yesterday, we reported that Fitch had revised its outlooks for the global reinsurance market and U.S. Property & Casualty insurance to negative from stable, as the magnitude of the challenges posed by the coronavirus pandemic become clearer.

This morning Fitch has added the London marketplace, which includes operations at Lloyd’s of London of course.

The rating agency said that its downgrade of the fundamentals of the London insurance and reinsurance market is due to, “Increased concerns over the COVID-19 disruption and the related impacts on the credit quality of London market insurers.”

The rating outlook for companies operating in the London market remain stable, Fitch said, but this will be revisited as its analytical work related to the Covid-19 coronavirus continues.

The London market is likely to be less affected by the coronavirus outbreak than areas of the insurance and reinsurance market such as European life insurers, Fitch said.

However, it noted that just because it maintains a stable rating outlook for the London market sector it does not mean ratings will not end up impacted.

Highlighting a range of issues, Fitch said the London market is threatened by the impacts of falling equity markets, widening credit spreads and declining interest rates, which are all negative for re/insurer capital.

While London market insurer bond portfolios are mostly highly-rated, the rating agency warned that widespread downgrades may weaken capital ratios.

Fitch said it expects the impact on underwriting performance to be more limited, saying that it expects the biggest exposure for London market insurers and reinsurers to come from event cancellation, business interruption and accident & health lines.

As we’ve explained before, we also hear that London market companies need to be vigilant on other lines of business, such as trade credit exposures, as well as certain marine and energy treaties that could pick up losses due to the coronavirus.

In addition, London market re/insurers now face low interest rates likely for longer, adding pressure on investment earnings.

Fitch had revised its sector outlook for the London market to stable from negative in November 2019, which at the time it said reflected the improvement in pricing conditions across insurance and reinsurance and an expectation that improved underwriting results would begin to emerge from 2020.

But, Fitch said that challenges remained anyway, citing the “stubbornly high expense ratio” of the London market, as well as continued low investment yields and the need for reserve strengthening across US casualty books of business.

Fitch also makes a warning specifically on the Lloyd’s market, saying that, “The rapid spread of COVID-19 could increase operational risks for the implementation of the Future at Lloyd’s project.”

With London market insurance and reinsurance business usually relying heavily on face-to-face interaction, the coronavirus pandemic will have an impact and if it is prolonged this could become an issue for some.

We already hear of issues in business as usual, particularly among some of the larger broking houses, although they would all insist continuity is already in-place.

We understand this isn’t the case and there are frustrations brewing among cedents and markets as renewals approach, with late delivery of data and information seen as becoming a bit of an issue in some areas. Something to watch going forwards.

Fitch said that it is now reviewing its insurance ratings relative to assumptions, taking into account the Covid-19 coronavirus’ effect on capital markets volatility, interest rates, market liquidity and insured claims/reserves.

The rating agency said it will compare analyse insurers and reinsurers and if it notices a deviation from relative to its existing ratings, they will be placed on Rating Watch Negative (RWN) or downgraded. The agency said that this review is in its earliest stages, so we shouldn’t expect any quick moves on downgrades at this time.

Also read: Global reinsurance, U.S. P&C outlooks negative on coronavirus: Fitch.