Underlining the magnitude of the challenge that the Covid-19 coronavirus poses to the re/insurance industry, Fitch Ratings has revised its outlooks for the global reinsurance market and U.S. Property & Casualty insurance to negative.
The fundamentals or sector outlook for the reinsurance market and U.S. P&C insurers have both been revised to negative from stable by the rating agency, which is down to “increased concerns over COVID-19, the disease caused by the coronavirus.”
For the reinsurance industry Fitch fears “impacts on the credit quality of reinsurers.”
For the U.S. P&C insurance market Fitch cites expected ” impacts on near term performance and the credit quality of insurers.”
Ratings for specific companies within each sector remain stable, Fitch said, but noted that this could change in time as its analysis of the impacts of the coronavirus on the insurance and reinsurance market advances.
Fitch further explained that it is, “In the process of reviewing its insurance ratings relative to assumptions with respect to the impact of the coronavirus pandemic on capital markets volatility, interest rates, market liquidity and insured claims/reserves.”
The rating agency said it will, “Compare the pro-forma profile of an insurer relative to existing ratings sensitives established by the agency. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative or downgraded,” adding that it is “at the early stages of this review.”
On the global reinsurance sector Fitch explained that it, “Believes that the ratings of reinsurers will be less impacted by the coronavirus pandemic than those of life and health insurers, which are sectors whose Rating Outlooks were recently revised to negative by Fitch.”
On the U.S. property and casualty insurance market Fitch said that it, “Believes that the ratings of U.S. P/C insurers will be less impacted by the coronavirus pandemic than those of life and health insurers.”
For both sectors, Fitch said that the stable ratings outlook “does not imply that no ratings in the sector will be impacted by these ongoing events.”
Fitch does expect that the ratings of some reinsurance companies and some P&C insurers will end up on a negative watch in due course, as more information emerges about the impacts of the coronavirus outbreak on the industry.
Downgrades are possible, the rating agency notes, but said that it sees the need as unlikely right now. The rating agency said that its “stable rating outlook – does not imply that no ratings in the sector will be impacted.”
Fitch noted that the reinsurance market has been favourable lately, particularly in terms of price trend development.
In addition, reinsurers have strong capital adequacy, robust risk management and solid business profiles.
On the potential for losses related to the coronavirus outbreak Fitch explains that it believes, “The underwriting loss exposure (contingency/event cancellation, travel/accident, trade credit, surety and business interruption) from the virus as manageable for reinsurers given the relatively small size of the exposed lines, and the use of policy limits/sub-limits and exclusions.”
This isn’t quite what we’re hearing, as we understand there are some concerns over certain mid-sized reinsurers exposure to areas of the market such as trade credit coverage in Europe.
It’s expected that some more information on specific company exposures may become clearer in the weeks ahead, but there are market sources saying that we should expect to hear of some companies having challenges over specific lines with exposure to coronavirus related shutdowns, contingency and trade restrictions.
The U.S. P&C industry is also seen as relatively robust and well-capitalised, of course helped by its reinsurance partners.
But, “New challenges to performance arise in 2020 with the coronavirus pandemic and recent shifts in investment market and economic conditions. Companies with significant allocations to equity investment will see capital declines in the next quarter and investment income will decline YoY with lower bond yields.”
On loss potential for the P&C insurers, Fitch said, “Claims experience from these events is not anticipated to significantly increase loss ratios in the near term, but as the duration and severity of the crisis lengthens uncertainty regarding future sources of underwriting losses expands.”
In addition, “A move towards an economic recession could alter premium growth trends through declines in insured exposures or renewed competitive pressure that restricts pricing momentum,” Fitch warns.
One other point of relevance on the global reinsurance market is the high levels of competition that players have experienced in recent years.
As the coronavirus impacts begin to flow through the reinsurance market, while at the same time large companies perhaps struggle to get up to speed with remote working and new business practices (especially when it comes to renewal time), the competition factor could become increasingly relevant.
Finally, it is important to also note the uncertainty related to potential legal or legislative action related to business interruption and property damage clauses, whether that could become an additional pressure on these market sectors should the pressure to honour ever more claims begin to weigh.