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AM Best turns negative on France, Italy & UK life markets

7th April 2020 - Author: Matt Sheehan

AM Best has revised its outlook for the life insurance markets in France, Italy and the UK to negative, due to concerns about the financial and economic headwinds caused by the coronavirus (COVID-19) pandemic.

am-best-logoIn France, the rating agency noted that technical margins have already been under pressure for a number of years due to the low interest rate environment.

COVID-19 is expected to have a materially negative effect on the French economy and investment markets, which in turn would pressure the results and solvency of the life segment.

For example, the anticipated economic effects of a COVID-19 driven recession are likely to negatively impact premium levels over the medium term as households will have less disposable income to invest in savings contracts.

The pandemic is also likely to depress insurers’ solvency levels due to a decline in equity markets, spread widening, and the increased risk of corporate bond impairments.

Meanwhile, in Italy the COVID-19 outbreak has already resulted in significant and immediate economic and financial consequences, as well as a widening in corporate credit spreads and a substantial fall in the market value of Italian listed companies.

A general weakening in credit quality across Italian corporate issuers means that the risk of bond defaults has increased, as Italian insurers are exposed to volatility in both the domestic and global financial markets.

In the UK, analysts noted that financial markets have responded negatively and quickly to the outbreak of COVID-19, and said that investment returns in the life sector would be hit by equity market declines and lower reinvestment yields.

There is significant uncertainty as to the severity of the impact of financial market volatility on insurers’ capital positions in the UK, and deteriorating economic conditions increase the risk of corporate bond defaults.

But on a positive note, good duration matching of assets and liabilities is likely to reduce the sensitivity of insurers’ balance sheets to interest rate movements, AM Best said.

The rating agency also expects the impact of a rise in mortality claims due to COVID-19 to fall within the boundaries of insurers’ pandemic scenarios run as part of existing stress tests.

Exposure is generally well protected with reinsurance and the impact of losses would be somewhat offset by a positive impact on longevity experience.

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