Ratings agency, S&P Global Ratings has released a report which shows how insurers’ capital buffers are proving resilient, despite the COVID-19 pandemic.
It reported that while COVID-19 financial market stresses could have wiped out up to 85% of the global insurance industry’s capital buffer at the beginning of 2020, a cushion remains to support most ratings.
Asset stresses represented 4%-7% of starting total adjusted capital on average, with equity stress the single most significant; however, a combination of credit default and migration was at least as severe as equity in most regions.
S&P claims that estimate does not account for the rebound in the financial markets in recent months, and believes there should be some buffer to absorb a possible second market dip. Insurance losses are expected to be contained within the industry’s earnings
Analysts noted that the impact of COVID-19 on re/insurers has been broad, covering blanket travel restrictions, societal lockdowns, and extensive monetary and expansive fiscal policy responses.
So far, S&P has taken 51 actions globally, representing just under 10% of its insurance portfolio. This compares favourably to the broader corporate and government rating universe where 41% of ratings have experienced a downgrade, negative outlook revision, or CreditWatch negative placement.
Most companies have updated financial results, including for the half-year, giving the market tools for S&P to analyse how the insurance industry has coped with COVID-19’s implications. It gives the company further insight into what to expect for the remainder of 2020 and into 2021, as the global economy starts to recover.
HSBC estimates that reported COVID-19 claims have increased by up to three times during second-quarter, to $20 billion from $6 billion in the first quarter.
Most of these losses were reported by European insurers (about 60%), where the majority (89%) came from the P&C sector. Reinsurers accounted for just over one-third of reported losses.
S&P continues to expect insured losses from COVID-19 to be an earnings event, rather than a capital event for the industry in 2020. In addition, financial markets have recovered significantly from their depths in March and April, with the capital adequacy implications of credit rating migrations and impairments offset by some of the rebound in equity markets and credit spreads.
Dennis Sugrue, a credit analyst at S&P, commented: “So far, we believe the industry’s buffers have shown resilience in the face of the pandemic. Although there might be some exceptions, we expect this industry resilience to continue through the remainder of 2020, barring any other unforeseen shocks.”
