Financial market disruption stemming from the spread of the coronavirus is the main threat to the credit profiles of European reinsurers, Fitch Ratings analysts say.
Furthermore, downgrades could be on the horizon should earnings weaken and capital headroom erode as a result of prolonged stress on equity and credit markets and declines in interest rates
In contrast, analysts note that the risk to ratings due to mortality from COVID-19 is still remote.
Falling equity markets, widening credit spreads and declining interest rates are all negative for reinsurers’ capital.
Each of these in isolation might have a limited effect on a reinsurer’s capital, but in combination analysts say they could have a material impact.
Moreover, the combined impact could be greater than the sum of the standalone individual effects.
Falling equity markets are negative for reinsurance companies to the extent that the companies have unhedged equity exposure that could weaken their capital.
However, most European reinsurers do not have significant exposure, partly due to high regulatory capital charges for equity risk.
Analysts say the coronavirus outbreak has triggered an investor flight to quality, depressing yields on highly-rated government bonds.
This adds to pressure on reinsurers’ investment earnings and capital from already ultra-low bond yields
The major European reinsurers have relatively long debt maturity profiles, with refinancing needs spread over several years.
They have a record of good access to the capital markets, but significant market dislocation would make it more costly to refinance maturing debt.
While financial market disruption could lead to reinsurer downgrades, Fitch does not expect COVID-19 mortality to do so.
The ratings agency estimate that a 1-in-200 mortality shock of the type that reinsurers plan for, corresponding to tens of millions of extra deaths globally, would consume 5%-20% of major European reinsurers’ regulatory capital, and this still appears a remote scenario.
Capital sensitivity to COVID-19 mortality is probably less than to general mortality given that COVID-19 fatality rates appear highly skewed to people of older ages with existing medical conditions.
Event cancellations due to the coronavirus may be partially covered by insurance, and reinsurers could face substantial losses.
The largest upcoming event is the Tokyo Olympics, due to start in July, with insurance coverage likely to total about USD2 billion, according to industry experts.
The risk is spread among several insurers and reinsurers but some reinsurers have exposure of hundreds of millions of dollars, equivalent to a meaningful proportion of recent annual earnings.
Most business insurance contracts cover only direct losses due to standard definable risks. This will largely shield the insurance sector from business-related claims.
In particular, most business interruption cover is designed for interruption due to physical property damage and does not include interruptions for other reasons, even shutdowns forced by authorities.
Fitch believes there will be some exceptions but claim exposures will be subject to policy limits.