Fitch Ratings does not expect recent premium adjustments announced by property/casualty insurers in response to the impacts of the COVID-19 pandemic to affect long-term market profits or individual company ratings.
Driven by unanticipated declines in risk exposures and claims incidence following the economic impact caused by the ongoing coronavirus pandemic, some insurers have announced premium return initiatives.
Initially, these programs were established by large auto insurers such as Allstate, but Fitch notes that these are starting to emerge in commercial lines as well.
“Premium return actions by insurers to date are viewed as a proportional response to recently emerging trends on claims and underwriting exposures, and do not represent an undue percentage of annual premiums.
“These actions will reduce the level of earnings in the coming months but not of a magnitude to move insurers toward large losses. However, greater expense pressures may materialize with overall premium volume declines if a more prolonged economic recession develops,” explains Fitch.
Clearly, in some areas of the insurance and reinsurance industry the ongoing pandemic is going to result in higher levels of claims. However, for other areas, such as the auto market, the claims experience is expected to drop significantly as social distancing measures and government orders dramatically lower the amount of drivers on the road and miles driven.
As a result of the decline in accident frequency, Fitch expects that auto insurers’ first-quarter and second-quarter 2020 loss ratios will be favourably impacted.
So far, State Farm, GEICO and Allstate are just some of the companies that have announced premium adjustment plans, and Fitch expects more insurers to reveal similar initiatives in the near term.
Furthermore, these actions are now being seen in the commercial insurance market as companies respond to declines in payroll or business receipts, for example.
“Declines in business’ operating activity will likely result in significantly lower claims incidents in areas such as workplace accidents versus prior trends,” says Fitch.
Interestingly, the ratings agency also highlights the potential influence of increased regulatory attention on the financial challenges of policyholders, and reputational risks as other factors that might push insurers’ premium return and discount activity.
As we discussed on Reinsurance news recently, insurers in California have been ordered to refund certain premiums to customers and businesses impacted by the ongoing COVID-19 coronavirus pandemic, and Fitch expects other states to take a similar approach.
“Insurers will be greatly challenged in estimating incurred losses in 2020, with unusual shifts in underlying risk exposures, claims reporting and closure rates and loss payment trends. When conditions eventually normalize, pricing challenges will lie in projecting the temporary versus more permanent effects of all these recent changes,” says Fitch.
