The COVID-19 pandemic is set to have an adverse but manageable impact on the European re/insurance sector, according to analysts at Moody’s, who predict a drop in company earnings rather than capital erosion.
“We see the industry as resilient overall, and believe it will be able to absorb the impact of the pandemic, leaving its capital broadly intact,” said Christian Badorff, a Vice President and Senior Analyst at Moody’s.
“The most severe long-term impact will likely be continued pressure on the sector’s investment returns due to a further fall in interest rates and an expected increase in corporate defaults.”
Moody’s considers central bank intervention to have reversed much of the fall in equity markets and widening of credit spreads witnessed seen in the first quarter.
The re/insurance sector has also taken advantage of attractive market conditions to boost its capitalisation by issuing hybrid debt, analysts noted.
Moody’s regards this development as a positive, as new issuance has only modestly increased the insurance industry’s leverage from a low level.
This is in contrast to comments by Fitch and Credit Suisse, which have warned that the sudden influx of capital into the market could slow and eventually halt reinsurance pricing increases.
Moody’s added that life insurers are typically more dependent on investment performance, and are therefore more exposed to low rates and market volatility than property and casualty (P&C) insurers.
For P&C insurers, the pandemic could generate an additional €50 to €80 billion of claims worldwide, the rating agency cautioned.
This would be equivalent to a mid-sized natural catastrophe event, with losses likely to arise mostly from event cancellation, business interruption and travel insurance policies.
However, some P&C insurers will benefit from a sharp decline in motor claims due to lower vehicle usage during Europe’s economic lockdown, Moody’s added.
