Analysis by Fitch Ratings warns that insurance companies in the U.S. are facing accelerated credit risks as a result of the economic fallout from the ongoing COVID-19 pandemic.
Fitch is expecting longer-term credit implications for U.S. insurers that stretch beyond its three to five-year ratings horizon.
The lower for longer interest rate environment, product pricing and design, digital transformation, the expanding role of the government, increasing regulation and sustainable investing are all factors expected to have longer-term credit implications for firms in the U.S. life, health, and property and casualty (P&C) sectors.
“Even lower interest rates for longer will negatively impact all insurance sectors, affecting life insurance the most and health insurance the least,” says Fitch. As a result, investment risk is projected to rise across all sectors as carriers search for yield, especially in the life and long-tail P&C segments.
To offset fading investment returns and lower earnings, insurers are expected to hike prices for customers and focus on efficiency improvements amid the first hardening market in almost two decades.
Government involvement is also increasing in light of recent events and the ongoing pandemic situation, and this too is expected to be negative for the returns across the insurance industry.
“Health insurers bear the most potential risk as public sentiment shifts to more government participation in the health system. Expectations for more stimulus to protect capital markets/corporations have grown, especially given the precedent set since the pandemic,” explains the ratings agency.
Ultimately, warns Fitch, this could drive tax increases to fund large deficits as well as state and local pandemic costs. Typically, heightened government involvement leads to greater operating costs for insurance companies, as potentially higher taxes dent earnings further.
Regarding any insurance regulatory changes, Fitch says that this will depend on the industry’s financial health as it emerges from the current crisis.
“The long-term credit impact of regulation is generally negative for all insurance sectors in terms of driving up costs, with regulators expected to focus on how insurers treated policyholders during the pandemic. However, any regulatory response will depend on actions insurers take to mitigate issues that could accentuate regulatory involvement,” explains Fitch.
