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Fitch revises London market outlook to negative amid COVID-19 issues

24th March 2020 - Author: Luke Gallin

Fitch Ratings has revised its sector outlook for the underlying fundamentals of the London market insurance space to negative from stable, driven by growing concerns around the impacts and disruption caused by the COVID-19 outbreak.

Fitch notes that the ongoing virus outbreak threatens the credit quality of London market insurers. While the sector outlook has been revised to negative, Fitch’s outlook for ratings levels in the sector remains stable, although this will be looked at again in the future.

Last night, UK Prime Minister Boris Johnson placed more stringent social distancing measures on the UK population in an effort to mitigate the spread and impact of the virus.

While the measures aren’t as strict as those in Italy, the worse hit country in Europe, they were welcomed by many in the country as concerns were growing around the inability of thousands to adhere to simple social distancing measures, ultimately put in place to save lives.

The hope now is that stricter rules on leaving the house and the closure of all but essential shops, such as supermarkets and chemists, will have a significant impact on the spread of the extremely infectious coronavirus.

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Clearly, the rules put in place in recent times in the UK and the wider world is already having and will continue to have an impact on industries of all shapes and sizes. The insurance sector is no exception to this and the uncertainty around the disruption and subsequent volatility caused by COVID-19 has led Fitch to revise its London market insurance sector outlook to negative.

Currently, says Fitch, the ratings of London market insurance firms will be less affected by the virus outbreak than those of European life insurers. However, the ratings agency adds that its stable rating outlook for the London market sector does not suggest that there will be no impact on ratings in the sector from the coronavirus.

“We are prioritising ratings that currently have a Positive Outlook during the review process. In addition, Fitch expects the ratings of some London market insurers could be placed on RWN. Near-term downgrades are possible, but currently viewed as unlikely,” explains Fitch.

Ultimately, the combination of falling equity markets, widening credit spreads and dwindling interest rates are all negative for capital, and although London market players’ bond portfolios are for the most part high-rated, Fitch warns that widespread downgrades driven by the virus could weaken capital ratios.

The impact on underwriting performance of the London market insurers is expected to be more limited, with the largest exposure coming from event cancellation, business interruption, and accident & health lines of business.

Numerous large sporting and music events have already been cancelled or postponed as a result of the coronavirus outbreak, with more casualties expected in the coming weeks as the virus continues to spread across certain parts of the world.

The 2020 Tokyo Olympics, for which Swiss Re has a $250 million exposure, seems increasingly likely to be either postponed or cancelled, with numerous countries refusing to send athletes to the games this year, which are scheduled to start at the end of July.

Of course, only time will tell exactly what happens to events like the Olympics, festivals like Glastonbury and sporting leagues and competitions around the world, and, only time will tell exactly how impactful COVID-19 has been and where insurers in London and beyond feel the brunt of the pressures.

It’s been reported by analysts that business interruption losses are expected to be low owing to virus exclusion, although there will likely be some impact here as certain firms, albeit an expected small minority, will have purchased extensions to cover against these types of losses.

In November 2019, Fitch revised its sector outlook from negative to stable for the London market in light of improved pricing conditions and the belief that better underwriting results would be evident in 2020. But despite improved pricing metrics, Fitch notes ongoing and significant challenges for the sector, underpinned by a high expense ratio, low investment returns and the need to bolster reserves to offset challenges in the U.S. casualty arena.

“Furthermore, the rapid spread of COVID-19 could increase operational risks for the implementation of the Future at Lloyd’s project, which aims to modernise the market and make it more cost efficient. Business transacted in the London market typically relies heavily on face to face interaction and this could be significantly disrupted if the COVID-19 outbreak is prolonged,” says Fitch.

Just yesterday, Fitch announced that its outlook for the underlying fundamentals of the global reinsurance sector had turned negative, a stance the ratings agency has also taken on the US life insurance sector, the UK life insurance sector, and the European life insurance sector.

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