Fitch Ratings plans to review the international ratings of all of the insurance firms in its coverage over the next four to five weeks as a result of the risks and uncertainties related to the global COVID-19 coronavirus pandemic.
Originally, Fitch announced its coronavirus-related reviews in a number of commentaries published over the past few weeks, in which the ratings agency has revised its segment outlook for all insurance company sectors/regions globally to negative.
Additionally, Fitch has revised its rating outlooks to negative for the life insurance markets in the U.S., EMEA and Asia-Pacific, as well as the U.S. health insurance industry.
Now, Fitch has released its assumptions that will be used for its coronavirus insurance reviews and warns that it anticipates taking a negative rating action in the instances when pro forma results fall outside prior rating sensitivities or criteria guidelines.
The following assumptions have been announced by Fitch for its COVID-19 reviews of insurers:
- Decline in key stock market indices by 35% relative to Jan. 1, 2020.
- Increase in two-year cumulative high yield bond default rate to 16% in the U.S. and 13% in Europe. Assumptions for other countries will fall within these ranges. The default rate assumptions will be applied to current non-investment grade assets, as well as a portion of ‘BBB’ assets.
- Both upward and downward pressure on interest rates, with spreads widening (including high yield by 400 basis points) coupled with notable declines in government rates.
- Capital markets access is limited for issuers at senior debt levels of ‘BBB’ and below.
- A COVID-19 infection rate of 5% and a mortality rate (as a percent of infected) of 1%.
- For the non-life and reinsurance sectors, a negative impact on the industry-level accident year loss ratio from COVID-19-related claims at 3.5 percentage points, partially offset by a favorable impact from the auto line averaging 1.5 percentage points.
The ratings agency adds that further, bespoke assumptions might also be used for some insurers regarding key risks not mentioned above, which will be set at a similar level of conservatism as used for the assumptions announced today.
Fitch plans to conduct its reviews in phases and initially, will focus on ratings that are viewed as the most vulnerable to a negative rating action. Fitch also plans to apply the COVID-19 assumptions to any insurer whose rating is up for a routine annual review.
“Fitch notes that periodic updates to its assumptions are possible given the rapid changes in government actions in response to the pandemic, and the pace with which new information is available on the medical aspects of the outbreak,” explains the ratings agency.
As a result of the impacts and uncertainty being driven by the global coronavirus pandemic, Fitch has turned negative on the US life insurance sector, the UK life insurance sector, the European life insurance sector, and also the London market and the global reinsurance space.
In addition, Fitch recently placed the Lloyd’s of London re/insurance marketplace on Rating Watch Negative, Coface on Rating Watch Negative, and revised the rating outlook for Allstate to stable from positive, all as a result of the pandemic.
