Analysts at Kroll Bond Rating Agency (KBRA) have warned that property and casualty (P&C) re/insurers could face “wide-ranging” implications due to the ongoing coronavirus (COVID-19) outbreak.
The rating agency said there remained “substantial uncertainty” about the nature and volume of coronavirus-related claims, but said that large commercial and industrial line re/insurers will likely be impacted if losses are triggered.
Depending on coverage, there could also be significant business interruption claims, including large single claims from potential cancellations of the Tokyo Olympics or the Euro 2020 football competition.
But while coronavirus-related claims could have a material impact on underwriting results during certain periods, KBRA believes that they are unlikely to be a major credit event, given the capitalisation and underlying profitability of the major companies in the sector.
Beyond these more direct losses, re/insurers could take a hit via their investment portfolios due to coronavirus-related stock market declines, particularly those companies that rely heavily on equities.
Additionally, as reserve discount rates decline as a result of tighter interest rates, KBRA expects to see some pressure on the capitalisation of P&C re/insurers.
However, if lower interest rates lead to lower reinvestment rates, it could create a headwind to net investment income that will make it even more important to sustain underwriting discipline going forward.
Analysts also warned that a major economic downturn due to COVID-19 could also translate into lower premium growth, mostly in the industrial and commercial lines.
In this scenario, KBRA anticipates that the larger players will remain disciplined, accepting a lower business volume in order to protect their balance sheets.
Looking ahead, the firm forecasts some reserving issues arising from COVID-19 given the uncertainty around claims, as well as some tightening of terms and conditions by commercial and industrial line re/insurers.
With major losses likely to lead to a hardening of renewal terms, KBRA expects to see re/insurers approach the April renewals cautiously, with some market reaction at the mid-year and 2021 renewals, depending on the extent and duration of the outbreak.
Since being identified by the WHO in late December, there have been almost 95,000 confirmed cases of coronavirus, and 3,221 people are believed to have died from the outbreak.
The vast majority of cases and deaths have been in China and in particular centred around the city of Wuhan, where the virus is thought to have originated.
But infections and deaths have increasingly been recorded in other countries, sparking fears of a global pandemic.
According to catastrophe risk modeling firm AIR Worldwide, the number of moderately symptomatic cases of the novel coronavirus COVID-19 in China on March 3 could range between 50,000 and 170,000, and the number of severe cases in China on March 3 could range between 20,000 and 80,000, with deaths ranging from 4,000 to 12,500.
These estimations outside of China are 7,000 to 19,000 moderately symptomatic, 3,000 to 10,000 severely symptomatic, and 500 to 6,000 deaths
“AIR’s model-based estimates account for uncertainty and underreporting,” said Dr. Narges Dorratoltaj, senior scientist at AIR. “Mild to moderate symptoms are the types of cases least likely to be captured in the official numbers, but even for severe cases and deaths, it is likely that there will be underreporting.”