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Life re/insurers well positioned to handle COVID-19 risks: S&P

1st April 2020 - Author: Matt Sheehan

Analysts at S&P Global Ratings believe the North American life re/insurance industry is well-positioned to handle the immediate impact of the coronavirus (COVID-19) pandemic, despite significant escalation for certain risks.

In particular, life insurers will face higher asset risk, S&P said, as well as equity market volatility, near-zero interest rates, and heightened mortality risk.

Nevertheless, the rating agency has maintained its stable outlook on the sector, citing a build-up of solid capital buffers and liquidity.

Given the deterioration in credit quality in corporate bonds and the significant losses in equity markets, asset risk is considered to be the most immediate risk factor for North American life insurers.

These companies tend to have relatively low exposure to equities in their investment portfolios since most heavily invest in fixed-income securities to match asset and liability durations within a relatively short range.

The unprecedented drop in key benchmark interest rates is also a risk for the industry, though life insurers have been effectively navigating declining rates for over a decade.

S&P anticipates only moderate increases to reserves in response to the low interest rate environment, although for insurers with longer-tail liability profiles, a moderate interest rate assumption change could translate into a larger reserve increase.

Mortality risks could also present a challenge for life insurers, particularly given the lack of cohesive prevention measures among US states.

While S&P does not envision significant rating activity, it noted that the tendency is toward a moderately negative trend, particularly for insurers that are more prone to the aforementioned risks or that were already facing ratings pressure prior to COVID-19.

Factors that could push the North American life industry towards a negative outlook include a prolonged recession, high corporate bond downgrades or defaults, substantial reserve increases, and large losses due to hedge breakage from equity market volatility.

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