While widespread immunisation from COVID-19 looks to be achievable by most developed economies by the end of the third quarter, some emerging markets may have to wait until the year-end or later, according to S&P Global Ratings.
For example, analysts note India’s escalating second wave and the threat it poses in both a humanitarian and financial context.
S&P believes the outbreak represents downside risks to GDP and heightens the possibility of business disruptions.
While the negative credit spillovers to the ratings agency’s portfolio is limited, the situation is considered fluid and something that poses a significant contagion risk to other geographies.
In Asia-Pacific, S&P maintains a negative outlook on the ratings of nearly one in five financial institutions due to what is described as “extraordinary risk management missteps” by some lenders in the past quarter.
Meanwhile in Europe, the Middle East, and Africa, low interest rates, a flat yield curve, and ongoing pressures on asset quality are expected to continue impeding the operation of many financial institutions.
Following some costs for derisking and impairments, S&P says many European insurers now display a capital surplus close to pre-pandemic levels.
Although capital market volatility and potential asset impairments remain a risk, analysts expect these to normalise in 2021.
Elsewhere, S&P has flagged the ongoing merger and acquisition trend as something that will heavily shape 2021.
Large insurers are said to be refocusing and reducing leverage by selling subsidiaries, with acquirers increasing leverage on their balance sheets.
There appears to be a strategic fit for some recent deals, with insurers often strengthening already well-established market positions.
With reinsurance rates continuing to rise, S&P is seeing tightening of terms and conditions with an increasing focus on communicable disease and exclusions for silent cyber.
However, reinsurance market supply still exceeds demand and its believed that that the global reinsurance sector did not earn its cost of capital in 2020, as it has struggled to do in the past four years.
This was due to pandemic-related losses, large natural catastrophe losses, adverse loss trends, and fierce competition. As a result, analysts think prospects for the global property/casualty (P/C) reinsurance sector have deteriorated.
Insurance claims appear to be trending back to normal, with lockdown-related business interruption claims not reoccurring after contract renewals.
With annual non-life insurance contract renewals, insurers are explicitly excluding pandemics, whereas insurance rates are reflecting explicit inclusion.
With economic activity picking up and lockdowns ending, frequency claims, such as for motor third-party liability, could rise from 2020 lows.
S&P does not assume these will match pre-pandemic levels any time soon and consequently forecasts European non-life primary insurance sector remains unchanged.
