Analysts at S&P Global Ratings believe that fallout from the coronavirus (COVID-19) pandemic will be “manageable” for North American property and casualty (P&C) re/insurers, and have maintained their stable outlook on the sector.
The rating agency considers current financial market turmoil and the ensuing recession to be a greater headwind to P&C re/insurers than underwriting exposure to pandemic risk, which accounts for only a small portion of the industry’s business mix.
“We don’t envision significant rating activity,” said S&P Global Ratings credit analyst Tracy Dolin. “However, the pandemic could hurt a few outliers and those insurers already facing ratings pressure prior to the arrival of the coronavirus.”
“Asset risk, stemming from the COVID-19 outbreak, stands out, given P/C insurers’ rising proportion of unaffiliated common stock within investment portfolios,” Dolin added.
“We also anticipate elevated credit risk from corporates, particularly from those sectors most vulnerable to social distancing measures, as well as the energy sector due to its own crisis.”
Business lines most directly affected by COVID-19 are likely to include travel insurance (covering trip cancellations) and event cancellation insurance, although many airlines, cruise lines, and hotels are waiving their cancellation fees, meaning policyholders will file fewer claims.
Business interruption claims could also be a major concern, although S&P noted that this coverage is generally included in commercial property policies and is tied to perils that cause property damage, which excludes infectious diseases.
The firm anticipates that efforts to extend business interruption policies to retroactively cover these exclusions will be largely unsuccessful unless the government provides resources to insurers to meet these obligations.
Overall, S&P believes P&C insurers are more resilient to a recession than other industry sectors, but still expects a decline in net premiums due to the anticipated sharp decline in economic activity.
Mitigating this decline to some extent will be the rate increases implemented in 2019 and early 2020, although slower pricing increases are now forecast for the rest of the year, particularly within personal lines and small commercial businesses.
Also, since premium volume is a function of both rate and exposure, in many commercial lines the premiums collected may fall as the insured exposure declines.
Offsetting the decline in premiums will be a likely significant decline in claims frequency in many lines, as lower economic activity, workplace closures, and home confinement limit accidents and break-downs.
