Analysts at Peel Hunt believe the default risk for re/insurers’ investment portfolios has been lowered by the UK Government’s decision to introduce a £350 billion emergency package of financial measures to support businesses affected by the coronavirus (COVID-19) outbreak.
Chancellor Rishi Sunak revealed the measures on Tuesday, which include £330 billion in loans, £20 billion in other aid, as well as a business rates holiday, and grants for retailers and pubs.
Peel Hunt has since reported that the support package is expected to lower the default risk across the corporate bond portfolio of the UK insurance industry, which is though to account for around 50% of the investment portfolio.
In addition, the Government package provides some clarity around business interruption cover that UK businesses have bought, lowering the risk that terms & conditions will be tested as COVID-19 leads to closures across travel and leisure industries.
Analysts suggest the clarifications will lower the UK underwriting risk of commercial lines insurers such as RSA, whilst broadly lowering the default risk of insurers’ sub-investment grade bonds.
The Association of British Insurers (ABI) has noted that many businesses in the UK are unlikely to be able to call on their insurance cover for standard business interruption (BI) as a result of the COVID-19 outbreak, irrespective of the Government ordering closures.
It explained that standard business interruption cover bought by SMEs is mainly intended to cover for business interruption following physical damage, which is not triggered by Covid-19.
Only larger corporates are likely to have bought additional pandemic cover, and even then the penetration is small.
As part of its emergency economic package, the UK Government has said that it will increase the amount businesses can borrow through the coronavirus Business Interruption Loan Scheme from £1.2 million to £5 million, with no interest applied for the first six months.
Additionally, the Government assured businesses that its advice to avoid pubs, theatres and other social venues is sufficient for businesses to claim on their insurance where they have appropriate business interruption cover for pandemics in place.