Coronavirus-induced capital market volatility in the European insurance sector is likely to have a greater short-term impact than underwriting losses.
According to a recent report from Moody’s Investors Service, for property and casualty (P&C) insurers, the pandemic could generate an additional EUR50bn ($57bn) to EUR80bn of claims worldwide – mainly against event cancellation, business interruption (BI) and travel insurance policies.
Moody’s notes that the sector faces legal action from BI policyholders in some countries after declining to pay claims, citing pandemic exclusion clauses. So far, the industry has lobbied hard to avoid retroactive changes that would result in very sizeable losses.
At the same time, some P&C insurers are expected to benefit from a sharp decline in motor claims due to lower vehicle usage during Europe’s economic lockdown although they are under political pressure to return some of these gains to policyholders.
Meanwhile, life insurers are typically more dependent on investment performance and are therefore more exposed to low rates and market volatility. However, the agency foresees no substantial increase in pandemic-related mortality claims for European insurers.
This is attributed to the fact that in Europe, older policyholders who are most vulnerable to coronavirus tend not to buy mortality protection.
Nevertheless, it is noted that some European (re)insurers are exposed to mortality risk in the US, where the situation remains very fluid.
Also, financial market disruption triggered by the coronavirus crisis may hinder life insurers’ efforts to move away from guaranteed-savings policies in favour of unit-linked products, which leave investment risk with the customer.
For European insurers, the most severe long-term impact of the pandemic could be the continued pressure on the sector’s investment returns due to a further fall in interest rates.
Insurers also face potential losses on their corporate bond investments as a coronavirus-induced economic downturn leads to an increase in corporate defaults.
Overall, Moody’s sees the industry as resilient and believe it will be able to absorb the impact of the pandemic – leaving its capital broadly intact. For this reason, the firm has so far taken only a small number of negative rating actions on European insurers.