27-03-2020
Insurance balance sheets put to the test amid market volatility
Insurance AlertssInsurance balance sheets put to the test amid market volatility
Financial market volatility presents the stiffest test for insurers in the current COVID-19 environment with the potential to inflict losses on capital or earnings, said S&P in its latest report.
The S&P 500 has been down by 30% in the last three weeks from its record high on 19 February, making it the fastest drop in history, while corporate bond spreads have widened significantly by up to 120% in some sectors.
“We consider that the volatility observed in the equity and bond markets to date could, in many cases, lead to material losses if insurers are required to mark to mark,” said S&P in a note to clients. The ratings agency said that while the capital buffers of many insurers would be enough to absorb the market shock, companies with limited resources would be particularly vulnerable.
“Insurers that demonstrate weaker capital positions or run their business to tighter capital levels will be more at risk if the volatility continues. We are closely monitoring insurers that have significant exposure to the financial markets in their proprietary investment activities or, in the case of life insurers, through the products they offer to policyholders,” said the S&P note.
Life insurers face heightened risk
Life insurers were most at risk given their much greater exposure to financial market volatility through their asset portfolios or product offerings. S&P anticipates that life companies in Asia will be in for a challenging time, and has revised the outlook for the region’s life sector to negative.
“Against a backdrop of investment market rout and a recession, we anticipate the region's insurers will see contracting capital buffers and weaker profitability in 2020 and 2021.We consider the resurgence of legacy negative-spread policies in markets such as Taiwan, Japan, and Korea, combined with slower new business growth momentum, is bound to dent profit margins for the region's life insurance companies.
“In order to prepare for the impact of a flat yield curve, life insurers will likely need to shore up higher reserve provisions, hampering capital buffers further,” the agency said.
Varying levels of disruption
In comparison to market risk, S&P believes that direct insurance exposure in the form of increased claims are less significant risk factors for the industry as a whole.
“The fatalities and need for medical care will cause an increase in mortality and medical claims for insurers. However, to date, the observed fatality rate suggests that the increase in mortality-related insurance claims will have a limited impact on the global life insurance industry.” It also added that business interruption (BI) exposure would be limited due to virus exclusion in standard BI policies.
Meanwhile, the containment measures undertaken by many governments could lead to a slowdown in sales due to a curb on social interaction – especially for insurers that rely heavily on face-to-face interaction between agents and customers.
The S&P 500 has been down by 30% in the last three weeks from its record high on 19 February, making it the fastest drop in history, while corporate bond spreads have widened significantly by up to 120% in some sectors. “We consider that the volatility observed in the equity and bond markets to date could, in many cases, lead to material losses if insurers are required to mark to mark,” said S&P in a note to clients.
The ratings agency said that while the capital buffers of many insurers would be enough to absorb the market shock, companies with limited resources would be particularly vulnerable.
“Insurers that demonstrate weaker capital positions or run their business to tighter capital levels will be more at risk if the volatility continues. We are closely monitoring insurers that have significant exposure to the financial markets in their proprietary investment activities or, in the case of life insurers, through the products they offer to policyholders,” said the S&P note.
Source: Asia Insurance Review
