COVID-19 second wave could eat into insurers’ capital, warns S&P

Global insurance ratings have proven resilient during the first wave of COVID-19, but S&P Global Ratings has warned that a second wave of the pandemic could eat into insurers' capital buffers as financial market losses and insurance claims pile up, particularly for industrial lines re/insurers.

The ratings agency noted that the capital strength of insurers have helped stave off widespread downgrades so far. However, if COVID-19 returns in the second half of the year it could erode carriers' capital position.

S&P's growth expectations for insurers globally in 2020 have diminished as a result of the slowdown in economic activity. The agency cited "lower investment returns, mark-to-market losses, and heightened claims" as main reasons that will likely erode earnings in 2020.

Furthermore, it warns losses from business interruption could rise if insurers face legal action, although it sees that retroactive legislative or regulatory changes as unlikely. According to the agency, lawsuits may arise on the back of safety concerns for employees, and these could lead to increased directors and officers liability or professional liability claims. Significant excess mortality due to COVID-19 could erode life insurers' capital positions.

S&P expects top lines and earnings to recover during 2021-2022 with non-life pricing continuing to improve and demand to remain stable for non-discretionary lines of business.

So far in 2020, the agency has taken negative rating actions on 9 percent of its global insurance ratings, compared with 40 percent of the wider corporate and government ratings universe. S&P stated that capital buffers at most insurers are "healthy enough" to support ratings, particularly those in North America and EMEA.

"The risk of insurers' invested assets losing value still outweighs the risk of rising insurance claims, particularly for life insurers and those with thin capital buffers," said S&P Global Ratings credit analyst Dennis Sugrue.

"Nevertheless, a second wave of COVID-19 infections that disrupts the economic recovery or necessitates the widespread reintroduction of lockdown measures could disrupt the financial markets further, deepen the recession, and increase asset losses and insurance claims," Sugrue added.