Falling markets bigger risk to European reinsurers than coronavirus mortality: Fitch

Financial market disruption stemming from the spread of coronavirus is the main threat to the credit profiles of European reinsurers, rather than the risk to ratings due to mortality from COVID-19, says Fitch Ratings.

According to the agency, falling equity markets, widening credit spreads and declining interest rates could have a material impact on reinsurer's capital. Each of these in isolation might have had a limited effect, but the combined impact could be greater than the sum of the standalone individual effects.

"While financial market disruption could lead to reinsurer downgrades, we do not expect COVID-19 mortality to do so," it said. "We estimate that a 1-in-200 mortality shock of the type that reinsurers plan for, corresponding to tens of millions of extra deaths globally, would consume 5%-20% of major European reinsurers' regulatory capital, and this still appears a remote scenario.

"Capital sensitivity to COVID-19 mortality is probably less than to general mortality given that COVID-19 fatality rates appear highly skewed to people of older ages with existing medical conditions."

Fitch warned that prolonged stress on equity and credit markets combined with declines in interest rates would weaken earnings and erode capital headroom relative to ratings, which could lead to downgrades.

"Falling equity markets are negative for reinsurance companies to the extent that the companies have unhedged equity exposure that could weaken their capital," Fitch said. "However, most European reinsurers do not have significant exposure, partly due to high regulatory capital charges for equity risk."

Fitch stated that major European reinsurers have relatively long debt maturity profiles, with refinancing needs spread over several years. They have a record of good access to the capital markets, but significant market dislocation would make it more costly to refinance maturing debt.

Fitch said that event cancellations due to the coronavirus may be partially covered by insurance, and reinsurers could face substantial losses. The largest upcoming event is the Tokyo Olympics, due to start in July, with insurance coverage likely to total about $2 billion, according to industry experts.

"The risk is spread among several insurers and reinsurers but some reinsurers have exposure of hundreds of millions of dollars, equivalent to a meaningful proportion of recent annual earnings."

It noted that although credit insurers may face a rise in claims as businesses struggle amid a sharp reduction in economic activity due to the spread of the coronavirus, major European reinsurers will have limited exposure. Credit and surety insurance represents a low-single-digit percentage of their global business, measured by premiums.

Fitch does not expect travel insurance to generate significant losses for reinsurers given the claims limits and policy excesses, and particularly given that most travel insurance does not cover pandemic-related trip cancellations.