How COVID-19 Has Changed Insurance
The COVID-19 pandemic's implications for global insurance markets have largely been felt through asset risks, volatility in capital markets, and weaker premium growth prospects. Developed markets, including the life insurance sector, are likely to shrink in real terms as a result of the economic slowdown—while developing markets will likely experience more declines in return on equity. The pandemic has also prompted insurance companies to ramp up digitization efforts, forcing them to focus on security and regulation protocols to fend off cyber security attacks.
Published: December 7, 2020
Global
The impact of COVID-19 on global insurance markets is largely felt through asset risks, notably capital markets volatility, and weaker premium growth prospects.
S&P Global Ratings expect most COVID-19-related losses (business interruption, event cancellation, etc.) to be picked up by reinsurers, so primary insurers' technical performance is unlikely to deteriorate materially. Strict lockdown measures helped maintain satisfactory performance, as motor and medical claims had a positive impact on loss ratios. Developed markets, particularly life ones, are likely to shrink in real terms as a result of the economic slowdown.
Developing markets, through their riskier asset allocation, will likely experience more declines in return on equity than developed markets. Ultralow interest rates mean that the most significant source of risk to insurers is the performance of investments, especially life insurers with guaranteed back books.
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U.S.
Overall, S&P Global Ratings thinks this might be a tough year for the life insurance companies S&P Global Ratings rates, but S&P Global Ratings expects they'll be able to navigate through the difficulties without a significant negative impact on their credit quality. In S&P Global Ratings' view, life insurers will continue to deal with investment portfolio stress, muted earnings, challenges to distribution, and elevated mortality claims.
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Europe
The COVID-19 pandemic is pressing insurance companies to urgently respond to megatrends--most importantly climate change and digitalization--that were already on the agenda, according to European insurance executives, experts, and analysts at S&P Global's conference.
The industry is starting to more precisely understand physical, transition, and liability risks linked to climate change and is revising underwriting and investments.
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ESG
As the COVID-19 pandemic spread from region to region, it has drawn attention to a hitherto unnoticed protection gap in insured and noninsured property/casualty (P/C) risks.
Key Takeaways
- The pandemic has highlighted the need for governments to improve their economies' resilience to big financial shocks, like those associated with natural catastrophes and epidemic diseases. Government-backed insurance solutions, supported by the (re)insurance industry, could protect government budgets, mitigating the potential for economic instability.
- The insurance sector, especially reinsurers, has a wealth of data and experience in assessing evolving risks such as climate change. This could enable governments, companies, and individuals to make better decisions.
- For reinsurers, helping to close the protection gap--the difference between insured and total losses--may provide diversification of risk exposure and help to attract, educate, and develop new insurance markets that can provide growth potential. Ultimately, it could reinforce reinsurers' relevance for potential new clients.
Cyber
The COVID-19 pandemic is forcing almost all organizations to speed up their digital transformation priorities.
This rapid transformation will inevitably increase systemic vulnerabilities to cyber attacks, leading us to expect the next decade to be the most important period of growth for the cyber insurance market.
As Threats Grow, Cyber Insurance Seen as More of a Necessity
Businesses are treating cyber liability insurance as less of a luxury and more of a necessity as larger numbers of customers are drawn into the market and existing clients seek higher coverage limits, according to Advisen Ltd. surveys.
A global survey of risk managers and insurance buyers undertaken by Advisen and Zurich North America found that the take-up rate for cyber insurance continues to climb, with 78% of respondents having purchased such coverage.
More than half of respondents had purchased stand-alone policies, compared with 34% who had bought any kind of cyber coverage in 2011, the first year of the annual survey.
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Auto
A majority of the biggest U.S. commercial auto liability insurers saw direct premiums written rise on a yearly basis in the third quarter, according to an S&P Global Market Intelligence analysis.
Progressive Corp. continues to lead the industry by a significant margin, with $1.44 billion in premiums written. It also recorded the largest year-over-year increase in premiums among the top 20 commercial auto liability insurers, at 30%.
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Changes in driving patterns have led State Farm Mutual Automobile Insurance Co. and its subsidiaries to dial back some of the temporary downward adjustments to premium rates they implemented during the summer.
The State Farm companies, over the last several weeks and in a number of states, filed to reduce the impact of COVID-19 premium adjustment factors, according to documents obtained by S&P Global Market Intelligence, as they cited a "diminishing effect" from the pandemic on driving exposure.
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Life Insurance
Higher mortality rates due to the coronavirus pandemic are affecting the bottom lines of many life insurers, but long-term care businesses are also seeing lower claims levels as individuals shy away from assisted living facilities.
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Health Insurance
Australia's private health system is unwell. Insurers are at risk of declining profitability as squeezed margins undermine their ability to pay claims in the long term, and consumers are being turned off by climbing premium costs.
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Capital Markets
Industry observers believe Root Insurance Co.'s pending initial public offering is likely to benefit from equity markets starved for investment opportunities and momentum from the pop that Lemonade Inc. received when it debuted on the public market.
But the stock could face turbulence from subsequent public scrutiny as Root's leadership will be tasked with turning around operational trends that are troubling even for a unicorn whose flaws investors tend to forgive for the promise of stellar growth.
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M&A
COVID-19 delayed deal-making across the insurance sector, but it did not derail activity.
Key Takeaways
- Through the first nine months of 2020, aggregate carrier deal value surged to $13.20 billion, an increase of 107.6% from an unusually sluggish year-earlier period.
- Comparisons get far more difficult through the balance of the year as activity in the fourth quarter of 2019 of $13.81 billion marked the second-highest total for that period in at least the past decade.
- The number of such transactions slumped by 15.3% through the first nine months of 2020 following particular weakness in April and May.
- S&P Global Market Intelligence projects that activity for the full year will slide by only 10.1%
- The pandemic and related fallout may even provide new urgency for M&A as prospective buyers face new impediments to top-line growth and prospective sellers reevaluate strategic priorities or struggle to cope with the financial and operational realities of the current environment.
Reinsurance
Given that reinsurers exist to take on insurance risks, it is not surprising that they are more exposed to underwriting, reserving, and catastrophe risks than to investment risks. However, their investment risk has never been negligible, and a decade of low interest rates and tough underwriting conditions forced reinsurers to increase their appetite for investment risk.
To generate additional return, reinsurers invested, cautiously, in riskier and more illiquid assets. The gradual shift in strategy has been successful--reinsurers' capital adequacy has remained high, on average. Had their asset allocations remained unchanged, their investment returns would have shown an even more material decline.
The economic impact of the pandemic has somewhat eroded reinsurers' capital adequacy, but their caution has largely paid off. Despite unfavorable movements in the financial markets and in the economy, the stress test S&P Global Ratings performed on reinsurers' balance sheets as of the end of 2019 does not indicate change to our assessment of the sector's overall capital adequacy.
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