The COVID-19 pandemic has had a wildly varying impact on different sectors worldwide, but, according to experts, insurance has actually been fairly resilient in the face of earnings losses and economic shocks, and has managed to emerge from the ‘first wave’ in reasonably good shape.
Michael Vine, director of services ratings Asia-Pacific at S&P Global Ratings, says that insurance had several advantages going into this crisis. It had learned lessons from the Global Financial Crisis and made certain provisions around risk management, while tougher regulatory requirements also put it in good stead to manage its risks.
He says that for insurers, this event is unlikely to significantly eat into capital - rather, it will be an “earnings” event which will see temporarily reduced figures.
“Insurance ratings have actually been pretty resilient through the first wave - certainly better than in other sectors,” Vine commented.
“There will be high Q2 and Q3 losses which could pressure earnings, but it will be asset risk that will outweigh other factors, particularly for the life insurance sector.”
“If we see a prolonged recovery or a second wave with more lockdowns, it could put a strain on insurers, but that’s not our base case,” he explained.
“Ratings-wise, insurance has performed pretty well with 9% negative rating action or outlook versus the broader corporate sovereign rating sector, where there’s been about a 40% decline.”
Vine says that when it comes to ratings and downgrades, insurers escaped the worst by implementing some “protective action” on balance sheets in the lead-up to January, February and March. He says Asia-Pacific insurers have also generally been ahead of the curve, with earlier waves of virus transmission and earlier lockdown actions.
“Rating actions activity for insurers peaked around March, which coincided with market lows and the oil price shock,” Vine said.
“The Asia-Pacific region was one of the early movers due to its implementation of lockdown earlier than many other regions - however, insurers have had only 45 ‘negative rating’ actions since the pandemic hit, compared to many hundreds for various other sectors.”
“Insurance performs pretty well, as perhaps the fourth-best sector in terms of rating actions,” he added.
“The shape of recovery does depend on any next waves, or the duration of any further lockdowns. It’ll also depend on when sales volumes return and when investment markets stabilise in the medium-term. However, this is still uncharted territory.”
When it comes to New Zealand-based insurers, Melville Jessup Weaver principal Craig Lough says that certain areas have taken larger earnings hits than others. Melville Jessup Weaver collects statistics around premiums, claims and expenses for ICNZ each quarter, and Lough says the past few years have been fairly healthy – though, currently, it is difficult to predict what the rest of 2020 is likely to bring.
“The last couple of years have seen pretty healthy profits, particularly in the last quarter of June,” Lough commented.
“The GWP for each quarter has been going up over time, but there has been a depressed June quarter. We were expecting that to jump back up, and it has - but not as much as we’d have thought.”
“In terms of gross earned premiums (GEP), we have lower GEP in the private motor space - not surprisingly - as well as domestic property, and travel was well down,” he added.
“Private motor premiums have been steadily increasing in almost a linear fashion over the last five years, with a big drop-off this June quarter. If people are working from home on an ongoing basis, the question will be whether we’ll see a move away from the usual annual policy to more of a distance-based policy - claim experiences suggest that might be a more reasonable approach.”
Lough says insurers’ travel books saw a “massive drop-off” in June, and the September quarter doesn’t look positioned to do much better. When it comes to claims loss ratios, property categories have done pretty well – though, unsurprisingly, travel again experienced a huge amount of claims, as did liability. However, Lough says the latter has been steadily rising over the past few years and isn’t necessarily down to COVID-19.
“Motor traffic around New Zealand is still slightly depressed, which suggests people are still operating in a semi-business-as-usual fashion,” Lough explained.
“Insurers will probably do better than other sectors and markets, but that isn’t to say that they won’t experience some pain. Premium affordability could be an issue with people out of work, and how the industry will respond to producing new products will be interesting.”
“The outlook is uncertain, but come September, we might have a better view on how the economy and the insurance sector is going,” he concluded.