Global insurers are now being threatened with coronavirus from two directions – a sharp increase in payouts and at the same time, significant investment losses.
While initially a low level of claims was expected because epidemics are excluded from many business insurance policies, a recession that might be in the cards for the global economy puts companies with trade credit insurance, including airlines and retailers, under strain. This is happening alongside added pressure on insurers’ investments, which comprise around US$20 trillion in assets alongside problematic big government bond holdings, according to Reuters.
Trade credit insurance covers the risk that a company’s customers cannot pay for goods or services bought on credit, and represents an US$11 billion market. Moody’s predicts that rising claims will hit three of the world’s biggest trade credit insurers – Atradius, Coface and Euler Hermes. The ratings agency pointed to data from Atradius and Coface to show that for each company, almost 15% of their total net potential exposure is in the hard-hit regions of Asia and Australia.
Atradius said recently that it expected corporate insolvencies to grow 2.4% globally in 2020, “largely resulting from the coronavirus outbreak,” reported Reuters.
As governments lock down regions and major events like the Olympics are threatened with cancellations and postponements, this injects even more stress into the global economy. In fact, travel and entertainment are the two sectors that trade credit insurers are most cautious about, according to Bernie de Haldevang, head of credit, political risk and crisis management at Lloyd’s of London insurer Canopius. Airlines have already taken a beating as flights are cancelled, and hotel groups as well as cruise lines are likewise being impacted by the coronavirus. In China, several insurers have already taken drastic steps by withdrawing credit insurance coverage, said insurance broker Marsh.
“It’s not a good time for anyone in the credit world,” Jeremy Shallow, head of speciality at insurer Argo Global, told Reuters. He continued that the firm’s underwriting of trade credit insurance takes into account a potential recession.
Travel restrictions to countries such as Italy and Israel will lead to more insurance payouts, while the cancellation of events like the South by Southwest music and film festival in Texas or the postponement of Coachella in California will contribute to claims.
Analysts at Barclays warned last week that coronavirus losses for Munich Re were “potentially more material than we thought,” seeing as the global reinsurer flagged a €500 million exposure if all the major events it covered this year were cancelled. The reinsurer also pointed to losses on life insurance policies as an issue if deaths climb.
Meanwhile, the investments that insurers rely on to pay out claims are hurting. At least 50% of insurers’ US$20 trillion in assets under management will be invested in government bonds, whose values are falling, analysts say. In turn, insurers need to put aside more capital for future payouts to policyholders, which puts a dent in their solvency levels.
Moreover, the sell-off in stock markets due to coronavirus fears has already taken around US$11 trillion off of the value of global stocks, and insurers like Legal & General and M&G are highlighting the dent to solvency ratios.
“The market moves already seen are giving insurers a lot to think about – in particular how their market risk models are coping with the current market stress,” said Colin Tipping, head of insurance investment management - international region at Mercer, in a report by Reuters.
Insurers tend to be long-term investors who don’t make hasty investment decisions. Nonetheless, the next few weeks will be nerve-wracking.
“If the economic situation deteriorates, they will no doubt be reassessing their portfolios and exposures,” Ferdia Byrne, insurance partner at KPMG, told Reuters.