The coronavirus (COVID-19) outbreak has already had a severe impact on the insurance sector globally and today Fitch Ratings has revised its London market insurance sector outlook from stable to negative. This revision reflects increased concerns over the disruption from the oubreak and the related impcts on the credit quality of London market insurers.
Fitch said that its outlook for ratings in the sector remains stable but that it expects to revisit the rating outlook again as its analytical work related to COVID-19 advances. It also said that it is reviewing its insurance ratings “relative to assumptions with respect to the impact of [COVID-19] disruption on capital markets volatility, interest rates, market liquidity and insured claims/reserves.”
Fitch believes that the ratings of the London market insurers will be less impacted by the coronarvius outbreak than those of European life insurers (the rating outlooks of which were recently revised to negative). However, it said, Fitch’s stable rating outlook for the London market sector does not imply that there will be no impact on ratings in the sector.
Fitch expects the ratings of some London market insurers could be placed on rating watch negative and said that near-term downgrades are possible, but currently seem unlikely. Falling equity markets, widening capital spreads and declining interest rates are negative for capital, it said, and though London market insurer bond portfolios are mostly highly-rated, widespread downgrades could weaken capital ratios.
“We expect the impact on underwriting performance to be more limited,” Fitch said, “with the biggest exposure coming from event cancellation, business interruption and accident & health lines. The low interest rates add to pressure on investment earnings from already ultra-low bond yields.”
Fitch referenced its recent revision of the sector outlook for the London market to stable from negative in November 2019 reflecting improved pricing conditions and the expectation that improved underwriting results would start to emerge from 2020. However, at the time it noted the significant challenges facing the market including continued low investment yields.
Fitch also highlighted that the spread of the coronavirus could increase operational risks for the implementation of the Future at Lloyd’s project, and that business transacted in the London market typically relies heavily on face to face interaction which could be significantly disrupted if the outbreak is prolonged.