Page 36 - The Insurance Times July 2020

unless a customer has taken out premium `any cause' cover, the sector - and we have seen extreme volatility in recent
which very few have. Of course, interest in `premium' weeks. Major exchanges around the world have experienced
policies could change in our world after COVID-19. some of their worst falls in decades, even if ground has later
been made up again. Movements in equities, interest rates
Event cancellations may cause greater losses to insurers as and credit spreads create tremendous asset liability
some large events (but certainly not all) have policies that management risks for life insurers as yield curves flatten.
may cover them even for epidemics or pandemics. The
largest event taking place this year is the Tokyo Olympics Globally, life insurers manage more than $20 trillion in assets
where analysts estimate approximately $2bn of coverage. and as much as half of this is estimated to be in government
It is likely that the reinsurance sector will bear some of the bonds. But the yields from these have fallen dramatically -
brunt here, as insurers claim back the costs of cover from US 10 year bond yields have more than halved since the end
them over a certain threshold. One major global reinsurer, of 2019 for example. The crisis also puts pressure on non-
for example, has been quoted as having exposure of over Government bonds which may cause credit concerns and
500 million Euros should all events covered for pandemics may lead to an increase in bond downgrades.
are cancelled.
In addition to this, as noted earlier, central banks have been
However, there are two potentially big areas to watch for slashing interest rates. We were already in a low interest
non-life. Firstly, trade credit insurance, covering businesses rate environment - which is always difficult for insurers in
against debts that cannot be paid by their customers or general, but especially for life insurers - now rates are
suppliers. This is an $11bn global market - and if increasing heading down even further (possibly below zero in some
numbers of companies go out of business due to coronavirus countries). Legacy businesses or products that are highly
impacts, insurers could face rapidly spiraling claims. There sensitive to market variables such as variable and fixed
are particular concerns that, alongside some big corporate annuities, long-term care insurance and universal life
in acutely affected sectors, SMEs in many markets could be insurance are likely to feel the effects more deeply.
hit hard due to supply chain disruption and a crunch in their
business levels. The cost of this may very much depend on All of these factors can result in solvency ratio challenges.
just how bad the pandemic becomes, the extent to which Prior to this COVID-19, much has been said about the
containment measures affect different kinds of businesses, industry being well-capitalized and so insurers may be
and how long it lasts. starting from a position of strength as it relates to capital.
However, risk-based capital approaches vary widely by
The second area is workers' compensation claims. We could country which impacts how reactive the ratios are to
see spikes in workers claiming they were not adequately current market conditions.
protected by their employers against exposure to the virus
brought about by their normal working duties. It is For example, the EU's Solvency II regime is very sensitive to
impossible to know at this stage how significant such claims financial market volatility and movements in bond yields and
could become. But insurers offering this type of cover to credit spreads. Other capital approaches could be sensitive
employers may need to brace themselves, depending on to bond downgrades. As a result, insurers will need to closely
how things develop. monitor solvency ratios in order to meet economic,
regulatory and rating agency capital requirements.
Finally, the volatility and falling interest rates within the
financial markets will likely impact general insurers from an The sector will be hoping that the pandemic blows itself out
earnings and solvency perspective. before long. Otherwise, if market volatility continues and
fluctuations persist, they may need to reassess their
Market volatility creating difficulties for life & investment portfolios and exposures to potentially reduced
investment earnings as well as protecting capital/security
retirement insurers:
for policyholders and key stakeholders.
Of all insurance segments, it is life insurers who are facing
the most difficult challenges. The industry is closely Impact on AOG perils like amphan cyclone in
monitoring the potential impacts on mortality rates; West Bengal & Odissa on 20.05.2020, recent
however, we expect that life insurers may also feel
significant impacts due to what is happening in the financial Delhi/ Asam/ Bihar flood incidents on general
markets. Because of the long-term assets and liabilities that insurance industry:
life insurers hold, market volatility is always challenging for All the insurance companies have received over hundreds

36 The Insurance Times, July 2020