Coronavirus leads to negative actions on 34% of EMEA insurers

Written by Adam Cadle

17/06/2020

Fitch Ratings took negative rating actions on 34% of rated EMEA insurance groups (including reinsurers) as a result of the portfolio review it carried out between 19 March and 2 June 2020 in light of the coronavirus pandemic.

The ratings agency took rating actions on all 84 insurance groups in its EMEA coverage, with downgrades accounting for 12% of actions, outlook revisions to negative accounting for 20% and rating watch negative accounting for 2%. However, the bulk of rating actions were affirmations with a stable outlook maintained (55%), and the limited number of downgrades shows that most EMEA insurers went into the crisis with some headroom in their ratings.

Ten EMEA insurance groups were downgraded, mostly by one notch, including eight Italian insurers following the downgrade of Italy's sovereign rating on 28 April 2020. Outlook changes to negative dominated the negative rating actions in the region. Outlooks generally have a one- to two-year time horizon, and reflect Fitch's expectation that many of the adverse credit effects of the pandemic will take time to appear. However, Fitch said it will take rating actions sooner in cases where it believes an insurer's negative rating sensitivities will clearly be breached for a sustained period or if the fallout from the crisis looks likely to have a more detrimental effect than Fitch has previously expected.

Ratings remain sensitive to changes in Fitch's rating case assumptions with respect to the pandemic. Periodic updates to assumptions are possible in light of how the pandemic develops and the reaction of governments, central banks, economies and financial markets.

Higher mortality rates due to the coronavirus will lead to a spike in mortality claims. However, most Fitch-rated EMEA life insurers reinsure a substantial portion of their mortality risk, especially that related to pandemics. In addition, many life insurers' exposure to mortality risk is offset by exposure to longevity risk.

The credit quality of some EMEA non-life insurers could be affected by a rise in claims arising from the pandemic, driven, for example, by court rulings on the validity of business interruption claims. However, a decline in motor insurance claims due to less road traffic during lockdowns and a slowdown in health insurance claims due to a temporary reduction in elective surgery and treatment could help to offset the effect for some insurers.

Insurers are exposed to equity and credit market volatility, with some life insurers particularly exposed to downgrades and defaults in their bond portfolios. However, most EMEA insurers' capitalisation has remained supportive of their ratings since the pandemic began, helped by the partial recovery in equity and bond markets after the sharp falls in later February and early March 2020.

Related Articles