by Alicja
Grzadkowska 12 Mar 2020
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.
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