What challenges are insurers seeing from COVID-19?
31 March 2020: Vincent Huck, editor of Insurance Asset Risk, takes a look at the challenges that insurers will face from the coronavirus effect on markets.
What a difference a few weeks make! The rosy optimism of January has slowly subsided as COVID-19 spread across the globe. Beyond the most important human cost, the virus is creating turmoil in markets. In the face of the crisis, insurance investors are left with a daunting question: ‘Is it going to get worse and do we need to do anything?'.
Key to their considerations is obviously movements in the equity markets with some increasing allocation to the asset class in 2019 in their hunt for yield. But that will only have a short-term impact. The long-term considerations have to do with insurers’ fixed income holdings. Underwriters could be doubly impacted: on the one hand their available capital will go down as assets value decrease and liabilities remain stable, even potentially increasing. On the other hand, a wave of downgrades would bring capital requirements up, and combined, these two movements will drag solvency ratio down.
While insurers are still figuring out what to do on this front, some have already taken action in other areas of their portfolios: real assets. With the low interest rates environment of the last few years, insurers have been piling up in real estate and infrastructure. But valuation of the assets has become an issue, and some have decided to freeze their funds.
Out of every crisis there are opportunities, and while regulators and rating agencies are confident insurers have the strengths needed to weather the storm, underwriters will need to be ready for when the sky clears.
You can read the full version of this article in the Financial Services Faculty's Insurance section. To do this, you will need to have Insurance membership of the Faculty.
For the latest news and guidance on the ongoing impact of COVID-19 for businesses and accountants, visit ICAEW’s dedicated coronavirus hub.