Insurance

European insurers well positioned to manage coronavirus risk – AM Best

By Ahmad Zaki

The coronavirus (COVID-19) could potentially put the balance sheet of European insurers under stress, although the biggest impact is likely to come from the ensuing economic fallout rather than from direct exposure to the virus.

AM Best in its latest report stated that it expects the European insurance industry to be in a good position to understand and manage the potential exposure to pandemic risk, whether through exposure management, reinsurance or other mechanisms.

AM Best in its latest report stated that it expects the European insurance industry to be in a good position to understand and manage the potential exposure to pandemic risk, whether through exposure management, reinsurance or other mechanisms.

Despite considerable uncertainty about the ultimate cost to insurers in terms of claims, the insurance industry has long recognised the potential exposures from a pandemic, the rating agency added.

Central bank reactions most important factor

European insurance companies in general remain well capitalised, but AM Best believes volatility in the wider financial markets could affect insurers’ results and their financial strength.

How central banks will react in terms of monetary policy and interest rate cuts, as they strive to support the economy, will be the most pertinent question for insurers, said the ratings agency.

For instance, the US Federal Reserve implemented a 50-basis-point emergency cut in US interest rates last week. In the short term, rate cuts support bond prices but increase the likelihood that the low interest rate environment will persist, dampening insurers’ longer-term investment expectations.

The prospect of the coronavirus spread contributing to a global economic slowdown is of course of significant concern. A global recession would likely lead to an overall decline in demand for insurance – particularly commercial insurance. However, periods of lower economic activity typically present fewer claims, which could prove positive for insurance company results.

Claims exposures in Europe

AM Best also added in their report that credit insurance and event cancellations will be the areas most likely impacted by coronavirus-induced disruptions to global trade.

Credit claims, however, will take some time to materialise, as policies generally are not triggered until payments fall outstanding. However, credit insurers are already taking a proactive approach. Credit underwriters continuously monitor exposures and are ready to cut limits when they identify an issue. Many of them are in the process of reviewing limits in China and affected industries around the world.

Several high-profile events have also been cancelled or postponed, and major international events and sporting tournaments – such as the Tokyo Olympics and the UEFA Euro 2020 Championships – have an uncertain future. Pandemic is not typically covered by contingency policies, except by endorsement, said AM Best, raising questions about insurers’ contingency exposures.

There is also some discrepancy about triggers for contingency policies. Organisers that choose to cancel an event as a precaution are unlikely to be covered by most policies.

Asia Insurance Review

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