Moody’s warns of long-term negative consequences of Covid-19 for European insurers

Although much of the impact from the coronavirus crisis will be short-term, the more negative implications for EMEA insurers will emerge over the mid-to long-term, according to rating agency Moody’s.

Releasing its latest EMEA Insurance Monitor, Moody’s said that the most adverse long-term impact will likely be continued pressure on the sector’s investment returns due to a further fall in interest rates:

“We also expect a rise in asset quality risk, as falling interest rates force EMEA insurers to invest in lower-rated securities and illiquid assets in the search for higher yields. The credit quality of insurers’ fixed income portfolios will also likely deteriorate as a consequence of rating downgrades and corporate bond defaults during the coronavirus- induced recession.”

Despite such concerns, Moody’s stressed that it believes that the industry has the capacity to absorb moderate shocks.

Looking more widely, Moody’s said that the coronavirus outbreak has also driven material deterioration in the global economic outlook, with GDP growth and inflation forecasts revised significantly downwards:

“The central bank-assisted stabilisation of the financial markets since March, and in particular the rebound of equity markets, illustrates a disconnect between the real economy and financial markets. Although we expect central bank intervention to continue to support financial stability, there is significant uncertainty around the effectiveness and duration of the economic recovery measures put in place by the authorities over the longer term.”

“The withdrawal or watering down of emergency support measures will add further pressure to insurers’ business volumes and premium growth.”

At the same time, Moody’s added, the coronavirus pandemic will sharpen the focus on environmental, social and governance (ESG risks), intensifying public scrutiny of companies’ responses to emerging trends like climate change and social inequality.

As such, it expects insurers to increasingly apply ESG considerations in managing both their underwriting and investment exposures.

Moody’s also noted that the coronavirus outbreak has also underlined the importance of adopting new digital technologies, and expects the pandemic to accelerate the transformation of insurers’ traditional businesses, pushing them to adopt more innovative digital solutions:

“We believe distribution and underwriting will increasingly move online, helping EMEA insurers reduce costs and remain relevant to policyholders. The shift towards greater digitalisation will also expose them to new data and security risks, and will require significant investment. Insurers seeking to catch up with the accelerated pace of digital transformation will likely increasingly invest in IT in the months ahead, and may also seek additional collaborations with InsurTechs.”