Moody’s warns over rising credit risks

Rating agency Moody’s has delivered a stark warning to the UK market that it should anticipate a rise in credit risks given the prospects for an unwinding of current extraordinary fiscal support measures.

The warning was given as part of a Moody’s 2021 P&C Insurance Outlook for the UK, as part of a wider thematic overview on the key areas that will shape global credit this year, with

geopolitical and trade tensions ­– especially between the US and China – also cited under policy challenges.

Other key themes to look out for this year include digital transformation, where Moody’s has drawn attention to the growth of digital service delivery, as e-commerce and remote work will accelerate changes in sectors such as retail, healthcare, education, banking and commercial real estate.

On the social trends side, the ratings agency anticipates that public health and safety issues stemming from the coronavirus, growing inequality, demographic trends and other social challenges will have substantial credit implications.

It added that weak earnings and more solvency concerns will weigh on hard-hit companies and governments, while higher debt levels and more relaxed underwriting will erode the positive effects of low interest rates on debt-servicing capacity.

Looking at the environmental impact this year, it said that the consequences of climate change will require increased adaptation and mitigation efforts, with wide-ranging effects on governments and companies.

Looking more broadly, Moody’s expects that the recovery from the unprecedented economic shock of the coronavirus will be tenuous and inconsistent across countries, regions and sectors.

On the ratings side, it said that commercial insurers are benefiting from significant price rises, but face large COVID-related losses, unlike retail players.

For key emerging risks lines in financial & professional liability, Moody’s said the market saw substantial price increases through 2020, especially in Q4 (+90%), driven by directors’ and officers’ (D&O) cover – an improvement reflecting reduced capacity, claims deterioration and economic concerns.

Cyber pricing rose 25-30% due to higher claims frequency and severity in the period. Moody’s said that while demand for cyber coverage is increasing, cyber insurance losses could rise and UK P&C insurers are taking a cautious stance, often collaborating with reinsurers.