P&C sector braced for €80 billion COVID costs

European insurers will be able to ride out the COVID-19 storm, that will cost the global P&C industry up to €80 billion according to a new report from ratings firm Moody’s.

It said the coronavirus pandemic has had an “adverse, but manageable”, impact on the European insurance sector, leading to a drop in company earnings rather than capital erosion, said the report.

“We see the industry as resilient overall and believe it will be able to absorb the impact of the pandemic, leaving its capital broadly intact,” said Christian Badorff, a Vice President and Senior Analyst at Moody’s. “The most severe long-term impact will likely be continued pressure on the sector’s investment returns due to a further fall in interest rates and an expected increase in corporate defaults.”

The report added central bank intervention has reversed much of the fall in equity markets and widening of credit spreads witnessed in the first quarter, and the insurance sector has taken advantage of attractive market conditions to boost its capitalisation by issuing hybrid debt. Moody’s said it regards this development as a positive, as new issuance has only modestly increased the insurance industry’s leverage from a low level.

“Life insurers are typically more dependent on investment performance and are therefore more exposed to low rates and market volatility than property and casualty insurers (P&C),” said Moody’s. “For P&C insurers, the pandemic could generate an additional €50 to €80 billion of claims worldwide, equivalent to a mid-sized natural catastrophe event, mainly against event cancellation, business interruption and travel insurance policies. However, some P&C insurers will benefit from a sharp decline in motor claims due to lower vehicle usage during Europe’s economic lockdown.”