COVID-19 will hit life insurers hardest

"The impact of the virus will depend on what the corporate landscape looks like in the coming months. Some corporations may not even be able to pay premiums at all.” Federico Faccio, senior credit analyst at Fitch Ratings.

Zero-bound interest rates and depressed asset values are negatively impacting European and US life insurers.

As COVID-19 starts to hurt the global economy, financial markets are facing widespread disruption with capital markets becoming increasingly volatile. The increased uncertainty in financial markets coupled with a spike in mortality risk means life insurers are being hit from both sides.

“The life business as a whole typically has substantial investment risk on the asset side. Therefore falling asset values and market volatility could negatively impact life insurers,” said Faccio.

Low interest rate environments are not a new phenomenon for insurers, who have adapted in the past and increased investment in public equities and bonds in lower investment grade rated debt.

But, on March 15, 2020, the Federal Reserve slashed its benchmark interest rate to near zero, meaning interest rates are set to reach the record lows last seen in the 2008 recession. Similarly, the Bank of England recently cut interest rates to 0.25 percent and looks set to lower this further.

“If you have falling interest rates then you have pressure on insurers’ earnings and capital. You also have a depressed asset value, meaning less available capital for insurers,” said Faccio.

“We would not expect these changes to drastically impact insurers' balance sheets in the short term but adopting a long term view this could be problematic. It is already a challenge in a normal environment for insurers but in these unprecedented times, this may become much harder and we may see the deterioration of credit markets.”

According to Fitch, the decline in interest rates has depressed yields, and savings contracts with investment guarantees have been hit hardest by these low yields. Life insurers in both France and Germany have been downgraded from a stable to negative outlook by Fitch because of this. What’s more, the ratings agency announced today (March 17 2020) the downgrading of its outlook on the US life insurance industry from stable to negative.

COVID-19’s impact on insurance premiums remains unclear, according to Faccio, who noted the vast differences between the accelerating nature of a pandemic and a natural catastrophe in which it is easier to model and predict premium rates.

“The impact of the virus will depend on what the corporate landscape looks like in the coming months as some corporations may not even be able to pay premiums at all,” Faccio concluded.