Fitch Ratings warns that some reinsurers are set to feel the financial pain of the global pandemic as it revised its outlook for the underlying fundamentals (sector outlook) of the global reinsurance sector to negative from stable.
The firm said it had taken the decision due to increased concerns over COVID-19, the disease caused by the coronavirus, and related impacts on the credit quality of reinsurers.
Fitch stressed its outlook for ratings levels in the sector remains stable (Rating Outlook); however, Fitch expects to revisit the Rating Outlook again as its analytical work related to the coronavirus pandemic advances.
“We are in the process of reviewing its insurance ratings relative to assumptions with respect to the impact of the coronavirus pandemic on capital markets volatility, interest rates, market liquidity and insured claims/reserves,” it said. “Fitch will compare the pro-forma profile of an insurer relative to existing ratings sensitives established by the agency. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative or downgraded. Fitch is at the early stages of this review.”
Currently, Fitch said it believes that the ratings of reinsurers will be less impacted by the coronavirus pandemic than those of life and health insurers, which are sectors whose Rating Outlooks were recently revised to negative by Fitch. However, it said the stable rating outlook for the reinsurance sector “does not imply that no ratings in the sector will be impacted”.
“Ratings currently on a positive rating outlook across all insurance sectors are being prioritised during the review process,” it added. “In addition, Fitch expects the ratings of some reinsurers will be placed on Rating Watch Negative. Near-term downgrades are possible, but currently viewed as unlikely.
“Favourably, the reinsurance sector has benefited from a trend of recent price improvements, very strong capital adequacy going into 2020, robust risk management and generally solid business profiles.
“Fitch views the underwriting loss exposure (contingency/event cancellation, travel/accident, trade credit, surety and business interruption) from the virus as manageable for reinsurers given the relatively small size of the exposed lines, and the use of policy limits/sub-limits and exclusions. Even prior to the recent coronavirus events, however, the sector faced pressures from a competitive market environment and low investment yields that limited profitability.”