Daniel Pearce senior insurance analyst GlobalData
Investments made by insurers are vulnerable to the economic impacts caused by COVID-19.
With a combination of volatility in financial markets, the increasing cost of claims and a looming economic recession increasing the pressure on insurers’ balance sheets, says GlobalData, a leading data and analytics company.
The pressure placed on insurers has led to concerns for some providers. Ratings agency Fitch recently downgraded the credit ratings of life insurers operating across the US, the UK and Europe.
Investments held in corporate bonds are particularly vulnerable to the impacts of an economic recession, with some businesses likely to default on payments. Insurers operating in the US are heavily invested in corporate bonds compared to their UK counterparts, and US life insurers in particular are more vulnerable to the downturn – given almost three quarters of their investments are in this area. This is especially true in the life sector where there is a 49.7 percentage-point difference between investments in corporate bonds. It also illustrates that the UK has a certain amount locked up in the relatively safe government securities, while this is not available in the US.
The spread of COVID-19 has highlighted the vulnerability of the insurance industry to external forces, as well as limitations in its ability to offer cover. Many businesses will feel aggrieved that their business interruption insurance does not provide protection against pandemics, leaving them exposed to cover the cost of COVID-19 losses themselves.There will undoubtedly be calls for this to change, but the industry will not be able to offer the necessary cover as it would not be financially viable.
Should a global pandemic occur again in the future, the associated cost of claims would far exceed any provider’s means, and their exposure to the volatility of financial markets and subsequent economic recession would put unprecedented pressure on balance sheets.