Oct 2020

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Sector maintains resilience, but risks remain on the downside

Source: Middle East Insurance Review | Aug 2020

Claims from event cancellation, business interruption and mortality will remain manageable for MENA insurers although the situation remains fluid.
Benjamin Serra, Senior Vice President, Insurance EMEA, Moody’s
What has been the impact of the pandemic on insurers’ financial strength globally?
The pandemic has had negative impacts on insurers’ financial strength. Both their capital and profitability have been hit by the consequences of the coronavirus outbreak.
Solvency and capitalisation of insurers globally fell due to a combination of lower interest rates, falling equity markets, and rising credit spreads in the wake of the outbreak. Nonetheless, insurers started the year with comfortable solvency positions and had, in general, sufficient buffers to absorb these financial markets losses. Government and central bank supports also provided some counterbalancing uplift and contributed to market recoveries.
Insurers also face an increase in claims as a result of the coronavirus crisis, mostly driven by travel and event cancellation, income protection and business interruption (BI). Nonetheless, overall, the amount of claims reported by most insurers has remained moderate at this stage, as pandemic exclusion clauses were built into most BI policies. The increase in claims is also partly offset by a reduction in claims in other lines of business, notably motor insurance, as lockdowns imposed by governments across the world have resulted in a significant drop in frequencies of motor accidents. In the life segment, while the coronavirus is causing tragic loss of lives across the world, the number of death claims has remained moderate, in part because the insured population is, in general, younger than the population most severely hit by the virus. Higher mortality also has a positive impact on annuity providers.
Nevertheless, the ultimate claims cost of the pandemic remains uncertain at the time of writing. Insurers face legal risks in relation to BI claims due to the lack of clarity in some pandemic exclusion clauses. In several countries, especially in Europe, there is growing political and consumer pressure on insurers to provide financial support to customers as they navigate the coronavirus crisis.
Finally, insurers’ results will be impacted by lower investment income – as interest rates fell sharply and dividends are going down – and by lower revenues as the slowdown in the economy will have a negative impact on insurance demand.
So far, we have only taken moderate negative rating actions on the insurance sector. The industry has been resilient to this pandemic, but risks remain on the downside.
What has been the impact on MENA insurers specifically?
MENA insurers are facing the coronavirus outbreak and a simultaneous decrease in oil prices. The latter is weakening the economic outlook of GCC countries, with adverse consequences for insurers.
Slower economic activity will result in reduced demand for non-compulsory insurance and the likelihood of reduced premium cover, which will exacerbate competition and pricing pressures. Financial market volatility has also negatively affected capitalisation, although from a high level, as a result of insurers’ high exposure to equity and real estate. Moreover, weak financial market performance and low interest rates will negatively impact 2020 insurers’ investment results, a key source of profits for many insurers in the region, and the fragile economy heightens the risk of future asset losses.
Insurers with weak liquidity face further downside risks. Delayed premium payments and slower economic activity will reduce inflows for insurers, leading to liquidity pressures for some insurers and will trigger additional receivables write-off, further hitting the industry’s profits and capital.
We expect event cancellation, BI, health and mortality claims to remain manageable for MENA insurers, although the situation remains fluid.
How will the sector emerge from this crisis and how much of an impact will the pandemic have on the insurance industry in the next five to 10 years?
The coronavirus pandemic and social distancing measures put in place to contain it are causing an unprecedented economic and psychological shock across the globe. The experience will be a defining event for many societal, business and credit trends. We expect far-reaching longer-term effects that will fundamentally reshape many aspects of the macroeconomy, business life and consumer behaviour. The crisis has accelerated existing disruptive trends and is causing a rethink of conventional habits, potentially reshaping business models, consumer preferences and competitive dynamics.
Identifying the long-lasting impact of this experience will be paramount for credit analysis. While many of the longer-term consequences are as yet unknown, we see three main areas where we can identify an enduring impact for financial service providers. 
First, we expect the resulting global economic recession to compel central banks to maintain low or even negative interest rates for several more years and to drive governments to increase fiscal stimulus with uncertain long-term consequences and varying implications for insurers, not least a profit squeeze. Central banks have also implemented massive asset-support programmes, continuing to push investors and speculators toward riskier behaviour in pursuit of returns.
Second, the outbreak will be a powerful catalyst for an accelerated migration to digital processes and services by both consumers and businesses, hastening the transformation of business models and competitive dynamics. The trend toward conducting ever more commercial services digitally and remotely has been massively accelerated out of necessity as a result of health concerns and social restrictions. Reluctant customers and businesses who may have been slower to embrace digital commerce and services have been forced to do so in short order. Companies that are unable to support such services have typically seen a shutdown in revenue. 
It is probable that financial services sector customers who have newly converted to novel ways of working and shopping may not fully return to their old ways when restrictions are lifted, as a result of gains in functionality, user experience and utility. For a number of technologies, the experience of social distancing has encouraged a sufficient number of new adopters to reach critical mass for that technology to flourish and begin to accelerate. 
Additionally, the widespread implementation of remote work practices for many white-collar employees, and its success in many instances, may lead to a breakaway from traditional work habits. Service businesses that have been able to operate remotely during the pandemic will not completely shift back once they consider improvements in digital efficiencies and cost savings, especially in areas like rent and business travel. 
Financial services companies stand out as a key beneficiary of the work-at-home trend. They are expense-heavy information-based businesses, in which most of the work can be done remotely, with potential cost savings being considerable. Firms that more permanently and successfully adopt elements of remote working should have more cost savings to realise as this trend progresses, giving incumbent financial institutions an opportunity to close a portion of their costs gap with online-only digital challengers. 
These changes will have profound and long-lasting effects on businesses regardless of how the current pandemic is resolved.
Third, the pandemic is accelerating a shift away from shareholder primacy towards addressing multiple stakeholders, such as clients, employees and the wider society, and driving an acceptance of a stronger social aspect to corporate strategy.
Such moves respond to broad societal trends, and have gained traction among leading chief executives and prominent investors. We expect the rising economic hardship caused by the pandemic to accelerate this nascent trend toward stakeholder rather than rentier capitalism. High structural unemployment caused by the sudden transformation of consumer behaviour and long-term depression in certain industries may support such sentiments.
We expect insurers to be a part of this dynamic. Some insurers are responding to societal and competitive pressures by refunding profit from expected lower loss rates back to their clients. They have also been asked to accept delays in premium payments without cancelling coverage, and to provide other means of financial relief to their customers. They have been under strong pressure from certain governments and societies to pay coronavirus-related claims that are currently not covered by existing language. Ex-gratia payments have become an option to preserve customers’ perception of the relevance of insurance, and to avoid harsher societal or regulatory-led business repercussions. 
Further ahead, we anticipate governments will seek to partner with insurers to set up insurance schemes that will cover losses in future pandemics. Governments around the world have already partly or entirely transferred health, retirement or natural disasters coverage to the insurance industry. M 
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