The COVID-19 crisis cost 16 global multiline insurers about $8 billion in 2020, although they still reported substantial net profit of $36 billion, according to a report published by S&P Global Ratings.
This net profit figure was down from $56 billion in 2019 and $48 billion in 2018, said S&P, which analyzed the impact of the crisis on 16 global multiline insurers (GMIs) that it rates. (The GMIs S&P analyzed for this report are listed below).
“[T]he crisis has turned out to be an earnings event for GMIs, and a manageable one – not a serious capital event,” said the report titled “COVID-19 Took a $8 Billion Bite Out of Global Multiline Insurers’ Earnings.”
The limited profit declines from COVID-19 “show the benefit of running diversified businesses, in terms of both product lines and geographies, as the pandemic clearly affected some activities much more than others,” said S&P.
“It also indicates that GMIs are managing their risk exposure in a sophisticated way and were able to calibrate their risk appetite to reduce the erosion of their financial metrics from such an unexpected event.”
Higher Losses for European GMIs
European GMIs faced steeper losses than those in other regions, despite being highly diversified, said S&P, noting that a large part of their losses came from non-European markets. “The higher losses for several European GMIs such as AXA, Allianz, and Zurich came mainly from their large commercial property/casualty lines. Overall, aggregate losses posted by the three most exposed players (AXA, Allianz, and Chubb) accounted for more than half of the $8 billion loss for the 16 GMIs.”
Non-Life Business Takes Greater Hit
The pandemic had a greater toll on non-life insurance business than on life business, the report said, explaining there is “a large negative correlation between people insured against death and the segments of the population who have died from COVID-19…”
In other words, S&P indicated, the highest mortality levels affected older people, who are less likely to have term life insurance, and lower-income people, who are typically less likely to be insured.
In the non-life sector, most of the underwriting losses from the pandemic were concentrated with a few products: business interruption, event cancellation and to a lesser extent, credit insurance, the report continued.
Large Reinsurance Losses
The profits of large reinsurers slid even more than for the GMIs, said the ratings agency, explaining that reinsurance policies, especially in commercial lines, covered a large share of primary insurers’ exposure.
S&P estimated that COVID-19-related losses came to about $20 billion for the top 20 global reinsurers it rates, which is nearly four times their year-end 2020 aggregated net profit.
Impact on Financial Markets
While the impact of COVID-19 on the income of these 16 GMIs was manageable in 2020, the consequences of the pandemic on their financial strength are further reaching, noted the report.
“Indeed, the most meaningful consequences of the pandemic were on the financial markets,” it continued. “Across the globe, long-term interest rates have tumbled, even into negative territory for some. That has accelerated the dilution of fixed-income investment yields for GMIs. This has not only hurt revenue from segments such as the general account savings business, but also from long-tail P/C lines such as general liability.”
For long-tail P/C business, technical reserves are dependent largely on assumptions about long-term interest rates. And with interest rates at such low levels, insurers have been forced to add to technical reserves in 2020, affirmed S&P.
The report said that COVID-19-driven declines in the stock market also took a toll on the balance sheets of GMIs, although the hit to income was not as significant. “In many cases, we just observed a decline in realized capital gains on equity investments in 2020, with no major consequences for profitability,” S&P continued.
However, if the stock market recovery had been delayed beyond the first quarter of 2020, it could have weakened the capital adequacy of many GMIs, the report emphasized.
Future Outlook
Additional COVID-19-related losses will be manageable going forward, predicted S&P.
S&P said its view on the sector’s outlook takes into account changes to terms and conditions for commercial insurance policies, including the insertion of exclusions for pandemic-related claims in policies renewed in 2021, as well as increases in rates, especially for the most-affected business segments, such as business interruption or event cancellations.
“Because GMIs started the pandemic with solid balance sheets and a good base of recurring profitability, we anticipate a recovery in earnings in 2021 and in coming years once vaccinations weaken the pandemic,” the report said.
However, insurers are likely “to see an increase in claims in personal lines, especially motor, as lockdowns end or loosen
up. They may also see a rise in health insurance claims due to medical treatments that were delayed in 2020 when medical institutions focused on serious cases of COVID-19. All in all, we anticipate a recovery in earnings this year and next as the pandemic comes under control,” the ratings agency continued in its report.
For the report, S&P analyzed six North American insurers (American International Group, Chubb, Prudential Financial, MetLife, Manulife Financial Corp., Sun Life Financial), seven insurers based in Europe, the Middle East and Africa (AXA Group, Allianz, Aegon, Aviva, Prudential Plc, Zurich Insurance and Mapfre) and three insurers based in Asia (AIA Group, QBE Insurance, Tokio Marine Group).
Source: S&P Global Ratings
*This story ran previously in our sister publication Insurance Journal