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30 March 2020
Australia’s life insurers and its Asia Pacific counterparts are in a for a “rough ride” as the coronavirus pandemic wreaks havoc on the global financial markets, S&P Global Ratings has warned.
Like its foreign counterparts, the industry is exposed to financial market risk because they hold significant investments in the equities and bond markets, the ratings agency says.
Financial markets have suffered sharp volatility over fears the COVID-19 pandemic could push the world into its worst recession since the 2008 global financial crisis. Equity markets have fallen by more than 30% while corporate bond spreads widened significantly by 40-120%.
“Australian life insurers are already under pressure from [total and permanent disability-type] claims and now there could also be COVID-19 related impacts as well,” S&P Credit Analyst Craig Bennett told insuranceNEWS.com.au.
“The biggest impact will be on the valuation adjustments to insurers’ investment assets.”
The industry was already struggling well before the pandemic broke out, with total net loss of nearly $1 billion for the December quarter, according to figures from the Australian Prudential Regulation Authority.
S&P has moved to downgrade its outlook for the Asia Pacific’s life insurance sector to negative from stable, taking into account the new risk posed by the pandemic. The revised outlook applies to the Australian industry as well, Mr Bennett says.
It expects the creditworthiness of insurers to be more affected by the stress on financial markets than through their insurance risk.
“We consider that life insurance companies are more at risk of negative rating actions as a result of the pandemic than non-life players, because they have larger exposure to financial market risk,” S&P says.
“Asia-Pacific's life insurance sector is in for a rough ride as turmoil in the investment market intensifies.
“Against a backdrop of investment market rout and a recession, we anticipate the region's insurers will see contracting capital buffers and weaker profitability in 2020 and 2021. Consequently, we have revised the outlook for the Asia-Pacific life sector to negative.”