Despite that the equity market has bounced significantly from the COVID-19 triggered market turmoil, differences in the underlying sector performances highlight the outlook variations across different sectors. The European financial sector remains among the least loved among investors, trailing behind the performance across the general European equity market. From an industry level, however, insurance companies have managed to outperform their banking peers by 18 per cent since the start of the year. Going forward, key trends are shaping the insurance industry outlook for the remaining half of the year.
Insurance business lines are two-fold: property and casualty, and life insurance, which simply classify insurance coverage for individuals against life or liabilities to others, such as auto and homeowner insurance. The COVID-19 pandemic has created a material headwind for the insurance industry, as the temporary economic lockdowns and slowdown in economic activity triggered a rise in claims and costs while premium revenue declined.
Governments’ initiatives to contain the spread of COVID-19 led to the temporary closure of businesses, which consequently led to an increase in claims related to event cancellations, travel insurance and business interruption claims. During the first quarter, Munich Re reported COVID-19 related losses, particularly related to event cancellation insurance, totalling about €800 million.
Meanwhile, the French Prudential Supervision and Resolution Authority, ACPR, reported that less than three per cent of insurance policies provide coverage for a business interruption pay-out specifically linked to the pandemic, while another four per cent are ambiguous. Despite that the number of business interruption policies which include coverage for a pandemic scenario is limited, insurers are facing scrutiny over ambiguous wording with losses on such policies expected to continue to increase. Axa, for example, opted for an out of court settlement over a dispute for not paying out on a business-interruption policy with unclear wording.
Premium income, on the other hand, is more cyclical in nature, with volumes closely correlated to the level of economic activity. The downgrades in economic growth expectations have therefore negatively impacted the expectations for premium income. For instance, the International Monetary Fund has downgraded economic growth expectations and anticipates a global growth decline of 4.9 per cent in 2020. Despite forecasting a 5.4 per cent increase in global growth in 2021, the IMF remarked that the 2021 GDP level is still expected to remain significantly lower than pre-COVID-19 levels. Commercial insurance premium income, which is more sensitive to the business cycle, is expected to be the most impacted. On this basis, premium income for insurers is likely to remain under pressure, with the outlook dependent on the depth and length of the COVID-19 recession.
The lower for longer interest rate scenario has also negatively impacted returns on life insurance product, especially life savings products with guarantees. Insurers face renewed pressures to balance the impact on their investment margin, as reinvestment risks increases in a lower yield environment.
On a positive note, the pricing for commercial property and casualty insurance has been increasing in most countries across the globe, most recently due to the rising claims costs and declining investment income. While a sustained increase in premium prices is a positive driver to profitability, the earnings outlook for insurance companies is expected to improve in a post COVID-19 environment, when claims decline and demand for insurance recovers.
Disclaimer: This article was issued by Rachel Meilak, CFA equity analyst at Calamatta Cuschieri. For more information visit www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.