Fitch Ratings has revised its outlook for the underlying fundamentals of the London market insurance sector to negative from stable. The sector outlook revision reflects increased concerns over the COVID-19 disruption and the related impacts on the credit quality of London market insurers.

On the other hand, Fitch’s outlook for ratings levels in the sector remains stable, although it expects to revisit the rating outlook again as its analytical work related to COVID-19 advances.

Fitch said it is reviewing its insurance ratings relative to assumptions with respect to the impact of COVID-19 disruption on capital markets volatility, interest rates, market liquidity and insured claims/reserves. Fitch will compare the pro-forma profile of an insurer relative to its existing ratings sensitivities. If sensitivities are notably breached, ratings will be placed on Rating Watch Negative (RWN) or downgraded. Fitch said it is at the early stages of this review.

The ratings of London market insurers will be less affected by the COVID-19 outbreak than those of European life insurers, whose rating outlooks were recently revised to negative, said Fitch in a market commentary published on March 23.

Fitch noted that the rapid spread of COVID-19 could increase operational risks for the implementation of the Future at Lloyd’s project, which aims to modernize the market and make it more cost efficient.

Business transacted in the London market typically relies heavily on face-to-face interaction, and this could be significantly disrupted if the COVID-19 outbreak is prolonged, the commentary continued.

Fitch said its stable rating outlook for the London market sector does not imply that there will be no impact on ratings in the sector. Indeed, some London market insurers could be placed on RWN, the ratings agency said.

“Falling equity markets, widening credit spreads and declining interest rates are all negative for capital,” said Fitch, noting that London market insurers’ bond portfolios are mostly highly rated, but widespread downgrades could weaken capital ratios.

“We expect the impact on underwriting performance to be more limited, with the biggest exposure coming from event cancellation, business interruption and accident & health lines. The low interest rates add to pressure on investment earnings from already ultra-low bond yields,” it continued.

In November 2019, Fitch revised the sector outlook for the London market to stable from negative, which reflected improved pricing conditions and the expectation that improved underwriting results would start to emerge from 2020.

“However, we still considered there were significant challenges, given the stubbornly high expense ratio for the market as a whole, continued low investment yields and the need for reserve strengthening in U.S. casualty lines,” the commentary added.

Source: Fitch Ratings

*This story ran previously in our sister publication Insurance Journal.

Topics Trends London COVID-19