Insurers largely withstood the first wave of COVID-19 thanks to their capital strength. They may not be so lucky when a second wave comes, S&P Global Ratings said in a new report.

“A second wave of COVID-19 infections that disrupts the economic recovery or necessitates the widespread reintroduction of lockdown measures could disrupt the financial markets further, deepen the recession, and increase asset losses and insurance claims,” S&P Global Ratings credit analyst Dennis Sugrue said in prepared remarks.

For now, however, Sugrue said that the risk of insurers’ invested assets losing value outweighs the risk of rising insurance claims as it has in the pandemic’s initial months. Both those capital buffers will wear down through the second half of 2020, S&P said, due to financial market losses and the rise of claims for industrial insurers and reinsurers. When that happens, S&P said the risk of ratings downgrades will rise.

Many Risks and Legal Costs Ahead

Standard & Poor’s said it could see more directors and officers liability or professional liability claims in the months ahead in the wake of pandemic-related lawsuits over employee safety concerns. There could also be an erosion of life insurers’ capital positions, it said, if there are many more COVID-19 related deaths. That’s not a good forecast, but S&P said the risk of retroactive legislative or regulatory changes are unlikely—actions that could considerably worsen the market dynamic.

The second half of 2020 could be brutal for insurers. S&P said it has diminished growth expectations for the industry and expects earnings will crater due to lower investment returns, mark-to-market losses and heightened claims.

The years 2021-2022 could be a different story. S&P said that, by then, it expects “top lines and earnings” to recover, with P/C pricing to keep improving. As well, demand should remain stable, it said, for non-discretionary lines of business.

Capital buffers at most insurers are healthy enough to support ratings, S&P added, particularly those in North America and EMEA.

The full S&P report is “Resilient For Now: A second wave could eat into insurers’ capital.

Source: S&P