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European re/insurers prepared to manage pandemic risk

Against the backdrop of the coronavirus outbreak, AM Best has said that it considers European insurers and reinsurers to be well positioned to manage their potential exposure to pandemic risk.

The rating agency noted that COVID-19 has the potential to challenge European re/insurers on both the asset and liability side of their balance sheets, although the biggest impacts are likely to come from the economic fallout of the virus.

But despite considerable uncertainty about the ultimate cost to insurers in terms of claims, the industry has long recognised the potential exposure posed by pandemics, analysts said.

For example, financial markets have been particularly volatile in recent weeks, but the insurance industry as a whole is not expected to take a large hit given its relatively modest exposure to the equity markets.

Similarly, the prospect of coronavirus-triggered global economic slowdown could lead to a global decline in demand for insurance, but AM Best expects this to be offset by the lower number of claims that typically come with periods of weaker economic activity.

Credit insurance is one of the areas likely to feel an impact from disruptions to global trade, but claims will take some time to materialise, as policies are generally not triggered until payments fall outstanding.

However, AM Best argues that credit insurers are already taking a proactive approach by continuously monitoring exposures and preparing to cut limits when they identify an issue.

Uncertainty also remains about insurers’ contingency exposure to the cancellation of large events like the Tokyo Olympics and the UEFA Euro 2020 Championships is being questioned, as pandemic is not typically covered by contingency policies, except by endorsement.

There is also some discrepancy about triggers for contingency policies, as organisers that choose to cancel an event as a precaution are unlikely to be covered by most policies.

AM Best noted that a deterioration on the asset side of insurers’ balance sheets, such as investment losses leading to lower earnings and lower solvency ratios, could put more force behind the current rate hardening in some areas of the market.

Furthermore, any pockets of claims in specialised lines of business like trade credit insurance or event cancellation could very quickly lead to hardening markets in those areas.

More than 110,000 cases of coronavirus have now been confirmed globally, and an estimated 3,831 people are thought to have died due to the outbreak.

The majority of cases and deaths continue to be recorded in China, but numbers in other countries are now accelerating, with South Korea, Iran and Italy all counting cases in the thousands.