While insurance rates have risen for nine consecutive quarters due to large catastrophe losses and accelerating claims inflation, Fitch Ratings expects that technical profits won’t be seen until the second half of 2021 as a result of the effects of the coronavirus pandemic.
Fitch believes that the commercial insurance industry will probably report significant losses in 2020 and H1 2021, postponing a return to technical profitability for most commercial insurers until the second half of 2021.
“The coronavirus pandemic will burden 2020/1H21 results, but will ultimately accelerate the hardening of the commercial insurance market,” said Robert Mazzuoli, Fitch analyst, in a statement in the report.
Fitch said commercial insurers will be hit hard by pandemic-related claims that affect event cancellation and credit and surety policies. These claims will run through this year, up to the end of the first half of 2021, said the ratings agency.
Other niche businesses, such as media or travel insurance, will also see large losses, said Fitch, in its report titled “Commercial Insurance Market is Hardening,” published on May 7.
Business Interruption Claims
At the same time, the ratings agency said, the industry also is facing mounting political pressure to pay for business interruption claims, irrespective of whether the relevant policies cover pandemics.
“While, in general, pandemic-induced business interruptions have not been covered by commercial insurers since the SARS pandemic in 2003, unclear policy wording and political pressure now raise increasing doubts how successfully commercial insurers can fend off claims now,” added Fitch.
There will be no immediate clarity about the size of total losses for the industry as litigation between insurers and commercial customers will take months to resolve, the report noted.
Fitch explained that reinsurance cover is unlikely to provide much relief as pandemics are usually excluded from business interruption policies.
Further, the report continued, the whole insurance industry will have to deal with investment losses, calls for rebates in lines of business that see a significant drop in claims, such as motor, and an increasing number of defaulting customers.
Highly Fragmented, Competitive Market
How did the commercial insurance sector get to this point, even before the pandemic?
Fitch said commercial insurers often lack pricing power in the large corporate insurance sector, which is the most competitive area of commercial insurance. “Insurers compete on a global scale for large corporate customers and the market is highly competitive.”
Barriers to entry are low, compared to the retail insurance sector, so new capital can enter the market easily, using brokers, said the report. “This can quickly lead to overcapacity in the respective market segment and a lack of underwriting discipline.”
Fitch pointed to the size of the commercial market sector which contributes roughly 45% of the global non-life business, accounting for €675 billion (US$731.2 billion) of net earned premiums in 2018.
“The commercial insurance market has attracted a couple of new entrants, such as large reinsurers, over the last 10 years,” said Fitch. “These new entrants wanted to diversify by geography or line of business or simply grow revenues faster than before and often bought their way into the market by offering lower prices than incumbents.”
However, the report noted that high industry losses have forced most insurers to cut back on capacity or even withdraw from certain lines of business or countries. “Fitch does not expect new capacity to enter the market over the next two to three years as the pandemic-related losses need to be recovered from first.”
Non-life commercial insurers have reported double-digit price increases for a variety of lines of business across all major global regions for 2019, which means that rates have risen for nine consecutive quarters, said the report.
The market has seen the highest price increases in the UK, Australia/New Zealand and the U.S., particularly in the area of financial and professional liability. In some cases, a doubling of prices has been observed, said Fitch, pointing to litigation cost as the main cause, which is spreading across industries.
“Tighter terms and conditions have often accompanied the most pronounced price increases. Fitch expects further price increases
for 2020 as claims inflation in some lines of business, such as professional liability, remain high and most commercial underwriters still show combined ratios above 100%,” the report continued.
Fitch does not expect new capacity to enter the commercial insurance market over the next two to three years until there is a recovery from pandemic-related losses.
The ratings agency said it considers the expected pandemic-related losses in commercial lines of business to be credit negative for the groups involved, as overall earnings resilience is weakened and capital is potentially reduced.
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