Nick Martin asseses the impact of covid-19 on the insurance sector, and while he expects the impact of claims directly related to covid-19 to be limited, warns there may be some secondary impacts from the inevitable global recession and especially on trade credit insurance.
Given the focus at insurance companies on underwriting returns, they take limited risk on the investment side with portfolios that are overwhelmingly comprised of high quality short-dated bonds and cash.
We continue to believe insurance companies can deliver attractive book-value growth in even stressed investment environments and given what we have witnessed in recent days it is possible that prospective investment returns for the industry are higher now than they were than at the start of 2020. This is because the significant decline in treasury yields are being more than offset by higher credit spreads. In summary balance sheets are robust.
It is likely that we could well see more demand for pandemic coverage post this event which is often what has happened historically post a heavily underinsured economic loss."
Most insurance policies exclude pandemics. There will be some event cancellation losses but even for these policies pandemic coverage often must be bought as an add-on and most customers do not purchase it. Our best guess is that the event cancellation market might see c$5bn of losses, of which the Olympics would be c$2bn, which for context is one small Florida hurricane.
Unprecedented
The scope for business interruption insurance losses is similarly limited by policy exclusions and the fact that most policies need a physical loss in order for the cover to apply. For example, a factory would need to burn down thereby impacting production. Pandemic cover can be bought as a separate add-on and priced for but lost production because staff are unable to enter an operational factory is not likely to be covered.
However, these are unprecedented times and it is not surprising that some politicians have tried to point fingers at the insurance industry claiming they are hiding behind small print to reduce claims. The industry has offered to help as a conduit for state funds in a similar way to how the US government already provides flood coverage which may be a model to watch for the future, to help the industry price for and provide coverage for businesses at a reasonable cost.
The message from insurance companies is clear. There will likely be some business interruption losses and companies are likely to be pragmatic where possible, but these will be at a very manageable level and primarily come from policies where the coverage was offered. We believe the equity market does not properly understand this dynamic and as a result it is one reason for the weakness we have seen in the sector.
It is likely that we could well see more demand for pandemic coverage post this event which is often what has happened historically post a heavily underinsured economic loss.
In the short term we see little, if any, negative impact on insurance demand from covid-19. Insurance purchased is largely disconnected from the magnitude of economic activity and the value of the product often increases in more difficult times which is a key attraction of the sector.
Nick Martin is a fund manager at Polar Capital Global Insurance Fund
