Long term implications expected to last beyond three- to- five year ratings horizon
Fitch Ratings-Chicago/New York-09 November 2020: The challenges faced by the North American insurance industry prior to the pandemic have been accelerated by the economic fallout from coronavirus, with longer term credit implications that extend beyond our three- to five-year ratings horizon, Fitch Ratings says. Even lower interest rates for longer, product pricing and design, digital transformation, deepening role of the government, increasing regulation and sustainable investing are expected to have longer term credit implications for U.S. life, property and casualty (P&C) and health insurers.
Even lower interest rates for longer will negatively impact all insurance sectors, affecting life insurance the most and health insurance the least. Investment risk, such as credit risk, liquidity risk, interest rate risk and/or equity risk, is expected to increase across all sectors as insurers reach for yield, especially in life and long-tail P&C. Insurance costs for customers are expected to increase as insurers raise prices and focus on efficiency improvements to offset falling investment income and lower earnings.
Heightened government involvement is expected to be negative for the returns across insurance sectors. Health insurers bear the most potential risk as public sentiment shifts to more government participation in the health system. Expectations for more stimulus to protect capital markets/corporations have grown, especially given the precedent set since the pandemic. This could lead to tax increases to fund large deficits as well as state and local pandemic costs. Government involvement tends to increase operating costs for the industry, with the potential for higher taxes that would reduce earnings further.
The breadth and magnitude of insurance regulatory changes will depend on the industry’s financial health coming out of the crisis. The long-term credit impact of regulation is generally negative for all insurance sectors in terms of driving up costs, with regulators expected to focus on how insurers treated policyholders during the pandemic. However, any regulatory response will depend on actions insurers take to mitigate issues that could accentuate regulatory involvement.