Fitch Sees Only ‘Modest Impact’ on U.S. P/C Insurance from Coronavirus

The coronavirus (COVID-19) outbreak is not currently anticipated to have a meaningful adverse impact on financial results reported by U.S. property/casualty companies, nor their ratings, according to Fitch Ratings.

The nature of insured commercial exposures along with restrictive language embedded in policy contracts will likely limit U.S. P/C carriers from a material level of claims, the analysts said. The most notable and immediate financial impact will be fluctuations in capital levels for companies with large common stock holding, given recent market downturns tied to the virus.

In a broad sense, traditional property/casualty insurance products protect against damage to physical objects such as cars, homes and factories, as well as various liability-related risks. Fitch noted these P/C products have limited direct exposure to claims related to a pandemic. More specialized lines that would potentially have more direct exposure include travel insurance, which provides reimbursement to travelers for canceled trips. However, contract language varies and pandemic-related cancellations are often excluded, the analysts added.

The risk of pandemic-related claims could arise in business interruption insurance or contingent business interruption policies. Typically, however, most business interruption policy language requires some form of property damage for coverage to apply. Thus, an interruption of business activity — for example, a factory shut down due to general government guidance for workers in a certain city to stay home — would likely not be covered. However, if a factory was shut down on fears it was contaminated by infected workers or equipment, this likely could be covered. Even in this case, claim exposures would likely be limited by policy sub-limits, according to the advisory.

Event cancellation is one area of insurance that may have losses. The largest event taking place is the Tokyo Olympics in July 2020. According to Fitch, industry experts anticipate coverage of approximately $2 billion for this event, with the large risk spread among several insurance companies. Fitch said the scope of risk under liability policies is harder to predict, but could include the case in which a company experiences some outbreaks among its workers and is sued on the view that it failed to take adequate or reasonable steps to protect its other workers.

Fitch estimates that the U.S. P/C industry has approximately 50% of its surplus invested in common stock with an additional exposure to alternative investments that have equity like return characteristics. Therefore, a 20% decline in the equity market would cause pre-tax unrealized losses of approximately 10% of statutory surplus, resulting in lower but still adequate capitalization ratios.

Favorably, the majority of assets are invested in high quality fixed income securities, but any reduction in interest rates would have a lagging impact on investment yield.