US property and casualty (P&C) insurers will continue to face new operational and risk management challenges from the COVID-19 pandemic-related insurance losses and premium volume declines in 2021, according to Fitch Ratings.
The rating firm explained that insurers that are able to manage the challenge of workforce flexibility, limit risk aggregations and reduce claims exposure through disclosure/exclusionary language and clarity of policy terms will be best positioned to transition to the ‘new normal’ longer-term drivers of the industry.
Fitch estimated that incurred loss from coronavirus claims totalled approximately $8 billion for North American publicly traded insurers to date and approximately $23 billion, including large global (re)insurers.
However, drawn-out settlement litigation for claims in a number of segments are expected to take years, it suggested.
It was noted that ultimate insured losses will depend on uncertain factors, including the duration of the pandemic, the extent of economic shutdowns from potential future waves of large-case outbreaks, the timing of return to more normal business and social activity, and the speed and strength of the economic recovery.
Higher pricing following recent losses, compounded by fear and uncertainty of pandemic-related claims, Fitch said has led to tighter underwriting terms and conditions in many areas, with commercial lines rate increases unseen since 2003.
It explained: “Changes in market conditions boost the potential for profit improvement when pandemic-related losses subside. However, larger underwriting profits are required to generate adequate returns to offset investment income declines as a result of persistently low-interest rates.”
“Challenges in managing traditional sources of volatility, such as natural catastrophe exposures or claims severity from medical and litigation costs, could also hinder future progress toward profitability.”
In a report, ‘The Next Phase: North American Insurance’, Fitch said that the onset of the COVID-19 pandemic and the ensuing health and economic impact made 2020 “unforgettable”.
“All these affected constituencies are parties to insurance coverage, and the events of 2020 are reshaping their perspectives,” the rating firm suggested.
In the report, Fitch identified six trends that are accelerating, including even lower interest rates for longer, products repriced, redesigned and reimagined; a digital transformation and an automated world; a deepening economic role of government; more insurance regulation; and a more sustainable and equitable economy.
It was highlighted that these trends will ultimately affect insurance company performance and ratings over the long term.
“Many aspects of business and social interactions are unlikely to fully return to prior norms, which creates challenges in assessing and pricing risk for insurers. The pace of economic recovery and return to more normal activity will influence claims frequency trends in segments with large recent declines, including automobile and workers' compensation,” Fitch concluded.
