September 2020 The insurance sector in an economic shock

The insurance sector in economic shock

Written by: Ghazi AbuNahl

Chairman of the Board of Directors of the Nest Investments Group of Companies (Holdings) L.T.D

And Emeritus Chairman of the World Trade Centers Association

It is expected that the global economy will take longer than initially expected to fully recover from the shock caused by the outbreak of the new Corona virus. The impact has been widespread, affecting all production and service sectors, and has plunged the world into the deepest recession since the Great Depression in the 1930s.

What about the implications of this virus for the insurance sector?

Life insurance companies globally manage assets worth more than $ 20 trillion, nearly half of which are government bonds. Government revenues have fallen dramatically, at a time when the crisis is also stressing the entire financial sector. This raises important credit concerns and has led to downgrades. Reports highlight that so far 24 countries that have had their credit ratings downgraded so far, and many more including major companies are at risk of downgrading in the near future.

Most of the international rating agencies have warned of the mounting risk of default in a number of developing countries. A mix of stalled trade, lower commodity prices and falling growth has led to a higher risk premium in emerging markets, increasing their cost of borrowing and ability to repay. The lack of market access and the mounting liquidity squeeze indicate a restructuring that will, in turn, lead to significant losses for private investors.

 

The sharp fluctuations in the financial markets also represent a big challenge for the life insurance sector, due to the long-term assets and liabilities managed by these companies. The markets have witnessed in the recent period an increase in currency exchange volatility. Many countries have experienced a decrease in their currency at a pace not seen in decades. Combined with volatile investment returns, interest rates and liquidity, this puts significant stress on life insurance companies in particular, and the insurance sector in general.

The reality varies by region. What applies to the markets of the United States and Europe differs from the Middle East. Also, Life insurance is still less widespread than other types of insurance and the least developed. Accurate statistics are not available about the size of the life insurance market in this geographic region of the world, but the latest estimates indicate that it does not exceed 20 percent of the total insurance market.

Although other types of insurance do not face the same interim challenges and future risks that Life insurance faces, the Corona virus has weighed on the entire insurance industry. Lloyd's of London expects that this sector will incur losses of $ 203 billion during the year 2020 due to the Covid-19 epidemic. $ 107 billion in compensation for canceling events or travel insurance, and $ 96 billion from the decline in the value of investments. “What makes this epidemic unique is not only its human and social impact, but also the economic shock,” with the sharp rise in unemployment, corporate bankruptcies and the collapse of GDP in many countries, adds John Neal, General Manager of Lloyd’s.

 

In the Middle East region in general and the Gulf Cooperation Council countries in particular, the decline in oil prices and the effects of the Coronavirus have weakened the economic expectations as well as the activities and businesses of these countries. This will have negative consequences for the insurance sector as a result of the decline in demand for its products. Arab and Gulf insurance companies will face greater pressures resulting from the weak performance of the stock markets, and the possibility of a decrease in the value of real estate, in addition to the increase in claims resulting from the cancellation of travel, events, conferences and major exhibitions. In Dubai, Expo 2020 was expecting 25 million visitors with the national insurance companies to provide travel and medical insurance to the visitors.

The sharp decline in the stock markets will have dangerous repercussions on the capital of a large number of insurance companies, which have relatively high exposure to longer term risks. In an already highly competitive area with very little margin for profit, there is a concern that companies will further undercut prices to generate immediate liquidity needs but then face a future of unprofitable business to service.

However, in contrast to this bleak scene, several facts confirm that global insurance companies have good capital to absorb the shock caused by the rise in insurance claims and costs associated with the emerging corona virus pandemic. Combined with stimulus measures launched by several countries, including Qatar, the Kingdom of Saudi Arabia, the United Arab Emirates and Bahrain, the insurance sector, as well as other sectors, are in a position to regain their market position when the pandemic is over.