Insurance sector proves its resilience in real life stress test

The global health crisis driven by the spread of the Covid-19 has had deep ramifications for companies globally. The insurance sector, both life and non-life, has also been impacted through a number of different effects. The key headwinds for the European insurance sector have been both from underwriting and market volatility.

Underwriting headwinds

  • For non-life insurers, this has been in contingency lines such as event cancellation (for example the postponement of the
    2020 Tokyo Olympics), as well as business interruption and other lines such as travel and weddings driven by lockdowns. However, retail lines such as motor insurance and home insurers have benefited strongly from lockdowns with lower mobility and lower burglaries as people stayed home. For retail- focused non-line insurers, this had a very positive impact on profitability.
  • For life insurers, this has mainly been driven by mortality books of business, due to excess mortality in most affected countries such as the US.

Market volatility headwinds

  • Elevated market volatility, especially equity markets dropping by close to 40% in Europe and credit spreads widening by close to
    160 bps on investment grade credit led to significant unrealised losses initially, which abated as markets recovered over the course of 2020.
  • Interest rates fell significantly as a result of aggressive monetary stimulus, leading to the 10-year government bond yield reaching a record -0.86% and profitability headwinds.

While Covid-19 had a material impact on the insurance sector, this needs to be put in the context of the resilience of European insurers. Firstly, the starting solvency position of the sector was solid around or above 200% (ie twice the minimum requirements) at the end of 2019, providing a large buffer to absorb losses.

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