Australia’s struggling life industry has been dealt another blow as the coronavirus pandemic wreaks havoc on the global financial markets, according to S&P Global Ratings.

Like its foreign counterparts, the industry is exposed to financial market risk because they hold significant investments in the equities and bond markets, the ratings agency says.

“Australian life insurers are already under pressure from [total and permanent disability-type] claims and now there could also be COVID-19 related impacts as well,” S&P Credit Analyst Craig Bennett told insuranceNEWS.com.au today.

“The biggest impact will be on the valuation adjustments to insurers’ investment assets.”

S&P yesterday downgraded its outlook for the Asia Pacific’s life insurance sector to negative from stable. The outlook revision applies to the Australian life industry as well, Mr Bennett says.

Financial markets have suffered volatility over fears the COVID-19 pandemic could push the world into its worst recession since the 2008 global financial crisis. Equity markets have fallen about 30% while corporate bond spreads widened significantly by 40-120%.

“We consider that life insurance companies are more at risk of negative rating actions as a result of the pandemic than non-life players, because they have larger exposure to financial market risk,” S&P says in a report. “Asia-Pacific's life insurance sector is in for a rough ride as turmoil in the investment market intensifies.

“Against a backdrop of investment market rout and a recession, we anticipate the region's insurers will see contracting capital buffers and weaker profitability in 2020 and 2021. Consequently, we revised the outlook for the Asia-Pacific life sector to negative.”

S&P expects the creditworthiness of insurers to be more affected by the stress on financial markets than through their insurance risk.

It says the trifecta of unprecedented low or negative interest rates, credit deterioration and a declining equity market will chip away at insurers' financial strength, with life insurers seen as most vulnerable.

“If the situation worsens, or lasts for a prolonged period, we expect that these factors will lead to more rating actions,” S&P says. “For insurers across all lines of business, we are evaluating the potential for financial market volatility to inflict losses on capital or earnings via their invested assets.

“We consider that disruption to the financial markets is the most likely reason why insurers' creditworthiness will deteriorate.”