The resilience of the global insurance industry will be tested if a second wave of COVID-19 infections leads to economic disruptions that increase asset losses and claims, S&P says.

Global insurance ratings have proven resilient during the first wave of the pandemic but industry growth expectations for this year have diminished due to the slowdown in economic activity.

“The risk of insurers’ invested assets losing value still outweighs the risk of rising insurance claims, particularly for life insurers and those with thin capital buffers,” S&P Global Ratings credit analyst Dennis Sugrue says.

“Nevertheless, a second wave of COVID-19 infections that disrupts the economic recovery or necessitates the widespread reintroduction of lockdown measures could disrupt the financial markets further, deepen the recession, and increase asset losses and insurance claims.”

S&P says losses from business interruption could rise if insurers face legal action, but it views retroactive legislative or regulatory changes as unlikely.

Employee safety concerns may prompt lawsuits, leading to increased directors’ and officers’ or professional liability claims, while “significant excess mortality” could erode life insurers’ capital positions.

S&P says on a global basis lower investment returns, mark-to-market losses and heightened claims will erode earnings, but for many sectors top lines and earnings are expected to recover in the next two years.

“We expect non-life pricing to continue to improve and demand to remain stable for non-discretionary lines of business,” it says.

Nevertheless, it also warns of a rising risk that an extended recession could have implications for longer-term demand, particularly for discretionary lines.

“If the economic recovery were disrupted or long lockdowns returned, insurers top lines in 2020 and 2021 would face more significant and longer-term consequences,” it says.

S&P says a potential increase in mortgage delinquencies will result in higher credit losses for mortgage insurers in North America and Australia.

For 2020 to date, S&P has taken negative rating actions on 9% of its global insurance ratings, compared to 40% of the wider corporate and government ratings universe.

“While not our base case, a prolonged economic recovery resulting in a more severe or prolonged financial market dislocation would put a strain on capital and earnings, increasing the risk of downgrades,” S&P says in the report titled Resilient For Now: A second wave could eat into insurers’ capital.

S&P maintains a stable outlook for the Asia Pacific Property/Casualty sector, noting prudent asset allocation, stable underwriting margins and robust capital adequacy.