Fitch Ratings has revised the rating outlook for the life insurance industry in Asia-Pacific, including the major markets of China, Japan and South Korea, to negative from stable. This, the ratings agency said, follows the coronavirus outbreak and the related impact on the credit quality of life insurers in the region.
According to a report by Fitch, uncertainties facing life insurers have increased significantly in the recent months. It cited material disruption in the financial markets, which may last for an extended period of time, and a potential spike in mortality risk, the severity of which is highly uncertain at this point.
Deterioration in global equity markets and the decline in interest rates will put pressure on life insurers' earnings, reserves and capital in the near term. In the longer term, a sustained disruption in the broader economies could cause further deterioration in credit markets, which would lead to increased bond and loan defaults and put more pressure on statutory capital levels.
Fitch is planning to hold a comprehensive review of all ratings assigned to life insurers in the APAC region, including those in China, Japan, and South Korea. This will include development of updated base and stress case rating assumptions to reflect the above uncertainties from the coronavirus outbreak. Ratings with a positive outlook will be prioritised during this review process.
Additionally, Fitch expects the stable outlooks of some life insurer ratings to be revised to negative. Those currently on negative outlook may be most exposed to a near-term downgrade.
According to the report, financial market disruptions are expected to affect the insurers' reported financials in several ways, such as increased reserving due to assumption revisions and for embedded guarantees associated with variable and indexed annuities, reduction in net investment yields and interest margins, increased hedging costs, and decrease in fee income due to reduced asset balances.
“APAC life insurers with high exposure to risky assets, such as equities, would be most vulnerable to financial market volatility,” it said. “Further rate cuts could also affect the solvency stability of insurers due to the wider duration mismatch between asset and liabilities. Interruption of new business generation leading to slower new business growth would have cash-flow implications for insurers with high exposure to single-premium policies.”
