Japanese insurers’ largest losses linked to the coronavirus outbreak are likely to result from movements in financial markets such as interest rates, equities, credit-spread products, or currencies, according to a report by Fitch Ratings.
In short, most losses are expected to be investment-related, rather than underwriting-related.
The spread of COVID-19 and accompanying fears of a global recession have led to volatility in the global financial markets, which may have a meaningful negative impact on Japanese insurers, the report said. This is due to increasing investment risks in Japanese insurers’ exposure to foreign credit products, currency risks and/or exposure to domestic equities, and through worsening asset and liability management (ALM) risks caused by a further flattening of the yield curve amid the sizeable ALM duration mismatch in most Japanese life insurers’ balance sheets.
The negative market sentiment created by the outbreak has led to lowered yields for high-quality government bonds such as Japanese government bonds. This reduces Japanese life insurers’ economic capital due to their ALM mismatch, according to the report. Furthermore, the Japanese yen has been appreciating as it is regarded as a safe haven asset under a ‘risk-off’ situation together with other assets such as the Swiss franc and gold, which would be detrimental for most Japanese insurers as their exposure to foreign currency is quite large compared with their capitalisation.
However, Fitch said that most Japanese insurers’ ratings are unlikely to change due to COVID-19 as most have been able to accumulate substantial capital buffers beyond what is required to support their current ratings over the last five to 10 years.
Due to the Japanese government’s announcement that its public health insurance will shoulder all COVID-19 treatment costs, direct net insured losses for medical insurance is likely to be quite limited, according to Fitch. Mortality losses due to the outbreak are also expected to be small, due to the low number of fatalities in the country, which was less than 10 as of March 09.
As for event-cancellation and business-interruption insurance, these policies usually contain exclusion clauses for “new” epidemics such as COVID-19. As a result, Fitch concluded that any net insured losses through event-cancellation and business-interruption insurance due to the cancellation of the Tokyo 2020 Olympic Games will likely be limited.
