Rating agency cites economic slowdown and decline in motor vehicle sales as key challenges, but does not anticipate significant coronavirus claims

Fitch Ratings has revised the sector outlook for the underlying fundamentals of the non-life insurance industry in APAC, which includes China, Japan and South Korea, to negative from stable due to the impact of COVID-19, the disease caused by the coronavirus, on near-term performance and the credit quality of insurers.

The slowdown in economic activities will affect APAC insurance demand. A prolonged decline in new motor vehicle sales will hurt the motor insurance business, which is the most dominant business line for the APAC non-life sector.

However, APAC non-life insurers’ exposure to lines directly vulnerable to the coronavirus pandemic is relatively modest. Fitch does not anticipate a significant increase in loss ratios in the near term due to the claims experience from these events, but uncertainty regarding future sources of underwriting losses will expand as the duration and severity of the crisis lengthen.

APAC non-life insurers’ risky asset exposure is generally lower than that of life insurers, but increased financial market volatility could weaken investment performance and solvency stability. Fitch currently believes the ratings of non-life insurers will be less affected by the pandemic than those of life insurers.

The pandemic is posing challenges to performance in 2020 with the recent shifts in investment market and economic conditions. Companies with significant allocations to equity investments will see capital declines in the next quarter and investment income will also fall year on year with lower bond yields.

A move towards an economic recession could slow premium growth through declines in insured exposures or renewed competitive pressure that restricts pricing momentum.